Global Markets

Equities were mixed last week as investors reacted to geopolitical developments in Iraq and Ukraine. Asian countries in particular retreated as oil prices climbed in reaction to the upheaval in Iraq. It was a relatively light week for new economic data. Geopolitical risks mostly offset the benign FOMC announcement as it met expectations.

As expected, the Federal Open Market Committee kept its fed funds target range at zero to 0.25 percent where it has been since December 2008. The FOMC reaffirmed its view that a highly accommodative stance of monetary policy including the low fed funds rate will remain appropriate for some time to come. It reduced its bond purchases by another $10 billion to $25 billion beginning in July. The FOMC said that it will add to its holdings of agency mortgage backed securities at a pace of $15 billion per month rather than $20 billion per month. It will add to its holdings of longer term Treasury securities at a pace of $20 billion per month rather than $25 billion per month currently.

Though labor market indicators have generally shown further improvement, the Fed remains concerned about the labor market. And even though the unemployment rate is lower — currently 6.3 percent — it remains elevated, according to the post-meeting statement. Recent data indicate that economic growth has rebounded in recent months. However, in its updated forecasts, the FOMC lowered its estimate for GDP in 2014 in part to transitory effects including the dreadful weather in the first quarter. Fed Chair Janet Yellen described inflation data as "noisy" — indicating that the FOMC is being patient about interpreting these data. In her post-meeting press conference, Ms Yellen reiterated that FOMC decisions are data dependent, whether positive or negative.

Global Stock Market Recap

Europe and the UK

Equities were mixed last week. Shares were pulled down Friday, reducing weekly gains amid mounting concerns about sectarian violence in Iraq and continued Ukrainian concerns. The geopolitical worries were in part offset by dovish remarks from the U.S. Federal Reserve along with the prospect of more stimulus from the European Central Bank. Escalating tensions in Iraq remained the key focus Friday, luring investors to assets perceived to be safe. Meanwhile, Russia has started massing troops near its border with Ukraine again according to the North Atlantic Treaty Organization (NATO). On the week, the FTSE added 0.7 percent, the DAX was up 0.8 percent and the SMI was 0.6 percent higher. The CAC was virtually unchanged (down 1.94 point).

Swiss National Bank

As widely expected, the Swiss National Bank again left monetary policy on hold. The target corridor for 3-month CHF Libor remains at zero to 0.25 percent with the point objective still pegged at zero. The Bank also reiterated its commitment to protect the CHF1.20 floor against the euro via unlimited intervention in the FX markets as necessary.

The announcement reflected continued worries about the weakness of prices. Despite an expected marginally stronger outcome for the second half of the year, the CPI is now seen 0.1 percentage points lower in both 2015 (0.3 percent) and 2016 (0.9 percent) assuming that 3-month Libor remains steady at zero percent.

The SNB expects a moderate recovery in the real economy over coming quarters and for calendar 2014 and still forecasts GDP growth of 2.0 percent. Nonetheless, downside risks still dominate and the Bank is clearly alert to the possibility of increased volatility in financial markets as monetary policies in the major currency areas diverge. Geopolitical conflicts and structural imbalances in the Eurozone are also seen as a threat to the stability of the local currency (Swiss franc).

The monetary authority has taken action to cool a housing market that, courtesy of near-zero interest rates, is in increasing danger of overheating. Starting at the end of June, higher capital requirements for mortgage loans will apply as a result of a rise in the sectoral countercyclical capital buffer. This refers to mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements. Regulations targeting the creation of adequate capital buffers are designed to reduce the 'procyclical' nature of lending by promoting the creation of 'countercyclical' buffers.

Asia Pacific

Equities were mixed last week as investors kept a wary eye on the situation in Iraq and its impact on crude oil prices and the simmering conflict in Ukraine. Seven of 12 indexes declined on the week. Those advancing were the Nikkei (up 1.7 percent), All Ordinaries (up 0.3 percent), KLCI (up 0.5 percent) and the Taiex and SET (both up 0.8 percent). The Shanghai Composite retreated 2.1 percent thanks to concerns about liquidity.

Equities in Japan and Australia rallied as a result of the FOMC's commitment to low interest rates and Chair Janet Yellen's relatively upbeat assessment of the U.S. economy. Worries persisted about Iraq's oil infrastructure after rebels attacked Iraq's largest oil refinery. In addition, Chinese shares dropped sharply on concerns about declining liquidity. Therefore, the Fed's message failed to act as a big sentiment booster except in Australia and Japan. Asian stocks opened on a strong note Thursday but gains quickly faded. And on Friday, most of the major equity indexes retreated. The sharp gains in the Nikkei reflected a favorable view among global investors of Prime Minister Shinzo Abe's corporate tax cut and other structural changes that will be rolled out later this month. Mr. Abe is set to formally release his growth strategy as soon as Tuesday.

