Global Markets

Global equities were mixed last week with geopolitical concerns subduing interest in risk assets. In economic news, June flash PMIs disappointed in Europe but improved in China and Japan where the readings crossed from contraction to modest expansion. Markets in the Asia Pacific region — and to a lesser extent in Europe and the U.S. — were unnerved by the massive downward revision to first quarter U.S. growth. The final estimate indicated that the U.S. economy had contracted 2.9 percent in the first quarter of the year thanks in part to dreadful weather that closed businesses and kept consumers at home.

Investors focused on what the data mean for Federal Reserve monetary policy. And the GDP data were not alone in disappointing investors, May durable goods orders did as well. However both existing and new home sales provided a bright spot. James Bullard, President of the Federal Reserve Bank of St Louis, said the U.S. economy is improving enough to withstand an increase in short-term interest rates next year. He predicted the pace of economic growth will accelerate to 3 percent this year after the unexpectedly deep first quarter contraction. There is a debate taking place in the market, namely, when will the normalization of policy begin. Mr Bullard opined that investors should not be focused on when the rate increase comes through, but the speed of further rate increases and how that's going to play out.

Global Stock Market Recap

Europe and the UK

Equities declined last week as geopolitical events combined with a lack of new economic information made investors back away from risk. The DAX and CAC retreated four of five days last week to end 2.3 percent and 1.7 percent lower respectively. Both the FTSE and SMI declined three of five days losing 0.1 percent and 1.6 percent on the week. However, all indexes are up for the first six months of the year with one day remaining in June. Investors are now looking to second quarter earnings season.

Comments by Bank of England officials also prompted investors to trade cautiously at a time when the market lacked strong catalysts to break the current trading range. BoE Governor Mark Carney, speaking to lawmakers, pushed back slightly against expectations that the Bank will increase interest rates before the end of the year, saying Britain's economy still has plenty of slack to work through. But BoE Deputy Governor Charlie Bean said Britain was gradually moving towards the point of tighter monetary policy, although the timing would depend on how the economy progresses from here. BoE's David Miles — one of the central bank's most dovish members — said it was increasingly likely he would vote to raise interest rates before leaving the BoE's monetary policy committee in May 2015.

The Bank of England's quarterly Financial Policy Committee (FPC) met and announced a fresh suite of measures aimed at cooling the booming UK housing market. The new moves, which had been well flagged in recent weeks by both Chancellor George Osborne and BoE Governor Mark Carney, will bolster April's Mortgage Market Review (MMR) which sought to clamp down on riskier lending. The action did not surprise financial markets and, if anything, the new controls were probably somewhat less restrictive than they might have been. A major problem facing the FPC is the sharp geographical differences between London and the southeast and the rest of the country. The latest official figures show property prices in London up nearly 19 percent on the year but excluding London and the southeast the national increase is little more than 6 percent. Addressing the former overshoot without jeopardizing the latter nascent recovery will not be easy.

Asia Pacific

Most equities advanced on the week although they mostly sagged Friday. However, the Nikkei did not. It dropped 1.7 percent on the week with most of the decline occurring on Friday after the release of key May economic data. The Nikkei declined on the week for the first time since the week ending May 16. Equities in Japan retreated as investors parsed mixed economic reports at home and abroad. They tried to project what disappointing U.S. data meant for Federal Reserve policy going forward in context of hawkish comments made by St Louis Fed President James Bullard. Equity investors as always, kept a close watch on the currency markets. The yen led gains against the dollar after Japanese inflation and employment data came in relatively in line with expectations. Investors though were unimpressed after Prime Minister Shinzo Abe unveiled an ambitious package of economic reforms aimed at boosting the country's long term economic growth.

Elsewhere in the region, the All Ordinaries advanced 0.5 percent on the week despite declining three of five days. Investors in Australia were stirred on expectations that U.S. interest rates would remain lower for longer given the week's lackluster data. With one day of trading remaining in the second quarter, the All Ordinaries has gained from year end 2013 while the Hang Seng (up 0.1 percent for the week) is just below the unchanged line, down 0.4 percent so far this year. The Sensex was virtually unchanged on the week but is the top gainer in the first six months of the year as new leadership at the Reserve Bank of India and the government has stimulated investors positively.

