Wrap up – last week   

Better US jobs data makes up for central bank disappointment

Improved US jobs data came to the rescue of global stock markets at the end of the week and most key markets managed to end the week higher. The lack of monetary action by both the European Central Bank (ECB) and the US Federal Reserve had left the markets struggling for much of the week.

On Thursday, the ECB hinted that it was ready to intervene in weaker sovereign bond markets to lower borrowing costs and reduce the possibility of a eurozone collapse. President of the ECB, Mario Draghi, announced that interest rates would remain unchanged but declared that the central bank “may undertake outright open market operations of a size adequate to reach its objectives”. In the first instance, governments would need to apply to the eurozone’s bail out funds (European Financial Stability Facility & European Stability Mechanism) and strict conditions would be imposed. Meanwhile, the Bank of England (BoE) kept interest rates on hold, and along with the US Federal Reserve, held off from any further stimulus measures.

Elsewhere, the Markit purchasing managers’ index (PMI) for the UK dropped from 48.4 to 45.4 between June and July. This reflected the worst month for British manufacturers in more than three years as demand for goods fell in both the domestic and overseas markets. Meanwhile, the three-party coalition in Greece reached agreement on €11.5bn of spending cuts over the next two years. On Friday, US non-farm payrolls bettered expectations with 163,000 jobs created in July. However, the unemployment rate ticked up to 8.3% from 8.2%.

Asian economies showed signs of strain from the effects of the eurozone crisis. Official Chinese PMI data dropped slightly from 50.2 to 50.1 in July, Japanese PMI fell two points to 47.9 and Indian PMI decreased to 52.9 from 55 in the previous month. Meanwhile, Taiwan’s domestic economy contracted by 0.2% year-on-year in the second quarter.

Shaping the markets — this week

A gloomy week for economic data releases. A fantastic final week of the Olympics

The week starts off with UK retail sales, which will probably have disappointed due to the poor weather and the removal of the July sales incentive (brought forward to June). A fourth consecutive quarter of negative economic growth is expected to be announced in Italy on Tuesday; a similar decline of 0.8% quarter-on-quarter recorded in Q1 is probable because of much weaker industrial production. Across Europe, June industrial production is anticipated to fall; this is likely to be confirmed on Tuesday for Italy and the UK, and Germany and Spain the following day. The Bank of England inflation report comes out on Wednesday.

Towards the end of the week, data releases focus on Asia, where July Chinese consumer price index (CPI) inflation may fall further from the 2.2% year-on-year reported previously. However, a recent rise in global food prices could move the CPI higher in Q4 should this continue. Government-driven fixed asset investments, particularly in railways, are likely to be reflected in better July Chinese industrial production numbers. Elsewhere, the Bank of Japan is unlikely to announce any stimulatory measures or change its 0.1% benchmark interest rate. Domestic demand now appears to be slowing, and the central bank may wait till October when it reviews its inflation outlook before deciding on any further action. Finally, on Friday the Chinese trade surplus may have narrowed from the $31.7 billion reported in June. The country’s official PMI export order index fell to 46.6 in July, while imports growth should be held back by softer domestic demand and processing trade activity.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1390.99

0.4

10.6

Dow Jones Industrials

13096.17

0.2

7.2

NASDAQ Composite

2967.90

0.3

13.9

FTSE 100

5787.28

2.8

3.9

Euro STOXX 600

265.58

2.2

8.6

Nikkei 225

8555.11

-0.1

1.2

Hang Seng

19666.18

2.0

6.7

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.58

2.0

-30.0

UK Gilt – 10 year

1.56

9.9

-42.3

German Bund – 10 year

1.38

0.2

-44.7

Japanese JGB – 10 year

0.74

-1.4

-25.2

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.15

-4.0

-80.6

ITRAXX Crossover 5 Year (MID)*

611.94

-6.4

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

15.64

-6.4

-33.2

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

108.98

1.7

0.7

Gold Bullion $/ Troy Oz

1601.15

-1.0

1.7

Currencies

vs $

vs £

 

¥

78.60

122.6

$

1.56

Euro

1.234

1.263

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

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