International Equity Prices Correct as Fed Announces Rate Hike
International equity prices saw a modest correction in December as the U.S. Federal Reserve announced its first rate hike in several years and indicated further increases in 2016. U.S. economic growth for the third quarter was revised higher and the strong labor market gains suggested that the expansion could continue. Markets in Europe underperformed during the month on concerns that lower demand in the emerging countries could continue to restrict export growth from the region. Major oil exporting countries such as Canada and Norway declined the most among the developed markets as energy prices slipped to the lowest in more than a decade. Among the emerging markets, oil and commodity exporting countries such as Russia, South Africa and Brazil declined the most during the month. Select markets in Asia Pacific outperformed on expectations that economic growth in several countries in the region has stabilized.
Global manufacturing growth turned softer during the month of December, as factory activity continued to decline in several emerging countries. Almost all major emerging countries including China, India, Indonesia, Brazil and Russia reported declines in output. Most developed countries continued to see gains in output, but the pace of growth slowed in the U.S. and the U.K. The Eurozone remained a bright spot as factory activity expanded at the fastest pace in several months. New order flows also slowed in December while export order flows showed only a small increase. Global services growth moderated in December, hurt by the slower pace of expansion in the U.S. and China.
Near-Term Outlook
Supported by the European Central Bank’s (ECB) policy measures, the Eurozone economic outlook appears stable. Though external trade remained subdued, healthy gains in domestic consumption helped the Euro-zone economy record 1.6 percent annualized growth during the third quarter. Among the large economies in the region, France expanded at a faster than expected pace while growth in Germany, which is more dependent on exports, weakened when compared to the previous quarter. The ECB decided in December to extend its bond purchases by another six months and will now end in March 2017. Nevertheless, if growth and inflation trends remain well below targets, the ECB has stated its readiness to increase the size of monthly bond purchases or expand the securities that are covered under the program. Outside the Euro area, third quarter economic growth in the U.K. fell short of expectations and allowed the Bank of England to delay interest rate increases. The central bank is expected to hold its benchmark rate steady through 2016 as inflation risks remain muted.
The Japanese economy is likely to expand at a modest pace in 2016 as exports continue to gain from weak currency and business confidence appears to be improving. Japan avoided a recession by expanding at an annualized 1 percent rate during the third quarter, helped by higher capital expenditure. Data indicates that Japanese companies are now investing in capacity expansions as well as increasing wages. Meanwhile, the Bank of Japan is expected to continue, or possibly expand, its bond purchases as inflation remains well below target.
Among the other developed economies, the growth outlook for countries that are major resource exporters remains subdued. Australia expanded at a healthy pace of 2.5 percent annualized during the third quarter of 2015 by increasing mining volumes to offset the drop in prices. The Canadian economy slowed further during the third quarter as energy exports slipped, but the cheaper currency is expected to help revive exports of manufactured goods.
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