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Data light, news heavy
International Perspective - June 23, 2017
By Anne D. Picker, Chief Economist


Global Markets

It was a quiet week for economic data but there was plenty of other news for investors to absorb. Once again geopolitical events dominated news. In Europe, Brexit negotiations began on Monday just a day after French President Emmanuel Macron's party was elected a majority in the country's parliament. In Asia, markets waited to find out whether the three year wait for China's A shares to be included in the MSCI Emerging Index was finally over. And today, June 23 is the first anniversary of the British vote, aka Brexit, to leave the European Union.


What does China's addition to the MSCI emerging index mean?

In Asia, key event was the addition of mainland Chinese A shares to the MSCI Emerging Index after a three year wait. MSCI's decision Tuesday to add China A-shares — stocks denominated in yuan and listed in either Shanghai or Shenzhen — is expected to boost demand for Chinese stocks by billions of dollars over time. The inclusion is another symbolic step in the internationalization of Chinese capital markets and is primarily driven by efforts to improve access and increase foreign participation. High quality blue chip A share companies equity valuations are likely to be supported by this decision. The inclusion is expected to take effect in two stages roughly a year from now.


The move is a step forward for Beijing as it attempts to open up its financial markets and attract foreign capital. China's inclusion had been rejected for the past three years amid worries about regulation and accessibility for global investors. The shares of 222 Chinese companies, known as A-shares, will be added to the Emerging Markets Index, though they will make up barely 0.7 percent of the index's value.


Many Chinese companies already have a dual listing, meaning they appear on both the Shanghai and Hong Kong markets. The Bank of China is one example. And some Chinese firms are listed on foreign markets. US-traded Chinese businesses include Alibaba. And since late last year, foreign investors in Hong Kong have been able to trade shares in about 900 firms in companies on the Shenzhen Stock Exchange and vice-versa following the official launch of the Shenzhen-Hong Kong trading link. That link followed the launch of the Shanghai-Hong Kong Stock Connect in November 2014 which allowed international investors to trade in hundreds of Shanghai-listed A-shares as well as Hong Kong stocks.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 June 16 June 23 Week 2017
Australia All Ordinaries 5719.1 5808.0 5754.6 -0.9% 0.6%
Japan Nikkei 225 19114.4 19943.3 20132.7 0.9% 5.3%
Topix 1518.61 1596.04 1611.3 1.0% 6.1%
Hong Kong Hang Seng 22000.6 25626.5 25670.1 0.2% 16.7%
S. Korea Kospi 2026.5 2361.8 2378.6 0.7% 17.4%
Singapore STI 2880.8 3231.4 3209.5 -0.7% 11.4%
China Shanghai Composite 3103.6 3123.2 3157.9 1.1% 1.7%
India Sensex 30 26626.5 31056.4 31138.2 0.3% 16.9%
Indonesia Jakarta Composite 5296.7 5723.6 5829.7 1.9% 10.1%
Malaysia KLCI 1641.7 1791.3 1779.5 -0.7% 8.4%
Philippines PSEi 6840.6 7882.2 7814.2 -0.9% 14.2%
Taiwan Taiex 9253.5 10156.7 10377.7 2.2% 12.1%
Thailand SET 1542.9 1576.6 1582.4 0.4% 2.6%
UK FTSE 100 7142.8 7463.5 7424.1 -0.5% 3.9%
France CAC 4862.3 5263.3 5266.1 0.1% 8.3%
Germany XETRA DAX 11481.1 12752.7 12733.4 -0.2% 10.9%
Italy FTSE MIB 19234.6 20940.7 20833.9 -0.5% 8.3%
Spain IBEX 35 9352.1 10759.4 10630.8 -1.2% 13.7%
Sweden OMX Stockholm 30 1517.2 1635.9 1645.4 0.6% 8.4%
Switzerland SMI 8219.9 8963.3 9032.9 0.8% 9.9%
North America
United States Dow 19762.6 21384.28 21394.8 0.0% 8.3%
NASDAQ 5383.1 6151.8 6265.3 1.8% 16.4%
S&P 500 2238.8 2433.2 2438.3 0.2% 8.9%
Canada S&P/TSX Comp. 15287.6 15192.5 15319.6 0.8% 0.2%
Mexico Bolsa 45642.9 49189.8 48980.3 -0.4% 7.3%


