Asia Pacific
The MSCI Pacific Index fell 3.4% in the week ending 8 August, underperforming other regions.
Japan’s TOPIX plunged 4.1% to a five-month low, hit by heightened Ukraine tensions, a stronger yen and concerns over the outlook for domestic and global growth.
A sharp decline in the shares of internet and communications conglomerate Softbank also weighed on the market. Softbank fell sharply on concerns over its US mobile strategy after the collapse of a proposed deal to merge its US operator Sprint with T-Mobile.
Australia’s All Ordinaries fell 2.1%—its worst week since March—as rising geopolitical risks drove the market lower. Domestic economic concerns also weighed on confidence as the Reserve Bank of Australia cut its 2014 economic growth forecast to 2.5%, from 3.0%.
Geopolitical concerns also hit Singapore’s Straits Times (-1.7%) and Hong Kong’s Hang Seng (-0.8%). Singapore stocks were hit by some disappointing corporate earnings news, including a report from real estate developer UOL Group, which said its second-quarter net profits had fallen by more than half. The Hong Kong market came under pressure from weakness in Macau casino stocks as gambling revenues fell more than expected last month.
United States
Despite ongoing geopolitical tensions and speculation over interest rates, US stocks were higher in the week ending 8 August. The S&P 500 was up 0.3%, while the Dow Jones and NASDAQ both gained 0.4%.
Geopolitical risk was the major driver of Wall Street performance last week, with a Russian troop build-up on the border with eastern Ukraine sparking worries over a possible invasion, while worsening violence in the Middle East raised concerns over international oil supplies as militant Islamist forces in Iraq marched on the oil producing region of Kurdistan.
The pullback of Russian troops from the border following a military exercise helped improve sentiment later in the week, although relations between Moscow and the west continued to deteriorate as the Russian government announced tit-for-tat trade sanctions against western food imports.
The pullback of Russian troops from the border following a military exercise helped improve sentiment later in the week, although relations between Moscow and the west continued to deteriorate as the Russian government announced tit-for-tat trade sanctions against western food imports.
The mood on Wall Street remained nervous as the US launched airstrikes in Iraq to try to halt the advance of Islamist militants threatening to overrun the north of the country.
Investors continued to keep an eye on domestic economic news amid ongoing speculation about when the Federal Reserve (the Fed) will begin raising interest rates. Last week’s economic data releases were generally stronger than expected, adding to the feeling that the Fed is preparing to act earlier than previously signalled.
New jobless claims fell by 14,000 to 289,000 in the week ending 2 August, bringing the four-week average to 294,000—the lowest since February 2006. The drop in initial claims for unemployment benefit is indicative of improving conditions in the labour market—which is a key consideration for Fed policymakers.
Meanwhile, US service industries continue to grow strongly, as shown by the Institute for Supply Management’s non manufacturing survey, which rose in July to its highest level since December 2005.
The economic data suggests that the US economy has maintained its strong momentum from the second quarter, adding to expectations for strong growth through the second half of 2014 as an improving labour market feeds through into stronger consumer confidence.
With corporate profits also expected to remain strong as demand picks up (US companies have reported earnings-per-share growth of more than 10% in the second quarter from the same period in 2013) the stock market should remain well supported, although geopolitical tensions and interest rate speculation continue to have the potential to cause bouts of volatility.
Europe
The MSCI Europe Index fell 2.0% in the week ending 8 August, as Russian trade sanctions on European Union food imports, a Portuguese bank bailout and disappointing economic data all hit investor sentiment.
Among the major markets, Germany’s DAX and Sweden’s OMX 30 were both down 2.2%, while the Swiss SPI fell 1.8%, the UK’s FTSE 100 dropped 1.7% and the French CAC 40 was 1.3% lower.