The Shanghai Composite was up 0.5 percent on the week but remains lower with one day remaining in the quarter. However, increasing concerns over tight liquidity overshadowed the positive sentiment generated by the flash HSBC/Markit flash manufacturing purchasing managers' index. The PMI climbed above the 50 breakeven point with a reading of 50.8, a seven month high. While the Chinese manufacturing data sparked early gains, the advance was wiped out amid investor speculation that falling property prices and tighter liquidity in the banking system will weigh on economic growth.

Currencies

The U.S. dollar was down against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. The currency retreated after disappointing U.S. economic data supported bets the Federal Reserve will keep borrowing costs near zero for a longer period of time. The final estimate of first quarter gross domestic product contracted more than previously estimated in the first quarter, while May durable goods orders unexpectedly declined.

The yen gained amid speculation the Bank of Japan will refrain from boosting monetary stimulus after official data showed Japanese consumer prices (including the increase in the sales tax) rose last month at the fastest pace in more than three decades, while the unemployment rate fell to the lowest since 1997. However, excluding the sales tax, the core CPI excluding fresh food was up 1.4 percent, slightly lower than April's adjusted reading.

Selected currencies — weekly results

Indicator scoreboard

EMU

June EU Commission's measure of economic sentiment (ESI) posted a 0.6 point decline to 102.0. The minor slip, which was only the second decline of any size since April last year, reflected mainly a 1.2 point drop in industrial sector confidence which, at minus 4.3, registered its lowest reading since last October. However, there were also smaller reversals in the consumer sector (down 0.4 points at minus 7.5) and in construction (down 0.7 points at minus 31.8). Services gained 0.4 points to 4.2 but remained below its long-run average (9.0) while retail crept up 0.3 points to minus 2.1. Regionally national ESIs were down in Germany (1.3 points), France (1.2 points) and Italy (1.0 points) but rose again in Spain (2.2 points). The improvement in Spain to 104.1 underlines what appears to be a significant turnaround in the country's economic fortunes. Just as notable was a 4.6 point rise in the Greek ESI to 103.7, its first reading above the common long run average (100) since August 2008.

Germany

June Ifo survey's business climate indicator slipped to 109.7, down from 110.4 in May. The drop reflected a further worsening in expectations which shed 1.4 points in declining to 104.8. The forward looking gauge has now fallen in four of the last five months and expectations this month were at their weakest level since October last year. Ongoing worries about the situation in Ukraine and, more recently, the instability in Iraq were the main factors here. By contrast the current conditions index was steady at May's 114.8 and remained just 0.4 points of the April high. Most of the major sectors saw morale improve this month led by retail (up 3.2 points) ahead of wholesale (up 1.1 points) and construction (up 0.3 points). Services morale was up (an unadjusted) 3.7 points leaving manufacturing (down 3.3 points) as the only category to suffer a reversal.

France

May total spending on goods expanded 1.0 percent on the month but was down 0.6 percent on the year. A weather related 8.0 percent bounce in energy easily more than reversed the previous period's 3.3 percent decline. Household spending on manufactured goods declined 0.4 percent on the month. Compared with a year ago purchases were down 0.3 percent, their first negative annual growth rate since October 2013, after a 1.3 percent increase last time. Sales were hit by a 2.9 percent monthly slump in auto demand. However, spending on household goods climbed a surprisingly sharp 3.1 percent and textiles posted a 0.6 percent advance. The other products category (0.1 percent) also just managed to keep its head above water.

First quarter gross domestic product was unchanged on the quarter following a 0.2 percent gain in the fourth quarter of last year. Compared with the first quarter of 2013, total output was up an unrevised 0.8 percent. Private sector domestic demand was disappointingly weak as household spending contracted 0.5 percent on the quarter and gross fixed capital formation dropped 0.8 percent (households minus 2.4 percent). Without the benefit of a 0.4 percent increase in public spending and a (marginally smaller revised) 0.5 percentage point boost from stock building, the headline data would have looked even softer. Exports were 0.6 percent higher over the quarter but with imports up 1.0 percent, net exports subtracted 0.1 percentage points from the change in total output.

