The MSCI Pacific Index slipped 0.7% in the week to 19 June, as concerns over Greece weighed on risk appetite.
Japan’s TOPIX was down 1.2%. Data released last week confirmed that exports had plunged for a second consecutive month in May, sparking concerns that weak external demand—largely due to a slowdown in China—will pose a risk to Japan’s second-quarter economic growth. Nevertheless, the Bank of Japan announced that it would keep monetary policy unchanged, as expected.
In Hong Kong, the Hang Seng fell 1.9%. Sentiment was dominated by uncertainty ahead of a controversial vote on a Beijing-backed electoral reform package, which would give Hong Kong voters the right to choose their leader in 2017 but would mean that candidates would be vetted by a pro-Beijing committee. Legislators rejected the proposal on Thursday. Further sharp declines in mainland Chinese stocks also hit confidence.
Elsewhere, Singapore’s Straits Times fell 1.6%, despite a recovery in April’s retail sales, while Australia’s resource-heavy All Ordinaries rose 0.7%, helped by gains in energy stocks as gold and oil prices climbed towards the end of the week.
In a turbulent week on global markets, Wall Street stocks were supported by a comforting message from the Federal Reserve (Fed) about the likely path of interest rates. The Dow Jones gained 0.7%, while the S&P 500 was up 0.8%. The technology-biased Nasdaq closed 1.3% higher, having touched an all-time high on Thursday.
Although global concerns over Greece and China continued to have an influence, the central focus of the week for US investors was the meeting of the Federal Open Market Committee on Tuesday and Wednesday. The Fed’s policy-setting group was widely expected to leave interest rates on hold, but markets were looking for clues to the timing of the first increase, and the pace of subsequent rises.
The policy statement and economic projections that came out of the meeting were viewed as more dovish than had been expected. Fed chair Janet Yellen said there were signs that economic momentum had improved after a weak first quarter, but that policymakers would want to see firmer evidence of the strength of the recovery before pulling the trigger on higher rates. Yellen reiterated that the path of tightening would be only very gradual.
A chart of interest rate predictions from individual Fed officials suggested rates will rise twice this year, but the committee appeared increasingly divided, with some members who had previously forecast multiple hikes now expecting only one.
Muted inflation data suggested there is no pressing need for the Fed to raise rates to stem future price increases. The headline consumer price index rose by a smaller-than-expected 0.4% month on month in May, while the Fed’s preferred core measure, which strips out food and energy, crept up just 0.1%.
Other data releases in the week painted a mixed picture of the health of the US economy. Industrial production unexpectedly fell 0.2% in May as output of military hardware and non-durable goods such as food and fuel declined. However, new claims for unemployment benefits fell more than expected in the week to 13 June, while a closely watched index of business activity in the heavily industrialised Philadelphia region surged this month.
On the markets, sentiment was boosted by merger & acquisition activity and two well-received initial public offerings. Retailer Target gained after agreeing to sell its in-store pharmacy business to chemist chain CVS Health for USD 1.9 billion, while exercise tracking device maker Fitbit and chemicals distributor Univar both performed well following their market debuts in the week.
European stock markets fell back in the week ended 19 June amid growing apprehension over the financial situation in Greece. The MSCI Europe Index was 1.4% lower.
The French CAC 40 and Swiss SPI both dropped 1.8%, while Germany’s DAX was down 1.4% and the UK’s FTSE 100 lost 1.1%. Spain’s IBEX 35 and Italy’s FTSE MIB both fell 0.8%.
Markets struggled to gain momentum in the face of a looming Greek debt default, as the country’s government failed to reach a deal with the European Commission to unlock EUR 7.2 billion of bailout funding.
Greece is due to repay EUR 1.6 billion to the International Monetary Fund (IMF) at the end of June, and then faces a tough debt payment schedule over the following months. Without access to European bailout funds, Greece will default—potentially triggering a Greek exit (or “Grexit”) from the eurozone.
If any last minute deal is to be reached, serious sticking points still need to be overcome. The Greek government, for its part, is unwilling to deliver the credible programme of economic reforms, including to its tax and pension systems, which would unlock European bailout funds.
Meanwhile, Greece’s European creditors continue to resist calls to write off some of the country’s debts and help Athens return to a path of debt sustainability, as debt forgiveness would be politically very unpopular.
If a deal proves impossible and Greece defaults on its IMF loans, the impact on global markets would be uncertain. Some commentators suggest that a Greek default, and even Grexit, would be manageable given the financial mechanisms put in place by the European authorities since the beginning of the region’s debt crisis.
Europe’s banks, for example, are now much less exposed to Greek debt than they were in 2012. Last week’s supportive final ruling from the European Court of Justice has also confirmed that the European Central Bank is legally entitled to use sovereign bond purchases to protect other eurozone countries from any Greek fallout.
However, Europe’s firewalls have not yet been tested and require a degree of decisiveness that eurozone officials have not often displayed. More fundamentally, there are warnings that Grexit, by showing that Europe’s monetary union is not irreversible, could lead to the break-up of the eurozone and the disintegration of the European Union itself—an outcome that would have major worldwide economic repercussions.
So far the muted reaction on European markets to the deteriorating situation suggests that investors either believe a deal will still be reached to prop up Greece, or that a default would be containable. In the last week stocks have moved only marginally lower, peripheral bond yields have barely budged and the euro has also remained resilient against the US dollar.
However, if a deal isn’t reached and Greece does descend into even deeper political and economic chaos, it’s difficult to believe that European financial markets will remain unmoved.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.1% in the week to 19 June as Chinese stocks were hit by bubble fears.
Locally traded Chinese stocks, known as A shares, suffered heavy losses, with the Shanghai Composite and Shenzen Composite Indices each losing around 13%, having more than doubled over the past 12 months. Fears that A-share valuations had become excessive were compounded by continued regulatory efforts to clamp down on margin lending by brokerages.
The MSCI China dropped 4.3%. The MSCI benchmark includes only Chinese stocks that are tradable by international investors—mainly those listed in Hong Kong. This month, MSCI announced that it would not include local shares in its benchmarks at this stage, contrary to mounting expectations that A shares would be added.
Emerging European markets were hit by growing fears of a Greek exit from the euro. Hungary’s BUX lost 1.9%, Poland’s WIG dropped 1.7% and the Czech PX was down 1.6%.
Latin America had a more positive week, with Brazil’s Bovespa gaining 0.8% and Mexico’s IPC up 0.6%. In Brazil, investors responded positively to news that President Dilma Rousseff had vetoed a proposed increase to social security spending, demonstrating a commitment to getting the country’s public finances back on track.
India’s Sensex also performed strongly, returning 3.4% as a better-than-expected start to the monsoon season boosted the economic outlook and eased fears that food shortages may fuel inflation. Since the beginning of June, almost 80% of India has received above-normal or normal rainfall, according to Bloomberg.
Bonds & Currency
Bonds were mixed this week, with US Treasury yields declining on a more dovish-than-expected Federal Reserve policy meeting, UK Gilt yields rising on stronger-than-expected wage growth, and German Bund yields supported by continued headlines surrounding Greece.
Despite no agreement on a deal to avoid a Greek default, peripheral eurozone bond yields barely budged on the week. The lack of contagion from Greece suggests investors remain hopeful for a last minute agreement, or have doubts about the longevity of the Greek government if capital controls are imposed. Peripheral bond markets may also be supported by the potential for increased European Central Bank action after a positive European Court of Justice ruling on the legality of sovereign bond purchases by the central bank.
*Source: J.P. Morgan Asset Management
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