Synchronised global economic growth continued to drive markets over the quarter, with the (almost) uniformly strong performance of the forward-looking manufacturing purchasing managers’ index (PMI) figures a particular feature of the global upswing.
In particular, Germany, France and the Eurozone are at six-year highs for manufacturing PMI readings: the Eurozone figure is at a record high (the data was first reported in the late 1990s.)
With healthy corporate profit estimates reflecting the economic backdrop, world markets were mostly positive over the quarter. In contrast, political headlines had a definite leaning to the negative, with the now-familiar hyper-partisanship in Washington; the messy aftermath of the inconclusive German elections (Germany ended 2017 still without a government) and the victory of pro-independence parties in Catalonia’s provincial election being among the causes for concern.
In Asia, the Japanese economy grew for a seventh consecutive quarter, while activity in China’s crucial manufacturing sector picked up in the quarter, on the back of robust global demand for Chinese exports.
US markets power into 2018
In the US, the Dow Jones Industrial Average added 11% in the December quarter (in total-return terms), which took the Dow to a 25.1% gain for 2017. The broader S&P 500 Index’s 1.1% gain in December helped it to a 6.6% rise for the quarter, and a 21.8% rise for the year. The technology-heavy Nasdaq Composite Index was up 6.6% in the final quarter of the year, on its way to a stunning 29.6% gain for 2017.
The US indices were motivated by a mix of the strongest growth rate for the US economy since the first quarter of 2015, a 17-year low in the US unemployment rate (4.1%), the fastest annual rate of growth in business investment in three years (10.8%), healthy company profit expectations and the passing in December of President Trump’s US$1.5 trillion ($1.9 trillion) tax-reform package, described as the biggest US tax overhaul since 1986. The bill, known as the Tax Cuts and Jobs Act, will cut the domestic tax rate paid by US companies from 35% to 21%, and also, for individuals, collapse the existing tax brackets from seven to three, with tax rates of 12%, 25% and 35%.
Politics weighs on European bourses
Political headlines gave European investors plenty of concern over the quarter. The German political limbo, the victory of pro-independence parties in Catalonia’s provincial election late in the quarter, the striking of a deal between Britain and the EU for the UK to conduct its “Brexit,” and an escalating dispute between the European Commission and Poland were the prime worries. But on the economic front, rosy news continued to flow.
Eurozone third-quarter GDP growth beat expectations, despite slowing slightly in the September quarter, from 0.7% growth to 0.6%, for an annual rate of 2.5% – its strongest growth rate since the March 2011 quarter. The unemployment rate for September dropped to 8.9% from 9%, representing the lowest joblessness rate since 2009.
The Eurozone ended the year reporting the fastest growth of business activity for nearly seven years, with the manufacturing PMI hitting 60.6 in December, its highest level since surveys began in 1997. German companies finished 2017 on a high note by recording the sharpest growth in business activity in more than six-and-a-half years, while French business confidence hit its highest level since January 2008. The UK’s manufacturing order books were close to a 30-year high in the December quarter, according to Confederation of British Industry (CBI).
On the markets, Germany’s DAX Index was up 0.7% for the quarter, and 12.5% for the year. In Paris, the CAC 40 Index lost 0.3% for the quarter, but gained 9.3% for the year. The pan-European Euro Stoxx 600 Index added 0.3% in the fourth quarter, but ended 2017 with a gain of 7.7%. In London, the FTSE-100 index’s 4.9% gain in December provided all of its 4.3% gain for the quarter, and more, helping to push the index to a 7.6% gain for 2017.
Japan leads the way in Asia
The Japanese government’s gamble to go to an early poll in October paid off for Prime Minister Abe, whose ruling coalition won a two-thirds “super-majority” in the lower house of the Diet. The country’s economy grew for a seventh consecutive quarter – the longest streak in nearly two decades – while household spending jumped by 1.7% in November from a year earlier, more than tripling forecasts for a 0.5% increase. Meanwhile, Japan’s unemployment rate hit a 24-year low, at 2.7%.
The 19th Congress of the Chinese Communist Party, held early in the quarter, delivered the biggest shakeup in Chinese politics since the cultural revolution. Chinese President Xi Jinping was effectively enshrined as leader-for-life: Xi laid out an ambitious plan not just for the next five years, but out to 2050, when China will become "a great modern socialist country" and a global leader.
The latest figures showed that China’s economy grew by 6.8% in the third quarter of 2017, with full-year growth poised for its first acceleration since 2010. However, the government’s clampdown on shadow banking and leverage since the beginning of the year – and tighter pollution rules that forced many steel mills, smelters and factories to limit output over the winter – inevitably dragged on economic activity.
On the Asian markets, the Nikkei Index in Tokyo added 12% for the December quarter, extending 2017’s gains to 21.3%. The Nikkei pushed through 22,000 points in October for the first time since 1996, and its closing figure for 2017 (at 22,764.9 points) was its highest year-end level since 1991. Hong Kong’s Hang Seng Index was up by 2.5% for December and by 3.4% for the quarter, finishing 2017 a hefty 36% higher.
The mainland’s Shanghai Composite Index was more subdued, retreating 1.3% for the quarter, on the way to a 6.6% gain for the year. In South Korea, a trying year of warlike actions from its North Korean neighbour seemed not to deter the stock market: the KOSPI Index closed out the year with a 3% gain in the December quarter, despite the Bank of Korea surprising the market by raising interest rates in November for the first time in more than six years. The KOSPI was up 21.8% over 2017.
Resources drive Australian market higher
The Australian economy’s annual growth rate rose to 2.8% in the September quarter, the strongest pace since June 2016: full-time employment in Australia is growing at its fastest pace in a decade. The Reserve Bank of Australia (RBA) left the official cash rate at 1.5% unchanged over the three meetings for the quarter, meaning the rate has not been changed since August 2016.
After a stagnant third quarter, the S&P/ASX 200 Accumulation index got cracking again in the December quarter, with three rising months. The index added 7.6% over the quarter, taking its rise for 2017 to 11.8%. On the back of strong commodity prices, the S&P/ASX 200 Resources Accumulation index was the main growth driver, generating a 15.6% appreciation for the December quarter and 25.9% for the year.
Iron ore jumped 12% in the December quarter, on the back of renewed Chinese buying of high-grade ore: however, for the year, iron ore fell 9.3%. Australian thermal (electricity) coal also had a healthy end to the year, gaining 3.7% in the December quarter to stretch its 2017 rise to 14%. Australian hard coking (steelmaking) coal surged by 13.7% in the quarter, but for the year, the commodity went backward, by 3%. Copper jumped 12% in the quarter, reaching a four-year high in late December: copper gained 30.8% in 2017, its strongest year since 2009.
Despite losing 0.32% against its US counterpart over the quarter, the Australian dollar strengthened by 8.34% against the greenback over the year.
Information current as at 31 December 2017. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.