Asia Pacific
The MSCI Pacific Index rose 2.0% in the week to 4 July.
Japan’s TOPIX was the region’s strongest performer, up 2.6%, as sentiment was boosted by positive manufacturing data out of China. Japanese export-focused stocks also benefited from a stronger US dollar, which makes Japanese exports more attractive to US buyers and boosts the value of US earnings when converted back into yen.
The Bank of Japan’s latest quarterly Tankan survey, which polls more than 10,500 Japanese companies about their business outlook, painted a mixed picture. The survey—released on Tuesday—highlighted a dip in confidence among Japanese businesses following April’s consumption tax rise. However, the survey also suggested that larger Japanese companies are planning to significantly increase capital investment in the current fiscal year.
Australia’s resource-heavy All Ordinaries rose 1.5%, as commodity prices were boosted by strength in China’s manufacturing activity for June. However, trade data showed the country’s exports declined 5% in May compared with April. The market’s reaction to the Reserve Bank of Australia’s decision to keep its policy interest rate at a record low was muted.
Hong Kong’s Hang Seng ended the week 1.4% higher, also helped by Chinese manufacturing data, while Singapore’s Straits Times delivered a flat return. Hong Kong retailers suffered losses, after data showed retail sales—particularly sales of jewellery, watches and luxury gifts—fell for a fourth consecutive month in May.
United States
Positive economic data helped send Wall Street to new record highs last week ahead of the Independence Day holiday on Friday. The S&P 500 rose 1.2%, while the Dow Jones closed 1.3% higher to end the week above the 17,000 level for the first time ever. The technology-biased NASDAQ gained 2.0%.
Investor confidence was supported by a slew of economic reports that suggested the US economy was regaining momentum after its weak start to the year. Perhaps the biggest boost came from the latest monthly employment report for June, which revealed that 288,000 jobs had been created last month, helping to push the unemployment rate down by two tenths of a percentage point to 6.1%.
The jobs report suggests that the US labour market is now finally in full recovery mode. The monthly average number of jobs created in the first half of 2014 now stands at 231,000—the strongest average rate of jobs growth over any six-month period since the end of the financial crisis.
Other positive economic news last week came from the housing market, where pending home sales posted their strongest monthly increase since October 2011, and from the Institute for Supply Management’s manufacturing survey, which continued to show a healthy rate of expansion in factory activity in June.
Investors also reacted positively to comments from Federal Reserve (Fed) chairwoman Janet Yellen suggesting that US interest rates were likely to remain on hold at a record low for some time to come despite the improving economic backdrop.
There had been some concern that rising employment would filter through into higher wage inflation, but so far average wage increases have remained benign. In June, average private sector wages rose at a seasonally-adjusted annualised rate of 2.0%, down slightly from the 2.1% rate recorded in May and broadly in line with consumer price inflation. Certainly wage growth isn’t yet a concern for Fed policymakers.
On the stock market, economically sensitive stocks led the gains. Technology stocks outperformed, with the internet and semiconductor sectors among the strongest in the week as investors continued to seek out fast growing smaller tech names. The media sector also performed well on merger speculation, while homebuilders were boosted by the stronger pending home sales data.
The market remains supported by low interest rates, rising corporate profits and a strengthening economic recovery. Although many risks remain—not least the potential for further geopolitical shocks or a less accommodative Fed—further gains are possible while these positive factors remain in place.
Europe
European stock markets made further gains in the week ending 4 July, with the MSCI Europe Index up 1.4%.
Among the major markets, Germany’s DAX rose 2.0%, the UK’s FTSE 100 was up 1.6%, Sweden’s OMX Stockholm 30 climbed 1.5% and Switzerland’s SPI gained 1.4%. Italy’s FTSE MIB was 1.1% higher and the French CAC 40 rose 0.7%, while Spain’s IBEX 35 lagged slightly, up 0.5% on the week.
