Weekly Stock Market Report
01-07 August 2009 US
Jobless rate drops for first time in 15 months – Wall Street stocks rose for a fourth consecutive week, pushing the S&P 500 above 1,000 for the first time since November as positive economic data contributed to hopes a recovery may be underway. The S&P 500 returned 2.3%, while the Dow Jones was up 2.2% and the tech-biased NASDAQ rose 1.1%. – Sentiment was boosted by unexpectedly strong earnings from overseas banks, including the UK’s HSBC, as investors hoped the worst may be over for the financial sector. – At home, American International Group (AIG), the insurer bailed out by the US government in September 2008, reported its first profit in seven quarters on narrowing investment losses. – Financial stocks also benefited from further signs the housing market may have bottomed out. Pending sales of existing homes increased by 3.6% in June – a fifth successive monthly gain – as lower prices and cheap borrowing attracted buyers. Mortgage applications rose by more than 4% in the week to 31 July. – The biggest boost for equities came from Friday’s employment report, which showed that the unemployment rate dropped in July for the first time since April 2008. The economy shed 247,000 jobs in the month, significantly fewer than expected, and the jobless rate fell to 9.4% from 9.5% in June. – Manufacturing activity also shrank less than forecast, with the Institute for Supply Management’s factory gauge rising to 48.9 in July from 44.8 in June. A reading below 50 signals contraction rather than expansion, but July’s reading represents the slowest pace of decline since before the collapse of Lehman Brothers. – However, service activity, which makes up almost 90% of US output, shrank more than forecast, trailing manufacturing, which has been spurred by government stimulus measures and by the “cash for clunkers” programme – a policy initiative that provides incentives for US residents to purchase new cars. – The consumer also remained a notable weak spot, with sales at 33 retailers dropping 5% in July, according to the International Council of Shopping Centres. However, several retailers lifted their full-year profit guidance as cost cutting helped to counter weaker sales.
by Edmund Brandt Investment Director J.P. Morgan Asset Management
EUROPE
Bank of England expands its asset purchase programme – Aided by positive earnings figures, additional central bank intervention and optimistic manufacturing numbers, the MSCI Europe Index rose by 2.3%. – Among the major markets, Italy’s S&P MIB performed best with a 4.0% gain while the French CAC 40 added 2.8%. The UK’s FTSE 100 was up by 2.7%, Germany’s DAX rose 2.4% and the Swiss SPI posted a 1.3% gain, while Spain’s IBEX nudged ahead 0.9%. – Markets were boosted by further positive corporate earnings reports. In the banking sector, investors welcomed stronger than expected first-half numbers from banking giants HSBC and Barclays. Deutsche Telekom, Europe’s biggest telephone company, reported a 32% increase in second-quarter profit, while Munich Re, the world’s biggest reinsurer, said second-quarter profit rose 14%. – Economic data also provided support to investor sentiment, with the eurozone manufacturing Purchasing Managers’ Index (PMI) rising for a fifth successive month in July. Although the PMI suggests manufacturing activity in the eurozone is still contracting, the rate of decline has now eased significantly since the beginning of the year. – UK PMI releases, meanwhile, suggested that both the UK manufacturing and services sectors are growing again. This perky economic data made it even more surprising that the Bank of England, decided at the end of the week to extend its asset purchase programme by an extra GBP 50 billion. – The Bank of England’s decision to continue with quantitative easing suggests it believes that government stimulus spending, record low interest rates and the GBP 125 billion the central bank has spent so far on bond purchases have not been enough to quell the threat of deflation. – The European Central Bank (ECB) left its benchmark rate at a record low 1%. ECB president Trichet indicated interest rates would be likely to remain on hold despite conceding that the eurozone economy won’t return to growth until next year. – Our own leading indicators compiled by our currency team suggest that the eurozone recovery is lagging the US and UK, but there are signs of a faster pick up in exporting countries, such as Germany.
