Money Matters July 9th, 2015

Asia Pacific
The MSCI Pacific Index slid 0.8% in the week to 3 July as worries Greece may be heading for a euro exit rattled global markets.
Japan’s Topix lost 0.9%. The Bank of Japan’s June Tankan survey showed that sentiment among the country’s large manufacturers hit its highest level since March 2014, before the sales tax rise that has weighed on growth over the past year. Retail sales rose 1.7% month on month in May, a second successive monthly gain.
Australia’s All Ordinaries slipped 0.1%. The Australian dollar fell to a six-year low as data showed retail sales grew 0.3% month on month in May, falling short of expectations. Slowing demand from China has put downward pressure on prices for Australia’s key export commodities, coal and iron ore, hitting consumer confidence.
Hong Kong’s Hang Seng fell 2.2%, hurt by speculation that Chinese investors were moving money out of the city’s market into mainland shares. Singapore’s Straits Times bucked the negative trend, returning 0.7%.
United States
US stocks fell in the week leading up to the 4 July holiday weekend, hit by nervousness over the financial situation in Greece and its potential impact on global growth. The S&P 500 and the Dow Jones were both 1.2% lower.
Investors had expected an 11th-hour bailout deal to be reached so Greece could make a EUR 1.5 billion repayment to the International Monetary Fund on 1 July. Instead, the Greek prime minister announced plans to hold a referendum on the terms of a new bailout offer from the country’s creditors.
Wall Street pulled back on the news, amid worries that a Greek default and potential exit from the eurozone would hit global growth and have unforeseen knock-on effects on the global financial system. President Obama warned that Greece’s financial problems were of “substantial concern” and that any slowdown in eurozone growth could have an impact on the US economy.
However, the stock market falls were relatively limited, with US investors quickly refocusing on the main domestic issue—the timing of the Federal Reserve’s (the Fed’s) first interest rate increase and the pace and magnitude of subsequent increases.
With the Fed making it clear that it will be guided by the strength of the economy, investors continued to scrutinise the latest economic data, which last week painted an improving picture.
Pending home sales rose for a fifth straight month in May, house prices were higher in April according to the Case-Shiller 20-city index (although below expectations), while consumer confidence rose sharply in June according to the Conference Board’s latest report. The Institute for Supply Management’s manufacturing survey was also higher last month, although well below its recent peak.
Most notably, the monthly jobs report for June continued to show a strengthening labour market, with the unemployment rate falling to 5.3%—its lowest level since before the financial crisis—although average hourly earnings were unchanged on the month.
Based on the latest economic news, investors continue to expect the Fed to act in September and finally lift US interest rates from zero, where they have been stuck since the end of 2008. The odds of a second rate rise before the end of the year are increasing as economic data continues to improve.
Europe
European stock markets fell ahead of a crucial referendum in Greece. The MSCI Europe Index lost 3.2%.
Peripheral eurozone markets were the worst performers, with Italy’s FTSE MIB down 5.4% and Spain’s IBEX 5.2% lower. In the eurozone core, the French CAC 40 dropped 5.0%, while the German DAX slid 3.8%. Outside the eurozone, the UK’s FTSE 100 fell 2.5% and the Swiss SPI ended the week 1.0% lower.
Markets fell heavily at the start of the week on news that Greece would go to the polls on Sunday 5 July to decide whether to accept the terms of a new bailout offer from its creditors.
With no agreement on a new bailout forthcoming, and with eurozone finance ministers rejecting a last-minute request from Athens for an extension to the existing bailout beyond its 30 June expiry, Greece missed a scheduled EUR 1.5 billion repayment to the International Monetary Fund—becoming the first developed nation to do so.
However, while stock markets were initially volatile, the euro and peripheral eurozone sovereign debt held up well, reflecting confidence in the ability of regional authorities to contain the fallout, whatever the outcome of the referendum.
In the event, the ballot delivered a resounding rejection of austerity, with the No camp securing 61.3% of the vote. The outcome strengthens the governing Syriza party’s domestic political standing, but makes negotiations with Greece’s creditors even more challenging.
The Greek prime minister, Alexis Tsipras, insists he will do everything to keep the country in the single currency area. In recent opinion polls, 60%-80% of Greeks have echoed this desire. Whether it is possible will depend on how the European Central Bank and other eurozone leaders respond to the referendum result.
Whatever happens, the road from here is likely to be costly for Greece. Forecasts for the Greek economy have tumbled as relations between Athens and its creditors have deteriorated. On average, 59 Greek businesses have gone bust every day since the start of 2015, and this number is likely to have soared with the closure of the banks. Meanwhile, tourists are rushing to cancel bookings for Greek holidays.
However, the crisis does not appear to pose immediate risks to peripheral economies, the European financial markets or the eurozone recovery, all of which are much less exposed to and better equipped to deal with Greek contagion than in 2011 and 2012.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.4% in the week ending 3 July, as sentiment was hit by a sharp decline in Chinese stocks.
The MSCI China Index was down 3.8% on the week, although the sell-off in the domestic A-share market has been much more dramatic, with the Shanghai Composite’s 12% drop last week leaving it 28% below its 12 June peak.
Chinese A shares have more than doubled in value over the last 12 months, fuelled by investors buying stocks with borrowed money (known as margin trading). However, recent moves to restrain margin trading have sparked sharp market declines, raising concerns over the impact on the Chinese economy.
Having already cut interest rates to try to provide support, the Chinese authorities last week partially loosened margin rules and announced a cut in trading fees. So far, these measures have failed to stem the losses.
Elsewhere, Brazil’s Bovespa suffered a 2.8% decline. Falling iron ore prices hit the country’s large commodity producers, while the Brazilian currency dropped at the end of the week as the central bank reduced the extent of its intervention in the foreign exchange markets.
Turkey’s BIST 100 was also 2.8% lower as political uncertainty continued to hit sentiment. Rival parties have been unable to form a coalition government since elections on 7 June, raising the prospect of fresh elections.
A sharp drop in oil prices hit Russia’s RTS, which was down 2.5% on the week, while Poland’s WIG (-2.0%) was hit by Greece default concerns.
In contrast, India’s Sensex gained 1.0%, boosted by hopes for stronger corporate profits ahead of the latest quarterly earnings season.
In South Korea, the Kospi rose 0.7% as the government announced a proposed USD 10.5 billion stimulus package to try to boost domestic demand, which has been hit hard by a recent outbreak of Middle East Respiratory Syndrome (Mers).
Bonds & Currency
With concerns over the situation in Greece intensifying after the unexpected announcement of a referendum on the latest bailout talks, yields on German, US and UK 10-year bonds declined by around 8-11 basis points on the week as investors sought safety. In addition, a weaker than expected US jobs report was seen as dovish for US interest rates by some market participants.
In contrast, peripheral eurozone, investment grade corporate, high yield and emerging market debt spreads all widened, as the increasing odds of a Greek euro exit led to some de-risking among investors.
*Source: J.P. Morgan Asset Management