Japan’s TOPIX was down 2.3%. Japanese machinery orders fell sharply in May, by 19.5% vs. expectations of a 0.7% rise, led by the electric machinery, chemicals, transportation and financials sectors.
The weaker-than-expected data has raised questions about the ability of the Japanese economy to recover from the impact of April’s consumption tax rise. In particular, investors are concerned over the appetite of companies to invest in their businesses—a key element of prime minister Shinzo Abe’s programme to revive the economy.
Hong Kong’s Hang Seng fell 1.3%, as weaker-than-expected trade data out of China weighed on sentiment. Investors are now awaiting the release of China’s second-quarter growth data on 16 July.
Australia’s All Ordinaries dropped 0.7%, while Singapore’s Straits Times rose 0.7%. In Australia, unemployment data for June was weaker than expected, reaching an 11-year high of 6%.
United States
Wall Street fell back in the week ended 11 July, with the S&P 500 down 0.9%, the Dow Jones 0.7% lower and the technology-biased NASDAQ 1.6% lower. In the absence of any major US economic data or corporate earnings news, renewed eurozone worries triggered profit taking following the strong recent market rally.
The second-quarter corporate earnings season got off to a quiet start, with investors taking cautious positions ahead of the major reports due later in the month. Higher risk technology stocks underperformed, while defensive utilities and telecoms outperformed.
Banks were lower as mortgage lender Wells Fargo reported a drop in second-quarter sales, hit by a slowdown in the US mortgage market. Sentiment was also hit by fears about the health of Portuguese lender Banco Espírito Santo, which reignited concerns about the creditworthiness of the European banking sector and helped to spark a large selloff on global markets later in the week.
Higher yielding stocks, such as utilities, were in demand from yield-hungry investors as US Treasury yields continued to track lower amid concerns over global growth and nervousness over increased violence in the Middle East. 10-year Treasury yields ended the week just above 2.5%—down from more than 3% at the start of the year.
US economic data was thin on the ground, although a further drop in initial jobless claims in the week ending 5 July (by 11,000 to 304,000) provided further evidence of a strong pickup in the labour market. Attention was focused on Europe, where a sharp drop in Italian and French industrial output in May led to worries that the eurozone recovery may be stalling—adding to renewed regional sovereign debt concerns.
The coming week will provide more direction for US investors, with some major economic data announcements due, including the latest monthly retail sales, industrial production and housing reports. The market will be looking for further evidence of a rebound in economic activity following the unexpected contraction in first-quarter GDP.
The corporate earnings season also gets underway in earnest, with reports due from many market heavyweights, including some of the biggest banking stocks, several large technology names, and a number of major industrial companies. Expectations are for positive results overall, which should support share prices at current levels.
Finally, investors continue to focus on the Federal Reserve (the Fed). The minutes from last month’s Fed policy setting meeting, released last week, suggested that policymakers remain comfortable with interest rates at their current record low level. However, given the recent strength of US economic and inflation data and the ongoing tapering of monthly asset purchases, the market will be looking for guidance from Fed chairwoman Janet Yellen on the likely timing of the first increase in US interest rates when she testifies to Congress later this week.
Europe
European equities suffered losses in the week ending 11 July, with the MSCI Europe Index down 3.0%. Reports of a missed payment on short-term debt by a member of Portuguese banking group Banco Espirito Santo sparked renewed concerns about the health of the eurozone banking sector, leading to a broad selloff that was compounded by a slew of disappointing European economic data.
Peripheral markets were hardest hit—Italy’s FTSE MIB fell 4.4% and Spain’s IBEX 35 declined 4.3%. The German DAX and the French CAC 40 both ended the week 3.4% lower, while Sweden’s OMX Stockholm 30 was down 2.7%. The FTSE 100 and the Swiss SPI lost 2.6% and 2.3%, respectively.
