Stock markets hold up but economic slowdown spreading

Last week proved to be a volatile week for stock markets as investors grappled with increasing signs of a spreading global economic slowdown.

In the United States, the Standard & Poor’s 500 ended the week at 1260.31, up 0.2 percent over the week. However, apart from Friday, when the index fell 0.6 percent, every trading day saw the index move by more than one percent.

European markets ended the week down, with the Dow Jones Stoxx 600 losing 0.5 percent to finish at 280.24. On a daily-close basis, though, the index was less volatile than the S&P 500.

Asian stocks performed even less well, the MSCI Asia Pacific Index falling 1.8 percent to 130.63.

On the whole, though, stock markets did not fare too badly despite the disastrous start to the week in the US. On Monday, the S&P 500 had fallen by 1.9 percent. That had left the index just 20 points above its 2008 low. However, the recovery over the rest of the week gave the index back much of the gains it had made in the past two weeks and leaves it still hovering around its 20-day moving average.

Based on its resilience last week, it appears to me that stocks are likely to continue to hold up relatively well over the next few weeks. This, though, may mean nothing more than the S&P moving sideways, as it did in December last year and February this year.

Stock markets in Europe and Asia are likely to continue to take their cues from the US.

Meanwhile, economic data out last week show that the US economy is flirting with recession but may not have fallen into one. Gross domestic product increased at a 1.9 percent annualised rate in the second quarter. Among third quarter data, the Institute for Supply Management’s manufacturing index dipped to 50.0 in July from 50.2 in June; this level is usually associated with continued, albeit low, economic growth.

Nevertheless, the US economy clearly remains weak. It lost another 51,000 jobs in July, the seventh straight month of job losses, and the unemployment rate rose to 5.7 percent, the highest level in more than four years. Furthermore, the Economic Cycle Research Institute’s Weekly Leading Index fell to 128.1 in the week to 25 July from 129.5 in the previous period while its annualised growth rate fell to minus 7.6 percent from minus 6.9 percent, providing no sign of an economic upturn.

Perhaps more ominous is the fact that the rest of the global economy is clearly starting to slow as well.

In Europe, the European Commission’s economic sentiment indicator for the euro area fell 5.3 points to 89.5 in July, its lowest level since March 2003, from 94.8 in June. This was the largest month-on-month decline since October 2001. Also, the eurozone manufacturing purchasing managers’ index (PMI) fell to 47.4 in July from 49.2 in June.

In Asia, Japan’s industrial production fell 2.0 percent in June and has fallen over the past two quarters. Japan’s manufacturing PMI edged up to 47.0 in July from 46.5 in June but remained below 50, indicating continued contraction in manufacturing activity.

Even China’s manufacturing activity may be contracting. The China Federation of Logistics and Purchasing’s PMI fell to 48.4 in July from 52.0 in June. Another PMI released by CLSA, though, registered 53.3, unchanged from June.

In any case, decoupling of economies from the US slowdown is looking increasingly like an unlikely prospect.