Global Markets

What a difference a week makes! Last Friday, equities seemed to be in free fall thanks to the shocking results of the Brexit vote. The negative reaction was two days long — last Friday and Monday. Then equities rallied on bargain hunting and receding Brexit fears. On the week, all but the OMX Stockholm 30 advanced. However, for the month of June, the picture was mixed at best. In Europe, only the FTSE advanced. Several major Asia-Pacific indexes — the Nikkei, Hang Seng, Kospi and the All Ordinaries — were lower while in North America, the results were split. The Nasdaq was down while the Dow and S&P advanced along with the Bolsa. The S&P/TSX Composite was virtually unchanged.

Manufacturing looks a little better

The June Eurozone manufacturing PMI climbed to 52.8 from May's 51.5 and signaled the best performance by the sector in half a year. The increase was underpinned by rising demand from both the domestic and overseas markets and reflected in an increase in employment that was the strongest over the current 22-month period of gains to date. However, inflation developments remained soft.

Regionally, the performance divergence within the core has become worryingly large. While Germany (54.5) registered a 28-month high, France (48.3) saw a 2-month low and was again contracting. Equal with Germany was Austria (54.5), ahead of Italy (53.5) and Ireland (53.0). Spain (52.2) and the Netherlands (52.0) also indicated moderate rates of expansion and Greece (50.4) saw positive growth for the first time in six months. The UK manufacturing PMI reported a surprisingly strong reading of 52.1 in June, up from May's 50.4.

Elsewhere, China's official CFLP PMI slipped a tick to 50.0, dead on the level that divides growth from contraction. More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four-month low of 48.6. Japan's manufacturing PMI edged up slightly to 48.1 but stayed in contractionary territory for the fourth straight month. India's PMI hit a three month high at 51.7.

Global Stock Market Recap

Europe and the UK

After continuing their plunge on Monday in the wake of the Brexit decision on June 23, equities staged a robust rally for the remainder of the week. Shares were up four of five days despite all of the uncertainties that will remain for some time to come. Only the OMX Stockholm 30 retreated on the week. Central banks provided investors with assurances that they would step in if necessary. On the week, the FTSE was up 7.2 percent, the CAC advanced 4.1 percent, the DAX gained 2.3 percent and the SMI was 4.4 percent higher. Interestingly, only the FTSE advanced in June — up 4.4 percent — and is 5.4 percent higher in 2016. The CAC lost 6.0 percent, the DAX was down 5.7 percent and the SMI retreated 2.4 percent. The three were down for the first six months of the year.

According to European Central Bank executive board member Peter Praet (in a speech to the Financial Times Festival of Finance), the euro area is exposed to a number of uncertainties both external and internal. He cautioned that the uncertainty originating from the UK referendum could weigh on economic confidence and partly reverse recent improvements in investment and consumption. He said that it is essential to swiftly establish an orderly process that governs the path towards a new post-referendum steady state so as to allow households and firms to adjust their economic decisions to the new environment.

Most economic data last week were favorable. May Eurozone unemployment declined to 10.1 from 10.2 — the lowest since July 2011. June manufacturing PMI climbed to 52.8 from 51.5 in May. This was the fastest growth in six months. The British manufacturing PMI (prior to the Brexit vote) improved to 52.1 from a revised reading of 50.4 — its highest level since January. There were also positive readings in the Eurozone for money supply growth, German retail sales, consumer prices and consumer confidence.

Both the Bank of England and the European Central Bank stressed the availability of liquidity, but it is still unclear how and when the UK secession will happen leaving markets vulnerable to volatility. In his second televised address since the country voted to leave the EU, BoE Governor Carney said the Bank would not hesitate to act when it comes to protecting the economy or the financial system. However, he warned that there is only so much the Bank can do.

Governor Carney told an audience of bankers and business executives that the BoE "can be expected to take whatever action is needed to support growth" — as long as inflation was projected to return to target. Both the pound sterling and gilt yields tumbled after his remarks. He noted that there would be major changes going forward and all this uncertainty "has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets." Carney said the Bank will consider a host of other measures and policies to promote monetary and financial stability. However, he noted that an uncomfortable truth is that there are limits to what the Bank of England can do.

Asia Pacific

While equities rallied for most of the week, it was too late for several of the main indexes to salvage their monthly results — especially after their post-Brexit two day dive. The impetus for the rally in part was visions of yet more stimulus from global central banks. For the week, all equity indexes followed here advanced with gains ranging from 0.7 percent (KLCI) to 4.9 percent (Nikkei). Despite that impressive weekly gain, the Nikkei was still down 9.6 percent in June.

