Global Markets

After sinking at the beginning of the week, equity markets stabilized and then gained traction thanks to a plethora of soothing messages from central bank officials. A consistent message was repeated over and over: Banks are not about to cut off stimulus. Equities advanced on both good and disappointing economic data.

The bankers' comments helped to restore calm after Fed Chairman Ben Bernanke signaled on June 19^th that the Fed would consider reducing its bond buying later this year if the economy improves as expected. Stock prices plunged and yields on Treasuries surged higher in response to the news. Late Wednesday, Richmond Fed President Jeffrey Lacker said in an interview with Bloomberg Television that financial markets had gotten a little bit ahead of the central bank's thinking, adding the Fed was nowhere near shrinking its balance sheet.

Since then, other central bank officials have also been quick to point out that scaling back the pace of asset purchases is not the same as monetary tightening. Federal Reserve Bank of New York President William Dudley said Thursday investors were wrong to think the timetable for tighter monetary policy in the U.S. had been brought forward. The outlook for the economy is still uncertain, he said. And should the economy falter, Mr. Dudley said asset purchases could continue at a higher pace. Federal Reserve Governor Jerome Powell echoed Mr. Dudley's sentiments, saying asset purchases would likely continue for some time. U.S. central bankers were not the only speakers on this theme. ECB President Mario Draghi also jumped into the fray as did retiring Bank of England governor Mervyn King.

While most equity indexes followed here advanced in this volatile week, at the same time, most retreated in the month of June. The quarterly results were decidedly mixed.

Global Stock Market Recap

Global Stock Market Recap — quarterly results

Europe and the UK

Equities advanced last week as central bank rhetoric helped calm investors’ nerves after Fed Chairman Ben Bernanke’s hint that the Fed could begin tapering its bond purchases should the economy continue to grow and match forecasts. However, the gains did little besides reduce the monthly and quarterly losses, which were significant. The FTSE and SMI were down for the first month in 2013 and retreated in the quarter as well. Monthly losses ranged from 3.3 percent (SMI) to 11.5 percent (MIB). On the quarter, the CAC edged up 0.2 percent and the DAX, 2.1 percent. Declines ranged from 0.6 percent (MIB) to 4.2 percent (OMX).

European leaders clinched a deal on combating youth unemployment, which has soared to alarming levels in many EU member nations, and agreed to set aside more money to tackle the situation. EU leaders agreed to speed up programs like the Youth Employment Initiative with spending concentrated in the first two years. The meeting also decided to allocate €8 billion for this program rather than the originally planned €6 billion.

European finance ministers reached an agreement Thursday on rules for winding down insolvent banks, inking a deal in which banks' shareholders, creditors and big depositors would take the first hit in the event of a bank crisis. The deal needs legislative approval from the European Parliament.

Doing his part to calm markets, European Central Bank President Mario Draghi said that the ECB has done as much as it can to support the euro area economy, and now governments should do their part to strengthen the region. Although the euro area has made much progress in recent years, it still faces many challenges. He said the ECB stands ready to act again when needed, though he noted that there are limits to what monetary policy can achieve. Monetary policy cannot create real economic growth, he said. "If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix." Among the many ECB speakers, the message was basically the same, echoing Draghi.

Asia Pacific

While most indexes here managed to record gains last week, it was too little too late to bail out the month or for that matter the quarter. Equities were boosted during the week by a combination of upbeat U.S. and Japanese data and comments from Federal Reserve officials assuaging investors' fears over an early end to the Fed's bond buying. The Nikkei was up 3.4 percent on the week but slipped 0.7 percent for the month. However, large monthly gains in April and May more than offset the June loss by a large margin — the index jumped 10.3 percent on the quarter.

The worst performing stock market was in mainland China, which was rattled by a domestic credit squeeze that culminated with the People's Bank of China injecting liquidity into local financial institutions. For the week, the Shanghai Composite slid 4.5 percent — the only index to decline in this region. The index dropped for the fourth month in six, losing 14.0 percent in the month and 11.5 percent in the second quarter.

