Asia Pacific
The MSCI Pacific Index slipped 0.2% in the week ending 7 August.
Japan’s TOPIX rose 1.2%, boosted by positive earnings results from construction firms and real estate developers. As expected, the Bank of Japan kept its policy stance unchanged at its latest monetary policy meeting, with governor Haruhiko Kuroda stating that he was confident of achieving the 2% inflation target before September 2016.
Hong Kong’s Hang Seng fell 0.3%, as concerns over the outlook for Chinese economic growth weighed on sentiment.
Elsewhere, Australia’s mining-heavy All Ordinaries was down 3.7% in another week of commodity price weakness. On Tuesday, the Reserve Bank of Australia left interest rates unchanged at a record low of 2%, as widely expected. However, in its accompanying statement, the central bank removed references to a likely further depreciation in the Australian dollar, sending the currency higher against the US dollar. Banks were among the weakest performers, while consumer goods companies performed positively, helped by a larger-than-expected 0.7% rise in retail sales in June.
Singapore’s Straits Times ended the week 0.2% lower.
United States
Wall Street stocks slipped back in the week to 7 August. The Dow Jones fell 1.8%, while the broad S&P 500 was down 1.2% and the technology-heavy Nasdaq lost 1.7%.
It was another challenging week for the energy and materials sectors as commodity prices continued to slide. Brent crude hit a new six-month low following six weeks of declines, while weak Chinese manufacturing data added to the downward pressure on metals prices.
Individual stocks with exposure to China also struggled, with Apple shares falling heavily amid concerns about slowing growth in the Chinese smartphone market. Meanwhile, media stocks had their worst week since 2011 as Disney reported disappointing earnings and investors worried about the potential impact for traditional broadcasters of the shift to digital media.
Market sentiment continued to be dominated by speculation about the timing of the first US interest rate rise since 2007, with the week’s economic data releases viewed as broadly supporting a September move by the Federal Reserve (the Fed).
Growth in the US manufacturing sector remained sluggish in July, according to a survey by the Institute for Supply Management (ISM). However, the ISM’s non-manufacturing index for the same period pointed to the strongest service sector growth since August 2005, as new orders surged.
July’s non-farm payrolls report suggested employment is growing steadily, with the jobless rate remaining at its lowest level since the financial crisis. The report showed that 215,000 jobs were created in the month, slightly below a revised 231,000 gain in June, while average weekly hours rose from 34.5 in June to 34.6 in July.
The Fed said in July that it needed to see “some further improvement” in the labour market before it would raise rates, meaning the one remaining payrolls report before the US central bank’s September meeting will be crucial.
Dennis Lockhart, president of the Atlanta Fed, said last week that he was ready to back a September rise, barring any deterioration in economic data. Lockhart is a moderate voice on the Federal Open Market Committee, tending to vote with the consensus, so his comments were viewed as providing an indication of the overall mood among policymakers.
Europe
The MSCI Europe Index rose 0.5% in the week ending 7 August, supported by positive corporate earnings news and progress towards a long-term Greek debt deal.
Among the major European markets, Germany’s DAX closed 1.6% higher and the French CAC 40 was up 1.4%. Italy’s FTSE MIB rose 0.7% and the UK’s FTSE 100 gained 0.3%, but Spain’s IBEX 35 was flat and the Swiss SPI dropped 0.1%.
European markets were again buoyed by positive profit announcements for the April-to-June quarter, with French lender Societe Generale and German consumer products maker Beiersdorf among the high profile names to beat expectations.
The European second-quarter earnings season has been generally positive, and much better than in the US, where profits are forecast to decline slightly overall. With more than half of European companies listed on the MSCI Europe Index having reported, the majority have so far beaten analysts’ expectations.
The European economy also provides a positive backdrop, although data released last week was mixed. On the positive side, the final print of the eurozone composite purchasing managers’ index (PMI) for July, at 53.9, remained consistent with stronger momentum in both manufacturing and services industries.
However, industrial production data for June disappointed, particularly in Germany and France, while retail sales for June were also weak, falling 0.6% month on month. Nevertheless, economic data overall continues to point to a stronger pace of eurozone GDP growth for 2015 and 2016.
Sentiment was also boosted by signs that Greece is inching towards final agreement with its creditors to secure the EUR 86 billion third bailout deal that it agreed in emergency talks last month. While obstacles remain, any finalisation of a deal with Greece would clearly remove a major short-term risk from the table.
In the UK, meanwhile, stronger manufacturing and services PMI data for July raised expectations that the Bank of England (BoE) may bring forward its first interest rate increase. However, the dovish tone of both the BoE’s latest inflation report and the minutes from its latest monetary policy meeting (which were published together on Thursday) suggested that UK interest rates may remain on hold for the remainder of 2015.
The BoE’s Monetary Policy Committee voted eight to one to keep rates unchanged in July, suggesting little appetite among policymakers to raise the cost of borrowing at this stage, while forecasts for UK inflation were revised down.
Global Emerging Markets
The MSCI Emerging Markets Index was down 1.4% in the week to 7 August, underperforming developed markets, as concerns over the health of the Chinese economy continued to weigh on sentiment.
The MSCI China delivered a flat return. The final reading of the Caixin/Markit purchasing managers’ index (PMI) confirmed that China’s manufacturing sector contracted by more than previously thought in July. The index fell to 47.8, from 49.4 in June, below the 50 threshold that separates contraction from expansion and marking the lowest level since August 2012. All major components of the index—new orders, output and raw material inventory—lost steam, suggesting the economy is struggling to gain momentum and raising concerns over the ability of the Chinese government to help support the stock market.
Elsewhere in emerging Asia, India’s Sensex was up 0.4%, helped by a jump in July’s manufacturing PMI to a six-month high. As widely expected, the Reserve Bank of India kept policy rates on hold but signalled that inflation risks had reduced, potentially opening the door for one more rate cut later in the year.
In Taiwan, the Taiex dropped 2.6%, led lower by weakness in technology stocks. July’s headline manufacturing PMI rose modestly to 47.1, compared to 46.3 in June, marking the fourth consecutive month of contraction, and suggesting that the recent sluggishness in export and industry activity is likely to linger in the near term. South Korea’s Kospi slipped 1.0%.
In Latin America, Brazil’s Bovespa fell 4.5%. President Dilma Rousseff’s approval rating hit rock bottom, according to a poll published in the week, due to a lack of confidence in her ability to kickstart the Brazilian economy. Mexico’s IPC rose 0.2%
In emerging Europe, Russia’s energy-heavy RTS fell 3.1%. The latest bout of weakness in the oil price—partly a result of continued concerns over the health of the Chinese economy—weighed on stocks and pushed the Russian rouble down to a six-month low against the US dollar. Hungary’s BUX and Poland’s WIG were down 0.4% and 0.6%, respectively.
Bonds & Currency
Bond markets fell modestly in the week ended 7 August ahead of a likely interest rate hike by the US Federal Reserve (Fed).
Ten-year Treasury yields were flat but two-year yields rose sharply as comments from the Fed (Dennis Lockhart, a member of the Fed’s rate setting committee, said he may back a September increase) and data releases (Friday’s payrolls report) suggested that rates would rise in September.
*Source: J.P. Mogan Asset Management