However, it was the peripheral eurozone markets that came under most pressure, with Spain’s IBEX 35 falling 3.9% and Italy’s FTSE MIB slumping 5.7%. Italian shares were hit by news that the country had slipped back into recession in the second quarter. Economic contraction only serves to add to Italy’s massive sovereign debt burden, while doubts over the ability of prime minister Matteo Renzi to implement much needed economic and political reforms further undermined confidence.
Meanwhile, the taxpayer-funded bailout of Portugal’s Banco Espírito Santo raised further concerns about sovereign debt levels in the most indebted countries—particularly with weak economic data and low inflation increasingly focusing attention back onto the long-term ability of the peripheral eurozone countries to service their debts.
Worryingly, economic growth is weakening in the core eurozone countries as well as the periphery. Most notably, German industrial production data for the second quarter, released in the week, showed a heavy 5.8% contraction in output compared to the first quarter.
With business conditions deteriorating further since June (Germany is among the most exposed economies to the escalating trade dispute with Russia), concerns over the outlook for the German economy—and the eurozone economy as a whole—continue to dent investor confidence. The situation is reflected most starkly in the bond markets, where geopolitical nervousness and concerns over weak economic growth and ultra-low inflation have helped send 10-year German government bond yields down to record lows just above 1%.
At its latest monetary policy meeting, the European Central Bank (ECB) kept interest rates on hold and reiterated the measures already in place to boost economic growth and counter the threat of deflation. ECB president Mario Draghi emphasised the upcoming targeted long-term refinancing operations, designed to boost bank lending, but suggested the central bank is ready to act with further measures (possibly including quantitative easing) if economic conditions deteriorate materially.
More effective in the short term, however, was Draghi’s attempts to further talk down the euro, with the single European currency falling to a nine-month low against the US dollar following the ECB president’s warning that the current divergence in eurozone and US monetary policy could last for some time. A weaker euro supports eurozone exports while also pushing up the price of imports, which should help to boost inflation.
Global Emerging Markets
The MSCI Emerging Markets Index fell 0.9% in the week ended 8 August.
Russia’s RTS was again among the weakest markets, falling 3.5% as relations between Moscow and the west continued to deteriorate over Russia’s role in the conflict in Ukraine. In response to western sanctions against Russia, the Russian government last week announced an almost total ban on food imports from the European Union, the US and several other western countries.
Turkey’s ISE 100 also fell 3.5% amid uncertainty over the outlook for the Turkish economy and worries over the style of governance of prime minister Recep Tayyip Erdogan, who was the leading candidate ahead of presidential elections on 10 August.
Elsewhere in emerging Europe, Hungary’s BUX dropped 3.4%, hit by concerns over new legislation that could have a negative impact on the country’s banking sector. Poland’s WIG fell 1.6% and the Czech PX-50 was flat on the week.
In Latin America, Brazil’s Bovespa fell 0.6%, while Mexico’s IPC gained 0.3%. In Argentina the Merval dropped 1.2% as negotiations to reach a debt restructuring deal continued following last month’s default.
In emerging Asia, the MSCI China Index fell 0.3%. Sentiment came under pressure from global geopolitical concerns but Chinese shares were supported by further positive economic news—including better-than-expected export data for July.
In India, the Sensex was down 0.6%, hit mainly be geopolitical risk. Meanwhile, concerns over the outlook for global growth and risk aversion hit Korea’s KOSPI (-2.0%) and Taiwan’s TAIEX (-1.9%).
Bonds & Currency
Bond yields continued to head lower in the week ending 8 August, despite continuing Federal Reserve tapering. US 10-year Treasury yields ended the week 7 basis points (bps) lower at 2.42% and are now 60bps below where they started the year.
Weaker than expected economic data in Europe coupled with increased geopolitical tensions helped German Bund yields to new record lows at 1.05%. Meanwhile, Japanese JGBs fell to 0.51%. JGBs have only had a yield this low on 14 previous occasions (source: SG Quantitative Global Equity Market Arithmetic-11 August 2014).
*Source: J.P. Morgan Asset Management
