The FTSE 100 index of leading UK company shares finished November at 6,722.62, gaining 176.45 points or 2.7% during the month.
Speculation continues that the FTSE 100 could still break its all-time high before the end of the year, despite it being back to virtually where it started 2014 at the end of November. Stocks often perform strongly during a December led ‘Santa rally’, although of course nothing is guaranteed when it comes to investing.
History tells us that the FTSE has delivered a positive return in 19 of the past 20 years during December, with an average return of 2% during December in each of the past two decades. Regardless of the fundamentals, this belief that stock markets tend to perform well in the final month of the year could be enough to drive positive investor sentiment and higher markets.
Globally, Japan continues to be troubled, with a snap election coming up over the issue of ‘Abenomics’ (the economic stimulus measures promoted by prime minister Shinzo Abe) and now a downgrade of the sovereign credit rating by agency Moody’s. This is based on “rising uncertainty” over their debt, with a cut from A1 to Aa3, a one-notch downgrade.
The downgrade follows news that Japan’s economy sunk into recession in the last quarter, with economic output contracting by 1.6% between July and September, despite continued central bank and government intervention.
The oil price continues to slide lower, presenting an opportunity for governments to phase out expensive subsidies, according to the head of the International Energy Agency. Globally, oil and other fossil fuel subsidies cost an estimated $550 billion in 2013.
The benchmark Brent crude price has fallen by around 40% since June, with the sell-off of oil and related stocks accelerating at the end of November due to the Organisation of Petroleum Exporting Countries (OPEC) deciding against curbing outputs to support the market price for oil. It is seen as test of the economics of ‘unconventional oil’, which includes production of oil from shale and oil sands. Brent crude fell to a five-year low of $68 a barrel at the start of December.
Another factor which might place downwards pressure on the oil price is slower than expected growth in Chinese manufacturing activity. China’s official Purchasing Managers’ Index fell to 50.3 in November, despite analysts predicting a figure of 50.6. Anything above 50 represents growth, but growth in manufacturing at these levels is marginal at best.
A slump in commodity prices has pushed European stocks lower at the start of December, with oil and mining stocks the hardest hit. The STOXX Europe 600 energy sector index is now in bear market territory, down 23% since June, driven lower by falling commodity prices. Copper prices have also fallen to a four and a half year low, hurting mining stocks. A gainer from falling energy prices is the airline sector, with fuel representing around a third of expenditure for aviation companies.
House price inflation
Here in the UK, house price inflation fell to an 11-month low in November, according to the latest figures published by Nationwide. Average house prices rose by 8.5% in the year to November, their slowest growth since last December. Growth peaked at 11.5% back in June. For the three months to November, perhaps a better indicator of house price trends, growth fell to 0.9%.
According to the chief economist at Nationwide, “There is something of a disconnect between the slowdown in the housing market in recent months and broader economic indicators, which have remained relatively upbeat,”
The latest price inflation figures show the Consumer Prices Index (CPI) measure up just 1.3% in October, from 1.2% in the year to September. Analysts described this modest increase as a ‘blip’ driven by temporary factors and still expect inflation to continue falling, resulting in interest rates remaining on hold for the foreseeable future. Inflation as measured by CPI has been at or below the Bank of England target of 2% for nearly a year.
Looking solely are ‘core inflation’, which does not calculate some of the more volatile goods and services, such as food and energy costs, price inflation remained unchanged at 1.5% for the year to October. The latest Bank of England quarterly inflation report forecast inflation to fall below 1% during the next six months, so an interest rate rise before the second half of 2015 is increasingly unlikely.
Gilts, gold & currency
The yield on a benchmark 10 year gilt stood at 2.65% at the start of December, up from 2.25% at the start of November.
The Forex Gold Index is $1,178.75/ounce and the Silver Index is $15.73/ounce.
£1 will buy $1.57510 or €1.26030.
Download our Monthly Investment Update for December 2014