Global equity markets struggled again last week with investors finally beginning to reassess the potential impact of the standoff between the West and Russia, along with the escalating crisis in the Middle East. European equity markets were also hurt by some weaker than expected economic data, including confirmation that Italy moved back into technical recession in the second quarter. However, most concern was centred on Germany, the engine of growth for the Eurozone economy, as manufacturing orders fell 3.2% in June following recent weakness in the IFO business climate survey. At present, the ECB’s Mario Draghi is putting the weakness down to “technical factors…..namely less working days” but he did concede that “if the geopolitical risks materialise, it’s quite clear that the next two quarters will show lower growth”.
Whatever the reason for the economic weakness, German equities are still falling with the DAX Index down another 2.2% last week bringing the YTD decline to -5.7%. The peripheral markets were harder hit with the major indices in Italy and Spain down 5.7% and 3.9% respectively. In Asia, Japan’s Nikkei 225 Index was the worst performing major index, declining 4.9% for the week after a drop of 3% on Friday. US equity markets bucked the negative trend ending the week marginally higher, unperturbed by the US airstrikes in Iraq. Core government bond yields continued to move lower with the German 10-Year government bond yield closing the week at 1.05% while the yield on the German 2-Year note turned negative.
European equity markets have opened higher this morning following a positive session in Asia overnight. Japan’s Nikkei 225 Index recouped some of the losses sustained last week with a gain of 2.4%. It is a busy week on the macro front this week with reports on industrial production, retail sales, employment and inflation from around the globe as well as second quarter GDP data for the Eurozone, UK, Japan and Russia.
The initial estimate of second quarter GDP growth is published for the Eurozone on Thursday with the consensus estimate at 0.4%, up from the weaker than expected 0.2% recorded in the first quarter. The official data and the survey data are slightly at odds on how well the Eurozone economy is performing so a weaker than expected print would not be a surprise. Meanwhile, the Japanese economy weakened in the second quarter after the front loading of spending in Q1 ahead of the April 1st consumption tax increase. It is simply just a case of how steep the slowdown was and whether it is temporary or a waning of the Abe effect.
The Bank of England will release their quarterly inflation report on Wednesday which will provide further insight into their outlook for the UK economy and hence monetary policy. Investors will be hoping for further clarity from Mark Carney on the Bank’s measurement of “economic slack”, given the strong performance of the UK economy and concern about financial stability risks, most notably the buoyant housing market.