21 August 2017
July saw major global stock markets touching record highs, as improving economic data and company earnings helped investors avert their attention from rising geo-political risk.
US economy picks up pace
The US economy accelerated to an annual growth rate of 2.6% in the June quarter, more than double the sluggish rate recorded in the previous quarter (which was revised downward to 1.2%). The number of jobs added in the US economy was well ahead of expectations in June, with 220,000 jobs added in the month; with revisions to earlier estimates bringing the monthly average gain since April to 194,000. Wage growth remained sluggish, however, coming in at an annual rate of 2.5% in June.
US inflation continued to languish below the Federal Reserve’s 2% target. Mid-month, Fed chair Janet Yellen – while expressing confidence in the American economy – signalled that the central bank would not rush to tighten monetary policy with inflation persistently below target, and wage growth so tepid. The forward-looking Chicago purchasing managers’ index (PMI) fell to 58.9 in July from 65.7 in June.
June US consumer spending matched expectations at 0.1% growth, well short of the robust 0.5% gain of March. Personal income came in flat, versus an expected 0.4% gain, with the May figure revised downward. The Fed held rates steady, and indicated it would start unwinding its balance sheet “relatively soon”.
Washington sideshow obscures earnings recovery
US politics continued to pose a major distraction to the markets, with further revelations indicating the Russian government backed Donald Trump’s presidential campaign and tried to damage his opponent. During the month, it was reported that US special counsel Robert Mueller would expand his investigation of President Trump to examine his financial dealings; while the revolving door of key staff changes at the White House continued apace, with chief of staff Reince Preibus axed following the failure of Senate Republicans to push through a bill to repeal and replace the Affordable Care Act, and Anthony Scaramucci lasting just 10 days in the post of White House communications director.
However, strong corporate results continued to flow. With two thirds of S&P 500 companies reporting second-quarter earnings at the end of July, 72% beat consensus expectations according to Thomson Reuters I/B/E/S. In a typical quarter, 64% of companies beat expectations. S&P 500 earnings are expected on average to have grown by 10.8% in the second quarter, according to Thomson Reuters I/B/E/S, and analysts continue to upgrade earnings estimates for the full year.
The upshot was that despite political distractions – as well as seemingly constant geo-political worries, with North Korea saying in July it had successfully test-fired an intercontinental ballistic missile, moving it closer to its goal of building a device capable of reaching the continental US – the US stock markets continued their surge.
For the month, the Dow Jones Industrial Average gained 2.7% to close at a record high; the S&P 500 gained 2.1%; and the technology-heavy Nasdaq Composite index surged 3.4%. The three main US indices have now risen in eight of the past nine months.
Euro’s rise unwelcome on stock markets
In Europe, the stronger euro against the US dollar in July hit the stock market’s exporters. The European currency gained 3.6% for the month, and has surged about 12% against the greenback since the start of the year. However, business sentiment in the continent’s powerhouse economy, Germany, continued to strengthen: the Munich-based Ifo Institute for Economic Research’s index of business sentiment reached another record level in July, with the Institute describing the mood among German companies as “euphoric” – noting German exporters were in “high spirits” despite the rising currency.
Ifo said at the end of July that the German economy was “powering ahead at full steam”, with gross domestic product (GDP) forecast to expand by 1.8% this year and 2% in 2018.
Meanwhile, in France, economic growth for the second quarter came in at 0.5%, making a growth rate of 1.8% over the past year. Exports surged by 3.1% in the June quarter – after a 0.7% contraction in the previous quarter – and household spending growth improved to 0.3% in the latest quarter, from 0.1%. However, the UK economy grew by a relatively weak 0.3% in April-June, following a modest expansion of 0.2% in the March quarter.
Hampered by the stronger euro, the Euro STOXX 600 lost 0.4% in July on the back of June’s loss of 2.7%, to languish at its lowest level since April. The German DAX gave up 1.7% on the month and the CAC-40 in Paris slipped 0.5%. In London, the FT-SE 100 eked out a 0.8% gain for July.
China rebounds, political concerns in Tokyo
In Asia, China’s GDP grew by 6.9% year-on-year in the June quarter ahead of expectations for 6.8% growth, despite the central government making it clear that regulatory tightening would continue to rein in excessive credit and an overheating property market. The National Bureau of Statistics reported that on a quarter-over-quarter, seasonally-adjusted basis, GDP expanded by 1.7% compared with growth of 1.3% in the first quarter, suggesting that momentum in the economy may be even stronger than the year-on-year figure indicated.
China’s industrial production and retail sales data were also strong: industrial output rose by 7.6% in June from a year earlier, coming in above both May’s 6.5% gain and market expectations. Retail sales surged by 11% in June from a year earlier, accelerating from May’s 10.7% rate and also beating forecasts. Construction activity in July ran at its highest level since December 2013, mainly on government-backed infrastructure spending.
However, China’s manufacturing activity fell more than expected in July, with the official manufacturing PMI for the month coming in at 51.4 – down from June’s reading of 51.7, and weaker than the 51.6 expected by the economists’ consensus.
In Japan, the Bank of Japan’s quarterly economic survey indicated that large manufacturers were seeing improving business conditions, and strong first-quarter corporate earnings saw full-year profit upgrades flowing. But in echoes of the situation in Washington, a swelling political crisis has Japanese PM Shinzo Abe fighting to save his government, raising questions over the completion of the long-awaited “Abenomics” structural reforms.
On the stock markets, the Nikkei in Tokyo gave up 0.5% for the month, the Hang Seng Index in Hong Kong was up 6%, the KOSPI in South Korea gained 0.5% and the Shanghai Composite Index was up 2.5%. In Australia, the S&P/ASX 200 barely moved (down 0.02%).
Oil, iron ore strong in July
On the commodities front, iron ore prices surged back over US$70 a tonne as Chinese futures hit four-month highs on the last day of July. For the month, iron ore was up 20%. Oil managed to break above US$50 a barrel for the first time since May, as the US stepped up sanctions against Venezuela – a major exporter of oil to the US and a member of the Organization of the Petroleum Exporting Countries (OPEC). OPEC crude output rose by 90,000 barrels a day this month to a high for the year, according to Reuters, as supplies from Libya continued to recover. For the month, WTI jumped 9% and Brent gained 9.9% for its best month since December 2016. Gold rose by 2.5%, while copper added 2.6%.