The Weekly Stock Market Report (6-12 June 2015)Contributor JPMAM UK
US: Consumer confidence surges
- US stocks delivered muted returns in the week to 12 June, as uncertainty over the timing of the first interest rate rise continued to weigh on sentiment. The S&P 500 returned 0.1%, while the Dow Jones Industrial Average rose 0.3% and the technology-biased Nasdaq slipped 0.3%.
- Economic data released in the week indicated that the US economy was strengthening, following a weak first quarter, and reinforced the case for the Federal Reserve (the Fed) to begin to raise interest rates.
- US retail sales rose 1.2% in May, with the "control group" figure - which excludes cars, gas and building materials - up a solid 0.7%. The readings for March and April were also revised up. Retail sales were hit early in the year - particularly in February - by the unseasonably bad weather, but have picked up since.
- Meanwhile, consumer confidence surged last month, suggesting that a strengthening labour market was boosting hopes for wage increases. The University of Michigan consumer sentiment index rose to 94.6 in the preliminary June report from 90.7 in May. The index highlighted a significant jump in income expectations, with the median income expectation measure increasing from 1.3% in May to 2.2% in June, reaching a new high and getting close to the average figure reported in the years leading up to the financial crisis.
- Finally, data released in the week confirmed that April was a strong month for total job openings, which jumped 5.2% to reach their highest level since the data was first collected in December 2000.
- Attention will now turn to the next Federal Open Market Committee meeting on 16/17 June, and for further clarity over when interest rates may begin to rise, with the strong data releases bolstering expectations that the Fed could raise interest rates as early as September.
EUROPE: Greek stalemate
- The failure of the Greek government to reach a debt repayment deal with the International Monetary Fund (IMF) sparked renewed volatility on European stock markets last week. The MSCI Europe Index fell 0.3%.
- Switzerland's SPI underperformed, down 0.9% in the week, while the French CAC 40 fell 0.4%, and Italy's FTSE MIB and the UK's FTSE 100 both dropped 0.3%.
- Germany's DAX was unchanged, while Spain's IBEX 35 eked out a 0.3% gain.
- The Greek debt drama continued to dominate sentiment on European markets as talks between the Greek government and its international creditors to secure the release of EUR 7.2 billion in bailout aid broke down. Without the bailout funds, Greece may not be able to make a EUR 1.6 billion loan repayment due to the IMF at the end of June.
- The European Commission said there was still a "significant gap" between the creditors' demands for aid to be linked to further budget cuts and tax increases, and the Greek government's desire to avoid further austerity measures. The IMF pulled its negotiators from the talks, while several European governments - including Germany's - hardened their stance as the Greek government offered no new concessions.
- Stock markets had initially pushed higher earlier in the week on hopes that a bailout deal would be reached. However, the lack of progress towards a deal resulted in a sharp pullback in share prices amid worries that Greece would be forced to default on its debt obligations.
- The implications of a Greek default are highly uncertain but there are fears that Greece would be forced to leave the eurozone, sparking contagion to other highly indebted eurozone countries. These fears were reflected in the bond markets, as Spanish, Portuguese and Italian bond yields rose sharply, while German yields fell back as investors sought out the safest investments.
- Investors are also worried that Greek instability could have a negative impact on eurozone growth. Industrial production rose just 0.1% in the month to the end of April, and was revised down to -0.4% in March.
- In contrast, UK industrial production rose 0.4% in April. With UK house prices also rising sharply in the wake of last month's general election, the UK economy appears to be picking up momentum in the second quarter. Furthermore, significant upward revisions to UK construction output mean that the UK economy is likely to have grown at a faster pace in the fourth quarter of 2014 and in the first quarter of 2015. First-quarter growth is now likely to be revised up to 0.4% quarter on quarter, up from the previously reported 0.3%.
PACIFIC: Yen rise dents Topix
- The MSCI Pacific Index was down 0.6% in the week to 12 June, hit by falls in Japan, where the Topix (-0.9%) was lower for the second consecutive week.
- Japanese sentiment was hit by comments from Bank of Japan governor Haruhiko Kuroda warning that the yen was unlikely to weaken further from current levels following a 5% fall against the US dollar since the end of April. Kuroda's comments caused the yen to rebound against the dollar, hitting exporters, whose margins fall as the yen rises.
- Apart from a 0.7% drop in New Zealand's NZX 50, other regional markets were higher on the week. Australia's All Ordinaries (+0.8%) recorded the biggest increase, boosted by stronger domestic economic news as the latest monthly jobs report came in better than expected. The Australian unemployment rate fell to 6% in May, the lowest level for a year, suggesting that record low interest rates and government stimulus measures are boosting business confidence.
- In Hong Kong, the Hang Seng gained 0.1%, while Singapore's Straits Times rose 0.6% - rebounding from a five-month low - as stronger US economic news boosted sentiment.
EMERGING MARKETS: MSCI defers addition of Chinese A shares
- The MSCI Emerging Markets Index was down 0.5% in the week ending 12 June.
- The MSCI China Index slipped 0.5%. Sentiment was hit by news that MSCI would not include A shares (locally-traded Chinese stocks) in its main indices at this stage. MSCI only includes Chinese stocks that are tradable by international investors - mainly those listed in Hong Kong - and the inclusion of A shares would have drawn global investors to mainland Chinese shares.
- On the positive side, May's trade report confirmed a stabilisation in exports and weak imports, with China's trade surplus rising to USD 59.5 billion. Industrial production growth demonstrated a moderate upturn, while retail sales also rose.
- Elsewhere in emerging Asia, India's Sensex was down 1.3%, as returns were hit by a rise in crude oil prices - India is vulnerable to higher crude oil prices as it imports a significant amount of its energy needs. Sentiment was also hit by concerns over corporate earnings and a potentially weak monsoon season.
- South Korea's Kospi fell 0.8%. On Thursday, the Bank of Korea cut interest rates to a record low of 1.5% amid concerns over a potential slowdown in consumption. Taiwan's Taiex slipped 0.4% despite a better-than-expected May trade report, which confirmed a rebound in exports, led by the non-technology sectors.
- In emerging Europe, Turkey's ISE 100 was down 1.7%. The Turkish lira weakened substantially following the country's general election on 7 June, with unofficial results showing that the AKP had lost its majority in parliament. Turkey's central bank is expected to step up its support for the currency until political clarity emerges.
- Russia's RTS rose 3.0%. The rouble rallied at the beginning of the week before weakening on Thursday amid expectations that Russia's central bank will reduce borrowing costs at its Monday meeting.
- Returns across Latin America were positive, with Brazil's Bovespa up 0.7% and Mexico's IPC rising 0.3%. In Mexico, the annual consumer price inflation rate fell more than expected in May, below the central bank's 3% target.
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