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US
Renewed concerns over the impact of the credit crisis acted to erase all of last week’s gains in just the first part of the US trading week, before a re-think later on Thursday gave rise to the biggest one day rally since the start of May.
US investors received a rude reminder that financial stocks still face considerable hurdles on Monday after ratings agency Standard & Poor’s cut ratings for several of the largest US financials. The news acted to send the sector well and truly into the red, and the rest of the market soon followed suit.
The mood was further soured following a report from the Institute of Supply management which revealed that manufacturing activity contracted for a 4th consecutive month. Meanwhile the Commerce Department reinforced the negative outlook for housing by announcing that construction spending dropped in April – the 6th monthly decline in 7 months.
Towards the end of the week though, traders gained confidence on the back of a better than expected sales report from Walmart, which provided tentative evidence that consumers are still spending despite the difficult conditions.
The technology sector continued to outperform its industrial peers with the Nasdaq returning to positive territory for the year. Unlike many other sectors, the tech shares have benefited from a weaker US dollar, which has helped boost their international sales. Furthermore, technology shares are less reliant on oil and as such have seen a lesser impact from rising prices.
Asia
Japanese stocks held up much better than those in other foreign markets, in fact the Nikkei carved out some fresh 5 month highs throughout the week. A strengthening Yen put exporters under pressure on Tuesday, while a mid-week slump in oil prices eroded gains for the energy sector, but the US rally on Thursday put Japanese investors in a buying mood by week’s end which helped to off-set these factors.
Meanwhile the Australian market largely followed the lead set by US markets throughout the week. The S&P ASX 200 declined steadily to a 7 week low on Thursday, however a good start to trade on Friday could see some of these losses recouped.
Interest rates were also in focus in Australia, with the Reserve Bank deciding to keep the official rate steady at 7.25%, the highest rate in 12 years. The central bank’s statement, which accompanies the rate decision, was little changed from the previous month. It continues to see inflation as a real concern, and while the recent rate hikes appear to be doing their job, the RBA signaled that it would be ready to again lift rates if demand refuses to moderate.
As with the US and Europe, Australian construction activity appears to have slowed. Data revealed a 3rd consecutive contraction in May, as high interest rates and slumping customer confidence drove activity to its lowest in over two years.
Europe
Lenders were also under pressure across the Atlantic following a very poor result and outlook from Bradford & Bingley. The news showed that the UK housing sector is also under considerable pressure, and is likely to further impact related stocks.
In the UK data revealed a contraction in the services sector and as with the US situation, we also saw construction levels decline. In fact construction activity hit its lowest levels in 11 years.
English borrowers were happy to see the Bank of England leave rates steady on Thursday as expected, and while the European Central Bank did the same, President Jean-Claude Trichet indicated that rate cuts were off the table, and in fact, a rate hike was possible as soon as next month.
In London the FTSE was hovering near a 6 week low on Thursday while the German and French markets saw all of the previous week’s gains evaporate.
Summary
This week acted to remind investors that economies around the world still face considerable challenges arising from the credit crisis and a slowdown in the housing market. And central banks continue to face the challenge of controlling inflation without adding undue pressure to the wider economy.
Nonetheless, there are still some sectors holding up rather well. In particular technology shares in the US, and resource stocks in Australia. While ongoing strength in the price of oil has helped sustain energy companies.
Happy Investing!
Andrew Page
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