On Thursday, Mainland Chinese shares tumbled, with the Shanghai Composite falling 1.6 percent to post its biggest single day loss in seven weeks, as liquidity worries resurfaced. The China Securities Regulatory Commission said last month that it plans to have 100 IPOs from June through the end of the year. Chinese Premier Li Keqiang said on Wednesday that the government would not resort to strong stimulus but would rely on targeted measures to boost growth. The economy would not suffer a hard landing and would continue to maintain medium to high growth in the long run without stimulus, Li said.

Currencies

The U.S. dollar was down against most of its major counterparts for the week. The currency was buffeted mid-week after the Federal Reserve announced that it would continue its dovish monetary policy and repeated that interest rates are likely to remain at record low levels for some time to come. The dollar dropped to a one month low against its major peers after the announcement. On the week, the dollar increased against the yen and Australian dollar. It retreated against the euro, pound sterling, Swiss franc and Canadian dollar.

The pound sterling climbed to $1.70 for the first time since the financial crisis after some Bank of England policymakers suggested the timeline for raising interest rates could be shortened. Bank of England Deputy Governor Charlie Bean said higher rates would be a sign that the economy was returning to normal. Ian McCafferty, a member of the Monetary Policy Committee, said Thursday that the BoE should not "hold back too long" on raising rates. The pound has been climbing against the dollar since last July, when it traded at $1.4813, and more recently since last Thursday from $1.6791 when BoE Governor Mark Carney told bankers at his annual Mansion House address in London that the timing of the first rate increase 'could happen sooner than markets currently expect.'

Selected currencies — weekly results

Indicator scoreboard

EMU

May final harmonized index of consumer prices slipped 0.1 percent on the month and was up 0.5 percent from a year ago. The core index (excluding food, alcohol, tobacco & energy) was up at a 0.7 percent yearly rate while the other two underlying indexes (excluding seasonal foods & energy and excluding unprocessed foods & energy) both decelerated from 1.1 percent in April to 0.8 percent. The yearly change in prices of non-energy industrial goods slipped from an already minimal 0.1 percent to unchanged while service sector inflation reversed April's 0.5 percentage point bounce in falling to 1.1 percent. The other major downward impact on headline inflation came from food, alcohol & tobacco where prices were up only 0.1 percent on the year after a 0.7 percent increase last time, but energy (unchanged after dropping 1.2 percent) moved in the opposite direction.

Germany

June ZEW survey was mixed with analysts more confident about the economy's current economic performance but, equally, more cautious about the outlook. The current conditions index was 67.7, its seventh consecutive monthly rise and its strongest reading since July 2011. By contrast, expectations dropped 3.3 points to 29.8. The forward looking measure has now declined every month so far this year and now stands at its lowest mark since December 2012. ZEW warned that second quarter growth could be slightly softer than originally anticipated but still sees the German economy as a whole as being in very good shape. Some slowdown this quarter is only to be expected following the weather related boost to activity at the start of the year.

United Kingdom

May consumer prices slipped 0.1 percent on the month and were up 1.5 percent from a year ago. The annual change is the weakest since October 2009. The surprisingly sharp deceleration would seem to confirm that the April CPI was boosted by the timing of Easter. The main downward pressure on the annual rate came from clothing & footwear where the 12-month change in prices dropped from 1.2 percent at the start of the quarter to minus 0.1 percent, its first negative reading since April 2013. Other areas of weakness included furniture & household equipment (0.9 percent after 1.5 percent), transport (0.4 percent & 1.6 percent) and communications (1.0 percent after 1.9 percent). Food & non-alcoholic beverages (down 0.6 percent after plus 0.5 percent) similarly subtracted from the yearly headline gain. The only real upward pressure stemmed from alcohol & tobacco (4.6 percent after 3.5 percent) and recreation & culture (1.1 percent after 0.5 percent). As a result, the core CPI was unchanged from April and, at an annual rate of 1.6 percent, 0.4 percentage points short of its previous outcome.

May output prices unexpectedly fell 0.1 percent on the following a minimally upwardly revised 0.1 percent increase in April and reduced the annual rise in prices from 0.6 percent to 0.5 percent. Manufacturers' input costs were also soft, posting their second consecutive 0.9 percent monthly drop and now stand 5.0 percent lower on the year. Output prices were generally relatively stable with the exception of the other manufactured products category which posted a 0.8 percent monthly decline. The only increase of any size was in food products (0.3 percent). Core factory gate prices were unchanged on the month and were up 1.0 percent from a year ago. Meantime, input costs were dominated by a 4.1 percent monthly drop in fuel although there were sizeable declines in imported food materials (1.2 percent), crude oil (0.9 percent) and imported chemicals (0.7 percent) as well. The only monthly rise was recorded by other home produced materials (1.9 percent).

