US equities

July 2010 (covering the month of June 2010)

US stockmarkets had a rollercoaster month, initially falling on concerns over weakening global growth prospects and eurozone debt contagion before rallying higher on benign US inflation figures and strong Asian data, especially regarding manufacturing in China and India. The respite was brief as a broadside of bad news, including a downward revision of US first-quarter GDP growth to 2.7% from 3.0%, poor US employment and housing numbers, setbacks in both US and Chinese consumer confidence and downbeat economic growth assessments from the IMF and the US Federal Reserve, sent markets in a sharp dive. The S&P 500 index fell to its lowest point since October last year and declined by 5.4% over June. The Dow Jones Industrial Average fell by a lesser 3.6%. The Nasdaq Composite and the smaller companies Russell 2000 indices finished the month 6.5% and 7.9% lower, respectively. Investors sought safety in US Treasury bills, pushing the yield on US 10-year Treasury notes below 3% for the first time in 14 months. Consumer discretionary, materials and industrial stocks were hardest hit, with the defensive sectors of telecommunication services, utilities and healthcare proving the most resilient.

Financial stocks suffered as the G20 met in Toronto to discuss, among other items, forcing banks to build more Tier 1 capital to enable them to withstand another crisis. The US financial reform bill, due to be passed by the Senate in July, also hangs over the sector. Although US banks look to have won the argument to keep ownership of their hedge funds and private equity arms, they will be subject to a 3% market capitalisation limit which will force some divestiture. They also look like facing a one-off US$19bn levy. In broader economic news, industrial production was up by 1.2% in May and capacity utilisation climbed back to 74.7%, halfway between the 68.3% low in June ’09 and the 80.6% near-term high in December ’07. However, this improvement in utilisation needs to be taken in context of a 1.3% year-on-year fall in US industrial capacity, something which has been relatively rare in modern times. Service industry data was mixed. The ISM non-manufacturing index was positive but unchanged, but business activity expanded for a ninth consecutive month. Retail sales fell by 1.2% from April to May, with building supplies sales falling most. Withdrawal of government incentives at the end of April led to a sharp fall in new home sales in May, down 33% from April and much worse than forecast. New housing starts and permits fell by 10% and 6% respectively and the average new home price fell by 9.6% on a year-to-year basis to US$200,900, its cheapest since December ’03. Unsurprisingly, homebuilder confidence also declined.

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