The Skeptical Speculator

US housing starts and German investor confidence rise

2013-06-19T09:14:00.000+08:00

Economic data on Tuesday were mostly positive.

In the US, housing starts rose 6.8 percent in May. A 10 percent slump in applications for multifamily homes pulled building permits down 3.1 percent but permits for one-family homes rose to the highest since May 2008.

Another report from the US showed that consumer prices rose 0.1 percent in May. As a result, the 12-month inflation rate climbed to 1.4 percent last month from 1.1 percent in April.

Inflation also accelerated in the UK in May. The inflation rate rose to 2.7 percent last month from 2.4 percent in April.

In Germany, the ZEW index of investor confidence rose to 38.5 in June from 36.4 in May.

Stock markets rise, housing markets improve

2013-06-18T10:36:00.000+08:00

Stocks started the week positively, with markets in the US, Europe and Asia all rising. Japan's Nikkei 225 in particular jumped 2.7 percent.

Notwithstanding the recent volatility, stock markets have mostly been rising, as have housing markets.

Indeed, in the US, a report on Monday showed that confidence among homebuilders surged in June. The National Association of Home Builders/Wells Fargo housing market index rose to 52 this month from 44 in May, the biggest monthly increase since September 2002.

In the UK, home asking prices rose 1.2 percent in June, according to a report by Rightmove on Monday. It was the sixth consecutive monthly increase and pushed average values above 250,000 pounds for the first time.

And Reuters reports on Tuesday that new home prices in China rose 0.9 percent in May, based on data released by the government. The government data showed that prices rose in 69 of the 70 cities tracked by the government.

Fed meeting in focus after another week of market losses

2013-06-17T10:15:00.000+08:00

Stocks around the world fell again last week as concerns persisted over the possibility of the Federal Reserve paring its bond purchases.

In the United States, the Standard & Poor's 500 Index fell 1.0 percent last week. It fell in four of the five trading days, only rising ironically on the day when US retail sales reportedly rose 0.6 percent, which should have raised tapering expectations.

In Europe, the STOXX Europe 600 Index fell 1.5 percent last week. It was its fourth consecutive weekly decline, the longest streak of losses since April 2012.

In Asia, the MSCI Asia Pacific excluding Japan Index fell 1.3 percent last week. It was its fifth consecutive decline, the longest streak of losses in two years.

Leading the falls was, as usual, Japan. The Nikkei 225 fell another 1.5 percent last week. On Thursday, it plunged 6.4 percent to extend its loss from its 22 May high to 20.3 percent -- thus putting it in a bear market -- before rebounding slightly on Friday.

Investors' nervousness last week was not helped by the absence of additional monetary stimulus from the Bank of Japan following its monetary policy meeting on Tuesday.

This week, it is the turn of the Federal Reserve to conduct its monetary policy meeting. No substantive change to prevailing monetary policy is expected but the Fed is expected to provide some hints on the likelihood and imminence of a tapering in its rate of bond purchases.

US economic data last week had been mixed. Retail sales rose 0.6 percent in May, its biggest rise in three months, but the Thomson Reuters/University of Michigan index of consumer sentiment fell from 84.5, the highest reading since July 2007, in May to 82.7 in June. Industrial production in May was unchanged from the previous month.

US stocks fall as industrial production stagnate and consumer sentiment declines

2013-06-15T09:36:00.000+08:00

US stocks fell on Friday amid some relatively disappointing economic reports. The S&P 500 declined 0.6 percent to end the week down 1.0 percent.

Data from the Federal Reserve showed that US industrial production was unchanged in May. However, manufacturing output managed to increase by 0.1 percent.

Consumer confidence declined in June, with the preliminary Thomson Reuters/University of Michigan index of consumer sentiment falling to 82.7 from 84.5 in May. The May reading, though, had been the highest since July 2007.

Producer prices rose 0.5 percent in May. This was not enough to suggest inflationary pressure, especially after the 0.7 percent decline in April.

However, inflation in the euro area accelerated to 1.4 percent in May from 1.2 percent in April.

Japanese stocks in bear market but US stocks jump on retail sales

2013-06-14T09:27:00.000+08:00

Asian stocks tumbled on Thursday. The MSCI Asia Pacific Index fell 2.2 percent, extending its drop since its 2013 high on May 20 to more than 10 percent.

As usual, Japan led the falls. The Nikkei 225 fell 6.4 percent. It is now more than 20 percent below its high last month, pushing it into bear market territory.

