Equities Weekly: North Korea Tensions Send Japan Stocks Tumbling [7 July 2017] July 12, 2017
Equities Weekly: North Korea Tensions Send Japan Stocks Tumbling [7 July 2017]
Author : iFAST Research Team

Global equity markets edged lower over the week ended 7 July 2017, with the MSCI AC World Index slid by -0.24%. The S&P 500 Index rose by a tepid 0.07% while upbeat non-farm payrolls revealed a further strengthening of the US labour market. Meanwhile, the Stoxx 600 Index posted a 0.17% gain, while the Nikkei 225 Index took a tumble by -2.00% as geopolitical tensions in the region ratcheted up by a notch. Asian and emerging markets closed lower over the week, with the MSCI Asia ex-Japan Index and the MSCI Emerging Markets Index falling -0.84% and -0.82% respectively.

Over in East Asia, Hong Kong, Taiwan and South Korea saw their respective equity indices incur losses of -1.70%, -1.55% and -1.40% respectively. China's HSML100 Index recorded a -1.21% decline, while its onshore equity markets had mixed performances, as the Shanghai Composite Index gained 0.37%, while the CSI 300 Index receded -0.72% over the week. Southeast Asia markets ended the week in red, Malaysia's KLCI Index and Singapore's Straits Times Index posted losses of -0.21% and -0.31% respectively, together with Indonesia's JCI Index and Thailand's SET Index, which fallen by -0.71% and -0.88% respectively. On the other hand, India's SENSEX Index gained 1.40%, while Russia's RTSI$ Index and Brazil's Bovespa Index fell -0.57% and -0.20% respectively. Crude oil prices slid a further -3.55% to end the week at USD 44.23 per barrel.

Economic Calendar:

The US will be releasing an array of economic data this week, including June's inflation, advance retail sales and industrial production data. Japan and the Eurozone will also be reporting their respective industrial production data. China's trade and inflation data are also due this week. Closer to home, investors will be keeping a close eye on Singapore's 2Q 2017 advance GDP growth for clues on the state of the economy. May's retail sales will also be closely scrutinised after showing signs of a recovery in April.

[All returns in MYR terms unless otherwise stated]

Investors may refer to Market Valuation As Of 7 July 2017 for more details.

US: June's ISM Manufacturing Trounces Consensus Expectations, Labour Market Springs Back To Life

June's reading of the Institute for Supply Management (ISM) manufacturing PMI came in at 57.8 (the highest since August 2014), up from May's 54.9 and trouncing consensus estimates of a 55.3 reading. A breakdown of the data's various components revealed that the increase was broad-based, with production, new orders, new export orders and employment all seeing a rise in readings in June. Inventories dipped slightly, while backlogs rose. Additionally, the ISM Prices Paid Index's reading came in at 55.0 (levels not seen since November last year), falling from a prior 60.5 reading and coming in lower than the consensus forecast of 58.5. Manufacturing momentum in the US remains supported with improving global demand and better momentum from emerging markets.

The US labour market rebounded following a disappointing May, setting the stage for one additional rate hike this year. The economy added 222,000 jobs in June 2017, a sharp recovery from the 152,000 jobs created in the previous month and surpassed the consensus estimate of 178,000. The largest area of job gains came from healthcare, which added 37,000 jobs, while hiring in the professional and business services sector was up by 35,000. While jobs growth was strong, the unemployment rate edged up to 4.4% from May's 4.3%. Wage pressures also remained scant as average hourly earnings grew 2.5% in annualised terms, slightly below the 2.6% consensus estimate. Market participants remain divided on the possibility of an additional rate hike this year, with futures prices currently indicating a 51.9% probability of a rate increase by December (as of 7 July 2017).

Japan: Economic Recovery Gaining Pace As Tankan Survey Reveals Improving Business Confidence

Over in East Asia, Japan's economic recovery is gaining momentum, with business confidence amongst large Japanese manufacturers at its highest level in more than three years. The Tankan Index of confidence among big manufacturers was at 17 in 2Q 2017, up from the previous quarter's 12, besting the consensus estimate of 15. The headline index reading of 23 for major non-manufacturers was also a three-point improvement from the previous quarter, with the latest data in line with market expectations. Meanwhile, the survey also found that large Japanese companies intend to increase capital expenditure in the current fiscal year by a higher-than-expected 8.0%. The Tankan survey results reaffirmed the BOJ's optimism on the economy, which is expected to grow by 1.6% for the 2017-18 fiscal year.

Brazil: Manufacturing PMI Above Neutral Reading For Third Consecutive Month, Inflation Downtrend Paves Way For Central Bank To Further Cut Rates

In South America, Brazil's June Markit Manufacturing PMI came in at a 50.5 reading, down from the prior month's 52.0 reading. The figure however, has continued to come in above the 50.0 neutral reading for the third consecutive month, signalling continued manufacturing expansion and a strong quarter for the country's manufacturing sector. The demand for manufacturing goods had continued to improve in June, though the rate of increase for both new orders and output had eased from May's high. Manufacturing costs, however, had increased in June, primarily due to the continued weakening of the BRL against the USD. June's purchasing price inflation had also accelerated from May's 16-month low, contributing to the upward pressures on cost. While political stability in the economy has weakened, multiple economic indicators have continued to point towards a gradual turnaround and it remains likely that Brazil's economy would see positive growth for the whole of 2017.

Additionally, inflation remains a bright spot in the economy, with the benchmark IPCA Consumer Price Index coming in at 3.0% year-on-year in June 2017, down from May's 3.6% and was slightly below the consensus estimate of 3.05%. The deceleration in June's inflation was mainly due to a moderation in the prices of housing and food, which registered price increases of 2.62% and 1.13% year-on-year, as compared to the previous month's 4.07% and 2.36% respectively. Since hitting 10.71% in January last year, Brazil's inflation has trended downward and is currently at its lowest in more than a decade, paving the way for the central bank to further slash interest rates this year as policymakers look to help the economy emerge from its worst recession.

Singapore: Manufacturing Activity Expands For Tenth Straight Month

Singapore's manufacturing sector continued its expansion for the tenth consecutive month, with June's manufacturing PMI coming in at 50.9, up slightly from the prior month's 50.8 reading and surpassing the 50.6 consensus estimate. The faster pace of growth came on the back of improvements in new orders, new exports, inventory, and factory output. While the PMI for the electronics sector dipped -0.3 points to a 52.1 reading, it was the eleventh consecutive month of expansion as global demand for semiconductors remained upbeat. Meanwhile, the Nikkei Singapore PMI, which includes the manufacturing, services, construction and retail sectors to better represent the structure of Singapore's economy, slowed from 51.4 to 50.7.

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