Global Markets

For most of the week, better than expected earnings offset a spate of mixed economic data from the U.S. and disappointment that Fed Chairman Ben Bernanke did not offer a roadmap to further quantitative easing. However, attention once again slewed back to Spain and Greece sending equities lower Friday. Investor morale sagged as Spanish borrowing costs approached record highs. Weakness across markets on Friday came on a day virtually devoid of new economic data.

Much of the reason for the week’s advance came from a number of well received second quarter corporate earnings reports along with broadly positive U.S. economic data, particularly with regard to housing — which is showing tentative signs of gaining some traction. However, data released Thursday quashed some of that optimism despite special factors that skewed the data particularly for weekly unemployment claims.

But broader market sentiment deteriorated sharply in the European morning on Friday when investors began unloading Spanish bonds. The latest increase in Spanish yields was triggered by soaring borrowing costs at Thursday’s €3 billion bond auction. The move has been given further momentum by anti-austerity protests, which reminded traders of the political difficulties of tackling budget deficits and after the Valencia region requested aid.

The International Monetary Fund on Monday cut its global growth forecast and warned that the outlook could dim further if policymakers in Europe do not act with enough force and speed to quell their region's debt crisis. The IMF also cautioned that the productive capacity in a number of emerging market economies, such as China, India and Brazil, may be lower than previously believed and future growth could disappoint. The IMF lowered its 2013 forecast for global economic growth to 3.9 percent from the 4.1 percent it projected in April, trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5 percent.

Global Stock Market Recap

Europe and the UK

Equities ended the week on a dour note despite optimism shown in trading during the week. With virtually no economic data to distract, investors focused on the sovereign debt situation especially in Greece and Spain and sold stocks. Earlier in the week, better than anticipated corporate news offset a series of mixed data from the U.S. and concerns about Spain. The FTSE slipped 0.3 percent while the CAC and DAX were up 0.4 percent and 1.1 percent respectively.

The European Central Bank’s action Friday kept investors’ focus on the debt situation. The ECB said that Greek government bonds would not be eligible for use as collateral in Eurosystem monetary policy operations pending an assessment by the Governing Council after a review by the Troika. The ECB said that due to the pending expiration on July 25 of the buy back scheme for marketable debt instruments issued or fully guaranteed by the Hellenic Republic, these instruments will become for the time being ineligible for use as collateral in Eurosystem monetary policy operations.

Spain's cost of borrowing soared while French yields declined at separate auctions on Thursday as investors sold Spanish debt in their flight to the perceived safety of the French debt. The Spanish auction also revealed poor demand for the country's debt, suggesting that the respite provided by the government's latest round of austerity measures is short lived. News that the European Financial Stability Facility plans to set aside funds to buy Spanish bonds should have eased tensions. But a poor Spanish auction suggested that Spain might be losing market access. Spain was forced to pay sharply higher borrowing costs in its short term bond auction. Demand was sluggish overall, prompting fears that it may eventually require a full blown sovereign bailout.

Eurozone finance ministers gave their final nod of approval for a €100 billion bailout deal for troubled Spanish banks on Friday. The agreement to backstop the Spanish banking sector was unanimous among the 17 members of the Eurozone. In the beginning, €30 billion will be set aside for use in case of 'urgent unexpected financing needs', the Eurogroup said in a statement after a conference call. The first tranche is likely to be made available by the end of this month.

European markets reacted differently on Tuesday and Wednesday to Ben Bernanke’s Congressional testimony, finishing lower on Tuesday but rebounding Wednesday. Tuesday's disappointment over Ben Bernanke's testimony before the Senate was replaced by excitement over some strong earnings results. However, investors continued to watch the U.S Federal Reserve Chairman's testimony on Wednesday, hoping for some hint regarding plans for a third round of quantitative easing.

Asia Pacific

Equities were mixed last week as investors focused on Fed Chairman Ben Bernanke’s mid-week testimony, looking for clues to further monetary easing in his remarks. A slew of weak U.S. economic data elevated concerns over the health of the U.S. economy despite better than anticipated earnings reports from several major U.S. companies. Investors also were keeping a wary eye on China as they looked for another source of stimulus for the slowing Chinese economy. On the week, five of 12 indexes followed here declined. The largest losses were incurred by the Nikkei and the Shanghai Composite which were down 0.6 percent and 0.8 percent respectively. The Hang Seng and All Ordinaries paced those that gained on the week — they were up 2.9 percent and 2.7 percent.