Jim Rogers thinks that Prime Minister Shinzo Abe has “ruined Japan”. He told Fusion MarketSite in an interview that with its “huge debt levels” and “horrible demographics”, Japan's attempt to force down its currency “is a disaster in the long term, and not guaranteed to work in the short term, either”.

Indeed, a report from Bloomberg suggests that Japanese consumer goods companies are “still planning for deflation”.

Felix Zulauf thinks that Japan may also ruin the rest of the world. He told Financial Sense that Japan “will be the root cause of the next big global crisis whenever it breaks out, probably some time over the next 12 to 18 months or so”.

However, Western markets were able to shrug off the decline in Japan on Thursday. The STOXX Europe 600 fell just 0.1 percent while in the US, the S&P 500 jumped 1.5 percent, its second biggest rise this year.

US stocks were boosted by better-than-expected retail sales data. US retail sales rose 0.6 percent in May, the biggest gain in three months.

Europe reports positive data but anxieities rising in emerging markets

2013-06-13T10:23:00.000+08:00

Economic data on Wednesday were relatively positive.

In Europe, industrial production increased 0.4 percent in April in the euro area and 0.3 percent in the European Union as a whole. It was the third consecutive monthly increase for both regions.

In the UK, the job market improved in May. The number of people claiming jobless benefit dropped by 8,600 last month, its seventh consecutive fall.

However, the World Bank announced on Wednesday that it had lowered it growth forecast for the global economy in 2013. It now sees the global economy growing 2.2 percent this year, down from a January estimate of 2.4 percent. The euro area in particular saw a sharp downward revision, with its economy now expected to contract by 0.6 percent compared with the prior estimate of a 0.1 percent contraction.

In financial markets, stocks continued to fall on Wednesday. The S&P 500 fell 0.8 percent, the STOXX Europe 600 fell 0.4 percent and the Nikkei 225 fell 0.2 percent.

US Treasuries also fell on Wednesday, pushing yields towards 14-month highs, after a US government sale of $21 billion of 10-year notes drew the weakest demand since August. The 10-year yield rose four basis points to 2.23 percent while the 30-year yield rose six basis points to 3.37 percent.

Bloomberg reports that anxieties are also surging in emerging markets.

The biggest drop in perceived creditworthiness for emerging-market borrowers since the credit crisis is deepening as speculation intensifies that central banks will scale back record stimulus.

Prices on the Markit CDX Emerging Markets index, a credit-default swaps benchmark for debtor nations from Latin America to the Middle East and Asia, have tumbled 4 cents in the two weeks through yesterday to 107 cents on the dollar. The decline is the biggest since the failure of Lehman Brothers Holdings Inc. reverberated across financial markets and caused the index to plunge 6.7 cents in the period ended Nov. 18, 2008.

Reuters adds that corporate bonds in emerging markets could be headed for a surge in defaults. The potential for financial turmoil in emerging markets could in turn give the Federal Reserve a “fresh headache” in deciding when to exit from quantitative easing.

BoJ holds off additional monetary stimulus, markets fall

2013-06-12T07:54:00.000+08:00

The Bank of Japan provided no additional monetary stimulus at its monetary policy meeting on Tuesday. “Japan's economy is picking up,” the BoJ said in a statement.

The yen rose following the decision while stock markets around the world fell. The Nikkei 225 fell 1.5 percent, the STOXX Europe 600 fell 1.2 percent and the S&P 500 fell 1.0 percent.

European government bonds fell on Tuesday. Spain and Italy’s 10-year yields rose six basis points to 4.65 percent and 4.35 percent respectively.

However, US Treasuries rose on Tuesday. The 30-year bond yield fell six basis points to 3.31 percent while the 10-year note yield fell three basis points to 2.19 percent.

On the economic data front, the UK provided some positive news. Industrial output rose 0.1 percent in April, the third consecutive monthly increase. A survey from the Royal Institution of Chartered Surveyors showed British house prices rose last month at their fastest pace since June 2010, while new buyer enquiries jumped to levels last seen in 2009.

Japan's first quarter growth revised up, OECD growth improving

2013-06-11T08:45:00.000+08:00

Japan's first quarter growth has been revised up. The Cabinet office reported on Monday that real GDP grew 1.0 percent in the first three months of the year, slightly better than the 0.9 percent growth initially reported.

