The Weekly Stock Market Report (20-26 June 2015)Contributor JPMAM UK
US: September rate rise looking likely
- US stocks fell in the week to 26 June, as positive US economic data and comments from the Federal Reserve (the Fed) suggested that the path of US interest rate rises could be steeper than previously expected. The S&P 500 and Dow Jones Industrial Average both slipped 0.4%, while the technology-biased Nasdaq was down 0.7%.
- A key driver of market performance in the week was a statement from Jerome Powell, a Fed governor, that US interest rates could rise twice this year - once in September and once in December - provided the US economy continues to improve. Investors had expected just one increase in 2015.
- US economic data released in the week added to speculation that the first rate rise would take place in September. Housing data was a bright spot, with both existing and new home sales for May beating expectations in May. Existing home sales rose a stronger-than-expected 5.1% in May, while the level of new home sales in May was the highest reported since February 2008.
- Consumer spending surprised positively, with real consumption increasing 0.6% in May, and upward revisions to the data reported for each month between January and April. Consumer sentiment also improved, with the University of Michigan consumer sentiment index rising to 96.1 in June from 90.7 in May.
- Meanwhile, the final revision to US first-quarter GDP showed that the economy contracted by 0.2%, compared to the previous estimate of 0.7%, in line with expectations. There was no single driver of the upward revision, as many of the main GDP components were adjusted by modest amounts.
- However, industrial activity weakened slightly. The headline reading of the Markit manufacturing purchasing managers' index (PMI) slipped from 54.0 in May to 53.4 in the flash June report, while the services PMI fell to 54.8, its lowest level since January.
- Healthcare stocks were among the week's best performers, after the Supreme Court upheld "Obamacare" tax subsidies. Investors will now turn their attention to the upcoming second-quarter corporate earnings season, where results should be supported by a better growth backdrop and stability in the oil price.
EUROPE: Greece reaches crisis point
- European stock markets were buoyed in the week to 26 June by hopes that Greece may be nearing a deal with its creditors. The MSCI Europe Index rose 2.6%, with eurozone markets leading the gains. However, events after the markets closed on Friday suggest a period of turbulence is now likely for regional equities.
- The French CAC 40 was up 5.1% over the week, while the German DAX gained 4.1% and the Italian FTSE MIB and Spanish IBEX added 4.9% and 3.9%, respectively. The Swiss SPI rose 1.4% and the UK's FTSE 100 edged up 0.6%.
- Eurozone equities performed strongly at the beginning of the week after regional leaders welcomed financial reform proposals put forward by Athens as a positive basis for further talks, suggesting a deal to unlock
- EUR 7.2 billion of bailout funding for Greece may be close. However, hopes of a swift resolution to the crisis were thwarted as negotiations repeatedly broke down without any agreement being reached.
- European Union leaders set Saturday as the deadline for Athens to accept a reform package or trigger an alternative plan that would attempt to contain the fallout from a Greek debt default. Late on Friday, Greek prime minister Alexis Tsipras announced a shock referendum, to be held on 5 July, to allow the electorate to vote on what he described as an "unbearable" bailout deal.
- Eurozone finance ministers insisted that no extension of the bailout programme would be forthcoming and that it would cease to exist on 30 June, as scheduled, meaning the Greek people will vote on a deal that - for now, at least - is no longer on the table.
- The European Central Bank (ECB) announced that liquidity assistance to Greek banks would be maintained, but frozen at the current level. The Greek government announced a week-long bank holiday to prevent financial panic and introduced capital controls, including a EUR 60 daily cap on withdrawals from cash machines.
- With Greece now likely to default on a debt repayment to the International Monetary Fund (IMF) on 30 June, the country and the eurozone are stepping into the unknown. A default on the IMF does not guarantee a Greek exit from the euro; if the Greek people vote in favour of a deal, Greece may well stay in. But the probability of an exit from the single currency - accidental or otherwise - is now higher than it was.
- As investors respond to the latest developments and wait for a clearer picture on Greece's future, regional markets are likely to be volatile. However, the moves should be less violent than at the previous height of the eurozone crisis. The region has support mechanisms that were not in place in 2011 and 2012, most notably the ECB's quantitative easing programme.
- Europe is also better positioned to withstand the fallout, with significantly reduced financial links to Greece, stronger economies, a healthier banking sector and smaller fiscal deficits. Last week's data releases provided a reminder of how far the region has come, with the eurozone composite purchasing managers' index - a measure of economic activity - hitting a four-year high in May.
PACIFIC: BoJ supports job recovery
- The MSCI Pacific Index returned 1.2% in the week to 26 June.
- Japan's Topix rose 2.2%, touching an eight-year high as central bank support fuels a recovery in corporate profits. Last week, minutes from the May meeting of the Bank of Japan (BoJ) showed many of the country's policymakers believe monetary stimulus should be continued until inflation reaches and remains stable at 2%.
- Japan's labour market is benefiting from efforts to reflate the economy, with the number of job openings per applicant hitting a 23-year high in May. However, as yet there is little sign of the sustained wage growth that would be needed to create inflation. Prices excluding fresh food rose just 0.1% vs. a year earlier in May, suggesting the BoJ's expectation that the 2% target will be reached by next summer may be optimistic.
- Hong Kong's Hang Seng slipped 0.4%, with heavy losses on the mainland Chinese markets having little effect on the island's stocks. Singapore's Straits Times gained 0.6%, while Australia's All Ordinaries lost 1.0%.
EMERGING MARKETS: China scraps limit on bank lending
- The MSCI Emerging Markets Index was up 1.1% in the week to 26 July, outperforming developed markets.
- The MSCI China Index delivered a flat return. Sentiment was supported by news that Beijing had abolished the bank loan-to-deposit ratio (the limit on the amount of loans banks can grant), which is currently capped at 75% of the deposits they keep. The move will help boost credit expansion and support the banking sector.
- Meanwhile, the HSBC/Markit flash manufacturing purchasing managers' index for China came in at 49.6 for June, up from 49.4 in May but remaining below the 50 level that separates expansion from contraction.
- Elsewhere in emerging Asia, India's Sensex rose 1.8%, as sentiment was boosted by the strong start to the monsoon. Stocks sensitive to interest rates rose on hopes that the improvement in the monsoon may lead to an earlier-than-expected rate cut by the Reserve Bank of India as food price inflation fears recede. However, rice traders were hit by forecasts showing that the monsoon is likely to ease in the first half of July.
- Taiwan's Taiex was up 2.6%, despite disappointing export orders and industrial production data for May. South Korea's Kospi rose 2.1%.
- In emerging Europe, Russia's RTS was down 2.5%. The Russian economy contracted more than expected in May, marking the lowest rate of growth since 2009 and increasing the likelihood that Russia's central bank will introduce further rate cuts.
- Turkey's ISE 100 ended the week 1.3% higher. The Central Bank of the Republic of Turkey kept all rates associated with its interest rate corridor unchanged, as widely expected. It expects inflation to fall thanks to a correction in food prices in the short term.
- Returns across Latin America were positive, with Brazil's Bovespa up 0.5% and Mexico's IPC up 1.3%.
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