Market Roundup June 2010
05 Jul 2010
In our regular market roundup, Invesco Perpetual provides TQ Invest with commentary on a volatile month of stock market performance.
Global overview
Positive news, such as strong manufacturing numbers from China, India and the US and China breaking its peg with the US dollar, was overwhelmed as investors became nervous over sovereign indebtedness, the capital adequacy of European banks and warnings that global growth may slow over coming months. World stock markets sold off, with the MSCI World index falling by 4.3% over June in local currency terms. Current newsflow regarding trade and production growth has generally been good, but consumer and investor confidence waned as a number of major institutions warned that risks to global growth have risen: The World Bank issued a warning that global economic growth could stall sharply if there were to be a sovereign default in Europe which led to a loss in market confidence; the Bank of International Settlements said that keeping interest rates low for too long or not cutting budget deficits could the sow seeds of another crisis; and the International Monetary Fund (IMF) stated that risks to the global economic outlook have ‘risen significantly' and that policy makers now have limited room to provide further support. The IMF is concerned that fiscal consolidation in Europe may crimp Asian growth, especially as the region is leading the global recovery. The G20 summit in Toronto revealed divisions in policy, with European countries adopting fiscal consolidation measures which the US administration believes will subdue domestic demand in the global economy.
US
- US markets fall on disappointing housing, employment and confidence numbers, in addition to external influences
- Industrial production and capacity utilisation show healthy gains
- New home sales fall sharply after the withdrawal of government subsidies
Europe
- Sovereign debt concerns drive weaker sentiment as governments across Europe continue with austerity measures
- Latest European inflation figures are lower than forecast
- German Ifo survey of business confidence at highest for 2 years
UK
- Markets fall on global growth concerns
- Emergency Budget raises VAT and CGT and affects major cuts in public expenditure
- BP agrees to cut dividends this year and place US$20bn into a claims fund administered by a third party appointed by the Obama administration
Asia Pacific
- China abandons its currency peg with the US dollar
- Prime Ministers of Japan and Australia replaced after heavy falls in public support
- Moody's upgrade Indonesia's credit rating outlook to ‘positive' from ‘stable'
Emerging Markets
- Nervousness over the European debt crisis sours investor sentiment
- Despite this, emerging Asian equities manage to gain, aided by upbeat economic data
- Oil and commodity prices fall, US dollar firms amid a rise in risk aversion levels
UK
Fears over the strength and sustainability of global economic growth continued to drive market volatility over June. All FTSE indices ended the month in negative territory, with the FTSE All- Share, FTSE 100, FTSE 250 and FTSE SmallCap indices declining by 4.9%, 5.2%, 2.8% and 2.1%, respectively. At the sector level, oil & gas producers was the worst performing sector in the FTSE All-Share index, led lower by BP which fell to a 14-year low following the well-documented oil spill in the Gulf of Mexico. The company agreed to US demands to place over US$20bn into a compensation fund and announced that it will not pay any dividends in 2010. In addition, news of tropical storms heading towards the Gulf of Mexico further dampened sentiment in BP shares. Chancellor George Osborne's Emergency Budget held on 22 June contained a raft of tax and benefit measures to reduce the UK's huge deficit. Indeed, the Budget revealed a more rapid fiscal response to the UK's debt problems than that planned by Labour's March budget. Highlights included a new £2bn levy on banks, a two-year pay freeze for public sector workers and downward revisions to GDP forecasts by the newly formed Office of Budget Responsibility to 1.2% and 2.3% in 2010 and 2011 respectively, versus 3.25% and 3.5% previously. The widely expected rise in capital gains tax (to 28% for higher rate taxpayers) was much less than the 40% some had been expecting. Also, as widely flagged, VAT will be increased to 20% from 17.5% (as from 4 January 2011). Minutes from the Bank of England's Monetary Policy Committee revealed that there was one dissenter in the decision to maintain interest rates at 0.5%. Andrew Sentance voted for a 25bps hike in interest rates at the June meeting. Elsewhere in the economy, UK inflation data, as measured by the consumer prices index, slowed to 3.4% year-on-year (y-o-y) in May from 3.7% y-o-y in April. The reading still remains well above the Bank of England's 2% target. The decline in inflation was helped by lower food prices, as well as slower rises in the price of petrol, alcohol and tobacco. Meanwhile, the retail prices index rose by 5.1% in May from 5.4% previously. In the currency markets, sterling strengthened against the euro (and the US dollar) buoyed by the tough fiscal consolidation measures in the emergency Budget and news that one member of the Bank of England's Monetary Policy Committee had voted for an interest rate rise. Sterling also benefited from the positive response from Fitch credit ratings agency towards the Budget, which eased fears that the UK's AAA rating could be downgraded.