In another positive sign for the Japanese economy, consumer confidence improved in May. Another Cabinet Office report on Monday showed that the consumer confidence index for general households rose to 45.7 in May from 44.5 in April.

However, the Cabinet Office's economy watchers survey was more downbeat. The index for current conditions fell to 55.7 in May from 56.5 in April. The index for future conditions fell to 56.2 from 57.8.

Nevertheless, the outlook for Japan and other major developed economies appear to be improving, according to a report from the Organisation for Economic Co-operation and Development on Monday. The OECD's composite leading indicator for the OECD as a whole rose to 100.6 in April from 100.5 in March. The US, euro area and Japan all saw increases in their CLIs.

Global economy accelerated in May but China slowed

2013-06-10T10:00:00.000+08:00

Reports on the global economy last week were generally positive although China's economy appears to have slowed.

Surveys of purchasing managers around the world showed that the global economy accelerated in May. The JPMorgan global all-industry output index rose to 53.1 last month from 51.9 in November.

JPMorgan Global All-Industry Indices
	April	May
Output	51.9	53.1
New orders	51.6	52.9
Input prices	52.1	51.7
Employment	50.4	50.4

China's economy may have slowed in May though. The HSBC China composite output index fell to 50.9 in May, the lowest level since last October, from 51.1 in April.

Reports over the weekend also indicated that China's economy slowed in May.

Exports rose just 1.0 percent in May from a year earlier, the smallest increase since July last year, while imports fell 0.3 percent.

However, the deterioration in the trade data may have been exaggerated by a government crackdown on practices by firms that disguised financial inflows as exports.

Still, industrial production did slow to 9.2 percent year-on-year growth in May from 9.3 percent in April. Fixed asset investment grew 20.4 percent over the first five months of the year compared to the same period last year, down from 20.6 percent in the first four months.

More positively, year-on-year retail sales growth improved to 12.9 percent in May from 12.8 percent in April even as inflation slowed to 2.1 percent from 2.4 percent.

Meanwhile, credit growth in China cooled in May. New local-currency lending fell to 667.4 billion yuan in last month from 792.9 billion yuan in April. Aggregate financing in May fell to 1.19 trillion yuan from 1.75 trillion yuan in April.

M2 money supply rose 15.8 percent in May from a year earlier compared to a 16.1 percent increase in April.

Stocks jump on positive economic data

2013-06-08T09:14:00.000+08:00

Stocks ended the week on a strong note. Both the S&P 500 and the STOXX Europe 600 rose 1.3 percent on Friday.

Earlier on Friday, Asian stocks had been little changed. The Nikkei 225 pared early losses to finish just 0.2 percent down.

Positive economic data throughout the day helped to buoy investor sentiment.

Japan started the day by reporting that its index of coincident economic indicators rose a preliminary 1.0 point in April. The index of leading economic indicators rose 1.3 points.

Later, Germany reported that its exports jumped 1.9 percent in April while its imports surged 2.3 percent.

This was followed by a report that showed that German industrial production jumped 1.8 percent in April, the third consecutive increase and the strongest gain since March last year.

Economic data from the UK on Friday were less positive. The trade deficit narrowed in April but only because a 3.8 percent decline in imports overwhelmed a 1.4 percent decline in exports.

The report that probably moved stocks the most on Friday, though, was the US employment report. That showed that employment in the US rose by 175,000 in May. That was better than the 163,000 median forecast from a Bloomberg survey and the 149,000 increase in April.

The unemployment rate nevertheless climbed to 7.6 percent from 7.5 percent as a result of a surge in the number of people entering the labour force.

ECB sees economy recovering at subdued pace

2013-06-07T09:47:00.000+08:00

The ECB held its main refinancing rate unchanged at 0.5 percent after its monetary policy meeting on Thursday.

ECB President Mario Draghi told a news conference after the meeting that “economic activity should stabilize and recover in the course of the year, albeit at a subdued pace”.

The ECB's growth forecast for the euro area this year was lowered to minus 0.6 percent from a previous estimate of minus 0.5 percent but the projection for next year was raised to 1.1 percent from 1 percent.

Also on Thursday, the Bank of England kept its bond-purchase target at 375 billion pounds and maintained its key rate at 0.5 percent.

In a sign that Europe's economy remains weak, a report on Thursday showed that German factory orders fell 2.3 percent in April, reversing the 2.3 percent increase in March.