The People's Bank of China said it will fine tune its policies as needed, suggesting slightly easier monetary conditions ahead as an acute cash crunch has exacerbated challenges faced by an already slowing economy. The bank will continue to implement prudent monetary policy, the central bank said in a statement after a quarterly meeting of the Monetary Policy Committee chaired by Governor Zhou Xiaochuan in Beijing. The PBoC did not mention the exact meeting date but said the meeting was held 'recently'. The bank said it will pay close attention to the latest global and domestic economic developments as well as changes in international capital flows. The bank also said it will deploy a mix of monetary policy tools to strengthen and improve liquidity management, monetary supply and moderate growth in social financing.

Currencies

The U.S. dollar was up against all of its major counterparts last week. On Friday, Federal Reserve Governor Jeremy Stein said the Fed may make a decision in September about tapering monetary stimulus. At the same time, the yen declined to the weakest level against the dollar since June 6^th and 10-year Treasury yields climbed as Fed officials sought to clarify policy on providing stimulus. The euro declined after the International Monetary Fund said the currency made up the smallest share of allocated central bank reserves since 2004.

The U.S. dollar was 62.2 percent of allocated reserves in the January through March period compared with 61.2 percent the prior quarter, according to the IMF. The euro’s share was 23.7 percent, compared with 24.2 percent in the fourth quarter of 2012. Reserve managers around the world held about US$194 billion in Australian and Canadian currencies, according to the first IMF data on the global holdings of the two currencies.

Selected currencies — weekly results

Gold

Earlier this year, the world's biggest gold buyers took advantage of the lower prices to snap up coins, bars and jewelry when prices tumbled. However, now consumers in both China and India are holding back and in the process making the decline more severe. Gold has now plunged about 37 percent from its peak in 2011 and it dropped below $1,200 for the first time in nearly three years according to the London PM gold fix.

The caution shown by Asian gold buyers is making it harder for the market to soak up the billions of dollars of physical gold being unloaded by exchange traded funds, which are seeing big redemptions by investors. Despite the drop in prices, Chinese and Indian consumers are holding back because of fears that prices will continue to decline amid growing confidence that an improving U.S. economy and a Europe free from further debt crises mean the metal is no longer needed as a safe haven.

Recent moves by India's government to clamp down on gold imports are meant to curb a wide trade deficit which is also hurting demand. Buying had already flattened earlier this month because of a higher import tax and restrictions on credit for bullion importers. The rupee's fall to a record low has limited price declines in India by making imported gold more expensive in rupee terms.

Indicator scoreboard

EMU

May M3 money supply was up 2.9 percent but down 0.3 percentage points from its April pace. The 3-month moving average measure closely followed by the ECB also was up 2.9 percent, unchanged from the slightly weaker revised rate at the start of the quarter. At a minus 1.1 percent annual rate, growth of bank lending was particularly soft and down 0.2 percentage points from last time. Borrowing by households slipped from 0.4 percent to 0.2 percent and within this, loans for house purchases dropped from 1.2 percent to 1.0 percent. Lending to non-financial corporations was down 3.1 percent from a year ago, slightly weaker than in April, while borrowing by non-monetary financial intermediaries (excluding insurance companies and pension funds) declined to a 0.2 percent annual rate from 0.6 percent.

June EU Commission economic sentiment improved with its economic sentiment indicator increasing 1.8 points to 91.3, its highest reading since May 2012. The second successive monthly advance reflected improvements in most areas of the economy, the only exception being services where confidence saw a small decline (minus 9.5 from minus 9.2). Consumer morale (minus 18.8) was up more than 3 points and confidence in industry gained 1.8 points to minus 11.2. Retail rose 2.3 points to minus 14.4 and construction 1.4 points to minus 32.2. Regionally sentiment was up in all of the four larger EMU states. Spain (2.5 points) saw the largest increase ahead of Italy (1.7 points), France (1.3 points) and Germany (1.1 points). However, current levels remain short of the common long-run average (100) although in Germany's case (99.8), at least the gap is only minimal.

