The MSCI Pacific Index fell 3.2%, hit by sharp falls in Japan and Hong Kong as volatility on Chinese markets hit sentiment.
Hong Kong’s Hang Seng was down 4.5%, as domestically traded Chinese A shares suffered another tumultuous week. Chinese stocks continued to fall sharply at the start of the week, before rebounding on Thursday and Friday on the back of official measures to stabilise trading and support prices.
In Japan the Topix was down 4.1%, as Chinese market volatility combined with worries over Greece to hit sentiment. The yen rose against both the euro and the US dollar, hitting exporters, while some disappointing earnings news hit several large stocks including Toshiba and Fast Retailing.
Elsewhere, Singapore’s Straits Times dropped 1.9% and Australia’s All Ordinaries was down 0.9%. Volatile commodity prices hit Australia, while the unemployment rate rose to 6.0% in June from 5.9% – although this was lower than had been feared.
Wall Street experienced volatile trading in the week to 10 July as overseas worries and a renewed slump in the oil price rattled markets. The Dow Jones ended the week 0.2% higher, while the S&P 500 was broadly unchanged following sharp midweek moves. The technology-heavy Nasdaq lost 0.2%.
Sentiment was largely driven by events in China and Greece, with pessimism at the beginning of the week giving way to relief as the Chinese authorities succeeded in halting a stock market sell-off and a Greek deal appeared close.
However, energy and materials stocks failed to recover their losses as global worries sent the price of Brent crude oil below USD 60 a barrel for the first time since April and other commodities were hit by fears demand from China would fall.
Investors were also unsettled by an outage on the New York Stock Exchange (NYSE) on Wednesday, which caused trading to be suspended for three hours. The NYSE attributed the suspension to an internal technical problem resulting from a new software release.
On the domestic front, the main issue for investors continues to be the timing of the first interest rate rise from the Federal Reserve (Fed). Minutes of the June meeting of the Federal Open Market Committee (FOMC), the Fed’s rate-setting board, showed that policymakers were divided. Officials believed improving domestic economic conditions merited tighter monetary policy, but were concerned about overseas events.
Fed chair Janet Yellen refused to confirm the market view that a quarter percentage point rate increase will come at the September FOMC meeting. Yellen said the path of the economy and inflation “remains highly uncertain” and warned that “unanticipated developments could delay or accelerate the first step”.
For now, a September rate rise still looks likely, but the Fed will be keeping a close eye on the ability of the European and Chinese authorities to contain risk. Increased stock market volatility or a stronger US dollar as a result of a global flight to safety could both bring about a delay to policy moves.
The MSCI Europe Index rose 1.9% in the week ending 10 July, boosted by renewed optimism for a Greek debt deal.
Among the major European markets, Spain’s IBEX outperformed with a 2.4% gain, while Germany’s DAX rose 2.3%, Switzerland’s SPI climbed 2.2% and the French CAC 40 added 2.0%. Italy’s FTSE MIB was 1.9% higher, while the UK’s FTSE 100 rose 1.3%.
The week began inauspiciously, with an overwhelming “No” vote to austerity in the Greek referendum appearing to kill off hopes of a new bailout deal and move Greece closer to the euro exit door.
The market reaction to the “No” vote was relatively muted considering the risks that a Greek exit could pose to the whole European project. The spread between the 10-year Italian government bond yield and the 10-year German Bund yield, for example, widened by a mere 20 basis points in the week, suggesting a notable absence of contagion fears.
Markets have been comforted by the decisive policy response from the European Central Bank (ECB). Unlike in 2010 when the crisis began, the ECB can now support markets through its quantitative easing and outright monetary transactions programmes. Crucially, investors believe that the ECB has the tools in place to stand by its promise to do “whatever it takes” to safeguard the currency union.
As the week progressed, market sentiment began to pick up amid signs that the Greek government—in the face of impending bankruptcy and expulsion from the euro—was preparing to ignore the referendum result and submit new reform proposals ahead of a eurozone summit in Brussels at the weekend.
The new proposals, delivered on Thursday evening, moved some way towards meeting the demands of Greece’s creditors and sparked hopes that an agreement could still be reached. However, the breakdown in trust between Greece and its creditors ensured that the negotiations would be difficult.
The deal that Greece eventually signed up to early on Monday 13 July contains even harsher measures than those rejected by the Greek people a week earlier, including a 30-year EUR 50 billion state privatisation programme. The Greek parliament has to approve the deal by Wednesday 15 July, and only then will eurozone leaders start more substantive talks on a three-year bailout programme, which could total over EUR 80 billion.
The initial market reaction to the news was positive, but investors remain wary given the deal still has to be approved by national parliaments in Finland, the Netherlands, Slovakia, Malta and Estonia as well as Germany.
Global Emerging Markets
Emerging markets lagged their global peers as losses on the Chinese markets continued. The MSCI Emerging Markets Index fell 2.9% in the week to 10 July vs. a 0.1% decline for the MSCI World.
The MSCI China was down 5.2%. The two main onshore Chinese exchanges, in Shanghai and Shenzhen, have seen heavy selling since 12 June, triggered by a clampdown on margin finance—the use of borrowed money to buy shares—amid worries about a bubble. Initial efforts from Beijing to stem the falls, including an interest rate cut, direct purchases of large cap shares and a cut to trading fees, had little effect.
Further measures introduced at the end of last week—notably a ban on selling by investors with large stakes in individual companies—finally succeeded in halting the decline, and Chinese stocks rallied sharply on Thursday and Friday.
However, the turbulence of the past month has prompted more than half of the companies listed on the two exchanges to suspend trading in their shares. Not only are they now missing out on the gains, but as suspensions are lifted there is a possibility that prices may fall anew.
Elsewhere, India’s Sensex dropped 1.5%. Industrial production rose less than forecast in May, climbing 2.7% year on year vs. a predicted 4% gain, as production of consumer goods fell.
Latin American markets held up better, with Mexico’s IPC slipping 0.3% and Brazil’s Bovespa edging 0.1% higher. Brazil’s president, Dilma Rousseff, faces possible impeachment this week as Brazil’s electoral watchdog hears allegations that a senior businessman made illegal contributions to her 2014 election campaign. Rousseff’s approval ratings have already plummeted amid widespread criticism over her handling of the country’s economy.
Central European markets also performed relatively well, helped by hopes Greece was close to reaching a deal with its creditors. Hungary’s BUX was up 0.9%, while the Czech PX gained 1.0%.
Bonds & Currency
Bond markets were mixed during the week, with G4 yields initially declining following the “No”
vote in the Greek referendum, and later unwinding those declines as prospects of a deal between Greece and its creditors improved after the Greek government appeared to concede ground.
US Treasury yields inched up on the week although they experienced a lot of intra-week volatility. In Europe, peripheral yields generally fell, with Spanish, Italian and Portuguese bonds rallying late in the week as a Greek deal began looking more likely. German 10-year yields rose sharply in the second half of the week in anticipation of a Greek resolution, ending the week up around 10 basis points.
*Source: J.P. Morgan Asset Management
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