United Kingdom

First quarter gross domestic product was up an unrevised 0.8 percent on the quarter and 3.0 percent when compared with the same quarter a year ago. Within the components of final demand there were few changes of note but there was a positive revision to gross fixed capital formation. This now shows a 5.0 percent quarterly gain, almost double the 2.7 percent gain estimated previously and up from 1.5 percent in the fourth quarter of last year. The other major changes came from foreign trade — exports now show a 0.1 percent quarterly decline (minus 1.0 percent previously) and imports, a 1.2 percent retreat (minus 1.1 percent). Net exports still had a neutral impact on quarterly economic growth having provided a full 1 percentage point lift at the end of 2013. Consumer spending was up an unrevised 0.8 percent and government consumption shaded to virtually flat.

Asia/Pacific

Japan

May consumer price index was up 0.4 percent and 3.7 percent on the year. Excluding fresh food, the CPI also was up 0.4 percent on the month and was up 3.4 percent from a year ago. Excluding the sales tax, core CPI was estimated to be up 1.4 percent on the year looking as though the pace of price increases has stalled or even peaked after increasing (excluding tax increase) 1.5 percent in April. Japan's monthly inflation reports have become a complicated affair since the national sales tax was raised on April 1 from 5 percent to 8 percent. Excluding both food and energy, the CPI was unchanged on the month and up 2.2 percent from May 2013. Energy costs were a major contributor to increased prices. They soared 10.1 percent in May after jumping 7.9 percent the month before. Including the effects of the tax increase, May's increase was led by higher prices for gasoline, accommodations, casualty insurance premiums and air conditioners, largely the same factors as seen in April. However, TV prices declined 0.9 percent and dropping 1.4 percent in April. Electronics goods however, were up 3.0 percent after increasing 3.2 percent in April. Prices for goods were up 5.7 percent on the year while those for services were 1.8 percent higher.

May household expenditures plunged 8.0 percent from a year ago as consumers brought forward to March spending prior to the increase in the sales tax that would have otherwise occurred in May. Spending was down 4.6 percent in April. All subcategories declined on the year. Food spending slid 2.8 percent and furniture & household utensils declined 15.5 percent. Housing plunged 25.8 percent and medical care expenditures were 10.0 percent lower while education slid 10.7 percent.

May seasonally adjusted unemployment rate slid to 3.5 percent from 3.6 percent the month before. The level, which has been on a gradual downtrend, reflects a tighter labor supply and was the lowest since December 1997 when it also was 3.5 percent. The number of unemployed dropped 370,000 in May for the 48th straight drop from the same month a year ago. Employment accelerated to a gain of 570,000 on the year from 260,000 in April. The number of payroll jobs was up 350,000 from the previous month to a seasonally adjusted 63.58 million in May, marking the first monthly rise in two months after falling 230,000 in April. The adjusted number of unemployed dropped 30,000 to 2.33 million after being flat in April.

May retail sales declined 0.4 percent on the year after dropping 4.3 percent in April thanks to the increase in the sales tax that was implemented April 1^st. All subcategories with the exception of food & beverages (up 2.2 percent) and fabric, apparel & accessories (up 2.7 percent) were down on the year for a second month. Motor vehicle sales dropped 4.1 percent in May after sliding 9.9 percent in April. Machinery & equipment declined 7.2 percent after 11.9 percent the month before. General merchandise was down 2.4 percent after sinking 8.8 percent in April.

Bottom line

Risk appetites eroded, sending many equity indexes down thanks to geopolitical concerns in Iraq and Ukraine. Mixed economic data also dampened investor spirits as the month and quarter grinds to an end on Monday. The U.S. dollar slid as traders here pushed out the possibility of a Fed interest rate increase given the disappointing economic data.

Next week will be a busy one. It also will be a short one in the U.S. — markets will be closed Friday for the Independence Day holiday. Both the Reserve Bank of Australia and the European Central Bank will hold monetary policy meetings. A slew of key economic data are expected globally including June PMI readings, May international trade data in the U.S. and Canada, Japan's quarterly Tankan and the U.S. employment situation report.

Looking Ahead: June 30 through July 4, 2014

Anne D Picker is the author of International Economic Indicators and Central Banks.