The MSCI Pacific Index was down 0.9% in the week ending 24 July.
Most major regional markets were lower, led by a 1.7% decline for Australia’s All Ordinaries. Australia’s index, which is dominated by mining and commodity-related stocks, struggled in a week when commodity prices fell sharply on concerns over falling Chinese demand.
Hong Kong’s Hang Seng fell 1.1% on Chinese growth concerns as mainland manufacturing activity contracted in July.
Japan’s TOPIX (-0.4%) was also hit by Chinese growth worries, while a weaker dollar was negative for exporters at the end of the week. However, the Tokyo market was supported by strength in retail stocks on a rise in tourist numbers, while electronics company Toshiba surged after the resignation of its chief executive and vice chairman following an accounting scandal. Investors hope the changes in management will help a draw a line under the affair.
Singapore’s Straits Times was unchanged on the week.
Earnings disappointments and a continued commodity price retreat weighed on Wall Street in the week to 24 July. The Dow Jones lost 2.9%, while the broad S&P 500 was down 2.2% and the technology-heavy Nasdaq slid 2.3%.
Materials and energy stocks sold off as commodity prices collapsed across the board. The oil price slipped below USD 50 per barrel (West Texas Intermediate), while weak manufacturing data from China and the eurozone pushed the copper price down to a six-year low.
Gold hit a new five-year low as expectations that a US interest rate rise was imminent left investors and traders unwilling to take large positions in the metal.
Weak second-quarter results for some big-name companies also hurt equities. In the technology sector, Apple’s iPhone sales and revenue forecast fell short of expectations, while IBM reported that sales had fallen across all of its major business units. Microsoft recorded its largest ever quarterly loss after it wrote down the mobile handset business it acquired from Nokia last year.
Elsewhere, Caterpillar and United Rentals fell after a slowdown in demand from mining companies forced both companies to cut their annual revenue forecasts.
Despite the high-profile disappointments last week, the overall trend this reporting season has been better than expected. Of the 185 S&P 500 companies to have reported so far, around 77% have beaten profit estimates, according to Bloomberg. Analysts expect earnings for the index overall to have fallen 4% in the second quarter, with commodity producers leading the decline.
Economic news in the week had a brighter tone, with initial jobless claims data providing a further indication of strength in the labour market. In the week to 18 July, 255,000 Americans made new claims for unemployment benefits, down by 26,000 from the previous week, and the lowest level since 1973.
The Federal Reserve (Fed) meets this week to set monetary policy. No change is expected at this meeting, but investors will be watching closely for indications of the likely timing of the first rate rise in this cycle. Earlier this month, Fed chair Janet Yellen told Congress she expects to increase rates this year for the first time since 2006, with subsequent rises happening at a gradual pace.
The MSCI Europe Index fell 2.0% in the week to 24 July, as improving sentiment on Greece was outweighed by underwhelming corporate earnings reports.
Among the major markets, Germany’s DAX was down 2.8%, France’s CAC 40 slipped 1.3%, Spain’s IBEX 35 fell 1.5% and Italy’s FTSE MIB dropped 1.1%. The UK’s FTSE 100 ended the week 2.9% lower.
Developments in Greece remained in focus in the week, as bailout talks got underway. On Thursday, Greece’s parliament approved the second round of reforms demanded by the country’s creditors as a prerequisite to securing a EUR 86 billion bailout.
George Stathakis, the country’s economy minister, said that he was confident the negotiations would be finished by mid August, when Athens needs the bailout cash to pay off a EUR 3.2 billion bond held by the European Central Bank.
Export stocks lagged as the better news on Greece led to the euro gaining ground against the US dollar.
Sentiment was dominated by lacklustre manufacturing data and mixed corporate earnings results released in the week. The Markit eurozone purchasing managers’ index slipped from a four-year high of 54.2 in June to 53.7 in July, lower than expectations. However, despite the decline—largely attributable to weakness in France—the reading remains above the 50 level that separates contraction from expansion.
Meanwhile, the turmoil in Greece in July led to a modest decline in eurozone consumer confidence, according to the European Commission’s monthly survey.
The second-quarter corporate earnings season continued. Shares of Credit Suisse rose significantly after the Swiss bank’s quarterly profits exceeded expectations, while recent weakness in commodity prices significantly weighed on earnings of energy and mining companies. However, HSBC said it estimated that 55% of European companies had beaten earnings-per-share expectations for the second quarter.
In the UK, stocks were hit by speculation over the timing of the first interest rate rise, with the minutes of the Bank of England’s July monetary policy meeting, released on Wednesday, suggesting a move was getting closer. Mining stocks were among the week’s worst performers after the price of gold tumbled to a five-year low against the backdrop of the strengthening US dollar and the prospect of higher interest rates in the US.
Global Emerging Markets
Emerging markets had a difficult week, with the MSCI Emerging Markets Index down 2.1%. Latin American and emerging European markets led the list of fallers amid global growth worries.
Brazil’s BOVESPA dropped 5.9% on fiscal policy concerns as the Brazilian government said it would cut spending less than originally planned. Rating agencies have warned that Brazil faces downgrades to its credit rating if it fails to tighten its budget sufficiently. Central bank director Luis Pereira also hinted that interest rates could rise as he told markets that policymakers’ vigilance on inflation was “paramount.”
Russia’s RTS fell 5.8%, hit by a sharp fall in oil prices as oversupply fears and worries over global growth sent the price of West Texas Intermediate down to $48 per barrel—the lowest level since March. The energy industry contributes a quarter to Russian gross domestic product according to Moody’s.
Turkey’s BIST 100 was 4.9% lower as political instability continued to hit sentiment, with border attacks by Islamic State militants adding to worries over the country’s lack of political leadership. Turkey has been without a government since the ruling Justice and Development party failed to win a majority in elections on 7 June.
Poland’s WIG fell 2.9%, with commodity producers hit by global growth concerns, while polls showing that the opposition Law and Justice party is on course to win parliamentary elections in October hit sentiment. The Law and Justice party is perceived as less business friendly than the current Civic Platform government.
Emerging Asian markets generally suffered more modest losses. The MSCI China Index fell 0.9% as the initial estimate of the Caixin manufacturing purchasing managers’ index for July came in below estimates. The index reading of 48.2 was the fifth successive month below the 50 level that separates contraction in manufacturing activity from expansion. Chinese stocks were supported, however, by hopes for further government stimulus measures.
India’s Sensex was down 1.2%, falling from a three-month high as disappointing corporate results sparked profit taking. South Korea’s Kospi, meanwhile, fell 1.5% as second-quarter GDP growth slowed to 0.3% quarter on quarter—the slowest pace in six years.
Bonds & Currency
Bond yields declined on the week, with yield curves flattening across the major developed markets. Economic data releases were mixed, with stronger than expected job market data in the US accompanied by weaker data on UK retail sales as well as eurozone and Chinese purchasing managers’ indices. In addition, lower commodity prices in oil markets and industrial metals have raised some worrying prospects for growth and inflation in the near term, pushing down on yields.
Benchmark 10-year US Treasury yields fell around 9 basis points on the week, while shorter-dated two-year yields rose as markets prepared for the Federal Reserve to raise interest rates.
*Source: J.P. Morgan Asset Management