European stocks fell on Thursday. The STOXX Europe 600 declined 1.2 percent, reversing early gains after the ECB failed to signal additional monetary stimulus for the near future.

However, US stocks managed to finish up on Thursday. The S&P 500 rose 0.9 percent to end a two-day losing streak.

Japanese stocks plunge again as Abe fails to provide details of growth strategy

2013-06-06T09:31:00.000+08:00

Japanese Prime Minister Shinzo Abe announced the objectives of his planned economic reforms on Wednesday. These include increasing incomes by 3 percent annually, allowing tax cuts and reducing red tape in special economic zones.

However, he did not provide details of how those objectives will be achieved.

Investors appear to be unimpressed with Abe's announcement. Japanese stocks plunged 3.8 percent on Wednesday, pulling the rest of Asia down.

Western markets were not spared. The S&P 500 fell 1.4 percent to a one-month low while the STOXX Europe 600 fell 1.5 percent to the lowest level in six weeks.

Economic data on Wednesday were mixed.

China's services sector continued to expand in May. The HSBC/Markit services PMI rose to 51.2 from 51.1 in April.

The eurozone services sector PMI also improved in May, rising to 47.2 from 47.0 in April. This helped push the composite index up to 47.7 in May from 46.9 in the prior month.

This still means that the eurozone economy probably continued to contract in the second quarter, after having contracted 0.2 percent in the first, especially since another report on Wednesday showed that eurozone retail sales fell 0.5 percent in April.

In contrast, the US economy continued to show signs of expansion based on reports on Wednesday.

The Federal Reserve's latest Beige Book described growth as “modest to moderate”, ADP reported that private employers added 135,000 jobs in May and the Institute for Supply Management reported that its services index edged up to 53.7 last month from 53.1 in April.

New orders for manufactured goods increased 1.0 percent in April, rebounding partially from March's 4.7 percent decline.

The UK economy also added to signs of recovery on Wednesday. The services PMI rose to 54.9 in May from 52.9 in April. The composite index rose to 54.3 in May, the highest since March 2012.

Japanese stocks rebound

2013-06-05T09:07:00.000+08:00

Japanese stocks rebounded on Tuesday. The Nikkei 225 rose 2.1 percent.

US stocks fell on Tuesday though. The S&P 500 declined 0.6 percent.

US stocks fell despite relatively good economic data on Tuesday. A report showed that US exports rose 1.2 percent in April to $187.4 billion, the second-highest level on record. Imports jumped 2.4 percent, resulting in a wider trade deficit.

There were also good economic data from the UK on Tuesday. The Markit/CIPS construction PMI increased to 50.8 in May from 49.4 in April. The British Retail Consortium reported that retail sales rose 3.4 percent in May compared with the same month last year.

Japanese stocks plunge again, global manufacturing gives mixed signals

2013-06-04T08:28:00.000+08:00

Japanese stocks plunged again on Monday, the Nikkei 225 losing 3.72 percent.

Again, the plunge was limited to Japan. Other Asian stock markets only fell mildly on Monday, as did European stocks. US stocks even managed to gain.

Economic data on Monday were mixed.

In China, the HSBC manufacturing PMI fell to 49.2 in May, below the 50 mark that divides expansion from contraction, from 50.4 in April. This was in contrast to the official manufacturing PMI, released on Saturday, which rose to 50.8 in May from 50.6 in April.

The official PMI for the non-manufacturing sector, released earlier on Monday, fell to 54.3 in May from 54.5 in April.

In the US, the Institute for Supply Management manufacturing PMI also fell below 50 in May. It fell to 49.0, the lowest level since June 2009, from 50.7 in April.

Contradicting this indicator, however, Markit's manufacturing PMI for the US rose to 52.3 in May from 52.1 in April.

Another report on Monday showed that US construction spending rose 0.4 percent in April.

Manufacturing improved in Europe in May. Markit's manufacturing PMI for the euro area rose to 48.3 in May from 46.7 in April. In the UK, the manufacturing PMI from Markit and the Chartered Institute of Purchasing and Supply rose to 51.3 from 50.2 in April.

Despite quantitative easing, markets may crack

2013-06-03T08:24:00.000+08:00

Markets continued to be volatile last week as investors remained concerned about rising interest rates.

Bill Fleckenstein thinks that “cracks have appeared” in bond markets, particularly Japan's.

The bottom line, I believe, is that Japanese authorities have “lost the bond market” (i.e., rates are much higher than authorities want, despite their best efforts) and the Fed has as well, but, perversely, Japan may be further along in the process, even though its powers that be started much later to really get serious about QE-powered monetary debasement.