Europe and the UK

European markets were mixed for the week. The FTSE retreated 0.5 percent and the DAX lost 0.2 percent. However, the CAC managed to edge up 0.1 percent while the SMI added 0.8 percent. The FTSE declined four of five days while the DAX, CAC and SMI were down three of five days. Equities were buffeted by sliding crude prices. Nerves regarding the beginning of Brexit negotiations made investors somewhat risk averse. On Friday, investors were disappointed after the euro area private sector grew at the slowest pace in five months in June. Traders were also keeping a close eye on developments at the weekend EU Summit in Brussels.


UK shares were hit hard in the immediate aftermath of last June's Brexit vote, but recovered speedily after the drop in the pound sterling boosted firms that earn revenue in foreign currencies. While the FTSE ended 2016 up more than 14 percent, fresh political concerns stemming from a hung parliament in this month's election and uncertainty around Brexit negotiations have slowed stock appreciation. Despite hitting a series of record highs along the way, British blue chips are up just 3.9 percent year to date with the FTSE the weakest major European market in terms of performance. Firms in internationally exposed sectors such as miners, tobacco companies and consumer goods have performed well, though renewed weakness in the price of oil has weighed on the index's energy constituents.


According to ECB President Mario Draghi, the euro area economy is growing and unemployment is falling, but underlying inflation is not rising because wage growth has not yet picked up. In a presentation on the economy at a summit of EU leaders on Friday, Draghi said the slow price growth meant that the bank's accommodative policy would stay as it is for now. Draghi said that sentiment was improving because one of the major uncertainties weighing down confidence last year was dispelled as new hope emerges about the future of the European Union, despite Britain's decision to leave. Draghi quoted U.S. economist Larry Summers who said that "confidence is the cheapest stimulus". Draghi also told EU leaders that economic growth and an improving business climate provided a unique opportunity for politicians to push through structural reforms and start a cycle of enhanced trust and economic convergence.


Asia Pacific

Most Asian equities were up for the week after the U.S. dollar steadied against the yen and crude oil prices lifted from 10 month lows. The focus was on China's equities given tight liquidity conditions. Investors shrugged off news that the country's banking regulator had ordered lenders to check exposure to rapidly growing firms. But stocks rose on Friday to end the week higher, on signs that liquidity was easing. Sentiment was lifted by MSCI's decision to include mainland shares in its emerging index. The inclusion process will begin in June 2018. Analysts expect the inclusion to be a significant boost to China's stock market in the long run and pave the way for global capital inflows into China's A-shares. The Shanghai Composite was up 1.1 percent on the week while the Hang Seng edged up just 0.2 percent.


Both the Nikkei and Topix added 1.0 percent on the week. Both were up three of five days as the yen softened against the U.S. dollar, bolstering exporters. After dropping earlier in the week, steadier crude prices in Asia helped as investors fretted whether OPEC-led output cuts would be able to rein in a three-year glut. A merchandise trade deficit in May surprised analysts. But the ministry of finance said that it was not unusual for May to record a deficit given that factories close for the Golden Week holidays and therefore do not ship. According to Bank of Japan Deputy Governor Kikuo Iwata, there is still a long way to go before achieving the inflation target of 2 percent. Further, risks have continued to be skewed to the downside, particularly those regarding developments in overseas economies and Japan's inflation expectations.


Reserve Bank of New Zealand

As widely expected, the Reserve Bank of New Zealand left its overnight cash rate (OCR), unchanged at 1.75 percent where it has been since November 2016. The post meeting statement also repeated their assurance that policy will be kept accommodative "for a considerable period", suggesting that recent stability in the cash rate is set to continue going forward.


