Wrap up – last week

Global rally is halted by the reappearance of Spanish troubles

Global equities enjoyed a rally over much of last week after better-than-expected earnings reports from the US and Europe. However, this soon came to an end when Spanish concerns came to the fore again towards the end of the week as it emerged Spain may follow in Greece’s footsteps and need a full bailout. The IBEX ended the week down 6.3%. This was despite the approval by eurozone finance ministers of up to €100bn in loans to recapitalise Spanish banks. 10-year yields on Spanish government bonds reached 7.2% following a poor bond auction. Debt yields for the perceived safe havens of the US, UK and Germany fell again; in fact a bond sale this week saw healthy demand for two-year German bunds with a negative yield. In UK news, June consumer price inflation came in surprisingly lower at 2.4% year-on-year, the third consecutive monthly fall. Unemployment fell to 2.58 million in the three months to May as more jobs were created by the London Olympics. Meanwhile, June UK total public sector debt rose to a record 66% of GDP (gross domestic product).

In the US, investors were left disappointed after Federal Reserve chairman Ben Bernanke delivered a grim economic outlook and offered no direct indication of additional monetary stimulus, but said the door is left open for further easing. Economic data was weaker, with June retail sales suffering a third consecutive monthly fall and June existing home sales declining by 5.4% month-on-month, while weekly jobless claims rose after a previous sharp drop.

In other updates, Chinese economic growth for Q2 came in at 7.6% above a year earlier, matching market expectations. Brent oil prices finished the week up over 5% after rising above $108 following rising tensions in the Middle East, this time in Syria. The euro finished the week sharply lower against the US dollar, the yen and the Aussie dollar.

Shaping the markets — this week

Euro area PMIs likely to disappoint while US and UK Q2 GDP growth expected to slow

Tuesday sees the release of the July euro area purchasing managers’ indices (PMIs); a contraction in activity is expected for the second quarter. In France, the INSEE business confidence indicator, which has been steadily falling since March, is likely to see a pause in its downward trend. On Wednesday, Germany’s ifo business climate survey is expected show further deterioration, which will be its third consecutive decline. Meanwhile, the first estimate of UK Q2 GDP is likely to show falling output as manufacturing and services growth remain weak and the Diamond Jubilee bank holiday reduced the number of working days in the period. Friday is likely to show higher price pressures in Germany due to increasing petrol prices.

In the US, the Markit flash manufacturing PMI is expected to post a modest gain on Tuesday. On Wednesday, new home sales are likely to reach about 380,000 due to increases in housing starts, building permits and improvements in builders’ market appraisals. Meanwhile, durable goods orders on Thursday are expected to be lower due to a contraction in transport bookings. At the end of the week, the US is likely to post a small gain in real Q2 GDP, at a seasonally-adjusted annual rate of around 0.9% to 1.5%, due to a slower pace of expansion in business activity. Also on Friday, the Thomson-Reuters/University of Michigan Sentiment survey is likely to show consumer sentiment has reached a seven-month low.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1362.66

0.4

8.4

Dow Jones Industrials

12822.57

0.4

5.0

NASDAQ Composite

2925.30

0.6

12.3

FTSE 100

5651.77

-0.3

1.4

Euro STOXX 600

258.17

0.7

5.6

Nikkei 225

8669.87

-0.6

2.5

Hang Seng

19640.80

2.9

6.5

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.46

-3.8

-41.4

UK Gilt – 10 year

1.42

-5.8

-56.5

German Bund – 10 year

1.17

-7.4

-65.3

Japanese JGB – 10 year

0.75

-2.1

-23.9

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.13

-15.2

-82.7

ITRAXX Crossover 5 Year (MID)*

643.09

-15.7

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

16.27

-2.8

-30.5

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

107.48

4.1

-5.6

Gold Bullion $/ Troy Oz

1580.70

-0.7

0.4

Currencies

vs $

vs £

 

¥

78.56

122.8

$

1.56

Euro

1.217

1.285

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

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