If quantitative easing cannot keep bond prices up and yields down, then stocks could be negatively impacted too.

Indeed, John Hussman reminds us in his latest article that history shows that Fed easing does not guarantee a rising market.

One of the most strongly held beliefs of investors here is the notion that it is inappropriate to “Fight the Fed” – reflecting the view that Federal Reserve easing is sufficient to keep stocks not only elevated, but rising. What’s baffling about this is that the last two 50% market declines – both the 2001-2002 plunge and the 2008-2009 plunge – occurred in environments of aggressive, persistent Federal Reserve easing.

It’s certainly true that favorable monetary conditions are helpful for stocks, on average. But that average hides a lot of sins.

Markets fall amid mixed data

2013-06-01T07:40:00.000+08:00

Markets ended the week on a negative note with both stocks and bonds falling on Friday.

The S&P 500 fell 1.4 percent while the STOXX Euro 600 fell 0.9 percent. The US 10-year Treasury yield rose two basis points after rising as much as 10 basis points earlier.

Selling had begun in Asia, where most markets fell. In particular, stocks in India fell 2.3 percent after a report showed that the economy grew 5.0 percent in the financial year 2012/13, the slowest rate in a decade.

A notable exception to the falls in Asia was the Nikkei 225, which rebounded 1.4 percent amid mostly positive Japanese economic data on Friday.

Japanese industrial output rose 1.7 percent in April, its fifth consecutive increase. However, manufacturers surveyed by the government forecast production to be flat in May and fall 1.4 percent in June.

Also pointing to an improvement for Japanese manufacturing was a rise in the Markit/JMMA manufacturing PMI to 51.5 in May, the highest since August, from 51.1 in April.

Meanwhile, there was less deflation in Japan in April. Consumer prices excluding volatile fresh food fell 0.4 percent from a year earlier compared with a 0.5 percent fall in March.

Japan's jobless rate was unchanged at 4.1 percent in April.

However, growth in household spending slowed to 1.5 percent in April from 5.2 percent in March.

US data on Friday were also mostly positive.

Consumer spending fell 0.2 in April while income was flat. However, with consumer prices falling 0.3 percent, real consumer spending was up 0.1 percent.

And consumer sentiment appears to be improving. The Thomson Reuters/University of Michigan consumer sentiment index increased to 84.5 in May, the highest since July 2007, from 76.4 in April.

In another positive sign for the US economy, the MNI Chicago Report’s business barometer jumped to 58.7 in May, the highest since March 2012, from 49.0 in April.

There were more gloomy data from the euro area on Friday though.

The unemployment rate in the euro area rose to 12.2 percent in April from 12.1 percent in March. Inflation accelerated to 1.4 percent in May from 1.2 percent in April.

And the region's largest economy, Germany, saw retail sales fall 0.4 percent in April, its third monthly decline.

Nikkei plunges again

2013-05-31T08:45:00.000+08:00

Japanese stocks plunged again on Thursday but markets elsewhere mostly shrugged it off.

The Nikkei 225 fell 5.2 percent on Thursday. It has now fallen more than 10 percent from last week's high.

Elsewhere in Asia, though, Hong Kong’s Hang Seng Index and China’s Shanghai Composite Index both fell just 0.3 percent.

And US and European stocks rose. Both the S&P 500 and STOXX Europe 600 gained 0.4 percent on Thursday.

Economic data on Thursday were mixed.

The US economy grew at a 2.4 percent annualised rate in the first quarter, less than the previously-estimated 2.5 percent. Slower inventory accumulation contributed to the downward revision. In contrast, consumer spending increased at a revised 3.4 percent rate compared to the previous estimate of 3.2 percent.

Meanwhile, the US housing market continues to show signs of recovery. Pending home sales rose 0.3 percent in April after a 1.5 percent increase in March.

There were also signs of recovery in the euro area on Thursday. The European Commission reported that its economic sentiment indicator for the euro area rose to 89.4 in May from 88.6 in April.

US to lead OECD growth, rapid credit growth in China raises concerns, Brazil raises interest rate

2013-05-30T08:54:00.000+08:00

The OECD released its latest economic outlook on Wednesday. It sees world real GDP increasing by 3.1 percent this year and 4 percent in 2014. Across OECD countries, GDP is projected to increase by 1.2 percent this year and 2.3 percent in 2014.