Japan reported key economic data at week's end including the Bank of Japan's closely monitored Tankan. The good news was that big manufacturers' sentiment held steady in the second quarter. However, elsewhere both retail sales and household spending declined for a third consecutive month in May as did core inflation. And industrial production tumbled also. This will put pressure on the Bank of Japan for fresh policy moves. And the June manufacturing PMI indicated that the sector continued to contract, perhaps reflecting the aftermath of the mid-April earthquake in southern Japan.

Chinese manufacturing PMIs also disappointed and added to pressure on Beijing to stimulate the economy by hastening infrastructure investment and urbanization. Growth in China's manufacturing sector according to the CFLP PMI stalled in June at 50.0 while Caixin's manufacturing PMI hit a four-month low at 48.6.

The All Ordinaries was up 2.6 percent for the week but 2.5 percent lower in June. Equities advanced on optimism that central banks will introduce measures to curb the economic fallout from Britain's vote to leave the European Union. Australia holds a national election on July 2. Australia now has been recession-free for 99 quarters.

A number of Asian central banks including those in Japan, China and Australia, are also expected to ease policy further later this year while a number of Asian governments have ramped up fiscal stimulus or are drawing up economic support packages.

Currencies

The US dollar was mixed last week. The currency was up against the pound sterling, yen and Swiss franc. It declined against the euro and the Canadian and Australian dollars. Sterling, buffeted by the decision to leave the European Union, declined Thursday and again on Friday, ending a two day mid-week rally after the Bank of England Governor Mark Carney said that the BoE may need to loosen monetary policy as it tries to contain the after effects of the decision. Equity investors roared their approval of new stimulus going forward. The lower value of the pound makes exports cheaper but at the same time, makes imports more expensive.

The yen continues to trade around the ¥102 to the US dollar on expectations that the Bank of Japan may implement further monetary easing to address the fallout from Britain's decision to leave the European Union. The dollar briefly fell to the mid-¥101 range Tuesday on risk aversion heightened by a sharp drop in the Nikkei in early trading. But the U.S. currency later rebounded as Japanese equities gradually pared those early losses. The yen is normally bought as a safe-haven asset amid global uncertainty. The US dollar was also underpinned by growing expectations the Bank of Japan may ease its monetary policy at its next policy meeting in late July to fortify the Japanese economy against threats to growth unleashed by the British vote last week.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

June flash harmonized index of consumer prices edged up 0.1 percent on the year. The HICP was back into positive territory for the first time since January. However, the limited acceleration was in large part due to the energy sector where yearly deflation was cut from 8.1 percent to 6.5 percent. Food, alcohol & tobacco (unchanged at 0.9 percent) had a neutral impact. Elsewhere, the rise in non-industrial goods prices actually dipped from 0.5 percent to 0.4 percent but services gained 0.1 percentage point to 1.1 percent. Excluding energy, food, alcohol & tobacco, the annual rate climbed from 0.8 percent to 0.9 percent. However, the second core, which excludes just energy & unprocessed food, only held steady at 0.8 percent.

France

May household consumption of manufactured goods rose 0.2 percent on the month and was up 2.6 percent from a year ago. The monthly headline advance was due to a 1.7 percent increase in textiles, their first increase in four months, and a 0.5 percent gain in food. This masked weakness elsewhere, notably in household durables which slumped 9.2 percent. Autos were down 0.3 percent while the other products category was only flat. With energy off 1.0 percent, total goods spending fell 0.7 percent from April when it dipped 0.1 percent.

United Kingdom

Final gross domestic product for the first quarter was up an unrevised 0.4 percent on the quarter and 2.0 percent increase from a year ago. Quarterly growth was largely dependent upon another solid gain in household consumption (0.7 percent) and government spending (0.5 percent) partially offset by weaker business investment (down 0.6 percent). A sharp unwinding of business inventories also helped to reduce growth of total domestic expenditure to just 0.3 percent from 0.5 percent in the fourth quarter but net trade boosted GDP by an unrevised 0.1 percentage point.