Its statement noted global economic growth had increased and become more broad-based. Although domestic growth had been weaker than expected at the start of the year, the RBNZ expressed confidence about the outlook, citing accommodative monetary policy, strong population growth, high terms of trade and recently announced fiscal measures as factors that would support economic activity. The statement again noted that a weaker currency would help "rebalance" the growth outlook towards the tradable sector.



The U.S. dollar advanced against most of its major counterparts including the yen, euro, pound sterling and the Canadian and Australian dollar last week. However, it tumbled against the Swiss franc. The dollar retreated Friday to a four day low as investors looked to next week's U.S. inflation data to perhaps provide some guidance to future Federal Reserve policies after its rate increase at its last FOMC meeting. The dollar peaked at a one month high earlier in the week after the Fed increased its fed funds interest rate and FedSpeak alluded to further tightening later this year.


Exactly a year after the Brexit vote, sterling was around a third of a percent stronger on the day with some investors betting the Bank of England could raise interest rates as soon as August. In the year since the vote, the pound has fallen more than 15 percent against the U.S. dollar and almost 13 percent against the euro. Sterling weakened on Tuesday after Bank of England Governor Mark Carney said now is not the time to raise interest rates, dashing some investors' expectations the Bank had shifted in that direction.


The Canadian dollar rallied against its U.S. counterpart after retail sales data grew by much more than expected in April and helped to bolster optimism over the economy and strengthened the case for the Bank of Canada to raise interest rates. However, softening consumer prices in May moved inflation further away from the BoC's target.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 June 16 June 23 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.763 0.757 -0.7% 4.9%
New Zealand NZ$ 0.6948 0.726 0.728 0.4% 4.8%
Canada C$ 0.7443 0.757 0.754 -0.4% 1.3%
Eurozone euro (€) 1.0534 1.120 1.120 0.0% 6.3%
UK pound sterling (£) 1.2333 1.278 1.273 -0.4% 3.2%
Currency per U.S. $
China yuan 6.9450 6.811 6.837 -0.4% 1.6%
Hong Kong HK$* 7.7533 7.801 7.800 0.0% -0.6%
India rupee 67.9238 64.428 64.519 -0.1% 5.3%
Japan yen 116.8100 110.840 111.260 -0.4% 5.0%
Malaysia ringgit 4.4862 4.276 4.289 -0.3% 4.6%
Singapore Singapore $ 1.4465 1.383 1.387 -0.3% 4.3%
South Korea won 1205.8300 1134.180 1138.850 -0.4% 5.9%
Taiwan Taiwan $ 32.3260 30.349 30.362 0.0% 6.5%
Thailand baht 35.8100 33.940 33.939 0.0% 5.5%
Switzerland Swiss franc 1.0174 0.9729 0.9693 0.4% 5.0%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


June overall growth as indicated by the flash composite output index shed more than a point to 55.7, its lowest mark in five months. The deceleration in activity was wholly attributable to services where the flash PMI declined 1.6 points to 54.7 —its worst reading since the start of the year. By contrast, the flash manufacturing PMI gained 0.3 points and, at 57.3 and claimed a 74-month high. Both sectors recorded further solid gains in new orders, notably manufacturing which recorded the fastest growth since February 2011. Backlogs similarly headed higher, again led by manufacturing where the rate of accumulation touched an 86-month peak. There was good news too on employment with June's advance much in line with May's near-10-year high. However, thanks to a fall in services, overall business confidence slipped to a 5-month trough. However, with sentiment in manufacturing climbing to a new record, the aggregate June print was still historically firm. Inflation news was relatively soft with both input and factory gate inflation falling from May. Regionally, flash composite output was down in both France (55.3 after 56.9) and Germany (56.1 after 57.4). Combined, the other member states also lost some momentum. The U.S. has been added to the graph for comparison.