The US economy is expected to lead growth among the major OECD economies, growing by 1.9 percent this year and 2.8 percent in 2014. The euro area economy is expected to contract by 0.6 percent this year and then rebound by 1.1 percent in 2014. Japan's economy is expected to grow by 1.6 percent in 2013 and 1.4 percent in 2014.

Meanwhile, China is expected by the International Monetary Fund to grow by 7¾ percent this year, with the pace of growth picking up moderately in the second half of the year.

However, the IMF also noted “important challenges” for China. It warned in particular that “the rapid growth in total social financing—a broad measure of credit—raises concerns about the quality of investment and its impact on repayment capacity”, and that “growth has become too dependent on the continued expansion of investment”.

Indeed, Bloomberg reports that the “economy is proving less responsive to credit”. Credit rose 58 percent to a record 6.16 trillion yuan in January-to-March but each $1 in credit firepower added the equivalent of just 17 cents in GDP, down from 29 cents last year and 83 cents in 2007.

It was another BRIC country, however, that tightened monetary policy on Wednesday. Brazil's central bank raised the benchmark Selic rate by 50 basis points to 8.00 percent.

Brazilian inflation had accelerated for nine straight months through March to 6.59 percent, above the top of the central bank’s target range of 2.5 percent to 6.5 percent, before slowing to 6.49 percent in April.

In contrast, the European Central Bank is more likely to ease than tighten, especially with the eurozone's largest economy, Germany, reporting an increase in unemployment in May amid moderate inflation on Wednesday. The number of people out of work rose 21,000 this month while inflation accelerated slightly to 1.5 percent.

Stocks rise with US consumer confidence and home prices

2013-05-29T09:31:00.000+08:00

Global stock markets went back to winning ways on Tuesday. The MSCI All-Country World Index rose 0.4 percent.

The Nikkei 225 in particular was able to finish with a gain of 1.2 percent after a volatile session.

In the US, stocks rose, with the Dow Jones Industrial Average closing at a record high of 15,409.39.

Positive US economic data on Tuesday boosted stocks.

Consumer confidence climbed to the highest level in more than five years in May, according to the Conference Board. Its consumer confidence index rose to 76.2 this month from 69.0 in April.

Also improving is the US housing market. The S&P/Case-Shiller index of home prices in 20 cities increased 10.9 percent in the year to March, the biggest 12-month gain since April 2006.

Markets mostly stable even as Japanese stocks fall again, Israel cuts rate for 2nd time this month

2013-05-28T10:31:00.000+08:00

Japanese stocks fell again on Monday. The Nikkei 225 fell by 3.2 percent while the Topix lost 3.4 percent.

However, the rest of Asia were little affected this time. Hong Kong stocks gained 0.30 percent on Monday while Chinese stocks rose 0.20 percent.

European stocks also rose on Monday. The STOXX Europe 600 gained 0.3 percent.

While the fall in global stocks on Thursday had been accompanied by weak manufacturing data from China, this time, there was more positive news. China reported on Monday that industrial companies' profits rose 9.3 percent in April from a year earlier, accelerating from a 5.3 percent increase in March.

So the turbulence in Japanese markets appears to reflect concerns over Japan itself rather than external economic factors. The yen climbed for a third day on Monday amid concern the Bank of Japan is struggling to control a jump in government bond yields.

Indeed, Raúl Ilargi Meijer at The Automatic Earth says that Japan's effort to induce inflation cannot work. Instead, Abenomics is a gamble that is “guaranteed” to be a “spectacular disaster”.

Meanwhile, though, the global central bank easing campaign continues. On Monday, the Bank of Israel cut interest rates for the second time this month. It reduced its benchmark interest rate by another quarter point to 1.25 percent, its lowest level since March 2010.

Stocks tumbled amid concerns of lower returns

2013-05-27T10:50:00.000+08:00

After rallying strongly over the previous few weeks, stock markets finally took a tumble last week amid signs that some investors are seeing low prospective returns from equities going forward.

The Standard & Poor's 500 Index fell 1.1 percent last week, the most in more than a month. The STOXX Europe 600 Index fell 1.7 percent, its first loss after four consecutive weekly gains. The MSCI Asia Pacific Index fell 2.7 percent, its biggest weekly decline since the week ended 13 July 2012.

The biggest losses occurred on Thursday.

