Wrap up – last week   

UK offers £100 bn of cheap funding to banks; has a ‘Grexit’ been narrowly avoided?

Key global equity markets managed to stage a recovery last week despite mounting concerns over the fate of the Eurozone and the all-important Greek elections on Sunday. Surprisingly, the week saw the euro rising to 1.26 against the dollar amid the uncertainty. The markets were lifted by hopes for further monetary stimulus from the US Federal Reserve (the Fed) as well as the European Central Bank’s decision to support proposals for the creation of a banking union to strengthen the supervision of banks in the region. Later in the week G20 officials confirmed that post the Greek vote, central banks were prepared to provide liquidity to stabilise financial markets to prevent bank runs that may extend to peripheral European economies. Spanish 10-year government bond yields soared above 7% after Moody’s downgraded Spain’s debt by three notches on Wednesday, while an auction of Italian 3-year government bonds saw yields skyrocket above 5.3% from 3.9% a month ago. Meanwhile, the Bank of England has said that it will pump £100 bn of cheap long-term funding into the UK credit markets to encourage lenders to provide loans to consumers and businesses.

In the US, disappointing economic data releases led investors to hope for an announcement of further monetary stimulus by the Fed at its next policy meeting. In May annual headline inflation was only up by 1.7%, (below the Fed’s 2% target for the first time since January 2011) driven by a large decrease in gasoline prices. Initial jobless claims climbed to 386,000 in the week to 9 June compared to a forecast of 375,000, while May retail sales fell 0.2% for a second month in a row.

On Sunday, the results of the much anticipated Greek elections showed that pro-Euro parties such as New Democracy were more in favour with voters; New Democracy won by a slightly larger margin over the anti-austerity Syriza, while the third-placed socialist PASOK has yet to decide if it wants to be part of the coalition.

Shaping the markets – this week

Second attempt to form a Greek coalition; US and UK central bank watch for signs of QE

Softening macroeconomic data and increasing risks have brought the question of more quantitative easing into focus once again. This week, minutes from the Bank of England’s June meeting (to be released on Wednesday) is expected to reveal a lively debate on whether to loosen policy further, while on the same day, the US Federal Open Market Committee (FOMC) will announce its decision on interest rates (expected to remain on hold) and quantitative easing (QE3) — if any.

In Greece, attempts to form a coalition government will begin on Monday. This week, European finance ministers meet on Monday and Tuesday ahead of the full quarterly European Union summit meeting of the heads of states on June 28 and 29. The key release for the region will come out on Friday; the German Ifo Business Climate is expected to have retreated from the 106.9 figure in May. The UK sees two important data releases: May’s inflation number (out on Tuesday) is expected to struggle to remain flat at around the previous figure (3.0% year-on-year), while retail sales (out on Thursday) is generally expected to show a rebound from the 2.3% drop in April (1%, month-on-month).

Industrial production, economic activity and labour market data releases in Russia this week are expected to show a tight labour market, restrained households consumption, a recovery in business spending, and a rebound in industrial production. In the US, housing data is expected to show the sector continuing its bumpy recovery while the Philadelphia Fed Index should bounce back into positive territory from a 5.8% drop the previous month.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1342.84

1.3

6.8

Dow Jones Industrials

12767.17

1.7

4.5

NASDAQ Composite

2872.80

0.5

10.3

FTSE 100

5478.81

0.8

-1.7

Euro STOXX 600

244.21

0.9

-0.1

Nikkei 225

8569.32

1.3

1.4

Hang Seng

19233.94

4.0

4.3

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.59

-5.3

-28.8

UK Gilt – 10 year

1.59

3.1

-39.0

German Bund – 10 year

1.46

14.9

-36.3

Japanese JGB – 10 year

0.83

-0.2

-15.7

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.61

2.3

-34.9

ITRAXX Crossover 5 Year (MID)*

682.69

-17.3

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

21.11

-0.6

-9.8

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

97.80

0.0

-9.7

Gold Bullion $/ Troy Oz

1627.49

2.6

3.4

Currencies

vs $

vs £

¥

78.73

123.2

$

1.56

Euro

1.263

1.244

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

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