The MSCI Pacific Index rose 1.2% in the week to 15 May.
Japan’s TOPIX was up 1.2%, as sentiment was boosted by prospects for stronger-than-expected earnings after several blue-chip companies delivered encouraging earnings outlooks. Meanwhile, the country’s current account surplus jumped in March to its highest level since October 2007, helped by a fall in imports and a rise in income from overseas investments. However, consumer confidence in Japan unexpectedly fell for the first time in five months in April, according to a Cabinet Office survey released on Friday.
Australia’s resource-heavy All Ordinaries was the region’s strongest performer, rising 1.7%, with mining companies performing particularly well due to a rise in commodity prices.
Elsewhere, Hong Kong’s Hang Seng rose 0.9%. First-quarter GDP came in line with expectations, rising 2.1% from a year earlier, benefiting from a decline in the trade deficit following a fall in imports.
In Singapore the Straits Times returned 0.3%, despite a deceleration in retail sales in March.
The S&P 500 ended the week to 15 May at a record high, edging up 0.3% as better-than-expected corporate results and receding expectations of an imminent interest rate rise outweighed renewed worries over a slowdown in the US economy. The Dow Jones gained 0.4% while the technology-focused NASDAQ gained 0.9%.
A lacklustre batch of data releases gave rise to concerns that the economic weakness of the first quarter may have been more than a weather-driven soft patch. Following the encouraging April payrolls report, released on Friday 8 May, there was further positive news on the jobs front as new claims for unemployment benefits fell by 1,000 in the week to 9 May, taking the four-week moving average—a more stable measure—to its lowest level in 15 years.
However, despite a recovering labour market and cheap fuel prices, the University of Michigan’s preliminary index of consumer sentiment plunged to 88.6 in May, the lowest since October 2014, from 95.9 the previous month.
Americans in all age and income subgroups and across the country were more pessimistic about both current conditions and the outlook for the next six months. Although unemployment fell in April to its lowest level since May 2008, survey respondents were more worried about losing their jobs than at any time since 2009.
Weak confidence appears to be translating into a reluctance to spend, with retail sales in April little changed vs. March, following the first quarterly decline in almost three years in the January-March period.
Meanwhile, industrial production fell for a fifth straight month in April as the stronger dollar continued to limit overseas demand for US goods and oil companies restricted operations given the weak price environment. Producer prices also declined in April, taking the decline over the past 12 months to 1.3%.
The overall economic picture was viewed as increasing the likelihood that the Federal Reserve (the Fed) will wait until December to raise interest rates, rather than taking action at its September meeting. Expectations for a delay in Fed tightening supported equities and sparked declines for the US dollar against other currencies over the week.
The unexpected strength of corporate earnings releases also continued to boost stock market sentiment, with profits at S&P 500 companies now expected to have grown 0.2% in the first quarter from a year earlier, vs. projections before the results season of a 4.8% decline.
On the bond market, the yield on the benchmark 10-year Treasury was unchanged at 2.14% at the end of a volatile week, having touched a six-month high of 2.37% on Tuesday.
European equities fell in the week to 15 May, with the MSCI Europe Index down 1.0% amid ongoing concerns over the Greek bailout crisis.
Germany’s DAX fell 2.2%, while France’s CAC 40 was down 1.9%, Spain’s IBEX 35 slipped 0.9% and the UK’s FTSE 100 returned -1.2%. Italy’s FTSE MIB rose 0.7%.
Lingering uncertainty over the situation in Greece dominated sentiment in the week. On Tuesday, Athens made a crucial payment of EUR 750 million to the International Monetary Fund (IMF), by tapping into its emergency IMF account and using its cash reserves. The payment followed a meeting on Monday between eurozone finance ministers and Greek officials to discuss the release of the final EUR 7.2 billion tranche of bailout funds.
Greece’s finance minister, Yanis Varoufakis, warned that the country’s financial situation was “terribly urgent,” raising concerns that Greece will be unable to make its debt repayment to the IMF next month. Greece has until the end of the month to reach an agreement with its creditors on the bailout, before it receives any further payments.
Data released in the week confirmed that eurozone economic growth remains solid. The eurozone economy grew 0.4% in the first quarter (quarter on quarter), a modest acceleration from the 0.3% pace of the fourth quarter of 2015, but slightly below forecast. Economic growth in Germany disappointed due to weak domestic demand, increasing 0.3% in the first quarter. France’s economy grew 0.6% in the three months to March.
Meanwhile, Mario Draghi, the president of the European Central Bank, reaffirmed the central bank’s commitment to implementing its EUR 60 billion a month asset purchase programme until September 2016.
In the UK, jobs and wages data surprised positively. For the first quarter the unemployment rate dropped to 5.5%, while average weekly earnings grew 1.9% compared to the first quarter of 2014.
The Bank of England downgraded its growth forecast for the UK for the next three years, although said the outlook was “solid.” In its quarterly inflation report, the central bank said its outlook implied there would be only “gradual” rises in interest rates “over the next few years.”
The MSCI Europe’s decline in the week was led by export-focused stocks, in particular German companies Volkswagen and BMW, which came under pressure from a steady rise in the euro.
Global Emerging Markets
The MSCI Emerging Market Index rose 0.2% in the week ending 15 May.
The MSCI China gained 0.6%. Following the release of a weak batch of economic data for April, the People’s Bank of China cut interest rates for the third time in six months, reducing its benchmark lending and deposit rates by a quarter of a percentage point to 5.1% and 2.25%, respectively.
India’s Sensex rallied for a second straight week, returning 0.8% amid hopes that slowing inflation will give the central bank scope to cut interest rates further to support growth.
South Korea’s Kospi added 1.0%. The Bank of Korea left its key interest rate unchanged at its meeting on 15 May, indicating that past rate cuts were beginning to feed through into improved domestic demand.
In Latin America, Brazil’s Bovespa returned 0.2%. Brazilian retail sales fell more than expected in March, dropping 0.9% after a revised 0.4% decline in February, as above-target inflation eroded spending power.
Emerging central European markets underperformed as their developed peers were rattled by continuing worries over Greek debt repayment. The Czech PX-50 slid 0.2%, Poland’s WIG lost 0.8% and Hungary’s BUX was down 1.5%.
Turkey’s ISE 100 jumped 4.2% on speculation that selling ahead of next month’s general election has been overdone. Investors have been nervous ahead of the 7 June vote as some polls have indicated that the ruling AK Party may not win enough seats to govern alone.
Bonds & Currency
Bond markets were mixed in the week to 15 May.
The yield on the 10-year US government bond ended the week unchanged, but rose at the beginning of the week before declining towards the end of the week, consistent with the weaker tone in the economic data.
Eurozone 10-year yields rose slightly on the week, but rallied strongly on Thursday and Friday. The 10-year German Bund yield ended the week 6 basis points higher at 0.62%.
*Source: J.P. Morgan Asset Management
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