Wrap up – last week   

Greece and Spain at the epicentre of euro ‘firestorm’, macro news flow takes a back seat

Equities, commodities, and the euro lurched lower, with US and European equities recording their worst weekly performance so far this year, as fears over a Greek exit from the euro gained traction just as fissures in Spain’s financial sector began to widen. Paralysed by resistance from anti-bailout parties, Greece has failed to form a coalition government, and there has been increasing evidence that Greek citizens are withdrawing euro savings from national lenders. This precarious situation is unlikely to be resolved until at least mid-June — when a repeat election is scheduled — although this could still lead to an indecisive result.

The euro ‘firestorm’ also swept into the Spanish markets, with shares in Bankia, Spain’s second largest bank by deposits tumbling 30% at one point during Thursday’s trading. It seems customers have withdrawn over €1bn since the government part-nationalised the bank; the level of bad loans on Spanish banks’ balance sheets is now reportedly at an 18-year high. Rating agency Moody’s issued its prognosis of the ill health of the Spanish financial sector, downgrading 16 of the country’s banks. Sovereign bond yields on Spanish and Italian debt reached worrying levels, while bunds and Treasuries were in demand as investors sought safer havens.

In this environment, macroeconomic releases took a back seat. Better-than-expected news on first quarter German gross domestic product growth — a solid 0.5% — failed to support the fragile single currency this week. Data out of the US was also largely positive, as core retail sales increased 0.4%, manufacturing in the New York region accelerated more than projected, and confidence among US homebuilders rose to a five-year high. In company news, the much-anticipated initial public offering of Facebook on Friday provided some distraction in an otherwise dire week — but systems problems on the Nasdaq contributed to a lacklustre debut and its underwriters were forced to prop up the share price.

Shaping the markets – this week

Eurozone PMIs and the Bank of England’s MPC meeting minutes to provide investor insight

Investors should get a high level steer from the Organisation for Economic Co-operation and Development’s (OECD) latest economic outlook to be released on Tuesday, whilst on Wednesday the Bank of England’s latest Monetary Policy Committee meeting minutes will provide insight on future monetary policy in the UK, particularly in terms of quantitative easing. Meanwhile, European Union leaders are set to discuss the worsening state of the Eurozone debt crisis at an informal midweek summit.

In terms of data, consensus expectations are for Monday’s US existing home sales release to rise to 4.60 million in April (seasonally adjusted annual rate) from 4.48 million in March. On Wednesday, UK retail sales (ex-auto fuel) for April are expected to show a 0.6% fall from March (month-on-month) on the back of wet weather. Thursday sees the release of several purchasing manager indices (PMIs) within Europe. Consensus expectations are for preliminary Eurozone surveys for the manufacturing (46.1) and services sectors (47.0) to remains in contraction territory, although individual country PMIs for France and Germany are expected to tick up following significant falls in April. Meanwhile, the IFO business climate survey for Germany is likely to decline for the first time in six months, from 109.9 in April to around the 109.5 mark in May as the backdrop in Europe deteriorates. Elsewhere, US durable goods orders figures for April are expected to show a rebound (+1.0%) from the 4.0% month-on-month fall in March.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1295.22

-4.3

3.0

Dow Jones Industrials

12369.38

-3.5

1.2

NASDAQ Composite

2778.79

-5.3

6.7

FTSE 100

5267.62

-5.5

-5.5

Euro STOXX 600

238.89

-5.2

-2.3

Nikkei 225

8611.31

-3.8

1.8

Hang Seng

18951.85

-5.1

2.8

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.70

-10.7

-17.3

UK Gilt – 10 year

1.75

-12.7

-23.1

German Bund – 10 year

1.34

-9.2

-48.8

Japanese JGB – 10 year

0.83

-2.2

-15.5

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.69

-2.7

-27.3

ITRAXX Crossover 5 Year (MID)*

746.07

55.8

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

25.10

26.2

7.3

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

108.36

-4.0

0.1

Gold Bullion $/ Troy Oz

1595.28

0.4

1.3

Currencies

vs $

vs £

 

¥

79.26

125.3

 

$

 

1.58

 

Euro

1.272

1.237

 

Source: Datastream. * Spread in basis points. Past performance is not a guide to future performance.

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