Germany

June Ifo business climate index edged up just 0.2 points to 105.9 following an unrevised 1.3 point gain in May. The headline barometer is now at its highest level since March but still within the narrow 104.3 to 107.4 range seen throughout the year so far. The minor improvement in sentiment this month was wholly attributable to more optimistic expectations which were up almost a point at 102.5, also their best reading since March. However, the assessment of current conditions retreated 0.6 points to 109.4, although this was also comfortably within its unusually narrow 2.9 point band seen since January. Among the major sectors, morale in manufacturing gained 1.7 points to 7.8 but slipped 2.7 points to minus 1.0 in wholesale and was down 0.2 points to 1.0 in construction. Retail was also lower, off 1.5 points at minus 1.4, while services declined a more marked 3.4 points to 11.6.

June unemployment was down 12,000 on the month following a smaller revised 17,000 increase in May. At a steady 6.8 percent, the jobless rate was also lower than anticipated having been revised down 0.1 percent to this level in mid-quarter. Despite the first drop in unemployment since February, vacancies declined a further 5,000 although at least this was smaller than the 7,000 decline posted last time. The June data leave a cumulative increase in joblessness of just 9,000 over the first quarter and should be consistent with a modest rise in real GDP.

France

First quarter gross domestic product contracted an unrevised quarterly rate of 0.2 percent. Following another 0.2 percent decline in the fourth quarter of 2012, the first quarter decline in total output confirmed the slide of the French economy back into technical recession. Compared with a year ago GDP was down 0.4 percent, also unrevised from the flash estimate. As previously indicated, weakness in the key private sector components of domestic demand was instrumental in the latest reversal with household consumption slipping 0.1 percent on the quarter and gross fixed capital formation off 1.0 percent. Although public sector consumption was revised marginally stronger to show a 0.4 percent gain, final domestic demand still subtracted 0.2 percentage points from headline growth. With minor and offsetting revisions to both exports and imports, net foreign trade also subtracted 0.2 percentage points off the quarterly change in total output. Accordingly, the headline print would have looked rather worse but for a 0.2 percentage point contribution from inventory accumulation.

May household spending on manufactured goods advanced 1.0 percent on the month which, even allowing for a steeper revised 0.6 percent drop in April, was significantly more robust than expected. However, compared with a year ago purchases were still only unchanged. Total spending on goods was up 0.5 percent on the month and the lion’s share of that was attributable to a 1.4 percent bounce in food sales implying a notably more subdued gain in discretionary spending. Autos advanced 0.9 percent on the month after a 2.0 percent increase in April, and the other products category was up 0.8 percent. However, household goods slipped 0.1 percent and textiles fully reversed the previous month's 1.5 percent increase.

United Kingdom

First quarter gross domestic product was up an unrevised 0.3 percent on the quarter and was up a downwardly revised 0.3 percent from a year ago. The revisions also removed the 2011/2012 recession. Among GDP expenditure components, consumer spending was revised up 0.2 percentage points to show a quarterly 0.3 percent growth rate but the good news here was tempered by a 1.7 percent annual slump in real disposable income, the steepest decline since the start of 1987. Elsewhere, gross fixed capital formation now shows a 0.2 percent gain from the fourth quarter, its first increase since the first quarter of 2012, while government final spending was up 0.1 percent. Exports of goods were down 0.6 percent, mainly due to weakness in manufactured goods — specifically material manufactures and chemicals. However, exports of services were up 0.6 percent. Imports of goods dropped 2.7 percent due to lower purchases of fuel. In terms of output, industrial production was up 0.3 percent on the quarter within which manufacturing saw a 0.2 percent decline. Construction dropped 1.8 percent but services expanded 0.5 percent.