Asia/Pacific

Japan

May retail sales dropped a greater than expected 1.9 percent from a year ago as the consumer sector remains weak. Expectations were for a decline of 1.6 percent. This was the third consecutive drop on the year. Fuel sales plunged 12.8 percent after sinking 13.7 percent from a year ago. Auto sales however, increased 3.1 percent after an increase of 0.3 percent last time for a second consecutive rise. Machinery sales declined 2.7 percent after bouncing up 5.9 percent in April. Food and beverage sales eased to an increase of 0.6 percent after jumping 2.4 percent in April. Apparel sales slipped 0.2 percent after increasing 1.7 percent on the year.

May industrial production tumbled 2.3 percent from the previous month and was down 1.8 percent on the year. It was the first monthly decline since February. Analysts expected output to slip 0.1 percent. Among the industries that were down were chemicals excluding drugs (down 7.5 percent), general-purpose, production and business oriented machinery (down 2.2 percent) and electronic parts and devices (down 3.2 percent). The steeper decline than expected no doubt was triggered in part by the mid-April earthquake that shuttered plants in southern Japan. METI forecasts output to increase 1.7 percent in June. The government maintained the view that output is fluctuating. The industries that are expected to contribute to the rebound are transport equipment, electrical machinery and chemicals.

May household spending was down 1.1 percent from a year ago. Expectations were for a decline of 1.4 percent. This was the third consecutive month that spending declined and probably further evidence of why the increase in the sales tax was postponed. The declines were led by housing which was down 4.9 percent on the year. Education tumbled 10.5 percent while culture & recreation slid 0.8 percent. However, spending did increase for food (1.2 percent), fuel, light & water (1.1 percent), furniture & household utensils (0.5 percent and clothing & footwear (3.0 percent).

May consumer price index was down 0.4 percent from a year ago. The core CPI excluding only fresh food also declined 0.4 percent on the year. The inflation data precede Prime Minister Shinzo Abe's announcement at the start of June that the government would delay a sales tax increase planned for April 2017 until October 2019. Excluding both food and energy, the CPI was up 0.7 percent on the year. The decline in prices puts pressure on the Bank of Japan to ease monetary policy further. Although it was expected to leave policy unchanged at its June meeting, the decision was met with disappointment.

Second quarter Tankan survey was mixed. The data for the survey were collected prior to the Brexit vote. The large manufacturers reading remained at plus 6 for a second quarter. This was the lowest reading since a 4 in the June quarter of 2013 but above expectations of plus 4. Small manufacturers came in below consensus with a reading of minus 5. The large nonmanufacturing index reading eased to 19 from 22 in the first quarter. Small nonmanufacturing index reading was zero after the first quarter reading of plus 4. According to the BoJ, all sectors were hit by the high yen. The reason for the surprisingly resilient Tankan results reflected the easing of economic headwinds. The slowdown in emerging markets eased, while the stronger yen worked in favor of some manufacturers as it lowered their costs of raw materials. However, a downturn in spending by foreign tourists dampened nonmanufacturers' sentiment.

Americas

Canada

April monthly gross domestic product was up 0.1 percent on the month and 1.5 percent from a year ago. What monthly increase there was in GDP was attributable to services where output expanded 0.2 percent. Within this, real estate & rental & leasing as well as public administration increased 0.5 percent while transportation & warehousing gained 0.4 percent as did accommodation & food. Other advances were quite minor and there were declines in arts, entertainment & recreation (3.9 percent), administrative & support, waste management & remediation services (0.1 percent) and other services (0.1 percent). At the same time, goods producing industries slipped 0.1 percent, their third decrease in a row. Manufacturing actually grew 0.4 percent but the gain here was more than offset by weakness in mining, quarrying, gas & oil extraction (down 1.4 percent) and agriculture, forestry, fishing & hunting (down 0.2 percent). Utilities were up 1.9 percent but construction was only flat.

Bottom line

Almost all equity indexes, after tumbling on Monday, rallied for the rest of the week. However, in June, the results were mixed. Economic data from Japan disappointed while data from Europe and the UK indicated improvement. However, all the data released were for the period prior to the UK June 23 vote to leave the European Union.

The Reserve Bank of Australia is expected to keep its monetary policy unchanged and leave its cash rate at 1.75 percent. Canada and the U.S. post their respective employment and international trade reports. Germany releases May manufacturers' orders and industrial production. And composite PMIs will be posted for Japan, the Eurozone, Germany and France. In a cautionary note regarding economic data — it is unlikely that the impact of Brexit will be visible until July data at the soonest are released.

Looking Ahead: July 4 through July 10, 2016

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