The MSCI Pacific Index fell 0.8% in the week to 3 June 2016.
Japan’s Topix slipped 0.9% as a stronger currency hit sentiment. As expected, Japanese prime minister Shinzo Abe announced the postponement of a sales tax rise that had been scheduled for next year until 2019, citing uncertainties in the global economy. The yen rallied as the decision was viewed as signalling a move towards supporting growth through fiscal rather than monetary policy, with Abe also due to announce a supplementary fiscal stimulus plan in the coming months.
Japan’s May manufacturing purchasing managers’ index remained deep in contractionary territory as the aftermath of the Kumamoto earthquake in April continued to hold back an already sluggish sector. However, the outlook for consumption looked somewhat brighter even before the news of the delayed sales tax, with real (inflation-adjusted) household earnings growing for a third consecutive month in April.
Australia’s All Ordinaries ended a seven-week winning streak, falling 1.4% as robust economic data and the recovery in commodity prices were viewed as reducing the likelihood of further interest rate cuts. The Australian economy grew 1.1% quarter on quarter in the first three months of the year, driven by strong export demand.
In Hong Kong, the Hang Seng gained 1.8% amid anticipation over a possible Shenzhen-Hong Kong stock connect scheme, similar to the Shanghai-Hong Kong scheme that resulted in strong flows into the island’s stocks following the launch in late 2014. The slump in retail sales eased slightly in April, with sales down 7.5% year on year after a revised 9.8% plunge in March. Tourist spending has been hit hard by the economic slowdown in mainland China.
Singapore’s Straits Times was up 0.2%.
US stocks delivered mixed returns in the week to 3 June, as sentiment was dominated by the release of a weaker-than expected jobs report for May. The S&P 500 delivered a flat return, while the technology-biased Nasdaq was up 0.2%, and the Dow Jones Industrial Average slipped 0.4%.
On Friday, the Bureau of Labour Statistics announced that the US economy added 38,000 jobs in May, well below consensus expectations for an increase of 158,000. Gains were restricted by a month-long strike by Verizon workers, which depressed information sector payrolls by around 35,000 jobs. Jobs were added in healthcare and business services, while manufacturing, mining and construction all shed jobs.
Despite the significant decline in jobs growth, payroll growth has been unusually strong over the past six months given the subdued pace of economic growth in the fourth quarter of 2015 and first quarter of 2016. The jobs report highlights the fact that momentum in the labour market is now slowing as the economy reaches full employment.
The unemployment rate declined from 5.0% to 4.7%, and the participation rate fell to 62.2%. However, it is important to note that the labour force has declined by 820,000 over the past two months, after rising by 2.4 million over the prior six, contributing to the sharp fall in the unemployment rate in May.
Outside the labour market, data highlighted a broad-based weakening in the manufacturing and services sectors. The Institute for Supply Management’s (ISM’s) manufacturing survey headline increased from 50.8 in April to 51.3 in May, while the Markit manufacturing purchasing managers’ index (PMI) declined from 50.8 in April to 50.7 in May. The latest figures for both of these reports surprised to the upside, but the May surveys as a whole (including separate regional surveys released earlier) suggest that the manufacturing sector remains weak.
The headline composite for the ISM non-manufacturing survey fell from 55.7 in April to 52.9 in May, reaching the lowest level reported in over two years, while the headline for the Markit services PMI—which reflects business activity—declined from 52.8 in April to 51.3 in May, marking one of the lowest readings on record for this series, which dates back to 2009.
The weaker-than-expected jobs report has lowered the likelihood of a rate rise at the Federal Reserve’s June meeting, although a July move is still possible. However, the central bank will continue to keep a close eye on whether economic data released over the coming weeks reflects a strengthening economy before committing to its next rate rise.
European equities underperformed their global peers in the week to 3 June 2016, with the MSCI Europe Index dropping 1.6% as data releases painted a muted picture of the region’s economic health.
