Asia Pacific
The MSCI Pacific Index returned 1.4% in the week to 22 May.
Japan’s TOPIX was the region’s strongest performer, gaining 2.5%. The Japanese economy expanded at an annualised pace of 2.4% in the January-March period, a second successive quarter of growth.
Private consumption, housing investment and exports all rose, suggesting the economy continues to recover. However, the strength of the expansion was largely due to a surge in inventories as more confident businesses built up stock in their warehouses. The pace of growth from here will depend on consumers increasing their spending to buy these stockpiled goods.
Australia’s All Ordinaries lost 1.1%. The Reserve Bank of Australia remains open to further interest rate cuts following two reductions so far in the current cycle, according to minutes of its last meeting. Policymakers are concerned about the slowdown in China, weak capital expenditure and conditions in the labour market.
Hong Kong’s Hang Seng ended the week 0.6% higher despite heavy midweek falls for some of the stocks that have rallied the most strongly since the introduction of the Shanghai-Hong Kong Stock Connect programme—a trading link with Shanghai that opened last year. Singapore’s Straits Times was down 0.4%.
United States
US stock markets touched record highs in the week to 22 May, but lacked clear direction amid continued uncertainty over the likely timing of an interest rate rise from the Federal Reserve (Fed). The Dow Jones closed 0.2% lower, while the S&P 500 gained 0.2%.
The first-quarter corporate results season is almost over and has surprised positively. Earnings growth for S&P 500 companies in the January-March quarter is now expected to come in at 1.5%, compared with expectations of a contraction at the start of the reporting period. Excluding the energy sector, growth is expected to be 9.5%.
Data releases in the week painted a mixed picture of the health of the US economy. New applications for unemployment benefits rose by 10,000 in the week to 16 May, but the four-week moving average—a less volatile measure—fell to a 15-year low, suggesting the labour market continues to strengthen.
New residential construction jumped to the highest level since November 2007 in April, helped by warmer weather. However, sales of existing homes fell 3.3% as weak first-quarter economic data deterred Americans from putting their houses on the market, despite strong selling prices.
Meanwhile, manufacturing in the Philadephia region—viewed as an economic bellwether due to the concentration of industry in the area—grew less than forecast in May. The Philadelphia Federal Reserve’s Business Outlook Survey fell to 6.7 in May from 7.5 in April. A reading above zero signals that activity is expanding.
Despite the sluggish economic backdrop, a stronger-than-expected inflation reading added to expectations that the Fed will raise interest rates later this year. The core consumer price index, which excludes volatile food and energy prices, rose 0.3% in April – the biggest monthly increase in over two years—taking the annual core inflation rate to 1.8%. The dollar gained and bonds were sold off on the news.
Few commentators now expect a rate rise at the Fed’s next meeting, scheduled for 16-17 June. The minutes of the April meeting of the Federal Open Market Committee, released on Wednesday 20 May, showed that the majority of members of the US rate-setting committee believed it was unlikely that data available by June would provide sufficient confirmation that conditions for raising rates had been met.
However, Fed chair Janet Yellen said in a speech in Rhode Island that if the economy strengthened as expected in the coming months it would be appropriate to begin to normalise monetary policy “at some point this year”. Yellen acknowledged recent economic weakness but said the first-quarter slowdown was largely transitory.
Europe
European equities delivered positive returns in the week to 22 May, with the MSCI Europe Index up 2.1%. Germany’s DAX rose 3.2%, while France’s CAC 40 was up 3.0%, Spain’s IBEX 35 added 2.1% and Italy’s FTSE MIB returned 1.3%. In the UK, the FTSE 100 ended the week 1.0% higher.
The European Central Bank (ECB) announced plans to adjust the pace of its bond purchases over the summer months. On Tuesday, Benoit Coeure, a member of the ECB’s executive board, said that the central bank would “slightly” increase its asset purchases in June and early July in anticipation of market liquidity drying up in July and August. However, the average pace of the ECB’s bond purchases will not deviate from its existing EUR 60 billion a month, as purchases will be tapered in July and August.
Expectations for an increase in bond buying led to the euro weakening significantly against the US dollar, which boosted export-focused stocks. The telecoms sector also performed strongly, boosted by deal activity and speculation.
Preliminary purchasing managers’ index readings in the eurozone painted a mixed picture. The composite index for the region declined for the second successive month in May, with the services index falling but manufacturing activity improving. Eurozone consumer confidence also deteriorated for a second consecutive month in May.
Data released in the week also highlighted a sharp decline in German investor confidence, with the Ifo business climate index falling to 108.5 in May from 108.6 in April. However, sentiment remains above the long-term average.
Meanwhile, concerns over the Greek bailout crisis continued, as Greek politicians warned that Athens may be unable to make its next debt repayment—of EUR 300 million—to the International Monetary Fund on 5 June without further aid.
In the UK, consumer price inflation fell to -0.1% in April, confirming that the country has slipped into deflation for the first time since 1960. This is primarily due to a fall in air fares following the recent record-low oil prices.
With inflation well below target, markets continue to expect the Bank of England to remain on hold until next year. Minutes from the Monetary Policy Committee’s May meeting reinforced this view and confirmed that there was a unanimous vote to keep interest rates unchanged in the month.
Global Emerging Markets
The MSCI Emerging Markets Index returned 0.1% in the week to 22 May.
The MSCI China rose 0.6% in the week, helped by speculation over the possibility of further stimulus measures. Data released in the week confirmed that China’s manufacturing sector contracted for a third consecutive month. The HSBC/Markit “flash” manufacturing purchasing managers’ index edged up to 49.1 from 48.9, but remained below the 50 level that separates contraction from expansion, leading to expectations for further monetary easing over the coming months.
Elsewhere in emerging Asia, India’s Sensex rose 2.3%, boosted by hopes that slowing inflation will lead the Reserve Bank of India to lower borrowing costs at its June meeting.
South Korea’s Kospi was up 1.9%, while Taiwan’s Taiex ended the week 0.6% higher, as Asian exporters benefited from the stronger US dollar.
Across Latin America, however, returns were negative. Brazil’s Bovespa fell 5.0%. Economic activity in Brazil contracted more than analysts expected in March, while the unemployment rate rose to the highest level in almost four years. Mexico’s IPC slipped 1.0%, after weak first-quarter economic data led the Bank of Mexico to cut its forecasts for economic growth for this year and next.
Russia’s RTS was down 2.2%, as sentiment was hit by concerns over the country’s growth outlook. The Czech PX-50 returned 0.4%, and Poland’s WIG slipped 0.1%.
Bonds & Currency
The yield on the 10-year US Treasury ended the week 6 basis points higher at 2.21%, following the release of stronger-than-expected core inflation data.
The 10-year German Bund yield was volatile, falling on the news that the European Central Bank would make changes to its asset purchases over the summer, but ending the week broadly unchanged.
*Source: J.P. Morgan Asset Management