In Tokyo, stocks declined as traders focused on dismal U.S. economic data and a relatively firmer yen and sold shares before the weekend. The Nikkei hit a three week low ahead of the start of the local corporate earnings season. Financial stocks also lost ground on concerns over ethics in banking after regulators fined Barclays £290 million for attempting to manipulate the London interbank offered rate (LIBOR) and HSBC admitted massive shortcomings in its anti-money laundering operations.

Currencies

The euro tumbled to a fresh two year low against the U.S. dollar Friday, dragged down by negative developments in Spain and Greece. The currency also tumbled to multi-year lows against the pound sterling, Australian dollar and yen. The euro slid to the lowest level since 2000 against the yen on concern the region’s crisis is far from being resolved even after officials agreed on an aid package for Spain’s banks.  Euro area finance ministers gave full approval to the bank aid package of as much as €100 billion.

However, the selloff deepened after the Spanish regional government in Valencia requested government aid to help refinance its debt. Spanish 10-year bond yields were above 7 percent for the first time in more than a week, a level generally considered unsustainable in the long term. Also weighing on markets, the European Central Bank said Friday that it would stop accepting Greek bonds as collateral for the time being.

Earlier in the week, the market was largely focused on U.S. economic data and the Federal Reserve for any signals of additional Fed stimulus, giving the euro a reprieve as it wavered in a tight trading range against the dollar. The dollar was stronger across the board as investors fled to currencies perceived as safer.

Selected currencies — weekly results

Indicator scoreboard

EMU

June final harmonized index of consumer prices edged 0.1 percent lower and was up 2.4 percent on the year for a second month. The unchanged headline inflation rate was reflected in the core indexes, all of which returned the same annual increases as seen in mid-quarter. The 12-month change in the HICP excluding food, drink, tobacco & petrol was steady at 1.6 percent, while both excluding just seasonal food & petroleum and without only unprocessed food & petroleum the rates were similarly steady at 1.9 percent and 1.8 percent respectively. The main upward pressure on the annual rate in June came from food (2.8 percent after 2.3 percent), alcohol & tobacco (4.9 percent after 4.7 percent) and clothing (2.2 percent after 1.9 percent). However, gains here were essentially offset by slower inflation in energy (6.1 percent after 7.3 percent), housing (2.7 percent after 3.0 percent) and recreation & culture (0.8 percent after 1.3 percent).

May seasonally adjusted merchandise trade surplus was a larger than expected €6.3 billion following a smaller revised €4.5 billion excess in April. The unadjusted data showed €6.9 billion of black ink after a €1.2 billion deficit last time. The improvement in the adjusted headline was mainly attributable to a 0.9 percent monthly decline in imports — their third decline in a row. Exports made a smaller contribution, increasing just 0.3 percent after a 1.4 percent drop last time. Compared with a year ago, exports climbed 6.0 percent but imports were only flat, another reminder of the weakness of the region's domestic demand.

Germany

July ZEW survey indicates that analysts have become yet more cautious about the German economic situation with both the current and expectations components posting further declines from their respective June readings. The current conditions index shed 12.1 points to 21.1, its second consecutive double digit drop. Expectations held up rather better but at minus 19.6, were still 2.7 points down on June for their weakest reading since the start of the year. Expectations have now worsened for three months in a row and stand 5.4 points below their long run average. Still, the only small drop in expectations at least compares favorably with declines of 12.6 points and 27.7 points in May and June respectively and prompted ZEW to hold out the possibility of an improvement in economic conditions in 2013. Even so, ZEW also warned that downside risks should not be underestimated.

June producer prices dropped 0.4 percent on the month. On the year, the PPI was up only 1.6 percent and the slowest pace in over two years. Energy costs once again dominated the headline monthly change, falling 1.4 percent on the month and without which the overall index would have slipped a modest 0.1 percent and would have been only 1.0 percent higher from a year ago. The other major categories were all subdued. Charges for capital goods were unchanged on the month while intermediates were down 0.3 percent from May. With both consumer durables and nondurables both up 0.1 percent on the month, overall consumer goods production prices were 2.1 percent higher on the year.

United Kingdom

June consumer price index dropped 0.4 percent on the month for the steepest decline for any June on record and enough to shave 0.4 percentage points off annual inflation which now stands at 2.4 percent, its lowest rate since November 2009. The main downward impact came from the clothing & footwear area where prices dropped 4.2 percent from May to stand 0.8 percent lower on the year after a 1.6 percent annual increase last time. However, there were more modest monthly declines too in transport (0.5 percent), alcohol & tobacco (0.5 percent), miscellaneous goods & services (0.3 percent) and communication (0.2 percent). Food & non-alcoholic drink saw a 0.1 percent dip as did housing, utilities & fuel. There were no price gains of any significance. Core CPI slid 0.3 percent from May to reduce the annual underlying rate to 2.1 percent from 2.2 percent the month before.