May retail sales were down 0.5 percent and were up 3.9 percent on the year. Excluding auto fuel, purchases declined 0.5 percent as well and were 4.7 percent above their level in May 2013. May's headline setback was wholly attributable to the food sector which, excluding auto fuel, posted a hefty 2.4 percent monthly drop. Non-food demand expanded 0.8 percent and now shows a yearly increase of fully 6.0 percent. Elsewhere, the only monthly contractions were recorded by household goods (1.4 percent) and fuel (0.5 percent). By contrast, clothing & footwear (1.2 percent) and non-store retailing (1.5 percent) enjoyed very good performances and non-specialized stores (0.3 percent) also made fresh headway.

Asia/Pacific

Japan

Japan recorded a smaller merchandise trade deficit than expected in May. At ¥909.0 billion from a year ago — analysts expected the deficit to widen to ¥1.176 trillion. Exports dropped a larger than expected 2.7 percent on the year (analyst expected a decline of 1.5 percent) while imports slid 3.6 percent on the year. Expectations were for a 1.5 percent decline. Exports declined on the year for the first time in 15 months while imports posted their first drop in 19 months. Exports to Asia slid 3.4 percent on the year for the first drop in 15 months. Exports to the U.S. declined 2.8 percent on the year for the first drop in 17 months. However, exports to China edged up 0.4 percent on the year while exports to the EU jumped 14.5 percent. The drop in exports indicates that the benefit from last year's weakening in the yen is waning. On a seasonally adjusted basis, the trade deficit in May was ¥862.2 billion, almost the same as April's ¥880.5 billion. On the month, exports were down 1.2 percent on the month and 1.9 percent from a year ago while imports retreated 1.3 percent and 0.6 percent. Exports to the U.S. slid 2.8 percent on the month while exports to the EU and China were up 14.5 percent and 0.4 percent respectively.

Canada

May consumer prices were up 0.5 percent on the month and up 2.3 percent on the year. It was the second consecutive month that it has been at or above the Bank of Canada's 2 percent target midpoint. Excluding food and energy prices were up 0.3 percent on the month and 1.5 percent on the year after a 1.4 percent annual rise last time while the BoC's preferred index matched the monthly headline gain to boost its 12-month increase by 0.3 percentage points to 1.7 percent. Both yearly core rates are now at their highest level since mid-2012. On a seasonally adjusted basis, the CPI posted a 0.2 percent monthly advance. On the same basis both the excluding food and energy core and the BoC's underlying index were also 0.2 percent firmer than in April. Within the adjusted headline the main boost to prices came from alcohol & tobacco, where charges jumped 0.8 percent from the start of the quarter and, to a lesser extent, the food sector which posted a 0.4 percent increase. All of the other major categories recorded either a 0.2 percent or 0.3 percent monthly increase.

April retail sales jumped 1.1 percent on the month after an upwardly revised 0.1 percent increase in March. Compared with a year ago purchases were up 5.1 percent, a 0.9 percentage point advance over March's annual rate. The recovery in nominal sales was mirrored in volumes which posted a healthy 0.8 percent increase from quarter-end and a 3.7 percent gain from April 2013. Within the monthly upswing in cash purchases gains were widespread with ten of the eleven subsectors registering fresh growth. Motor vehicles & parts (2.4 percent) led the way but even excluding this category, sales expanded a solid 0.7 percent. Elsewhere, there were sizeable increases in electronics & appliances (1.2 percent), furniture & home furnishings (1.0 percent) and clothing & accessories (1.5 percent). General merchandise posted a 0.9 percent gain and health & personal care was up 0.8 percent. The only monthly decline was in miscellaneous stores (0.2 percent).

Bottom line

As expected the FOMC continued to reduce its bond purchases but at the same time said that it will continue to maintain its accommodative monetary policy. The Swiss National Bank maintained its policy interest rate range of zero to 0.25 percent. Investors remained cautious due to the geopolitical turbulence in Iraq and Ukraine.

The upcoming week will give investors a peek at June data in the form of the flash PMI indexes. Final estimates of first quarter growth for the U.S. and UK will be released. In Japan, May data for consumer prices, household spending, unemployment and retail sales are expected.

Looking Ahead: June 23 through June 27, 2014

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