Japan's Nikkei 225 kicked off the world-wide decline that day by plunging 7.3 percent, the most since the aftermath of the March 2011 earthquake and tsunami. The fall was mostly attributed to rising government bond yields. The Bank of Japan responded by injecting 2 trillion yen into the financial system.

Other markets also declined on Thursday. Elsewhere in Asia, the Hang Seng fell 2.5 percent. The STOXX Europe 600 lost 2.1 percent. The S&P 500 fell as much as 1.2 percent during its trading session but managed to recover to end just 0.3 percent lower for the day.

Earlier in the week, the S&P 500 had hit an all-time high of 1669.16 on Tuesday.

Indeed, the falls last week had ironically occurred just days after Goldman Sachs equity strategist David Kostin raised his forecast for the S&P 500 after its recent record-breaking run.

In a report released on Monday, Kostin said that the US stock market would climb a further 5 percent to 1750 by the end of the year and continue to advance in the next few years to hit 2100 in 2015.

“Our positive 2013 outlook for S&P 500 has played out much faster than we expected,” he wrote.

However, others think that the strong gains already made in markets may limit future returns.

Lim Chow Kiat, group chief investment officer of the Government of Singapore Investment Corporation, said at a conference in Singapore on Tuesday that lower returns on bonds and stocks in the next 10 years are a concern for investors.

Lim said that the average annual return on bond yields will be about 1.9 percent over the next decade while equities may offer a 1.6 percent median real return a year.

Lim said that “more and more investors are being crowded into searching for yields and taking risk” and this “leaves little on the table to cushion adverse outcomes”.

Lim's stance is similar to John Hussman of Hussman Funds.

In an article on Monday, Hussman described current market conditions as “overvalued, overbought, overbullish”. He estimated a prospective 10-year total annual nominal return on the S&P 500 of just 2.9 percent.

Furthermore, with bond yields rising, Hussman said that conditions are now similar to several major market peaks in the past.

“In general, the initial decline from these peaks tends to occur as a sharp 6-10% market drop over a handful of weeks, typically followed by a partial recovery attempt toward the prior peak,” he said.

Now, the S&P 500 has not seen a sharp drop recently. Its fall last week was mild.

However, the Nikkei 225's loss on Thursday did fall within the range Hussman mentioned as typical following a peak, but in one day rather than over several weeks. It reflects the kind of volatility that often marks the end of a bull market.

Of course, this does not necessarily mean that Japan's stock market has peaked. Back in 2007, China's Shanghai Composite Index fell 8.8 percent on 27 February. Other markets' reaction to that fall was greater than to the recent Japanese fall, with the STOXX Europe 600 falling 3.0 percent that day and the S&P 500 falling 3.5 percent.

However, Chinese stocks recovered strongly after that. By the time it peaked in October 2007, the Shanghai Composite was double its level at the start of 27 February.

Still, some investors are clearly concerned that at current levels, prospective long-term returns from equities have diminished. This could leave stocks vulnerable to further sell-offs.

Stocks stabilise after Thursday tumble

2013-05-25T09:50:00.000+08:00

After the big falls on Thursday, stocks were mostly stable on Friday.

The S&P 500 fell 0.1 percent, the STOXX Europe 600 fell 0.2 percent and the MSCI Asia Pacific Index fell 0.3 percent.

The Nikkei 225, which fell 7.3 percent on Thursday to trigger the turbulence in global markets, actually managed a 0.9 percent gain after a volatile trading session.

Economic data on Friday were mostly positive.

In the US, durable goods orders rose 3.3 percent in April after falling 5.9 percent in March.

The increase was driven by an 18.1 percent jump in aircraft orders. However, even excluding transportation equipment, orders increased 1.3 percent.

Orders for non-defense capital goods excluding aircraft rose 1.2 percent in April after a 0.9 percent increase the prior month.

There were also positive data from Germany.

German first quarter growth was confirmed at 0.1 percent. Declines in construction activity and investment held down growth.

However, growth may have improved since. The Ifo institute’s business climate index rose to 105.7 in May from 104.4 in April, the first increase in three months.

Also improving is German consumer confidence. The GfK consumer sentiment index will rise to 6.5 in June, the highest since September 2007, from 6.2 in May.

Stocks fall as Nikkei plunges 7 percent

2013-05-24T09:11:00.000+08:00

The big market news on Thursday was the plunge in Japanese stocks. The Nikkei 225 dived 7.3 percent, the most since the aftermath of the March 2011 earthquake and tsunami.

