The Weekly Stock Market Report (30 May – 5 June 2015)Contributor JPMAM UK
US: Payrolls jump in May
- US stocks fell slightly in the week ended 5 June amid volatility in bond markets and caution over the outlook for interest rates. The S&P 500 fell 0.7% and the Dow Jones was down 1.0%, while the technology-biased Nasdaq was unchanged.
- Bond yields rose sharply as the latest economic data releases suggested the US economy was bouncing back from the weakness of the first quarter, and that the Federal Reserve (the Fed) was on course to raise interest rates as early as September. The 10-year US Treasury yield - which is indicative of US government borrowing costs - rose by around a quarter of a percentage point to end the week at an eight-month high of 2.40%.
- Economic headlines were dominated by the latest monthly jobs report, released at the end of the week. Non-farm payrolls rose by 280,000 in May, which was well ahead of forecasts, while upward revisions to the previous two monthly reports and a jump in wage growth to a two-year high suggested that the US labour market was strengthening.
- Strong manufacturing and construction spending data added to the evidence of a return to economic recovery after the unexpected slowdown earlier in the year. The Institute for Supply Management's manufacturing index for May increased to 52.8, from 51.5 in April (readings above 50 indicate that activity is growing). Meanwhile, construction spending rose by a stronger-than-expected 2.2% in April.
- Last week's better economic reports increase the likelihood that the Fed will raise interest rates from zero at its September meeting. The jobs report in particular will have a significant bearing on policy, as a strong labour market should boost consumption and higher wages could feed through into higher inflation. At the current pace of job creation, the US unemployment rate is on course to fall below 5% by the end of year.
- However, given the economic weakness experienced at the start of 2015, the Fed will want to be certain that the US economy has fully regained its footing before taking action. Investors, meanwhile, are nervous about the Fed's ability to normalise interest rates without undermining growth and disrupting financial markets.
- Therefore, until there is more clarity on the timing of the first rate rise, and on the likely pace of subsequent rate increases, markets may remain volatile.
EUROPE: Greece takes a stand
- The MSCI Europe Index lost 2.0% in the week to 5 June as Greece appeared to be nearing a crisis point. Italy's FTSE MIB fell 2.8%, while the UK's FTSE 100 was down 2.6% and the German DAX lost 1.9%. The French CAC 40 and the Spanish IBEX 35 slid 1.7% and 1.4% respectively, while the Swiss SPI dropped 1.3%.
- Markets were unsettled by news that Greece would not make a scheduled EUR 300 million repayment to the International Monetary Fund (IMF), instead combining four payments due in June into one large payment at the end of the month. The move, which is permitted under a little-used IMF rule, was viewed as a show of defiance.
- The Greek prime minister, Alex Tsipras, had previously signalled that Greece would make the payment, and Christine Lagarde, the head of the IMF, had also expressed confidence that Greece would pay. However, Tsipras has come under intense pressure from inside his own party, the left-wing Syriza, to stand up to the IMF as a negotiating tactic as discussions continue about the terms of a rescue package for Greece.
- Last week, European Commission president Jean-Claude Juncker presented Tsipras with a five-page list of policy commitments that Athens needed to implement to secure the EUR 7.2 billion in aid. On Friday, Tsipras told his parliament he could not accept the "absurd" proposal, but nonetheless said he believed an agreement was close.
- A turbulent week on the bond markets added to the nervous mood. Investors sold core government bonds after data showed inflation had returned to the eurozone. Consumer prices in the single currency area rose by a larger-than-expected 0.3% in the year to May, the first annual increase since November, easing fears over deflation.
- The sell-off was exacerbated by comments from European Central Bank president Mario Draghi, who said bond market investors "should get used to periods of higher market volatility," ending hopes that regional policymakers may be concerned about large moves and preparing to intervene. Yields on the benchmark 10-year German Bund and UK Gilt touched their highest levels of the year following the remarks.
- Despite the pick up in inflation, Draghi indicated that the ECB remained fully committed to its quantitative easing programme and could increase its bond buying if needed. The central bank raised its inflation projection for this year slightly, but left its 2016 and 2017 forecasts unchanged.
- In the UK, weak economic data added to concerns over the pace of the recovery, following a disappointing first quarter. The services sector grew at the slowest pace in five months in May, according to the Markit purchasing managers' index. Manufacturing activity was broadly unchanged as sterling strength hit export demand.
PACIFIC: Japanese wages beat inflation
- The MSCI Pacific Index lost 1.5% in the week to 5 June, as global markets were rattled by Greece's decision to delay a scheduled loan repayment.
- Following a very strong run so far this year, Japan's TOPIX slipped 0.4%. Wages in Japan rose faster than the cost of living for the first time in two years in April, as the impact of last year's sales tax increase faded. Real wages (wages adjusted for inflation) rose 0.1% from a year earlier.
- Australia's All Ordinaries was the weakest performer, falling 4.6%. The Reserve Bank of Australia left interest rates unchanged at its meeting on Tuesday, as widely expected. However, the accompanying statement made no reference to the potential for further cuts in the coming months, leaving the central bank looking more hawkish than previously thought.
- Hong Kong's Hang Seng lost 0.6%, while Singapore's Straits Times was down 1.7%. The HSBC/Markit purchasing managers' index fell to 47.6 in May from 48.6 a month earlier, as the slowdown in China hit demand. Readings below 50 signal that activity is contracting rather than expanding.
EMERGING MARKETS: Brazil rates rise
- The MSCI Emerging Markets Index fell 1.5% in the week ended 5 June as expectations for a US interest rate increase, a stronger dollar and concerns over a potential Greek debt default hit sentiment.
- Most individual markets recorded losses. However, one of the brighter spots was Brazil's Bovespa, which rose 0.4% as the country's central bank moved to raise interest rates by half a percentage point to 13.75% in order to bring inflation under control.
- The rate increase helped support the Brazilian currency, the real, which had fallen sharply against the dollar in previous weeks. However, there are concerns that higher rates will further dent economic growth and make it harder for Brazil's government to cut spending and bring its finances back into order.
- China's local markets also continued to surge, with the Shanghai Composite Index up some 9% on the week, sparking further concerns over a potential bubble in locally-traded Chinese stocks (known as A shares).
- However, the MSCI China Index fell 1.1%. The MSCI benchmark includes only Chinese stocks that are tradable by international investors - mainly those listed in Hong Kong. Speculation is mounting that MSCI will include A shares in its emerging market indices when its benchmarks are recalibrated this week.
- South Korea's Kospi was down 2.2%. A 10.9% slump in exports in the year to May raised concerns over the impact of a weaker Japanese yen on Korea's international competitiveness. Tourism-related stocks struggled as more cases of Middle East Respiratory Syndrome (Mers) were identified in Korea.
- Taiwan's TAIEX dropped 3.7% to the lowest level since January on growth concerns as the country's purchasing managers' index for May continued to suggest that manufacturing activity was contracting.
- Russia's RTS fell 4.8% as the fighting in Ukraine intensified and the rouble fell sharply against the dollar as the Bank of Russia said it was building up its foreign currency reserves.
- Meanwhile, Turkey's ISE 100 fell 1.3% ahead of parliamentary elections on 7 June, with polls suggesting that President Tayyip Erdogan's AK Party would fail to win an outright majority.
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