The MSCI Pacific Index rose 0.4% in the week to 31 July.
Japan’s Topix returned 0.2%. Consumer prices excluding fresh food rose 0.1% from a year earlier in June, ahead of expectations but well short of the Bank of Japan’s 2% inflation target, which policymakers have said will be reached in the second half of 2016. The slump in the oil price over the past year has added to the challenges Japan’s central bank faces as it tries to boost inflation through a vast programme of monetary stimulus.
Australia’s mining-heavy All Ordinaries added 2.2%, rounding off its first monthly gain since February despite continued turbulence in commodity prices. The Reserve Bank of Australia meets on Tuesday 4 August to set monetary policy, with most economists forecasting no change following interest rate cuts at both of the last two meetings.
Hong Kong’s Hang Seng fell 2.0% as selling on mainland Chinese equity markets resumed, fuelling worries about the impact of the worst stock slide since 2009 on China’s economy. Singapore’s Straits Times slid 4.5%.
Speculation over the likely timing of an interest rate rise by the Federal Reserve (Fed) was the dominant theme on Wall Street in the week to 31 July. The broad S&P 500 closed 1.2% higher, while the Dow Jones gained 0.7% and the technology-heavy Nasdaq was up 0.8%.
Following its meeting on Tuesday and Wednesday, the Fed’s policy setting committee signalled that it remained on track for a rate increase this year, pointing to “solid” job growth and an economy that is expanding “moderately”. Policymakers said they would raise rates when they had seen “some” further improvement in the labour market and gained reasonable confidence that inflation would move back up to the 2% target.
Investors continued to expect a September rise, viewing the addition of the word “some” to the statement about labour data, which was otherwise unchanged from the previous meeting, as an indication that a policy move was imminent. Positive GDP data, released on Thursday, was viewed as strengthening the case for a September move.
The US economy grew 2.3% in the second quarter, slightly below the consensus forecast of 2.5%. However, the first-quarter reading was revised upwards from a 0.2% contraction to a 0.6% expansion. The data underpinning the second-quarter acceleration was also strong, with consumer spending rebounding, led by robust demand for cars in an environment of weaker fuel prices.
Confidence in a September move was shaken on Friday by news that the employment cost index, a closely watched measure of wage growth, had risen just 0.2% in the second quarter, the weakest quarterly gain since records began in 1982. The dollar fell and government bonds rallied sharply on the news, suggesting the market believes wage weakness may delay a Fed move, given the importance policymakers place on both jobs and inflation data.
Companies continue to report earnings for the April-June quarter, with high-profile disappointments last week including a decline in quarterly profits at Facebook, while positive surprises included encouraging results for United Parcel Services, which is seen as a bellwether for the health of the US economy.
With around two-thirds of S&P 500 companies now having reported, around 74% have beaten profit estimates and around half have exceeded revenue expectations, according to Bloomberg. Analysts expect earnings for the index overall to have fallen 2.8%, with declines led by the energy and materials sectors given continued commodity price weakness.
The MSCI Europe Index was up 0.7% in the week ending 31 July, boosted by positive corporate earnings results and a wave of M&A activity.
Among the major markets, France’s CAC 40 rose 0.5%, Italy’s FTSE MIB was up 0.1% and the UK’s FTSE 100 ended 1.8% higher, while Germany’s DAX and Spain’s IBEX 35 slipped 0.3% and 1.1% respectively.
Sentiment was boosted by positive results from the second quarter corporate earnings season. According to HSBC, more than half of the 32 companies that have reported in Europe have beaten earnings-per-share expectations. Luxury and capital goods companies—believed to be among those that would suffer the most from a Chinese slowdown—have performed particularly strongly.
Concerns over the Greek debt crisis moved out of the spotlight in the week. On Thursday, the International Monetary Fund made it clear that it is very wary of providing any financial contribution to a third Greek bailout.
Meanwhile, Greek prime minister Alexis Tsipras faced a mutiny from leftwing members of his Syriza party unhappy with the conditions attached to the bailout, leading to his announcement that he will be forced to call early elections in September or October if they continue to oppose the deal.
Data released in the week confirmed that market sentiment has proved resilient to the Greek saga. The European Commission’s economic sentiment indicator rose to a four-year high in July, while in Germany, the Ifo business climate index, based on a monthly survey of around 7,000 firms, also improved in the month.
In the UK, investors welcomed a bout of takeover activity. In particular, shares in UK insurer RSA rallied on the news that Swiss rival Zurich Insurance was considering a possible offer for the company. However, mining stocks came under pressure from a drop in global commodity prices amid continued worries over Chinese demand.
Global Emerging Markets
The MSCI Emerging Markets Index slipped 0.5% in the week to 31 July, underperforming developed markets, as sentiment was hit by concerns over slowing growth in China.
The MSCI China tumbled 3.8% in the week, raising concerns over the ability of the Chinese government to help support the stock market. Economic data releases were weaker than expected. Industrial profits were down 0.3% in June from a year earlier, while manufacturing activity contracted for the fifth consecutive month in July, with the purchasing managers’ index falling from 50.2 to 50.0—the level that separates contraction from expansion.
Concerns over the outlook for the Chinese economy pushed commodity prices down. Copper—for which Chinese demand is an important driver—hit a six-year low, while oil hit a four-month low.
Elsewhere in emerging Asia, South Korea’s Kospi slipped 0.8%, despite a rebound in business sentiment in July, according to a survey by Federation of Korea Industry. Taiwan’s Taiex fell 1.2% after the government issued a weaker-than-expected early reading of second-quarter GDP growth.
In India, the Sensex delivered a flat return. Sentiment was supported by hopes of a further rate cut by the central bank at its upcoming monetary policy meeting, and stronger-than-expected earnings results for auto and pharmaceutical stocks.
In Latin America, returns were positive. Brazil’s Bovespa ended the week 3.3% higher, as investors shrugged off news that Standard & Poor’s had lowered Brazil’s sovereign rating outlook to negative from stable, warning that the country could lose its investment grade rating in the next 12 to 18 months. Mexico’s IPC was up 1.1%.
In emerging Europe, Russia’s RTS was flat. The Russian rouble climbed against the US dollar after the Russian central bank announced it had stopped buying foreign currency to replenish its reserves. Hungary’s BUX was up 0.9%, while Poland’s WIG rose 1.7%.
Bonds & Currency
US Treasury yields rose early in the week after the Federal Reserve (Fed) signalled that it remained on track to raise rates this year.
However, yields slipped back on Friday after the US employment cost index for the second quarter came in well below expectations, raising question marks over the Fed’s timetable. Other core yields were also slightly lower over the week.
*Source: J.P. Morgan Asset Management