Other Asian markets fell as well, with the Hang Seng in particular falling 2.5 percent.

European stocks were also hit hard, the STOXX Europe 600 losing 2.1 percent on Thursday.

However, the selling pressure on Thursday dissipated during the US trading session. The S&P 500 fell just 0.3 percent after having fallen as much as 1.2 percent earlier in the day.

The fall in Japanese stocks was mostly attributed to rising government bond yields. The Bank of Japan responded by announcing on Thursday that it was injecting 2 trillion yen into the financial system to stem volatility.

Not helping markets was a weak manufacturing report from China on Thursday. HSBC's preliminary manufacturing PMI for China fell to 49.6 in May from 50.4 in April, putting it back into contraction territory.

Europe's economy also showed further contraction on Thursday, although there were signs of improvement. Markit's flash composite index based on purchasing managers surveys rose to 47.7 in May from 46.9 in April. The manufacturing index rose to 47.8 from 46.7 while the services index rose to 47.5 from 47.0.

In another sign of improvement in the eurozone economy, the European Commission reported on Thursday that its consumer confidence index for the region rose to -21.9 in May from -22.3 in April.

Elsewhere in Europe, the UK confirmed that it grew 0.3 percent in the first quarter. However, growth was mostly due to a rise in inventories, raising doubts about its sustainability.

At least US growth looks likely to have been sustained, based on data on Thursday. Initial claims for state unemployment benefits fell 23,000 to 340,000 last week. New single-family home sales rose 2.3 percent in April. Markit's preliminary manufacturing PMI for May continued to show expansion despite falling to 51.9 from 52.1 in April.

Bernanke wary of premature tightening, stocks fall anyway

2013-05-23T09:03:00.000+08:00

Federal Reserve Chairman Ben Bernanke gave no clear indication of when tightening of monetary policy is likely to begin in his testimony to the US Congress on Wednesday. From Reuters:

The Federal Reserve's monetary stimulus is helping the economy recover but the central bank needs to see further signs of traction before taking its foot off the gas pedal, Fed Chairman Ben Bernanke said on Wednesday...

"If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases," he said...

"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further," Bernanke said.

The lack of assurance of continued monetary easing, however, was enough to send US stocks down on Wednesday. The S&P 500 fell 0.8 percent, pulling back from the record high the previous day.

Ten-year Treasury yields rose 11 basis points to 2.04 percent, topping 2 percent for the first time since March, and the US dollar rose 0.5 percent to near its strongest level since 2010.

A sustained recovery in the housing market will probably increase the probability of tightening. The National Association of Realtors reported on Wednesday that existing home sales rose 0.6 percent in April to an annual rate of 4.97 million units, the highest since November 2009. The inventory of homes on the market rose 11.9 percent but remains at just 5.2 months' worth of sales.

Elsewhere, there were mixed economic data from the UK on Wednesday. Retail sales fell 1.3 percent in April but factory orders improved in May, with the Confederation of British Industry's total order book balance improving to -20 this month from -25 in April.

Japan's trade deficit rises, BoJ holds off further easing

2013-05-22T12:45:00.000+08:00

Japan's trade deficit worsened in April. A report on Wednesday showed that the trade deficit rose 69.7 percent from a year ago to 879.9 billion yen.

While exports rose 3.8 percent in April from a year ago, imports jumped 9.4 percent, partly as a result of a weaker yen.

The yen has been weakening ever since the Japanese government and the Bank of Japan made it clear that they will be trying to stimulate the economy.

However, the BoJ announced no new easing measure after its monetary policy meeting on Wednesday.

Meanwhile, the Bank of England could yet provide further monetary stimulus after a report on Tuesday showed that inflation fell in the UK in April. Inflation eased to 2.4 percent last month from 2.8 percent in March, with almost half of that drop coming from weaker petrol and diesel costs.

Also on Tuesday, the Federal Reserve provided no indication that it is about to wind down its own monetary stimulus. St Louis Fed President James Bullard told reporters after delivering a lecture in Frankfurt that he “can't envision a good case to be made for tapering unless the inflation situation turns around”. New York Fed President William Dudley told the Japan Society in New York on Tuesday that he could not be sure whether policymakers would next reduce or increase the amount of purchases due to the “uncertain” economic outlook.

The absence of any explicit talk of a withdrawal of monetary stimulus helped push the S&P 500 to another all-time high on Tuesday.