European Central Bank (ECB) president Mario Draghi gave more details on the cheap funding that the ECB will provide to Europe’s commercial banks through its targeted longer-term refinancing operations (TLTROs). The ECB hopes to boost lending to businesses by providing banks with access to long-term funds at very low interest rates.
Tight credit conditions have been cited as one of the key reasons for the region’s ongoing economic weakness. Last week, data confirmed that the composite eurozone purchasing managers’ index (PMI) had dipped slightly in June, suggesting that the pace of recovery in the services and manufacturing sectors may already be cooling.
Against this backdrop, investors were encouraged by the scope of the TLTROs, which are being offered on more generous terms than previous funding operations. Draghi also said that as much as EUR 1 trillion could be made available to the banks if demand is strong. However, there are doubts over how much appetite there will be from the banks in the current environment when they are also under pressure from the ECB’s asset quality review to strengthen their balance sheets.
Nevertheless, investors remain sanguine about the ECB’s commitment to support the eurozone’s fragile recovery, particularly with Draghi reiterating last week that the central bank stood ready to take further action if necessary.
The week also saw action from Sweden’s central bank—the Riksbank—which unexpectedly slashed Swedish interest rates by half a percentage point to just 0.25%. The move comes against a deteriorating inflationary backdrop, with Swedish consumer price index inflation falling 0.2% in the year to May.
Meanwhile, UK economic momentum continues to pick up steam, with June’s manufacturing PMI pointing to further strong growth in UK manufacturing output. Investors will focus this week on the latest monthly meeting of the Bank of England’s (BoE’s) policymaking committee. While no change in policy is expected, investors will look for any signal for the timing of the first rise in UK interest rates following recent warnings from the BoE’s governor Mark Carney that rates could rise sooner than expected.
Global Emerging Markets
The MSCI Emerging Markets Index rose 1.6% in the week ending 4 July, boosted by a stronger-than-expected jobs report from the US and positive manufacturing data out of China.
The MSCI China Index rose 2.1%, as China’s official purchasing managers’ index of manufacturing activity edged up to a six-month high of 51.0 in June. The reading suggests that the Chinese government’s recent stimulus efforts are beginning to have an impact, and that China’s economy may be stabilising.
The MSCI India Index was up 3.4%, as the market continued to be lifted by hopes of economic revival under the new prime minister, Narendra Modi. Attention is now focused on the new government’s first federal budget, to be announced on 10 July, which investors hope will lay out measures to boost infrastructure development.
In Taiwan, the TAIEX returned 2.2%. Among the strongest performers was TSMC, a producer of microchips for Apple products, following a strong outlook for the company’s earnings.
Returns were positive across Latin America. Brazil’s Bovespa rose 1.7%, boosted by strong jobs data in the US. A Brazilian poll showed support for the three main presidential candidates increasing. To win in the first round of voting in October, a candidate has to receive more votes than all the other candidates combined. A rise in support for all the main candidates, therefore, increases the likelihood of a second round of voting.
Mexico’s IPC rose 2.4%, as sentiment was boosted by the stronger-than-expected jobs report from the US, while Argentina’s Merval rose 3.0%.
In eastern Europe, returns were negative. Russia’s RTS dropped 1.4%, as the market closely watched the situation in eastern Ukraine, where Kiev-sent troops continued fighting with pro-Russian separatists.
The Czech PX-50 fell 4.9%. The International Monetary Fund raised its growth outlook for the Czech Republic and recommended that the government maintain its supportive monetary conditions. Poland’s WIG returned -1.4%, while Hungary’s BUX returned -1.5%.
Bonds & Currency
US benchmark 10-year Treasury yields ended the week one basis point higher at 2.64% as investors weighed stronger employment data with comments from the Federal Reserve suggesting that global monetary policy would remain accommodative.
Benign US wage growth and further details from the European Central Bank regarding its latest policy easing measures also helped to anchor Treasury yields in the week.
*Source: J.P. Morgan Asset Management
