Week in Review: Stocks Slide, Euro Recession, China Exports
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
U.S. equities fell this week, as did European stocks on fears that a new recession in Italy could endanger the economic recovery of the broader European Union. Stocks fell in spite some strong economic data that showed the U.S. job market was recovering, although at a slow pace.
U.S. equities fell this week, as did European stocks on fears that a new recession in Italy could endanger the economic recovery of the broader European Union. Stocks fell in spite some strong economic data that showed the U.S. job market was recovering, although at a slow pace.
The S&P 500 fell 0.8% for the week beginning August 4th, continuing a bearish trend that caused the index to fall over 2.6% in the previous week. However, a number of economic indicators were better than expected in a sign that the U.S. economy was continuing to recover at a slow pace.
On Monday, the Federal Reserve announced that loan demand and lending activity were rising throughout the nation, driven by commercial loans. Some analysts believe this is a leading indicator that greater investment in the U.S. economy will drive growth. On Tuesday, CoreLogic announced that home prices had risen 7.5% year-over-year in June, a sign that the housing market was continuing to recover. In an additional sign of stronger housing and lending markets, the Mortgage Bankers Association announced that mortgage refinances had increased in their weekly survey released on Wednesday.
As housing and lending improve, trade and aggregate demand for services showed signs of strength too. The ISM non-manufacturing index came in at 58.7% on Tuesday, a sign of greater-than-expected expansion of professional and business services. On Thursday, the Department of Labor reported unemployment claims fell to their lowest level since 2006, again signaling strength in the labor market.
European Struggles
While U.S. stocks fell in spite of good news, European stocks fell for the week on fears that Italy’s recession and tensions in Ukraine would reverse the improved growth rates seen in the EU over the past 18 months. Italy announced its GDP fell 0.2% in the second quarter, the second quarter of contraction and the beginning of a recession that analysts had not expected.
Germany has also shown surprising weakness, although its economy is not showing signs of contracting yet. Factories in the central EU nation fell 3.2% in June on a month-to-month basis, surprising economists and signaling that Russian tensions over Ukraine may be hampering trade across the continent. EU officials immediately associated the manufacturing fall with the crisis, although some experts have argued that European growth remains limited by monetary policies at the European Central Bank.
The ECB is expected to react to the fallen numbers in a few ways. Analysts expect the bank to keep its benchmark rate at 0.15%, a historical low. Additionally, analysts believe the bank will continue a monetary stimulus policy that is expected to increase money velocity in the economy and spur investment.
European bonds remained flat or declined on the news, except for Italy’s long-term bonds, which have seen yields rise.
China Exports Unexpectedly Rise
China saw its exports rise in July as imports declined, which may suggest greater global consumption as the Chinese middle class begins to stall. Exports rose 14.5% from the prior year, far above expectations, while imports suddenly fell 1.6%. In June, imports rose 5.5%.
The growing exports are a good sign for Chinese officials, who have targeted growth of 7.5% for 2014, but so far have seen total imports and exports rise only 0.2% for the year. Earlier in the year, disappointing Chinese PMI data indicated lackluster demand abroad, which the Chinese government attempted to offset with stimulus programs that would encourage domestic demand. Falling imports suggest that that stimulus is not succeeding.
China remains mostly dependent on exports, however, so the rise may offset the fall in imports. In total, the country exported $212.9 billion in July, as opposed to $165.6 billion in imports. The nation’s trade surplus has doubled over the prior year to $47.3 billion. The nation saw its trade surplus with the European Union grow the fastest, at 37% over the prior year, to $13.7 billion. Its surplus with the U.S. grew by 17% to 22.3 billion.
