Europe
European indices faltered as investors opted to take some profits following the monetary easing measures announced by the European Central Bank last week. The MSCI Europe Index fell 0.6% for the week ended 13 June.
The UK’s FTSE 100 was the biggest faller, returning -1.2%. The French CAC 40 was down 0.8%, Germany’s DAX was 0.7% lower and Italy’s FTSE MIB fell 0.6%. Switzerland’s SPI returned -0.1% for the week. However, Spain’s IBEX 35 ended the week in positive territory, rising 0.4%.
A quiet week in reporting terms for continental Europe left the UK in the spotlight. In a keynote speech delivered on Thursday, Bank of England governor Mark Carney sent a clear message to households and businesses that an interest rate rise “could happen sooner than markets currently expect.” Carney added thatthere was “no pre-set course” on when to raise interest rates but that “eventual increases will be gradual and limited.”
Ratings agency Standard & Poor’s upgraded the UK’s credit rating outlook from “negative” to “stable”, and maintained its AAA assessment of borrowing strength. The agency also forecast that the UK economy would grow by almost 3% in 2014.
Italy’s economy is shrinking, according to GDP figures from the first quarter of the year, which showed that the economy had contracted 0.5% quarter-on-quarter, largely due to declining construction figures. However, consumer spending rose 0.3%, suggesting households may increase the rate of spending in the rest of the year.
Industrial output for the eurozone as a whole rose 0.8% in April, reversing March’s 0.4% monthly decline. Output rose 2.2% on an annualised basis for the first quarter of 2014. On a country basis, April was a strong month for industrial production in Spain, the Netherlands, Portugal and Ireland.
Meanwhile, UK industrial output grew at its fastest annual pace for more than three years in April, according to official figures from the Office for National Statistics. Output rose 3% year-on-year, the fastest rate since January 2011. Manufacturing output was boosted by transport equipment, electronic products, and rubber and plastics.
Asia Pacific
The MSCI Pacific Index rose 0.2%, supported by gains in Hong Kong and Japan.
Hong Kong’s Hang Seng gained 1.6%, boosted by stronger Chinese economic data for May. Mainland banking stocks performed well as data showed a jump in bank loans last month.
Japan’s TOPIX rose 0.8%, helped by exporters as the US dollar strengthened against the yen. As expected, the Bank of Japan remained on hold at its latest monetary policy meeting. Despite fears that the recent sales tax rise would undermine growth, it stated that the Japanese economy was continuing to recover modestly.
Elsewhere, Singapore’s Straits Times fell 0.2%, while Australia’s All Ordinaries was 1.1% lower. Sentiment in Australia was hit by worries over a drop in iron ore prices and the strength of the Australian dollar—both of which are negative for the country’s large commodity producers.
United Stated
US After strong gains over the last month, US stocks eased in the week ending 13 June as rising geopolitical tensions and further interest rate speculation sparked profit taking.
Despite hitting another record high on 9 June, the broad S&P 500 closed the week 0.7% lower, while the headline Dow Jones Industrials was down 0.9%. The technology-heavy NASDAQ outperformed, falling 0.2%, with semiconductor companies boosted by a strong revenue forecast from Intel.
On the broad market, airline stocks were among the weakest, as a profit warning from German flag carrier Lufthansa—and worries over higher fuel costs on the back of heightened Middle East tensions—hit sentiment.
Oil prices surged, as Sunni insurgents took control of several key cities in central Iraq, posing a threat to the country’s oil output. Although Iraq’s key oil fields remain largely safe from trouble in the north and south of the country, Iraq is one of the world’s largest oil producers and the growing insurgency represents a potential threat to future output. Brent crude rose to USD 114 per barrel—the highest level since last September.
Investor confidence was also hit by interest rate uncertainty as Mark Carney, governor of the Bank of England, warned markets that UK interest rates could rise sooner than expected. With recent economic data suggesting that US economic growth has picked up pace in the second quarter after a weak start to the year, Carney’s warning served to remind investors that US monetary policy would not stay accommodative indefinitely.
Investors aren’t expecting any change in the US Federal Reserve’s (the Fed’s) current policy stance at its next monetary policy meeting, which concludes on 18 June. However, the accompanying statement from Fed chair Janet Yellen will be watched closely for any sign of a move towards Carney’s more hawkish stance.
More importantly, as the Fed prepares to raise interest rates from their current record low, investors are focusing their attention on the tools that the Fed will need to employ in order to regain control over market interest rates. Quantitative easing has supplied the banks with trillions of dollars of excess reserves, so simply reducing the supply of reserves or raising the rate that the Fed pays on excess reserves (the traditional transmission tools used to change official interest rates) will no longer be as effective as it was before.
The tools under discussion by the Fed are complex, but they may result in some draining of bank reserves in preparation for an eventual interest rate rise. The question is when the Fed will start these preparations, and if draining reserves will be interpreted by investors as a tightening of policy.
Global Emerging Markets
The MSCI Emerging Markets Index rose 0.6% in the week to 13 June, outperforming developed markets, as rising oil prices on the back of heightened tensions in the Middle East provided a boost to oil exporters and stronger economic data lifted sentiment in China.
Brazil’s Bovespa was up 3.2%, boosted by stronger oil producers. Concerns that fighting in Iraq could disrupt global oil supplies sent oil prices to ten-month highs.
The week also saw the start of the 2014 FIFA World Cup. The tournament brings international attention to Brazil and should have a positive impact on the domestic economy. Sentiment was further helped by the national team’s victory in its opening game against Croatia in Sao Paulo.
Russia was another beneficiary from rising oil prices, with oil producers contributing to a 1.2% gain in the RTS. Tensions with Ukraine remained high, however, as Moscow began talks with Kiev regarding outstanding gas payments amid continued Russian separatist violence in east Ukraine.
The surge in oil prices was negative for oil importers. India’s Sensex, for example, dropped 0.7%, amid worries over the impact of higher fuel costs on economic growth and inflation. India meets about three quarters of its energy requirements from imports.
Meanwhile, the growing uprising by Sunni insurgents in neighbouring Iraq damaged sentiment in Turkey, amid worries that the escalating violence could threaten regional stability. Investors are also concerned that the deteriorating geopolitical situation could stunt the Turkish government’s efforts to narrow the country’s trade deficit. The ISE 100 fell 1.7%.
In contrast, the MSCI China Index rose 2.2% as investors focused their attention on some encouraging domestic economic data. Chinese manufacturing and service sector surveys improved and exports picked up in May, reinforcing recent signs that the Chinese economy had stabilised after slowing earlier in the year. On Wednesday, premier Li Keqiang said that policymakers will focus on “targeted measures” to support economic growth.
Bonds & Currency
The Bond yields were broadly unchanged over the week, while credit spreads tightened slightly as investors digested a slew of central bank comments and economic data reports, while geopolitical instability also influenced sentiment.
US 10-year Treasury yields hovered around 2.6% ahead of the upcoming Federal Reserve meeting, when no policy change is expected. UK 10-year Gilt yields climbed to 2.74%–its highest level since early April following comments from Bank of England governor Mark Carney suggesting that UK interest rates could rise earlier than had been expected.
*Source: J.P. Morgan Asset Management
