Wrap up – last week

European leaders procrastinate on debt action, German government raises ‘money for nothing’

Market sentiment was once again driven by the Eurozone debt crisis as investors focused on the potential impact of Greece exiting the euro and the weak outlook for growth. Consequently, ‘safe-haven’ assets, such as 10-year UK gilts and German bunds were in demand, which led to yields falling further. These concerns also helped the German government, perceived to be the most creditworthy across the Eurozone, to auction €4.6 billion of two-year bunds with an average yield of just 0.07%. Despite both economic headwinds and bouts of volatility, most major equity markets finished the week in positive territory, with the exception of Japan and Hong Kong, where the Nikkei 225 and Hang Seng closed down.

Wednesday’s informal summit of European leaders failed to deliver anything meaningful towards the region’s debt crisis, which according to the Organisation for Economic Co-operation and Development, “remains the single biggest downside risk facing the global outlook”. Bankia, Spain’s fourth-largest bank, went cap in hand for a €19 billion injection from the Spanish government. The IFO business climate for Germany fell more than expected in May, whilst purchasing managers’ indices (PMIs) for the wider Eurozone area revealed the services sector fell to a 7-month low and the manufacturing sector had dropped to a 35-month low. Meanwhile, the HSBC/Markit preliminary PMI for China identified the country’s manufacturing sector had contracted further, which raised hopes of further accommodative monetary policy from the world’s second largest economy.

Shaping the markets – this week

Markets keenly await Friday’s all-important US jobs data

This week sees a raft of data released from the US. On Tuesday expectations are for a 2.8% fall in the 20-city composite S&P/Case-Shiller Home Prices Index reading for March, year-on-year (y-o-y). On the same day, the Conference Board Consumer Confidence Index is expected to rise from last month’s 69.2 reading. On Wednesday, pending home sales in the US are likely to show a fall (-0.1%) in May, month-on-month (m-o-m), which would mirror last month’s slowdown in mortgage applications. Consensus expectations are for gross domestic product in the US to be revised down to 1.9% on Thursday from the 2.2% estimate. On Friday, consensus expectations are for May’s all-important non-farm payrolls release to rise by 148,000 versus April’s rise of 115,000. Meanwhile, the ISM Manufacturing Activity Index for May is expected to fall to around the 54.0 mark from last month’s 54.8, given global market concerns.

Elsewhere, the unemployment rate in Japan is set to remain steady at around 4.5%, although post-earthquake reconstruction demand could see the figure released on Tuesday softening slightly. Whilst market expectations are for consumer prices in Germany to have stabilised in May (m-o-m), the drop in fuel prices means there is potential for a fall in Wednesday’s preliminary release. UK mortgage approvals for April, released on the same day, are expected to remain around the 50,000 mark, whilst market consensus is for net consumer credit in the UK to have risen to £0.2bn in April. Thursday sees the release of industrial production numbers out of Japan for April, with a 0.5% (m-o-m) rise expected as weak export demand is likely to be offset by robust reconstruction-led domestic demand. On the same day, preliminary consumer price inflation for the Eurozone is expected to remain around 2.6% y-o-y. Finally, China’s official purchasing managers’ index is expected to fall from last month’s 53.3 level but still remain in expansion territory (above 50).

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1317.82

1.7

4.8

Dow Jones Industrials

12454.83

0.7

1.9

NASDAQ Composite

2837.53

2.1

8.9

FTSE 100

5351.53

1.6

-4.0

Euro STOXX 600

242.49

1.5

-0.8

Nikkei 225

8580.39

-0.4

1.5

Hang Seng

18713.41

-1.3

1.5

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.74

4.1

-13.2

UK Gilt – 10 year

1.68

-7.5

-30.6

German Bund – 10 year

1.30

-4.2

-53.1

Japanese JGB – 10 year

0.89

5.3

-10.2

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.69

0.8

-26.5

ITRAXX Crossover 5 Year (MID)*

717.25

-28.8

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

21.76

-13.3

-7.0

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

108.20

-0.2

-0.1

Gold Bullion $/ Troy Oz

1566.26

-1.8

-0.5

Currencies

vs $

vs £

 

¥

79.60

124.5

 

$

 

1.56

 

Euro

1.251

1.251

 

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