Weekly Market Highlights June (3)

Source: Amp Capital (here for full market update) & iCapital biz (subscription required)

United States
Economic data continues to provide evidence growth is picking up. Retail sales up strongly in May, consumer confidence up, small business optimism up, jobless claims remaining low, job openings up strongly in April even

though the hiring and quits rate was down fractionally and mortgage applications to purchase up strongly. The Federal Reserve Bank (the Fed) will be the big focus in the week ahead. Recent improvement in US economic

indicators have come too late, and the labour market improvement is not yet strong enough, to bring on a rate hike at Wednesday's Fed meeting, but the Fed is likely to signal that it remains on track to hike rates later this year (my bets on September) providing economic data continues to improve giving confidence that inflation will rise back to target (I think it's a 2% target).

Eurozone

Greece nearing the end game. Ball is now in Greece's court to accept offer at end of June or face dire consequences for not avoiding a default. The June 18 Eurozone finance ministers’ meeting is the next deadline to watch. The pressure on Greece is now immense as recent turmoil has helped plunge it back into recession.  So Greece is likely to remain a source of volatility. But even if Greece does end up leaving the Euro, the threat of contagion to other peripheral countries is low compared to the 2010-12 period as they are now in better shape and the ECB is now providing stronger support.

Asia

Chinese shares’ inclusion in MSCI benchmark indices on hold but inevitable. Foreign investors still bit convoluted, will need time to make foreign access easier and when that occurs global demand for Chinese shares will be boosted. This will in turn inject a more significant and much needed foreign institutional element into the Chinese share market helping to balance out speculative retail investors and making for a more stable market.

Chinese economic data for May provided signs of a stabilization in growth after the soft patch early this year. Imports and fixed asset investment were weaker than expected, but growth in industrial production, consumer spending, exports, property sales and money supply improved and credit came in stronger than expected. At the same time though inflation was weaker than expected and producer prices are continuing to fall highlighting that monetary policy still remains way too tight, so further PBOC easing is still likely. 

Japanese economic data was good with March quarter GDP growth revised up to a strong 1% quarter on quarter driven by strong investment, strong machinery orders in April indicating that the strength in investment may be continuing and further falls in bankruptcies and Tokyo office vacancy rates.

Over in Malaysia, the stock market has of late been hit by heavy foreign funds selling. With US economic growth expected to make up for seasonally weak Q1, more foreign funds selling is to be expected. I've said before when putting my comment on Kenanga Growth Fund (change from BUY to HOLD rating) a week ago because there is lack of any catalyst in the Malaysian market.

Can U Answer Three Simple Finance Questions?

Roughly half of the world can’t answer these three questions correctly:


1.  Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?
A) more than $102
B) exactly $102
C) less than $102

2.  Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy
A) more than
B) exactly the same as
C) less than today with the money in this account?

3.  Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
A) true
B) false


Even worse – 70% of Americans & 73% of Japanese can’t answer all three questions correctly. What about Malaysians? I did a short poll today (60% of folks couldn't get all correct answers so the findings are not far off) asking friends from different working backgrounds and various age profile (21 to 60). I asked 20 people.

These findings were recently published by two economists, Annamaria Lusardi and Olivia Mitchell, and the results reveal startling levels of financial illiteracy across the world. Their works can be found @ Most People in the World Have No Idea How to Manage Their Money. (the answer is in this link)

This is why most people that we know have so many persistent financial problems. We don’t even come close to understanding the construct of money or how it should be used. It is really unfortunate that most schools don't even teach basic finance but emphasize math and even additional maths! The fact is people need to become better educated on the topic of money, finance and economics. It is no rocket science, reading articles or asking folks who are familiar can be a good start. Although it seems to be a long road ahead for most of us it’s never too late to get started.

Weekly Market Highlights June (2)

Source: Amp Capital (here for full market update) & iCapital biz (subscription required)

United States
Economic data is good. ISM manufacturing conditions index rose, non-manufacturing conditions indexes remain solid, construction activity rose strongly, auto sales rose to their fastest pace since 2005, the trade deficit narrowed sharply and labour market indicators are strong; stronger than expected employment growth in May and a slight pick-up in wages growth. All of which indicates that the Fed is on track for a September rate hike albeit a very small hike. This will lead to more inflows of capital to the dollar. We are already witnessing the impact of such anticipation now: 1 US Dollar equals 3.75 Malaysian Ringgit.

Eurozone
Also saw some good economic data. Composite business conditions PMI revised up for May, retail sales up more than expected in April and unemployment falling more than expected. Inflation rose to 0.3% yoy in May and core inflation rose to 0.9% indicating that the risk of deflation is continuing to recede. Europe still has a long way to full recovery so it is good to see that ECB President Draghi reiterate the commitment to implement its quantitative easing plans in full (i.e. buying bonds out to September 2016). Negotiations on a “reform for funding” deal for Greece are continuing to drag on. Greece will likely continue to be a source of volatility through June. Whichever way it goes though, the threat of contagion to other peripheral countries is low compared to the 2010-12 period as they are in far better shape now and the ECB is buying bonds across Europe as part of its QE program.

Asia
The 140% surge in Chinese shares over 12 months. Another bubble that may be close to ending? The easy gains are probably over and a period of correction would be healthy. However, the Shanghai composite index on an historic PE of 21 times is still below its long term average and should benefit as further monetary easing comes through. China's official manufacturing PMI rose marginally in May, albeit it’s still at the low end of the range it’s been in for the last few years. More policy easing is likely required though to be confident.

In Japan there was a welcome rise in wages growth. However, at 0.9% year on year, it still has a fair way to go before the Bank of Japan (BoJ) can be confident it has broken the back of deflation.

In India, the Reserve Bank cut interest rates again with inflation being below target and growth in activity slowing in the March quarter. Further rate cuts are still likely.

In Malaysia contrary to what the government is saying a weaker myr is not helping our exports due to the decline of oil related exports and palm oil. As such the exports of major commodities continued to declined on a year-to-year basis for the 9th consecutive month. Imports would continue to stay low due to weaker domestic demand after the GST implementation. The broad trend in the Malaysian ringgit remains down as the Fed is likely to raise rates later this year unless BNM shores up support by selling foreign reserves. It is not likely to raise interest rates.