The MSCI Pacific Index returned -0.6% in the week to 27 June.
Japan’s TOPIX fell 1.2%. On Tuesday, prime minister Shinzo Abe announced a package of measures aimed at boosting Japan’s long-term economic growth—the third arrow of his economic policy. Among the steps outlined is a cut to Japan’s corporate tax rate and a bigger role for women and foreign workers—key to addressing the shrinking workforce in one of the world’s most rapidly ageing societies. The market’s reaction to the long-awaited policy speech was muted, as much of its contents had been signalled in advance.
Economic data out of Japan was mixed. The Markit purchasing managers’ index rose from 49.9 in May to 51.1 in June, its highest level since March, while household spending continued to pull back in May, after having been hit by an increase in the domestic sales tax on 1 April.
Elsewhere, returns in the region were positive. Hong Kong’s Hang Seng returned 0.1%, helped by better-than-expected Chinese manufacturing data. Australia’s All Ordinaries rose 0.5%, also boosted by positive manufacturing data out of China—Australia’s largest trading partner.
Singapore’s Straits Times ended the week 0.4% higher. Manufacturing output unexpectedly contracted in May, due to a decline in the production of electronics and pharmaceuticals.
United States
US equities closed slightly lower for the week ending 27 June, but remain on course to end the quarter in positive territory and record their sixth straight quarterly gain. The S&P 500 returned -0.1%, while the Dow Jones fell 0.6%. The technology-heavy NASDAQ rose 0.7%.
Energy stocks sold off as tensions in Iraq continued. However, the market’s apprehension waned in the latter part of the week as the forces of Islamist militant group ISIS appeared confined to the area north of Baghdad, thereby leaving the country’s crude oil output undisturbed.
First-quarter GDP contracted at an annual rate of 2.9%, according to further revisions announced by the Bureau of Economic Analysis. This was a much steeper fall than the previous estimate of -1.0%, with the downward alteration owing mostly to new information about health care spending following the rollout of the Affordable Care Act.
Existing home sales data came in stronger than expected in May, with sales increasing 4.9% to 4.89 million, on a seasonally-adjusted annual rate. New home sales surged by 18.6% in May to 504,000, also on a seasonally-adjusted basis.
Preliminary numbers for June’s manufacturing purchasing managers’ index (PMI) data revealed an increase from 56.4 in May to 57.5, the highest level since May 2010. Details of the survey were favourable across the board and indicate that after the slowdown in the first quarter—following an inventory correction and harsh weather—manufacturing sector strength should continue in the near term. Markit’s flash PMI report for the services sector also came in ahead of expectations, increasing by 3.1 points to a new high of 61.2.
According to data provided by the US Department of Labor, job dismissals are still hovering just above their pre-recession lows. It reported that the number of initial jobless claims for the week ending 21 June fell by 2,000 to 312,000. Fewer firings typically foreshadow an acceleration in job growth.
US consumer confidence increased by a stronger-than-expected 3.0 points to 85.2 in June, according to the Conference Board’s index. The University of Michigan, which publishes its own consumer sentiment index, announced a preliminary number of 82.5 for June, up from May’s 81.9.
Europe
European stock markets suffered losses in the week ending 27 June, with the MSCI Europe Index down 1.6%. Financials led the declines, as the prospect of French bank BNP Paribas being handed the biggest-ever penalty for violating US sanctions weighed on European banks more broadly.
The French CAC 40 was among the week’s worst performers, down 2.3%, alongside Italy, where the FTSE MIB lost 3.0%. Germany’s DAX and Spain’s IBEX 35 both declined 1.7%, while the Swiss SPI fell 1.6% and the FTSE 100 ended the week 1.0% lower. Sweden’s OMX Stockholm 30 was down 0.5%.
The European political landscape was dominated by wrangling over the choice of the next European Commission president—a post ultimately handed to Jean-Claude Juncker, much to the opposition of UK prime minister David Cameron.
On the economic front, it was a busy week of data releases. The Markit flash eurozone composite purchasing managers’ index (PMI) for June suggested that manufacturing and services growth in the single currency bloc has slowed for a second month running. Nevertheless, output has now risen in absolute terms for 12 consecutive months.
Output gains were the greatest outside of Germany and France—excluding the eurozone’s two largest economies, the PMI was the strongest since August 2007, suggesting that the region’s periphery is making good progress in catching up with the core countries.
Markit’s separate release on Germany showed that input costs had risen by the most on a year-to-date basis in June, and this is likely to have contributed to German inflation surprising on the upside. The national measure of consumer price inflation (CPI) rose to an annualised 1.0% in June, from the previous month’s 0.9%. Meanwhile, another measure of CPI calculated for European purposes was estimated to have risen 0.4% in June, vs. expectations of it remaining unchanged.
With concerns about low inflation having weighed on the regional economic recovery, the spike in German inflation is likely to provide a welcome boost to the eurozone inflation rate. Subdued price pressures, and expectations that prices might be lower in the near future, can impede economic expansion by encouraging consumers to postpone their purchases, thereby curbing overall demand.
In the UK, the Bank of England’s Financial Policy Committee recommended two new measures in response to the strength in domestic house prices. The first aims to ensure that borrowers can afford their mortgages, by imposing more stringent affordability tests, and the second seeks to place limits on high loan-to-income mortgages, with a view to minimising the risks of excessive household debt.
Global Emerging Markets
In a mixed week for markets and regions, the MSCI Emerging Markets Index fell 0.3% vs. a -0.6% return for the MSCI World.
The MSCI China returned 0.1%. The HSBC flash purchasing managers’ index for China jumped from 49.4 in May to 50.8 in June, beating forecasts and ending a five-month period of contraction (a number above 50 indicates growth). Although the better-than-expected manufacturing data raised hopes that economic growth is stabilising, it also led to speculation that further broad-based stimulus measures from policymakers would be reduced.
South Korea’s KOSPI was up 1.0%. Sentiment was boosted by the central bank’s latest monthly survey, which showed that consumer confidence rebounded in June following a sharp dip in May. However, industrial output contracted the most in over five years in May, adding to signs that the economic recovery may be losing steam. 
India’s Sensex delivered a flat return. The market benefited from data showing near-record high oil exports from Iraq, indicating that supply remained unaffected by escalating violence, as well as a fall in the price of Brent crude. India imports two-thirds of its oil needs and there were concerns that rising crude prices could cause domestic inflation to rise.
In Latin America, Mexico’s IPC slipped 0.9% as concerns lingered over US economic growth. Inflation remained steady in early June, while Mexico’s global index of economic activity rose 2.9% in April, the strongest increase since December 2012.
Brazil’s Bovespa fell 2.7%, dragged down by Petrobras, which reacted negatively to the agreement that the government would give additional production rights to the state-owned energy giant in exchange for billions of dollars in advance payments. However, the Brazilian real strengthened after the central bank confirmed that its currency-support programme will last until the end of the year.
In emerging Europe, Russia’s RTS rose 1.5%, as the Ukraine crisis moved further out of the spotlight.
Bonds & Currency
US, UK and euro 10-year government bond yields were around 8-12 basis points lower last week, pulled lower by the larger-than-expected downward revision to first-quarter US GDP growth.
The spreads of German Bunds to US Treasuries and UK Gilts have reached their widest levels since the start of 2005, driven by the increasing divergence between the European Central Bank, which has eased policy further, and the Federal Reserve and Bank of England, which appear to be moving towards interest rate normalisation.
*Source: J.P. Morgan Asset Management