Asia/Pacific

Japan

May consumer price index was up 0.1 percent on the month but down 0.3 percent on the year. Core CPI excluding just fresh food -- the Bank of Japan’s key inflation measure -- was up 0.2 percent and unchanged on the year. Excluding fresh food and energy, the CPI was up 0.1 percent but down 0.4 percent from a year ago. A positive sign was that price declines for key categories eased. For example, recreational durable goods dropped 7.1 percent after sinking 12.8 percent in April. Televisions were down 9.6 percent after 16.4 percent in April. Energy costs were up 3.7 percent in May after 1.3 percent.

May unemployment rate remained at 4.1 percent for a third month. The number of unemployed persons was 2.79 million, a decrease of 180,000 or 6.1 percent from a year ago. The number of employed persons increased 430,000 or 0.7 percent from a year ago to 63.40 million. This was the fifth consecutive month that employment has risen on the year. In May, the number of payroll jobs rose 20,000 from the previous month to a seasonally adjusted 63.03 million, marking the second consecutive monthly rise after rising 40,000 in April.

May household spending dropped 1.6 percent from a year ago after increasing the four previous months. Analysts expected an increase of 1.4 percent. Fuel, light & water charges dropped 6.9 percent from a year ago on lower energy prices. Transportation & communication spending sank 10.0 percent and housing was down 4.1 percent. Education and culture & recreation were down 2.5 percent and 2.4 percent respectively. Spending for clothing and footwear jumped 6.9 percent while medical care was 4.3 percent higher from a year ago.

May retail sales were up 0.8 percent from a year ago. This was the first increase in 2013. Analysts expected sales to be unchanged. Motor vehicle sales were down 6.1 percent while machinery & equipment dropped 4.5 percent. The other main categories of sales were positive with general merchandise up 0.9 percent, fabrics, apparel & accessories up 5.7 percent, food & beverages up 1.4 percent and fuel up 3.0 percent. While both household spending and retail sales measure consumer spending, the two often give divergent pictures of spending.

May industrial production was up 2.0 percent but down 1.0 percent from a year ago. Analysts expected output to edge up 0.2 percent but drop 2.4 percent on the year. It was the fourth monthly increase in production. General purpose production & business oriented machinery, electrical machinery and chemicals excluding drug contributed to higher monthly output. Commodities including parts & accessories of steam turbines, parts & accessories of boilers and water tube boilers also advanced on the month. According to METI’s survey of production forecast in manufacturing, production is expected to decrease 2.4 percent in June and to increase 3.3 percent in July.

Americas

Canada

April monthly gross domestic product edged up 0.1 percent for its worst performance so far this year. Annual growth slipped 0.3 percentage points to 1.4 percent. The subdued headline data were depressed by the goods producing sector where output dropped 0.3 percent on the month. Within this, manufacturing posted a 0.2 percent gain, while utilities were up 0.5 percent. Nevertheless, advances here were more than offset by a 1.5 percent decline in mining, quarrying, & oil & gas extraction and a 0.4 percent slide in construction. Services expanded a monthly 0.3 percent after a 0.2 percent increase in March. The strongest performing sector was easily arts, entertainment & recreation (3.4 percent), ahead of other services (0.7 percent), wholesale trade (0.6 percent) and finance & insurance (0.6 percent). Retail trade was up 0.5 percent in line with transportation & warehousing. Elsewhere, there were minor monthly gains although administrative and support, waste management and remediation services recorded a minimal 0.1 percent decline.

Bottom line

Equities stabilized and mostly gained in the last week of the month and quarter. However, the gains could not offset the selloff that occurred earlier in the month. Most indexes were down for the month of June and the quarter.

The coming week features the usual first week of the month central bank meetings — the Reserve Bank of Australia, the Bank of England, and the European Central Bank. No policy changes are expected. For the BoE, it will be the inaugural meeting for its new governor and former Bank of Canada governor, Mark Carney. Also featured are the various PMI indexes. In Japan, the closely watched Tankan survey will be carefully studied for any positive effects of Abenomics and the Bank Japan’s stimulus program. And in the U.S., the employment situation report will be released on Friday.

Looking Ahead: July 1 through July 5, 2013

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