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PACIFIC
Taiwan CPI drops by most since 1970 – The major Pacific stock markets had a mixed week, with the MSCI Pacific Index ending just 0.3% higher. – Japan’s TOPIX, the largest market in the region, rose 0.7% as investor confidence was boosted by expectations that the rate of decline in the world’s second largest economy was slowing. Japanese new vehicle sales (-4.2% year on year) saw their smallest decline last month since July 2008 as government scrappage incentives and stimulus programmes helped drum up demand. – Japanese quarterly earnings reports were mixed. Panasonic raised its profit forecasts amid renewed global electronics demand, while phone operator NTT reported a rise in profits at its fixed line business. But chipmaker Elpida reported a loss and Konica Minolta, a printer maker, revealed a big decline in profits. – Elsewhere, the greater China markets of Hong Kong and Taiwan both suffered profit taking on concerns the Chinese authorities were looking to rein in lending to cool China’s rapid economic growth. – Taiwan’s TWSI fell 3.0% as the island’s consumer price index dropped in July by the most since 1970. Lack of consumer demand amid record high unemployment is fuelling deflation and there remains little sign of a pick up in Taiwan’s economy. The unemployment rate hit a record 5.91% in June. – Hong Kong’s Hang Seng was 1.0% lower, with falling home sales in the city hitting property developers. Hang Seng Bank also disappointed with a 29% drop in first half earnings, although HSBC positively surprised investors by posting a first-half profit thanks to the strong performance of its securities division. – Singapore’s Straits Times also struggled, dropping 4.1% over the week. DBS, South-East Asia’s biggest bank, fell back after reporting lower than expected profits as non-performing loans rose sharply. – In contrast, Australia’s All Ordinaries recorded a 1.3% rise, boosted by stronger mining stocks on the back of a further rise in commodity prices. The Reserve Bank of Australia, meanwhile, kept interest rates on hold at 3% amid signs that the Australian economy was rebounding from its recent slowdown. – Korea’s KOSPI also rose (+1.2%) as several brokers upgraded the country’s stock market due to optimism that government stimulus measures were boosting both economic growth and corporate earnings prospects. A trade accord with India was also positive, raising hopes that Korean companies will benefit from greater access to India’s fast growing market.
EMERGING MARKETS
China falls on loan curb fears – Despite strong gains for many markets, emerging market stocks underperformed their developed market counterparts due to weakness in emerging Asia. The MSCI Emerging Markets Index rose 0.7% versus a 1.9% gain for the MSCI World. – Manufacturing activity in China expanded to the highest level in a year in July, boosted by record lending and government stimulus programmes, with the Purchasing Managers’ Index rising to 52.8 (seasonally adjusted) from 51.8 in June. – However, the MSCI China Index fell 1.7% on concerns the central bank may rein in lending to prevent overheating in the economy. China Construction Bank, China’s second-largest lender, said it would cut new loans by 70% in the second half of the year versus the first half to avoid a surge in bad debt amid fears that asset bubbles may be forming. – In India, the Sensex fell 3.3%. India’s exports declined for a ninth consecutive month in June, falling 27.7% versus a year earlier, as the global recession continued to weigh on demand. – Latin American markets, meanwhile, enjoyed a fourth straight week of gains. Mexico’s BOLSA rose 4.2%, while Brazil’s BOVESPA returned 2.9%, boosted by data showing that inflation slowed for a third successive month in July, taking the annual rate to the midpoint of the central bank’s target range. – Emerging European stocks continued their march upwards after suffering heavy losses earlier in the year. The Czech PX was again the week’s strongest performer, returning 7.1%, while Hungary’s BUX rose 3.1%. – Russia’s RTS rose 6.2%, lifted by an interest rate cut taking the country’s main rate down 0.25% to 10.75%.
Source for information: JPMorgan Asset Management, Datastream, Financial Times. The opinions expressed in this document are those held by the author at the date of publication. The views expressed herein are not to be taken as an advice or recommendation to support an investment decision. The information included in this document has been taken from source considered as reliable; JPMAME cannot however guarantee its accuracy. Issued by JPMorgan Asset Management (Europe) Société à responsabilité limitée, European Bank & Business Centre, 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000.