US
US stock markets had a rollercoaster month, initially falling on concerns over weakening global growth prospects and eurozone debt contagion before rallying higher on benign US inflation figures and strong Asian data, especially regarding manufacturing in China and India. The respite was brief as a broadside of bad news, including a downward revision of US first-quarter GDP growth to 2.7% from 3.0%, poor US employment and housing numbers, setbacks in both US and Chinese consumer confidence and downbeat economic growth assessments from the IMF and the US Federal Reserve, sent markets in a sharp dive. The S&P 500 index fell to its lowest point since October last year and declined by 5.4% over June. The Dow Jones Industrial Average fell by a lesser 3.6%. The Nasdaq Composite and the smaller companies Russell 2000 indices finished the month 6.5% and 7.9% lower, respectively. Investors sought safety in US Treasury bills, pushing the yield on US 10-year Treasury notes below 3% for the first time in 14 months. Consumer discretionary, materials and industrial stocks were hardest hit, with the defensive sectors of telecommunication services, utilities and healthcare proving the most resilient. Financial stocks suffered as the G20 met in Toronto to discuss, among other items, forcing banks to build more Tier 1 capital to enable them to withstand another crisis. The US financial reform bill, due to be passed by the Senate in July, also hangs over the sector. Although US banks look to have won the argument to keep ownership of their hedge funds and private equity arms, they will be subject to a 3% market capitalisation limit which will force some divestiture. They also look like facing a one-off US$19bn levy. In broader economic news, industrial production was up by 1.2% in May and capacity utilisation climbed back to 74.7%, halfway between the 68.3% low in June '09 and the 80.6% near-term high in December '07. However, this improvement in utilisation needs to be taken in context of a 1.3% year-on-year fall in US industrial capacity, something which has been relatively rare in modern times. Service industry data was mixed. The ISM non-manufacturing index was positive but unchanged, but business activity expanded for a ninth consecutive month. Retail sales fell by 1.2% from April to May, with building supplies sales falling most. Withdrawal of government incentives at the end of April led to a sharp fall in new home sales in May, down 33% from April and much worse than forecast. New housing starts and permits fell by 10% and 6% respectively and the average new home price fell by 9.6% on a year-to-year basis to US$200,900, its cheapest since December '03. Unsurprisingly, homebuilder confidence also declined.
Europe
European equity markets remained under pressure in June despite generally robust corporate newsflow. Sovereign debt concerns drove the weaker sentiment while macroeconomic data proved mixed. Greek debt was downgraded to junk status by Moody's, who at the end of the month commented that Spanish debt was in danger of losing its AAA credit rating. All this left European equities lower on the month with only the healthcare and consumer goods sectors resisting the falls. The utilities and oil & gas sectors suffered the most during the month. Governments across Europe are continuing to announce austerity measures in order to tackle the deterioration in government finances. On 16 June, the French government announced an increase in the standard retirement age from 60 to 62, while in Spain the government has cut public sector wages and is looking to pursue pension, financial and labour market reforms. Spanish cajas - unlisted, mutually owned banks that command half of Spain's lending business and are often controlled by local governments - have emerged as a weak spot in Spain's economy and financial system. The Spanish government has also raised the pressure as international concern over the state of Spanish banks, coupled with concern about the country's double-digit budget deficit, has sent financing costs soaring for Spain's government, companies and households. Banks across Europe are being "stress tested" while another significant event weighing on market sentiment towards the end of the month was the ECB wanting €442bn of loans repaid by banks. The ECB offered banks the chance to 'roll over' the money into three-month loans, but banks have apparently just taken up €131.9bn of this offer, indicating that most banks were able to get hold of any money they needed in the markets, which is reassuring. European inflation slowed more than economists forecast in June as energy prices receded and companies continued to cut costs, although unemployment remained stubbornly at 10%. Germany, Europe's largest economy, is showing signs of evading the worst of the Eurozone sovereign debt crisis. Consumer sentiment held steady while business confidence (as measured by the Ifo survey) rose to its highest level in two years. Furthermore, German inflation was lower-than-expected, unemployment fell for the 12th consecutive month and, as the euro remains weak, Germany's export-led economic recovery is gaining traction. Elsewhere, Ireland emerged from recession in Q1 buoyed by a strong rise in its export sector.