Worries over the solvency of eurozone banks were exacerbated by weaker regional economic data, which rekindled peripheral sovereign debt concerns. Eurozone industrial production figures for May were much weaker than expected, with both the German and the French releases attributing declines in part to the timing of public holidays. Italy’s industrial production slumped, although the rest of the eurozone periphery held up relatively well.
In the UK, all eyes were on the latest meeting of the Bank of England’s (BoE’s) policymaking committee. As expected, the BoE left UK interest rates unchanged at their record low of 0.5%, but the market continues to broadly expect rates to begin to rise either at the end of this year or in early 2015, and probably before the Federal Reserve begins to raise US interest rates. The decision to raise interest rates will likely hinge on the strength of the UK recovery and the outlook for inflation.
While surveys continue to show that British businesses are in good health overall and house prices are still rising rapidly—although activity indicators pointed to some moderation in the positive trend in June—export growth has failed to pick up and wage inflation remains weak. Against a distinctly mixed backdrop, the publication of the BoE’s Quarterly Inflation Report and an updated set of forecasts in August should provide some greater clarity on the future course of UK monetary policy.
Meanwhile, there was some optimism that the upcoming corporate earnings reporting season could show an improved outlook for European companies. According to ratings agency Standard & Poor’s, second-quarter earnings for the average S&P Europe 350 company are estimated to have increased by 5% in the April-to-June quarter, with the biggest improvement in the earnings outlook for companies in the consumer discretionary, materials and information technology sectors.
With European equity markets trading at near six-year highs, investors are keen to see earnings growth come through to help support current share price valuations.
Global Emerging Markets
The MSCI Emerging Markets Index fell 0.2% in the week ending 11 July.
One of the strongest performing markets was Indonesia, with the MSCI Indonesia Index up 4.1% on the week as initial vote counts suggested that pro-business candidate Joko “Jokowi” Widodo had won the presidential election held on 9 July. However, rival candidate—and former general—Prabowo Subianto, also claimed victory. The country’s Elections Commission is now checking the vote count and will announce the final result by 22 July.
The MSCI China Index fell 0.9%. Although recent manufacturing surveys have suggested a pickup in Chinese growth, disappointing trade data released last week cast renewed doubts over the economic outlook. Exports rose 7.2% in June from a year earlier—a five-month high, but well below forecasts, while imports grew 5.5%, also missing expectations.
India’s SENSEX dropped 3.6%—the biggest weekly fall since March 2013—as investors reacted negatively to the new government’s first budget announcement. Finance minister Arun Jaitley vowed to cut borrowing and boost growth but left investors unclear about how both objectives would be achieved.
Investors were also disappointed by a separate announcement that controversial rules to tighten policy on tax avoidance by foreign investors, proposed by the previous government, would be implemented as planned in 2015. Investors had hoped the plans would be modified or scrapped by the new government.
Brazil’s BOVESPA rose 1.4%, boosted by hopes that defeat for the Brazilian football team in the World Cup semi final would hurt President Dilma Rousseff’s re-election bid. Investors hope that Dilma, whose interventionist policies have damaged many large state-controlled stocks, could suffer a further drop in popularity as Brazilians refocus their attention on the country’s struggling economy following the country’s World Cup exit.
Argentina’s MERVAL climbed 8.4%, with sentiment boosted by hopes that the government’s negotiations with creditors looking for compensation from the country’s 2001 debt default will help Argentina to remain solvent.
Bonds & Currency
US Treasury yields fell in the week, supported by weaker eurozone economic data, and negative headlines surrounding the solvency of a Portuguese bank. UK Gilts and core eurozone bond yields also fell, but peripheral euro bond yields rose amid renewed sovereign debt concerns.
With the Federal Reserve continuing to reassure investors that interest rate hikes will be slow and gradual, with global growth set to remain sluggish, and with geopolitical uncertainty on the rise, developed market sovereign yields should remain well anchored in the short term at least.
*Source: J.P. Morgan Asset Management
