The MSCI Pacific Index returned 0.1% in the week to 1 August.
Japan’s TOPIX delivered a flat return. Caution eased over the April-June corporate results, as major Japanese companies reported encouraging earnings. Automakers performed particularly strongly as a result of increasing sales to China.
However, economic data released in the week was negative for sentiment. Retail sales were down 0.6% in June from a year earlier, while the unemployment rate rose to 3.7% in June from 3.5% in May. Industrial output for June fell at the fastest rate since 2011, leading to concerns over the ability of the government’s Abenomics programme to end deflation and restore growth.
Hong Kong’s Hang Seng rose 1.3% in the week, led by gains in property stocks, which benefited from further signs that the Chinese government is loosening restrictions on the property market in order to boost sales.
Australia’s All Ordinaries fell 0.5% on concerns that the US Federal Reserve may raise interest rates sooner than expected. Singapore’s Straits Times dropped 0.2%.
Stocks fell sharply in the week ended 1 August amid further uncertainty over the timing of the first US interest rate increase. Concern over Russian sanctions, Argentina’s sovereign default and the European financial sector also hit sentiment, with the S&P 500 falling 2.7% and the Dow Jones down 2.8%.
Speculation over US interest rates intensified as economic data strengthened. The second-quarter GDP data stole the headlines, as the US economy grew at a better-than-expected 4% annual pace in the April-to-July period. Growth momentum appears to have carried through into the third quarter, as July’s Institute for Supply Management manufacturing activity index rose to its highest level in more than three years.
Investors also focused on the employment cost index, which increased sharply in the second quarter—boosted by higher wages—suggesting that inflation pressures in the economy may be building as jobs growth strengthens.
Against this backdrop of accelerating economic activity and worries over inflation, the latest meeting of the Federal Reserve’s (the Fed’s) interest rate setting board only served to increase expectations that interest rates may now rise before the middle of 2015—which is the market’s latest forecast.
Charles Plosser, president of the Philadelphia Fed, objected to the policy statement’s suggestion that borrowing costs would probably stay low for a “considerable time” after the US central bank ends its asset purchase programme, suggesting that dissent within the Fed over the current easy money policy may be growing.
However, the July employment report—released at the end of the week—suggested there is still significant slack in the labour market, providing support for the Fed’s core position that weak labour costs can allow it to be patient with interest rates. Although the 209,000 jobs created in July is consistent with above-trend economic output, this was down from the 277,000 average over the second quarter. The unemployment rate also ticked up to 6.2%, due to an increase in labour market participation, and average hourly earnings were flat.
US stocks were also hit last week by heightened volatility caused by the latest round of sanctions issued against Russia, Argentina’s sovereign default, and the bailout of Portuguese lender Banco Espírito Santo. These concerns outweighed the ongoing strength of US corporate reports as the third-quarter earnings season continued.
With most S&P 500 companies having now reported, overall earnings are up by nearly 10% compared to the same period in 2013, while company managements have generally reported positive outlooks for the rest of 2014. Strong corporate fundamentals should therefore provide good support for share prices going forward.
The MSCI Europe Index was down 2.6% in the week ended 1 August. Markets took a hit as sanctions on Russia were stepped up amid limited signs of an easing in the tensions in Ukraine. Tougher sanctions included restricting the access of state-owned Russian banks to European debt and equity markets. Also weighing on markets were concerns that Portugal’s largest lender, Banco Espirito Santo, could require state assistance.
With Germany more affected than most other markets by the fallout of tougher sanctions on Russia due to the close trading ties between the two countries, the DAX was the weakest regional market, falling 4.5%. Elsewhere, Spain’s IBEX 35 and Italy’s FTSE MIB suffered respective losses of 3.4% and 3.3%, while the French CAC 40 and Sweden’s OMX Stockholm 30 both lost 3.0%. In the UK, the FTSE 100 fared slightly better, down 1.7%.
Negative sentiment, however, overshadowed a host of encouraging European data releases that highlighted improvement in credit and labour market conditions. The European Central Bank’s (ECB’s) bank lending survey showed a strengthening of the trend towards easier lending standards in the eurozone in the second quarter. The ongoing economic recovery in the eurozone appears to be having a positive effect on how banks assess the level of risk associated with extending credit to corporates, with lending standards falling for the first time since 2007.
Meanwhile, eurozone labour market conditions improved in June, with the unemployment rate falling to 11.5% in June, from 11.6% in May—the lowest level since September 2012. Across the eurozone, the lowest unemployment rates were recorded in Austria and Germany, while the highest were in Greece and Spain. Youth unemployment, however, remained stubbornly high, at 23.1% in June compared with 23.9% a year earlier.
Of concern, however, was a further decline in the eurozone rate of consumer price inflation, which fell to 0.4% in the year to July, from the previous month’s 0.5% increase. While subdued price pressures remain a concern for the ECB, a weakening in the euro in the weeks following the announcement of its latest monetary policy measures has boosted expectations that the rate of eurozone inflation will begin to rise gradually over the latter half of the year.
Manufacturing purchasing managers’ indices for July pointed to stable growth in the eurozone, and a slight slowing in activity in the UK. Overall, the recovery remains on track, bolstering confidence that European companies can grow their earnings. Initial evidence from the second-quarter earnings season has been modestly encouraging, with signs of larger companies returning to earnings growth.
Global Emerging Markets
The MSCI Emerging Markets Index returned -0.9% in the week to 1 August, as the mood remained cautious after the European Union (EU) and the US announced a new round of sanctions against Russia.
Argentina’s Merval delivered a strong return of 5.1%, despite the country officially defaulting on its sovereign debt. Following the failure of last-minute negotiations, Argentina missed its deadline to pay USD 1.3 billion to private bondholders in New York. Argentina’s ongoing dispute with creditors stems from its 2001 default, and is expected to exacerbate problems in its recession-hit economy. However, the default is unlikely to have a significant impact on developed or emerging markets.
Elsewhere in Latin America, Brazil’s Bovespa was down 3.3%, while Mexico’s IPC slipped 0.9%. In Brazil, concerns over the country’s rising inflation and weak economic growth weighed on sentiment. In Mexico, stocks received little boost from second-quarter earnings results, which showed companies struggling with weak consumer spending and higher tax rates. However, US data confirming growth in the manufacturing and construction sectors—both with strong links to the Mexican economy—was positive for sentiment.
The MSCI China was up 0.2%. China’s official manufacturing purchasing managers’ index (PMI) rose to a 27-month high of 51.7, vs. the 51.4 expected, while the HSBC PMI was revised down to 51.7 from 52.0. Profits for China’s industrial companies rose sharply in the year to June, adding to signs of economic recovery.
South Korea’s KOSPI rose 1.9%, after data released in the week confirmed that exports in July grew at their fastest annual rate in seven months. Taiwan’s TAIEX was down 1.8%.
Russia’s RTS fell 2.7%, as the EU and US widened sanctions against Moscow for its involvement in the situation in Ukraine. The sanctions, which are the toughest since the end of the cold war, target the key sectors of the Russian economy—energy, arms and finance.
Bonds & Currency
US Treasuries rose, driven by the front end of the curve, following weaker-than-expected employment data.
However, 10-year Treasuries were broadly unchanged on the week, at 2.9%, as weaker stock markets balanced some of the stronger economic news from earlier in the week.
*Source: J.P. Morgan Asset Management
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