July 2012 Market Commentary
Following the wholesale falls in May, the last thing stock markets needed on 1st June was weak US jobs data. Unfortunately, that was precisely what arrived and markets around the world fell even further.
However, all the major markets – with one exception – had rallied by the end of the month, helped in large part by victory for New Democracy in the Greek elections and agreement over a bailout for the Spanish and Italian banks.
The notable exception was China, with the market falling by 6.6% in June – one of only a handful of world markets to fall. While the Chinese stock market is up 1% from the start of the year, it is – worryingly – down 24% on a 12 month basis.
For investors with nerves of steel, Spain and Italy’s stock market performance in June matched their march to the finals of Euro 2012, up by 14% and 10% respectively. But the real reward went to those investors with no nerves at all. The Greek stock market, buoyed by the election victory of New Democracy, rose by 20% in June.
There was bad news to start the month for the UK, with the manufacturing sector contracting at its worst rate for three years. The Purchasing Managers’ Index for the sector slumped from 50.2 to 45.9, with anything below 50 generally being held to indicate a contracting sector and a loss of confidence.
This was countered a week later by news that the service sector had expanded in May: in contrast to manufacturing the services PMI was steady at a healthy 53.3.
Figures for May also showed a rise in house prices – albeit only 0.5% – and for a while there was a danger of good news emerging. But Mervyn King, Governor of the Bank of England, managed to calm everyone down by labelling the current crisis “the worst since World War II” and the rest of the month did little to improve sentiment.
Moody’s downgraded 15 of the world’s biggest banks, including RBS, HSBC and Barclays and by the end of the month the banks were in even more trouble with several of them caught out rigging interest rates and effectively over-charging thousands of small and medium sized businesses. By July 2nd, Barclays’ chairman, Marcus Agius, had resigned and chief executive, Bob Diamond, followed suit just 24 hours later. Bizarrely, the task of finding Diamond’s replacement then fell to Agius when the latter was reinstated.
Despite all these woes, the UK stock market performed admirably in June, rising by just over 5% to end the month at 5,571 – emphasising that the key factors in June were outside the UK.
As the date of the Greek election neared there was a feeling of real unease throughout Europe. New Democracy and the far-left group Syriza were neck and neck in the polls and financial heavyweights around the world queued up to predict the end of the euro. Or, as the Spanish foreign minister put it, “the sinking of the Titanic.”
In the event, New Democracy won the election with 29.7% of the popular vote – to Syriza’s 26.9% – and a government was formed under Antonis Samaras.
At the end of the month, a summit of Europe’s leaders (yes, another one!) agreed on a bailout package for the Spanish and Italian banks. The cost of long term borrowing – which the Spanish government had described as “unsustainable” when it reached 7% – fell back and, for the time being at least, there is no crisis on the horizon.
Significantly, Angela Merkel seemed to soften her hard line on austerity at this summit, which may be an inevitable reflection of the swing to the left in France.
The strong performance of the stock markets in Spain, Italy and Greece has already been noted. Germany’s DAX index was also up – although by a much smaller percentage – the index rose by just over 2% to finish at 6,416.
Despite the month starting so badly for the US stock market, by the end of the month the market had rallied decisively and was back up to 12,880 – once again within touching distance of the psychologically important 13,000 barrier.
Inflation remains low in the US – at 2.3% – and there was also good news with the April figures confirming a narrowing in the trade deficit to “only” $50bn for the month.
Despite the fact that this equates to a $1tn of debt every 20 months the US stock market seems happy to ignore the deficit, and with the Federal Reserve extending its stimulus package (in order to keep short term borrowing costs low), most commentators were generally in a good mood.
The same couldn’t be said for the Republicans when the Patient Protection and Affordable Care Act – more generally known as Obamacare – was declared constitutional by the US Supreme Court (ironically headed by an appointee of George W Bush). This move – seen as outright Government coercion by the Right – brought a spike in donations to Mitt Romney’s election campaign. Obama remains the favourite for the November election, but it is going to be close.
As above, the Chinese stock market fell significantly in June. It was confirmed that China’s GDP was at a three year low for the first quarter of the year, and even the continuing trade surplus ($18.7bn in April) and a fall in inflation to 3%, couldn’t overcome this bad news.
Japanese inflation was even lower at 0.4% and GDP growth for the first quarter of the year was revised upwards to 1.2%. The most significant news though was a surge in Japanese exports – up 10% in May – as deliveries to the US (mainly of cars) leapt 38%. Exports to China also rose.
The Japanese stock market ended the month at 9,007 for a rise of 5.4%. Hong Kong was also up – 4.3% higher at 19,441.
The two biggest emerging markets – India and Russia – both saw good gains in June rising by 7.8% and 8.2% respectively. The Australian economy is expanding more quickly than had been expected but the stock market was virtually unchanged in the month. Greece was the biggest winner of the month and the Turkish stock market also posted a rise in excess of 10%.
Despite this rise, though, Greece remains the worst performing market on a year to date basis and is joined in the bottom five by Spain, Italy, Portugal and Argentina. Perennial star performer Venezuela is far and away the best-performing market with a 68% rise in 2012, followed by the Philippines and Thailand.
Despite the economic crisis, the repeated cries of doom and gloom and the dire warnings of the Spanish foreign minister, there is one ‘Titanic’ which appears totally unsinkable – the English Premier League. Rights for the next three years were sold for £3bn, an increase of 71% on the previous package. Those of you wondering how your favourite player is going to finance his next Ferrari need worry no longer…
Independence, impartiality, courtesy, personal, tailored, up to date.Mr & Mrs P - Doncaster