Asia Pacific
Equity markets across Asia were mixed in June as positive economic data suggested the recovery remains on track, but concerns about the Eurozone debt crisis and potentially slowing growth in China kept sentiment subdued. Exports from China increased by 48.5% year-on-year (y-o-y) in May, and news that the government had abandoned its currency peg with the US dollar was also well received. Greater exchange rate flexibility is likely to encourage a gradual re-balancing of the Chinese economy towards consumption and should also dampen some inflationary pressure. During the month, data continued to demonstrate the strength of China's recovery as retail sales and industrial production saw healthy rates of expansion. Stocks in Indonesia were supported by news that ratings agency Moody's had raised its credit rating outlook from ‘stable' to ‘positive' on expectations of further sustainable economic growth. In Australia, Prime Minister Kevin Rudd was replaced by Julia Gillard following a steep fall in public opinion polls. The new Prime Minister was quick to state her willingness to negotiate with mining groups over the controversial super tax planned on sector profits and also announced plans to call an election in the coming months. Prior to the change in political leadership, mining group Xstrata suspended projects in Australia valued at A$6.6bn due to the proposed resources tax. Among companies, Samsung Electronics announced plans to launch a tablet computer in the third quarter of the year and also detailed its intention to double its market share in smartphones. In China, Bank of Communications said that it will sell $4.8bn of stock in a rights issue, around 20% less than originally planned due to the currently challenging market conditions. Japanese stocks were lower as investor sentiment remained cautious. News that export growth and industrial production had slowed in May was countered by rising consumer confidence, higher machinery orders and a 10th straight monthly decline in corporate bankruptcies. The improving data suggest the export-led recovery is broadening out into the domestic economy and Japan's Cabinet Office increased its forecast for growth in the year to March 2011 from 1.4% to 2.6%. Political developments were also a factor, as Prime Minister Hatoyama resigned after less than 9 months following a severe decline in public opinion polls to be replaced by Naoto Kan. Towards the end of the month, the new Prime Minister set out his plans to tackle Japan's public debts through measures including an overhaul of the tax system. At the corporate level, Fujitsu and Toshiba announced initial discussions aimed at combining their mobile phone operations to create Japan's second largest handset maker.
Emerging Markets
Global emerging equity markets marginally failed to hold onto initial gains as fresh concerns about eurozone finances dented investor confidence amid a rise in market volatility. The MSCI Emerging Markets (US$) index declined by 0.9% during the month, a smaller drop than registered in developed markets. Emerging Asia was the outstanding regional performer - the only major region that managed to post a gain in June. Share prices here were supported by encouraging economic data, especially strong export growth. In a surprise decision China ended the renminbi peg against the US dollar to allow greater flexibility for its currency. Weaker commodity prices and higher interest rates soured investor sentiment in Latin America with Brazilian stocks under-performing. With investors becoming more risk averse amid fears that the fiscal woes affecting the peripheral members of the Eurozone could spread to other regions, equities in emerging Europe, particularly in Hungary, came under pressure. Although the MSCI Latin America (US$) index fell by 3.4%, economic news from the region continues to be upbeat. Year-on-year retail sales in April increased by 9.1% and 22.4% respectively in Brazil and Chile. In an effort to combat inflationary pressures, some central banks in the region raised interest rates. Brazil's selic-rate was raised by 75bps for the second consecutive time and now stands at 10.25%. The cost of borrowing was also increased in Chile and Peru. By contrast, the key overnight rate in Mexico was left unchanged at 4.5% as inflation is below 4% and consumer spending still remains sluggish. In political news, Juan Manuel Santos took 69% of the election vote on 20 June and will become Colombia's next president. He is expected to continue with market-friendly policies. The lack of a clear resolution to the fiscal woes in the Eurozone and a sovereign default scare from Hungary prompted broad weakness in emerging European equities, apart from Turkey where macro news continues to be good. Although stocks in Hungary dropped the most, the danger of a sovereign default is slim given that the country's debt/GDP ratio this year is expected to be 79% (source: EU), in line with the EU average and far below Greece's projected 125%. The credit backdrop in emerging European countries is significantly better than many Eurozone members. In a positive sign, Fitch revised the Czech Republic's sovereign rating outlook to positive from stable. Underscoring that the Russian economy is still accelerating, first quarter industrial production here was revised upwards.
The views expressed in this article are those of Invesco Perpetual and may not represent those of TQ Invest.