In the eurozone, the German DAX lost 1.8%, the French CAC 40 was down 2.1%, Spain’s IBEX slid 3.4% and the Italian FTSE MIB dropped 3.8%.
Regional manufacturers appear to be struggling to gain traction, despite the broader recovery in growth. The final reading of Markit’s eurozone manufacturing purchasing managers’ index for May was unchanged from the “flash” estimate of 51.5, the lowest level in three months.
Prices in the single currency area continued to fall last month, with consumer price inflation creeping up to -0.1% in May from -0.2% in April. The slump in energy prices over the last 12 months has compounded the challenge for regional policymakers, who target an inflation rate of below but close to 2%.
The European Central Bank (ECB) left monetary policy unchanged at its meeting on Thursday, as expected, and modestly raised its forecasts for 2016 growth and inflation. However, Mario Draghi’s cautious statement was viewed as leaving the door open for further policy action if the moves announced earlier this year are not sufficient to support a sustained recovery and a significant pickup in inflation.
Expectations that the meeting would bring good news for Greece’s troubled financial system proved premature. Officials in Athens had expressed hopes that the ECB would enable Greek banks to access its cheap loans by reinstating a waiver that allowed it to accept Greek government bonds as collateral, despite their junk status.
However, the ECB’s council decided to postpone its decision for at least three weeks, until Athens had completed all elements of the first review of its EUR 86 billion bailout—a condition of the release of the next tranche of funding.
In Italy, concerns over the banking sector took hold again, with shares in UniCredit nearing a four-year low as investors worried the ongoing search for a new chief executive would damage the ability of the country’s largest lender to improve its capital position.
Outside the eurozone, the FTSE 100 ended the week 1.0% lower as bookmakers narrowed the odds of a UK exit from the European Union in the upcoming referendum. Sterling fell heavily after a Guardian opinion poll suggested public opinion had moved towards a Leave vote.
Global Emerging Markets:
The MSCIMarkets Index rose 0.8% in the week to 3 June 2016.
Brazil’s Bovespa gained 3.2%. The Brazilian economy contracted for a fifth consecutive quarter in the January-March period, but the 0.3% quarter-on-quarter drop in gross domestic product (GDP) was less bad than feared, with currency weakness supporting exports. Investors also hope the economic team installed by interim president Michel Temer since the beginning of impeachment proceedings against President Dilma Rousseff will succeed in bringing about a return to growth.
The MSCI China Index was up 0.6% as sentiment was boosted by growing hopes that the country’s A shares (mainland-traded stocks) would be included in MSCI global benchmarks and by speculation over the possible creation of a Shenzhen-Hong Kong stock connect scheme.
Economic data did little to change the picture of a weak manufacturing sector. The official manufacturing purchasing managers’ index (PMI) was unchanged at 50.1 in May—just above the 50 level that separates expansion from contraction—while the Caixin-Markit PMI weakened slightly, remaining in contractionary territory.
Elsewhere in emerging Asia, India’s Sensex returned 0.7%. The Indian economy grew 7.9% year on year in the first quarter, the fastest pace among all major economies. However, commentators raised questions over the poor quality of the data, with almost half of the increase accounted for by “discrepancies”.
South Korea’s Kospi was up 0.8%. First-quarter GDP growth was revised up from 1.5% to 2.1% year on year, suggesting a slowdown in the market turmoil at the beginning of the year had a smaller impact than initially feared.
In emerging Europe, Russia’s RTS was down 1.6%, Poland’s WIG fell 2.4% and the Czech PX slid 1.2%.
Bonds & Currency:
US Treasury yields fell across the curve as a weak employment report caused investors to reappraise their interest rate expectations.
Core eurozone sovereign debt yields also fell sharply, with yields on five-year German Bunds briefly falling below -0.4%, making them ineligible for the European Central Bank’s quantitative easing programme, which is limited to bonds with yields above or in line with the main deposit rate—currently -0.4%.
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