Week in Review: Global stocks climb amid rising optimism

For the week ended June 18, 2010

• Manufacturing activity up; U.S. housing slumps
• U.S. inflation tame • U.S. jobless claims rise
• BP sets aside money for oil-spill claims
• FedEx sees global recovery
• Eurozone prices rise slightly
• German economic expectations slide
• U.K. jobless claims fall

In a fairly quiet week, global stock markets rose amid renewed optimism about the overall health of the eurozone economy despite ongoing concerns about debt-laden Greece, Spain, and Portugal. European Union leaders agreed to disclose how banks perform on stress tests, reassuring nervous investors who seek greater transparency. A successful Spanish bond auction on Thursday contributed to the confident sentiment for currencies that have been seen as risky.

Meanwhile, U.S. economic reports had mixed to positive news. U.S. factory output rose; housing starts slumped; inflation was muted, but new concerns were expressed about weakening prices potentially leading to deflation.

Stock markets continued their two-week rally. The MSCI World Index, a benchmark for equities in 24 developed markets, ended the week with its ninth-straight day of gains, the longest such stretch in 11 months. Emerging market stocks extended a 10-day run of gains. By Friday morning, the major U.S. stock indices were all up more than 2% for the week.

U.S. economic news

Manufacturing activity perks up
Output at U.S. factories, mines, and utilities increased 1.2% in May, adding to a 0.7% gain in April, according to a report from the U.S. Federal Reserve Board. Industrial production had been projected to rise 0.9% in May, based on a Bloomberg News survey of economists. Rising demand from overseas markets has led companies to rebuild inventories and invest in new equipment. U.S. exports have risen in 10 of the past 12 months, according to figures from the U.S. Department of Commerce.

U.S. housing starts slide
Countering the resurgence in manufacturing activity and the implied rebound in business confidence, U.S. housing starts slumped in May. This was not surprising given the expiration of the federal government’s tax credit for first-time home buyers. U.S. housing starts fell 10% to a seasonally adjusted annual level of 593,000 in May. The National Association of Home Builders reported a drop in its confidence index in June, to 17 from 22.

U.S. consumer, producer prices stable
Inflation pressures remained tame in May according to indices that measure consumer and producer prices. In reports released by the U.S. Department of Labor this week, producer prices for finished goods fell a seasonally adjusted 0.3% in May from April, but they were 5.3% higher than a year earlier. Excluding food and energy prices, however, wholesale inflation rose by 0.2% in May. The Consumer Price Index dropped 0.2% in May, but as with producer prices, the underlying consumer prices, excluding volatile energy and food items, rose 0.1%. Consumer prices were 2.0% higher than 12 months earlier on an unadjusted basis.

U.S. jobless claims rise
Initial claims for jobless benefits in the United States rose by 12,000 to 472,000 for the week ended June 12. However, the four-week average, which smoothes volatility in the weekly numbers, fell by 500 to 463,500. The official unemployment rate remains elevated, at 9.7%.

U.S. and global corporate news

BP commits to $20 billion fund, halts dividend
Under pressure from the U.S. government, BP agreed to set aside $20 billion to clean up the massive Gulf of Mexico oil spill and to compensate victims of the environmental disaster. The oil giant also suspended its dividend to shareholders and will sell about $10 billion in assets over the next year to raise cash. In other news, BP’s credit rating was lowered to “A2″ by Moody’s, following downgrades by Fitch and Standard & Poor’s in recent days.

FedEx sees global recovery
Executives of FedEx said they are observing a broad-based recovery, driven by activity in Asia and not adversely affected by sluggishness in Europe. The leading U.S.-based package delivery firm, which is seen as a bellwether for economic activity, expects rising demand for its services and economic growth of more than 3% in the United States and globally for its fiscal year ending May 2011.

Global economic news

Eurozone inflation picks up
Eurozone consumer price inflation rose 0.1% in May from April and 1.6% from a year earlier, according to Eurostat, the European Union’s statistics office. Although price increases in the region rose to their highest levels in 18 months, they remain below the target of just under 2% set by the European Central Bank. Core inflation, excluding energy, food, alcohol, and tobacco, rose 0.1% on the month and 0.8% on the year.

German economic expectations slide
German economic expectations declined in June in their sharpest drop since the collapse of U.S. investment bank Lehman Brothers in October 2008. The ZEW Indicator of Economic Sentiment for Germany fell to 28.7 points in June from 45.8 points in May. However, the country’s economic outlook remains positive.

U.K. jobless claims drop
The number of people claiming jobless benefits in the United Kingdom fell more than expected in May according to the Office for National Statistics. The total number of recipients of claimant benefits fell 30,900 to 1.48 million in May, and the unemployment rate – the “claimant count rate” – declined by one-tenth of a percentage point.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times.

Arturo E. Miranda C.
Vicepresident | International Sales
Thales Securities