Wrap up – last week   

A mini rally for stocks; China cuts rates but other major central banks disappoint

Hopes for renewed easing measures to combat the crisis in Europe and prop up a weakening global economy spurred a mini rally in stocks and lifted the yields on safe haven government bonds. However, the lack of the anticipated action from the European Central Bank (ECB), the Bank of England (BoE), and in particular, the absence of a definitive commitment from the Federal Reserve (Fed) to extend liquidity, dashed any hopes of further policy easing in the coming weeks, souring the mood by the end of the week. Although this limited the gains in stocks, major indices managed to end the week firmly in positive territory. China surprised the markets with a 25 basis points rate cut, responding to signs of a slowdown in the world’s second largest economy. The action initially lifted sentiment but later put commodities under pressure on concerns for the strength in demand for raw materials. Copper ended the week at a 6-month low.

With bond yields risen to dangerous levels, and a three notch credit rating downgrade by the Fitch rating agency, all eyes were on Spain last week — widely expected to be forced to seek a bailout imminently. This came to fruition over the weekend as the Spanish government agreed to seek a bailout for its troubled financial sector.

Macroeconomic data in Europe painted a dismal picture as May’s Eurozone purchasing managers’ data suggested rapidly contracting manufacturing and services output while industrial output disappointed in Germany. Over the weekend China’s data releases for May showed that inflation fell to the lowest level in nearly two years (consumer price inflation at 3% year-on-year), industrial production grew at a lower than expected 9.6% (year-on-year) and retail sales were at their slowest pace since February 2011.

Shaping the markets – this week

Europe under microscope: €100bn bailout for Spain and countdown to Greece’s elections

Investors have plenty to mull over in the coming week. The €100bn bailout agreed over the weekend for Spain has initially calmed nerves and provided a cushion should Greece’s elections throw financial markets into a tailspin. As the countdown for June 17 elections begins, markets could have a jittery week.

On the data front, in the US, three measures of inflation for May — consumer price inflation (CPI), producer price inflation (PPI) and the import price index — are all due this week. PPI is likely to have fallen by 0.3% (estimate) due to a sharp drop in gasoline prices while CPI is expected to retreat by 0.2%-0.3%. Retail sales figures out on Wednesday are expected to show a small fall on the month. Finally, the Empire State Manufacturing Index out on Friday could reveal a significant decline as it includes a measure of executives’ optimism over the next six months.

In the UK, April’s industrial production and trade balance figures are due. The former is unlikely to show an improvement on the previous 0.3% decline given that the economy has slipped of late, while the latter is expected to remain flat. The BoE’s Q2 Bulletin should also shine a light on any further quantitative easing.

Data for Europe is likely to confirm a decline in Italian Q1 gross domestic product (GDP) growth and a sharp fall for the euro area industrial production, which has fallen consistently since September last year.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1325.66

3.7

5.4

Dow Jones Industrials

12554.20

3.6

2.8

NASDAQ Composite

2858.42

4.0

9.7

FTSE 100

5435.08

3.3

-2.5

Euro STOXX 600

241.93

2.9

-1.1

Nikkei 225

8459.26

0.2

0.1

Hang Seng

18502.34

-0.3

0.4

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.64

17.3

-23.5

UK Gilt – 10 year

1.56

10.9

-42.1

German Bund – 10 year

1.32

14.4

-51.2

Japanese JGB – 10 year

0.83

2.0

-15.4

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.59

8.4

-37.2

ITRAXX Crossover 5 Year (MID)*

700.00

-25.3

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

21.23

-20.4

-9.3

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

97.78

-0.6

-9.7

Gold Bullion $/ Troy Oz

1586.40

-1.6

0.8

Currencies

vs $

vs £

 

¥

79.61

122.7

 

$

 

1.54

 

Euro

1.247

1.236

 

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

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