June claimant count unemployment was up 6,100 on the month after a smaller revised 6,900 gain in May. This left the claimant count jobless rate at 4.9 percent for the 10th consecutive reading. However, the data were probably distorted on the upside by changes to the benefit system that encouraged additional claims by women (up 8,100 compared with a 1,900 decline for men). By the same token though, hiring ahead of the Olympics likely made for some downside bias although this is impossible to quantify. The underlying trend is probably close to flat. On the ILO definition, unemployment in the three months to May declined by 65,000, a steep enough drop to reduce the jobless rate to 8.1 percent.

June retail sales edged up 0.1 percent in volumes on the month and were up 1.6 percent on the year. Excluding fuel, sales were up a slightly firmer 0.3 percent from mid-quarter and were 2.2 percent stronger than in June 2011. In contrast to expectations, the ONS found no significant Jubilee effects but did suggest that record rainfall during the month had a clear negative impact in some areas. However, working the other way, there may also have been a boost from pre-Olympic Games buying. The best performing sector was clothing & shoes which posted a 2.5 percent monthly jump, albeit at the cost of heavy discounting. The other stores category (1.4 percent) also performed well as did non-store retailing (0.8 percent). Elsewhere there were modest increases apart from food which posted a 0.7 percent decline and fuel, which fell 2.2 percent. Excluding fuel, non-food demand advanced a solid 1.2 percent.

Americas

Canada

May manufacturing sales dropped by 0.4 percent on the month for the fourth decline in the last four months and followed a steeper revised 1.1 percent slide in April. Sales were 5.6 percent higher than a year ago. Volume sales performed a little better but were still down 0.2 percent from the start of the quarter. Sales were lower in 13 of the 21 reporting industries but by far the most significant monthly drop was in petroleum & coal (9.6 percent), reflecting temporary shutdowns at some refineries. Other areas registering sizeable monthly declines were machinery (3.5 percent), electrical equipment (2.5 percent), leather & allied products (2.5 percent) and chemicals (1.3 percent). However, partially offsetting increases were seen in transportation equipment (8.1 percent) within which aerospace surged nearly 66 percent after a slump of almost 35 percent last time, fabricated metals (2.8 percent) and miscellaneous manufacturing (3.2 percent). Motor vehicles were up 1.6 percent.

June consumer prices slid 0.4 percent and were up 1.5 percent on the year following a 1.2 percent gain in May. The increase was led by higher prices for the purchase of passenger vehicles and to a lesser extent, for electricity. Excluding food and energy the CPI was down 0.4 percent and up 2.0 percent on the year. The Bank of Canada’s preferred CPI excluding eight volatile items was down 0.4 percent and up 1.7 percent on the year. Auto prices increased 3.9 percent on the year after increasing 1.7 percent the previous month. The June increase was the result of less discounting by manufacturers compared with June 2011. Electricity costs jumped 5.9 percent on the year mostly as a result of increases in Ontario, Alberta and British Columbia. Despite the increase in electricity prices, the energy index declined 0.8 percent in the 12 months to June, following a 1.6 percent decrease in May. Gasoline prices declined 1.8 percent after declining 2.3 percent in May. Shelter costs advanced 1.3 percent in the 12 months to June. In addition to price increases for electricity, homeowners' replacement costs were up 2.1 percent and rent went up 1.3 percent. The cost of food was up 2.0 percent on the year following a 2.5 percent increase in May. On a seasonally adjusted basis, the CPI declined 0.2 percent after decreasing 0.3 percent the previous month.

Bottom line

Investors focused on second quarter earnings reports and on Fed Chairman Ben Bernanke’s testimony mid-week in hopes for some clues about future quantitative easing. However, weak economic data made investors wary but the unease was offset by better than anticipated earnings. However, at week’s end, debts woes in Spain and Greece surged to the surface again and investors fled to safe havens. The euro tumbled against its major counterparts.

This week will be dominated by flash manufacturing and services PMI readings in the Eurozone, Germany, France, China and the United States. Investors will be looking for signs of improvement in economic growth, especially in China. And of course, investors will continue to monitor the situation in Spain.

Looking Ahead: July 23 through July 27, 2012

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