The MSCI Pacific Index rose 1.3% in the week to 25 July.
Japan’s TOPIX rose 1.4%, benefiting from optimism about the upcoming domestic corporate earnings season. The market shrugged off data confirming that exports unexpectedly fell by 2% in June from a year earlier, amid weak demand in the US and Asia.
Meanwhile, Japan’s core inflation (consumer prices excluding fresh food) slowed to 1.3% in June on an annualised basis, excluding the effects of April’s consumption tax rise. The reading—which marks the second successive monthly drop—has cast doubt over whether the Bank of Japan can achieve its 2% inflation target.
Hong Kong’s Hang Seng was the region’s strongest performer, up 3.2%, as sentiment was boosted by an upbeat report on Chinese manufacturing activity. Chinese property stocks led the gains, following speculation that the Chinese government will loosen property restrictions to stimulate economic growth.
Chinese manufacturing data also boosted sentiment in Australia, leading to a 1.0% return for the All Ordinaries. Second-quarter core inflation rose 2.8% from a year earlier, near the upper end of the Reserve Bank of Australia’s 2%-3% target. Singapore’s Straits Times returned 1.2%, despite a much lower-than-expected manufacturing output reading for June.
The S&P 500 produced a flat return in the week ended 25 July as generally supportive corporate earnings reports and optimism over the global economy were balanced by geopolitical concerns. The Dow Jones was down 0.8% on the week, while the technology-biased Nasdaq gained 0.4%.
It was a busy week for corporate results, with the second-quarter earnings season in full swing. Most reports continued to show better-than-expected profits, which helped to support share prices. As of the end of the week, with more than half of companies having reported, 78% had beaten Wall Street earnings estimates.
More impressively, some 66% of companies have so far reported better-than-expected sales, suggesting that the improving economic backdrop is helping to boost consumer demand and business spending. Company managements have also largely given positive outlook statements, suggesting rising optimism for profits growth in the second half of 2014 as the US and global economies continue to improve.
The strong earnings season helped push the S&P 500 to a record closing high on Thursday before rising geopolitical concerns sparked profit taking at the end of the week. Investors contemplated the impact of new economic sanctions on Russia as the conflict between Moscow-backed Russian separatists and the Ukrainian government in east Ukraine intensified.
The market was also rattled by the situation in the Middle East, as escalating violence between Israeli and Palestinian forces in the Gaza Strip threatened regional stability, while ongoing incursions by Islamist militants in Iraq continued to threaten global oil supplies.
Geopolitical concerns are likely to continue to cause bouts of market volatility. The situation in Ukraine and the Middle East has the potential to hit global trade, raise energy prices and derail the global economic recovery. So far, however, each conflict has remained relatively contained, allowing investors to remain focused on improving global economic data.
Last week saw another strong report of manufacturing activity in China, suggesting that the Chinese economy is continuing to gain momentum, while the latest European purchasing managers’ indices suggested regional economic momentum was stabilising following recent weakness. In the US, the June durable goods report showed a stronger-than-expected rise in new orders and, although shipments were down last month, GDP forecasts continue to expect a strong rebound in US growth in the second quarter.
Signs of a stabilisation in economic activity across the eurozone helped European equities to eke out gains for the week ending 25 July. The MSCI Europe Index finished the week up 0.6%.
Spain’s IBEX 35 was the strongest performer among the major markets, returning 3.4%. Italy’s FTSE MIB rose 1.6%, while Sweden’s OMX Stockholm 30 increased 1.2%. The Swiss SPI gained 0.7% and the FTSE 100 ended the week up 0.6%. The German DAX returned -0.8%, while the French CAC 40 fell 0.1%.
The eurozone composite purchasing managers’ index (PMI) reached a three-month high of 54 in July according to flash estimates. The composite PMI, which measures activity in the services and manufacturing sectors, increased from 52.8 in June and is well above the 50 level that indicates expansion. The data helped ease concerns over a recent slowdown in the eurozone economy, although France’s manufacturing sector remained notably weak.
Negative investor sentiment concerning the Russia/Ukraine conflict has so far been restricted largely to the Russian stock market. The crisis is unlikely to have a major economic impact on Europe unless it results in a curtailment of energy exports from Russia to Europe, or a significant hit to global confidence and risk appetite. The European Union is discussing tougher sanctions, including locking Russia out of the continent’s capital markets, although getting such measures approved across the board remains a challenge.
In economic news, the latest GDP figures showed that the UK economy has finally returned to pre-crisis levels. Output grew 0.8% in the second quarter of the year, meaning that the UK economy is now 0.2% bigger than it was at its previous peak in early 2008. The International Monetary Fund predicted that the UK economy would grow by 3.2% in 2014, surpassing every other major advanced economy.
Meanwhile, Spain’s economic recovery has started to filter through to the labour market, with the country’s unemployment rate falling to a two-year low of 24.5% in the second quarter, down from 26% in the first quarter. More than 400,000 started work in the quarter—the largest quarterly increase for nine years.
Global Emerging Markets
The MSCI Emerging Markets Index was up 1.1% in the week to 25 July, outperforming developed markets, as strong Chinese manufacturing data offset lingering geopolitical concerns in Ukraine and the Middle East.
The MSCI China rose 3.8%, as sentiment was boosted by data that pointed to improving conditions in the country’s manufacturing sector. The flash HSBC-Markit manufacturing purchasing managers’ index for June came in at 52.0, up from 50.7 in May and the highest level in 18 months. The reading, which
highlights a particularly strong increase in new orders, suggests that the government’s recent stimulus efforts are working.
India’s Sensex rose 1.9%. The new government pledged on Friday to pursue a low, stable and simple tax regime to spur economic activity. Meanwhile, the International Monetary Fund (IMF) retained its forecast of 5.4% growth for the Indian economy in 2014—India is the only emerging economy to escape a cut in the IMF’s update of its World Economic Outlook.
Russia’s RTS dropped 2.4%, hit by concerns over the impact of further international sanctions on the country’s economy. Sentiment towards Russian assets has soured after the US stated that the missile used to shoot down a Malaysian Airlines jet over eastern Ukraine on 17 July was supplied by the Russian military.
Russia’s economy grew 0.1% in the second quarter, meaning the economy has just avoided slipping into a technical recession (two consecutive quarters of economic contraction). The government has said it expects the economy to expand 0.5% this year.
In Latin America, Brazil’s Bovespa rose 1.4%, boosted by positive manufacturing data out of China—Brazil’s biggest trading partner. Mexico’s IPC returned 0.2%. The central bank left interest rates unchanged, but indicated the economy may finally be recovering from a weak first quarter. Mexico registered its fifth consecutive monthly trade surplus in June, with both exports and imports rising from a year earlier.
Argentina’s Merval fell sharply, down 8.5%, after there was a lack of progress in the government’s negotiations with creditors to resolve a dispute over USD 1.5 billion in unpaid debts.
Bonds & Currency
10-year Treasury yields traded in a tight range, ending the week one basis point lower, in the absence of major economic surprise or further geopolitical escalation.
Investors are looking ahead to the Federal Reserve’s (the Fed’s) next interest rate setting meeting, scheduled for 29 and 30 July. Markets will remain focused on any evidence of a change in the Fed’s wording around future interest rate increases in light of the recent stronger economic data, particularly relating to the labour market.
Credit spreads narrowed slightly after having widened significantly earlier in the month. Some of the recent spread widening has also been due to nervousness over the outlook for interest rates ahead of the Fed’s meeting. Again, credit risk also remains focused on the potential for change in Fed policy.
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