Wrap up – last week

Mario Draghi’s comments drag investors away from the abyss and London welcomes the world

Equity markets began last week on a sour note, sliding for the first three days as a raft of weak economic data, some soft earnings reports and Moody’s decision to lower its outlook on AAA-rated Germany dented market confidence. Frayed nerves were not helped by Italy and Spain imposing short-selling bans. Ongoing concern about the fragility of the Spanish economy manifested itself in the bond market as the yield on the Spanish 10-year sovereign bonds leapt above 7.5% — a level seen as unsustainable. It did, however, drift back below 7% by the end of the week, following soothing words from Mario Draghi, the European Central Bank (ECB) president, who stated that the ECB would do “whatever it takes” to preserve the euro. Speculation that the European Stability Mechanism would be granted a banking licence, however, was shot down by the Bundesbank, which continued to reiterate its opposition. Nevertheless, the euro gained against the dollar over the week and equity markets recovered.

In broader economic news, the UK announced its economy had contracted by 0.7% quarter-on-quarter in the second quarter of 2012, belying any hope that the country would escape technical recession. South Korea’s pace of growth also dipped, with year-on-year growth falling to 2.4% in the second quarter, the slowest pace for nearly three years. In commodity markets, Brent Crude Oil dipped mid-week before a more optimistic mood helped push it back above $107 a barrel. The US Department of Agriculture reported that up to 45% of US corn crops were in a poor or very poor state after the recent droughts, but prospects of showers helped push corn prices slightly lower over the week. In corporate news, Apple missed Wall Street forecasts — although iPad sales were better than expected, the sequential slowdown in the pace of growth of iPhone sales took the shine off the results. Meanwhile, London welcomed the world to the thirtieth modern Olympiad with an eccentric opening ceremony.

Shaping the markets — this week

The US is likely to take centre stage as Fed decision and non-farm payrolls are reported

The schedule of US economic data this week is as busy as the athletics calendar. First off the mark is the S&P/Case Shiller 20 Composite house price index for May, which is released on Tuesday: consensus expects a 1.5% year-on-year (y-o-y) fall but the figure may surprise to the upside. On Wednesday, the Institute for Supply Management (ISM) manufacturing index is expected to rise above the 50 mark in July, up from 49.7 in June. The same day the US Federal Reserve Open Market Committee gives its latest rate decision: consensus expects the target rate to remain at 0.25% and any easing to come through language rather than explicit quantitative easing. On Friday, the US non-farm payrolls figure is expected to report 97,000 net new jobs for July and the unemployment rate to stay at 8.2%. The same day, the ISM non-manufacturing index is expected to improve marginally on June’s reading of 52.1.

Elsewhere, on Tuesday, Japan releases its June unemployment rate. The expectation is for no change from last month’s rate of 4.4%. Germany also reports its July unemployment rate, expected to remain around the 6.8% level. The eurozone consumer price index flash estimate is expected to be 2.3% y-o-y in July, down from 2.4% the previous month. On Wednesday, China’s purchasing managers index (PMI) for manufacturing in July is expected to come in unchanged at 50.2 but the UK’s PMI for manufacturing is expected to show a small fall from the 48.6 level reported in June, confirming contraction. On Thursday, the Bank of England and ECB are expected to make no change to their policy interest rates.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1385.97

1.7

10.2

Dow Jones Industrials

13075.66

2.0

7.0

NASDAQ Composite

2958.09

1.1

13.6

FTSE 100

5627.21

-0.4

1.0

Euro STOXX 600

259.81

0.6

6.2

Nikkei 225

8566.64

-1.2

1.3

Hang Seng

19274.96

-1.9

4.6

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.55

9.3

-32.0

UK Gilt – 10 year

1.46

4.3

-52.2

German Bund – 10 year

1.38

20.2

-45.1

Japanese JGB – 10 year

0.75

0.1

-23.8

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.19

6.1

-76.6

ITRAXX Crossover 5 Year (MID)*

650.06

7.0

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

16.70

2.6

-28.6

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

107.12

-0.3

-1.1

Gold Bullion $/ Troy Oz

1616.65

2.3

2.7

Currencies

vs $

vs £

¥

78.63

123.6

$

1.57

Euro

1.237

1.278

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

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