Asia Pacific
The MSCI Pacific Index rose 4.4% in the week to 17 July, as sentiment was boosted by gains in the Chinese market and easing worries over Greece.
Japan’s TOPIX was the region’s strongest performer, rising 5.0%. Exporters delivered strong gains, benefiting from the weakening Japanese yen vs. the US dollar. (A weaker yen makes Japanese exports more attractive in international markets and increases the value of profits earned overseas).
The Bank of Japan (BoJ) left its policy stance unchanged in its monetary policy meeting, as expected, stating that it would continue to expand the monetary base at an annual pace of JPY 80 trillion. It lowered its forecasts for economic growth and inflation, but BoJ governor Haruhiko Kuroda provided reassurance, stating that the downgrade to inflation would not affect the goal of achieving the central bank’s 2% inflation target by mid 2016.
Hong Kong’s Hang Seng was up 2.1%, in line with gains in the Chinese market following recent volatility.
Elsewhere, Australia’s All Ordinaries was up 3.2%. Sentiment was boosted by news that the National Australia Bank’s business confidence index had risen to the highest level since September 2013, helped by tax cuts and write-offs for small firms in May’s budget.
Singapore’s Straits Times ended the week 2.2% higher, despite news that the economy had contracted more than expected in the second quarter, largely due to weakness in the manufacturing sector.
United States
Calmer global waters lifted Wall Street stocks in the week to 17 July. The Dow Jones returned 1.8% and the broad S&P 500 was up 2.4% as worries over Greece and China eased.
The technology-biased NASDAQ surged 4.3% to close at an all-time high after several big names released strong earnings reports.
T
he US dollar continued to gain as a small pickup in inflation added to expectations the Federal Reserve (Fed) will soon raise interest rates. Core US consumer prices rose at an annual rate of 1.8% in June, up from 1.7% in May.
In her semi-annual testimony to Congress, Fed chair Janet Yellen said an interest rate rise this year would be “appropriate” if the economy remained on the expected path. Yellen reiterated that the timing of the first rate rise was less important than the pace of subsequent increases, which she said would be gradual.
The quarterly earnings season got underway in earnest last week, with some of the US’s largest companies reporting results for the April-June period.
Google’s share price jumped after the search engine operator reported a better-than-expected second quarter and promised tighter cost controls. Internet TV provider Netflix also released strong results, helped by growth in subscriptions beyond the US market.
Further positive surprises came from the financial sector, where tighter cost controls helped lenders to boost their earnings. Overall, analysts project a 5.3% decline in profits for members of the S&P 500 in the quarter, according to Bloomberg, with energy and materials companies expected to have struggled given commodity price weakness.
Deal activity continues to be supportive for equities as companies put high levels of stockpiled cash to work. Internet auction site eBay hit a record high after it agreed to sell its enterprise unit for USD 925 million.
Biotechnology company Receptos accepted a USD 7.2 billion bid from Celgene, while the investment arm of one of China’s top universities was rumoured to be planning a USD 23 billion offer for US chipmaker Micron Technology.
Europe
Easing concerns over Greece helped propel European stock markets higher in the week ended 17 July 2015. The MSCI Europe Index rose 3.0%.
Among the major markets, the French CAC 40 outperformed with a 4.5% gain. Peripheral eurozone markets also performed well, with Spain’s IBEX 35 up 4.0% and Italy’s FTSE MIB 3.6% higher. Elsewhere, the Swiss SPI rose 3.3%, Germany’s DAX climbed 3.2% and the Swedish OMX 30 put on 2.8%, whie the UK’s FTSE 100 lagged behind with a more modest 1.5% gain.
Sentiment was supported by an improvement in the situation in Greece. The eleventh-hour agreement reached in Brussels early on Monday morning to offer Greece talks on a third bailout programme in return for commitments to further austerity measures was greeted positively by investors.
The threat of a destabilising debt crisis in the eurozone receded as the week progressed, with the Greek parliament approving the deal and the German parliament also backing the plan, and with the European Union arranging a EUR 7 billion bridging loan to prevent Greece from defaulting on a looming payment to the European Central Bank (ECB).
Given the political difficulties faced on both sides to resolve the situation—not least the need for any bailout deal to include some form of debt relief from Greece’s creditors and the tough fiscal targets that Greece has to stick to—many obstacles remain. Nevertheless, the immediate reduction in risk was reflected by a drop in eurozone government bond yields. Spanish 10-year sovereign yields, for example, fell 21 basis points (bps) to a seven-week low of 1.93%.
With Greece concerns abating, investors refocused on the regional economic recovery. Last week’s positive data included the ECB’s bank lending survey for the second quarter, which showed a further easing in eurozone credit conditions and a rise in loan demand, suggesting that access to (and demand for) credit is improving. Meanwhile, new car registrations rose 1.6% month on month in June, suggesting that consumer confidence is continuing to pick up across the continent.
In the UK, stocks were held back by interest rate speculation, as Bank of England governor Mark Carney warned that the time for a first rate increase is getting closer. With wage growth accelerating in May, investors began to contemplate higher interest rates before the end of the year. UK stocks were further constrained by weaker metals prices, which hit mining stocks.
Global Emerging Markets
The MSCI Emerging Markets Index was up 1.3% in the week to 17 July, buoyed by encouraging data out of China and news of a deal between Greece and its creditors.
The MSCI China rose 1.2%, supported by hopes that rescue measures announced by policymakers to stabilise the market were working after several weeks of sharp declines. Economic data released in the week topped expectations. China’s economy grew 7% year on year in the second quarter, beating expectations of 6.8% growth, while industrial output, retail sales and household disposable income all rose in June. Exports rose a stronger-than-expected 2.8% in June from a year earlier, compared to a fall of 2.5% in May.
Meanwhile, the People’s Bank of China announced a relaxation in rules to allow more foreign involvement in its domestic bond market, a step to encourage more long-term institutional investment.
Elsewhere in emerging Asia, India’s Sensex rose 2.9%, boosted by hopes for a decline in crude oil prices following the imminent lifting of sanctions on Iran. Auto stocks were among the week’s strongest performers, on hopes that state-run refiners will cut fuel prices.
Taiwan’s Taiex was up 1.5%, while South Korea’s Kospi rose 2.2%.
In Latin America, Mexico’s IPC was up 0.9%, while Brazil’s Bovespa slipped 0.5%. The Brazilian central bank’s IBC-Br economic activity index was practically flat in May from April, below expectations for a pickup.
In emerging Europe, Poland’s WIG rose 1.6%. On the positive side, headline deflation eased in June, helped by stronger food prices. However, the Polish labour market disappointed for a second consecutive month, with corporate sector wage growth and employment both slowing in June.
In Russia, the RTS ended the week 0.8% higher, despite weakness in industrial production, which unexpectedly contracted 4.8% in June from a year earlier.
Bonds & Currency
Peripheral eurozone government bond markets had a positive week, supported by an improvement in the situation in Greece. The yield on Spanish 10-year sovereign debt fell 21 basis points (bps) over the week to a seven-week low of 1.93%, while the 10-year German Bund yield fell 10 bps to 0.79%.
The US Treasury bond market offered a muted response to expectations that interest rates could rise as soon as September. The yield on the two-year US Treasury was up 2 bps on the week to 0.67%.
*Source: J.P. Morgan Asset Management
