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  • Weekly macroeconomic and market update 20 July 2015

Weekly macroeconomic and market update

Read on for an overview of the major market and macroeconomic events for the week ending 17 July. This week we look at a potential deal between Greece and its creditors, dubious economic figures released by the Chinese authorities and several other updates from what was a very busy week.

Greece – formal negotiations have begun

A deal for Greece appears to be underway, with Greek banks reopening this week – although capital controls remain in place. The Greek parliament passed the first round of legislation, despite a significant rebellion within Prime Minister Tsipras’s own Syriza party which included a number of ministers. Tsipras is now expected to reshuffle his cabinet, but it seems increasingly likely that another general election will be called before the year is out, the timing of which could be accelerated if there are further rebellions.

Germany also passed the required vote that enables formal negotiations to begin – but in a sign of how politicised the issue is, Angela Merkel also had to deal with a small rebellion. Assuming the deal is finalised, this would take some of the pressure out of the markets in the short term. However, without a more comprehensive deal involving debt-restructuring (as the IMF has been pushing for) we just seem to be setting in motion a third crisis further down the line.

Dubious figures from the Chinese authorities

China reported second quarter growth of 7.0% year on year, which no one really believes and which is ahead of expectations of a slow-down to 6.8%. Fixed asset investment, industrial production and retail sales figures all also surpassed expectations. As fairly extreme interventions in the Chinese equity markets appear to have arrested the sharp falls seen earlier in the month – though the stock of 633 companies remain suspended – fresh questions have been raised over the credibility of the Chinese authorities when it comes to economic and market policy.

Last week’s other events

  • UK economic numbers were mixed, with inflation again coming in flat year-on-year while core inflation fell to 0.8%. Average earnings numbers were stronger than the month before, with a 3.2% rise, but unemployment unexpectedly ticked up to 5.6%.
  • Eurozone monthly industrial production fell, confounding forecasts for a marginal increase, whilst core inflation was also slightly softer. In Germany, the ZEW economic sentiment index fell more than expected from 31.5 to 29.7 (30.00 was expected), though current conditions were ahead of expectations, suggesting a deteriorating outlook from those businesses polled.
  • Across the pond, US industrial production and capacity utilisation expanded more than expected and the claimant count also continued to improve. The housing sector was another area of strength, as month-on-month housing starts rebounded to 9.8% from May to June against a fall of 10.2% previously. The only negative readings came from the Philadelphia Fed Manufacturing Index, which fell considerably more than expected, from 15.2 to 5.7 whilst retail sales figures also disappointed.

The markets

How did the possibility of a Greek resolution and the continued slowdown of the Chinese economy affect market performance over the past seven days?

Graph 20-07

  • Equities – UK equities were up 1.5% on the week, US equities returned 2.4% while European equities (excluding the UK) only managed a 0.7% rise. In Asia, Japanese equites were up 5.0% and Hong Kong was up 2.1%. Emerging Markets were fairly flat, returning just 0.2%.
  • Bonds – In the UK gilts were relatively unchanged, just 1 bp tighter on the 10-year at 2.08%. US Treasuries were just 6 bps tighter at 2.35%. Despite the Greek resolution moving through, German 10-year bund yields fell 0.90% to 0.80%.
  • Currencies – The euro was the story of the week as it fell across major currencies – finishing the week down 2.6% against the US dollar and 3.25% against sterling (which was broadly stronger, gaining 0.6% against the dollar). The yen was also sliding against the dollar and sterling (down 1.9% versus sterling).
  • Commodities – Oil remains under pressure, with Brent at US$57.07 and West Texas struggling to stay at the US$50 level before finishing the week at $50.82. Copper resumed its downward trend to finish at US$2.50 and gold had also slipped down to US$1,130.70 by Friday – followed by a further fall over the weekend as updates from China on its gold reserves disappointed markets.

The week ahead

Compared to last week we have a quiet seven days ahead of us. Today Greece is due to pay back a €3.5 billion loan to the ECB, which is now expected to go without a hitch. On Tuesday there is little of particular note, although the Bank of Japan will release monetary policy committee minutes. On to Wednesday and the bank of England will release the minutes from its most recent MPC meeting, and we will also get US home sales reports.

On Thursday there are UK updates on retail sales figures, which we expect to continue the strength seen so far this year. Forecasts are for an acceleration to 4.9% from 4.6%. Later in the day, the US releases some more jobless numbers and the Eurozone releases flash consumer confidence numbers, which are expected to remain suppressed.

A range of PMI indicators are released on Friday, starting with Manufacturing figures from Japan and China overnight. In China this will be the HSBC reading rather than the official figure, which is expected to be improved from the month before, just still just shy of the 50 mark at 49.8. This will be followed by Manufacturing and Services flash numbers for the Eurozone and Germany specifically, which are predicted to be little changed from the June reading. The day and week finishes with US Manufacturing PMI, expected roughly flat at 53.7.

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