May's merchandise trade balance shifted to a deficit of ¥203.4 billion from a surplus of ¥481.1 billion in April. Exports increased 14.9 percent on the year, up from 7.5 percent in April. Imports gained 17.8 percent on the year, up from 15.2 percent the month before. Exports to China were up 23.9 percent on the year after a gain of 14.8 percent for the seventh consecutive increase. Exports to Korea, Hong Kong and ASEAN countries also recorded stronger annual increases but were offset by a modest decline in exports to Taiwan on the year. Demand from outside the region also picked up appreciably, with exports to the United States up 11.6 percent on the year after 2.6 percent in April. Exports to the European Union picked up from 2.2 percent to 19.8 percent. Import growth was largely driven by imports of raw materials, up 25.7 percent on the year in May after an increase of 6.5 percent in April, with iron ore imports accounting for much of this increase. Fuel imports rose 41.5 percent, but moderated from the 58.7 percent increase recorded in April. Manufactured goods, machinery & chemicals offset weaker growth in electrical machinery and transport equipment.




April retail sales jumped a greater than expected monthly 0.8 percent after increasing a revised 0.5 percent in March. On the year, sales were up 7.0 percent. Sales were up in 9 of 11 subsectors, representing 71 percent of total retail trade. Excluding sales at motor vehicle and parts dealers, retail sales climbed 1.5 percent. However, after removing the effects of price changes, retail sales in volume terms were up 0.3 percent. General merchandise stores recorded the largest increase in Canadian dollar terms. Building material & garden equipment and supplies dealers increased for the eighth consecutive month. Thanks to higher prices, gasoline stations were up for the seventh time in nine months. Clothing and clothing accessories stores rebounded after declining in March. All store types within food & beverage reported higher sales. However, after a 2.3 percent increase in March, sales at motor vehicle & parts dealers decreased 1.0 percent in April. The decrease stemmed from lower sales at new and used car dealers (down 1.7 percent). Sales at other motor vehicle dealers (8.2 percent) rose for the first time in four months.


June consumer prices were weaker than expected. On the month, the unadjusted CPI was up 0.1 percent (0.2 percent was expected) and 1.3 percent (1.5 percent was expected). Less food and energy, the CPI was up a monthly 0.2 percent and 1.4 percent on the year. Prices were up in six of the eight major components on the year with the shelter and transportation contributing the most to the annual increase. The clothing & footwear and food declined on an annual basis. Shelter costs grew 1.9 percent in May on the year after increasing 2.2 percent in April. The transportation index rose 2.2 percent on the year compared with 4.2 percent in April. Gasoline prices contributed the most to this deceleration. Passenger vehicles edged up 0.2 percent on the year marking its smallest annual increase since February 2015. At the same time, the price of air transportation rose more in the 12-month period to May than in April.


Bottom line

With little new economic data, markets focused on the beginning of Brexit talks in Europe. In Asia, the question was whether China would finally be included in the MSCI Emerging Index after three years — it is.


What was lacking in new data this week will be more than made up for in the traditionally heavy last week of the month, and in this case of the second quarter. Japan as usual releases its key monthly data, this time for May. Key inflation data for the euro area will be reported. Undoubtedly it will get heightened attention given the weakness of recent inflation reports elsewhere. The ECB pays close attention to surveys and this time the June EC consumer and business sentiment surveys will be released. And in Germany, the Ifo survey is always monitored closely for German sentiment. Canada posts its monthly GDP for April. With the economy picking up and talk of a possible rate increase by the Bank of Canada, investors will be looking to see if the good news extends to the start of the second quarter.


Looking Ahead: June 26 through June 30, 2017

The following indicators will be released this week...
June 25 Germany Ifo Business Survey (June)
June 28 Eurozone M3 Money Supply (May)
June 29 Eurozone EC Consumer & Business Sentiment (June)
June 30 Eurozone Harmonized Index of Consumer Prices (June flash)
Germany Unemployment (June)
Retail Sales (May)
France Consumption of Manufactured Goods (May)
Asia Pacific
June 29 Japan Retail Sales (May)
June 30 Japan Household Spending (May)
Consumer Price Index (May)
Unemployment (May)
Industrial Production (May)
China CFLP Manufacturing PMI (June)
June 30 Canada Monthly GDP (April)
Industrial Product Price Index (May)


Anne D Picker is the author of International Economic Indicators and Central Banks.


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