What's driving world markets?

Politics remained the key driver of markets last week. Greek voters on Sunday voted “no” on a referendum on the last Eurogroup bailout proposal, China central bankers continued to ease policies to support the domestic stock market, and after much rhetoric regarding its debt load, Puerto Rico made a last minute payment.

  • The no vote in Greece made clear the wishes of the Greek electorate, but leaves in place a difficult situation. Capital controls remain active, and economic hardship appears to be on the rise for the Greek populace. It will take time for a new deal to be negotiated with Eurogroup finance ministers, who appear unwilling to forgive some of the debt Greece owes. Humanitarian issues of basic human necessities for Greece require a deal prior to the next debt deadline, which is July 20 when Greece must repay €3.5 billion in debt to the European Central Bank (ECB). Odds of an exit by Greece from the eurozone have risen but are not a certainty.
  • The Chinese domestic stock market has fallen 30% from the peak in June after more than doubling over the past year. Policymakers in China have eased terms on margin loans, constrained new share issuance, and expanded foreign investor quotas. For now there is little sign of contagion, rates remain low, and the currency has seen little volatility. We believe economic activity will continue to slow modestly through the rest of the year.

Economic data indicated global growth remains modest. U.S. employment continues to improve but signs of wage growth remain unconvincing. Manufacturing activity continues to contract in Russia, Brazil, and China, while activity remains positive in the United States, Europe, Japan, and India. Economic data, combined with the debt crisis in Greece and the volatility in the domestic Chinese stock market, seem to indicate economic activity will remain modest, with some risk of slower growth. As we move beyond the policy risks, quantitative easing (QE) in Europe and Japan and improving jobs market in the United States should provide some improvement in developed world growth.

  • The U.S. unemployment rate improved to 5.3% in June and underemployment (the combination of the unemployed and those working part time that would prefer to work full time) fell to 10.5%. The report was not an emphatic positive, with Fed watchers concerned regarding the decline in labor force participation and slowing growth in average hourly earnings. Nonfarm payrolls added 223,000, and we expect this measure to continue to improve over the rest of the year. Improvements in the unemployment rate will likely be slower, with rising consumer confidence and job openings leading to stabilization in the rate of labor force participation. Lastly, we expect wage growth to accelerate slightly this year with employers paying up for qualified employees.

For more information, please go to: https://reserve.usbank.com/insights/market-economic-update.

Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment.

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