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DECPG Daily: Global equities weaken…German business sentiment improves in June…Chinese manufacturing slows

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Financial Markets…Global equities edged lower on Monday as mounting speculation  that the U.S. central bank will scale back its stimulus program, combined with a prospect of tighter credit conditions in China, pushed risk-aversion among investors higher. The benchmark MSCI world stock index fell 0.8% to add to last week’s loss of 3.2%, while MSCI’s developing-country index slid for a fifth consecutive day to a one-year low. Notably, China’s Shanghai Composite Index tumbled 5.3% today, the steepest decline since August 31, 2009.

U.S. Treasuries slumped on Monday as government bonds dropped around the world amid growing stimulus concerns. The benchmark 10-year note yield climbed as high as 13 basis points to 2.66%, the highest level since August 2011. Elsewhere, the 10-year yields on German, Austrian, and Belgium climbed 10 bps, 28 bps, and 24 bps, respectively.

The dollar strengthened against most major currencies amid the positive outlook for the U.S. economy, which has fueled market speculation of the Fed’s early exit of its monetary stimulus program. The Dollar Index, which tracks the greenback against those of six trading partners, rose 0.4% to 82.66 on Monday, extending last week’s 2.2% gain. Against the euro, the dollar was up 0.2% to $1.3101 after rising to the highest level since June while the U.S. currency fell 0.4% against the yen to 97.50.

High-income EconomiesGerman business sentiment improved for the second month in June, with the Ifo institute’s business climate index edging up to 105.9 from 105.7 in May. Although the current situation sub-index fell (to 109.4 from 110), the sub-index for German executives’ expectation of the future rose (to 102.5 from 101.6), suggesting increased optimism among German firms.   

Consumer confidence in Italy rose to its highest in over a year in June, with the Italian Statistics Office’s confidence index jumping to 95.7 from 86.4 in May. The increase mostly reflects a sharply improved view of the country’s general economic situation (with the sub-index rising to 91.6 from 71.7), and bodes well for consumer spending in the second quarter.  

Singapore’s consumer price inflation edged up to 1.6% (y/y) in May from a three-year low of 1.5% in April. The modest pickup reflects a faster pace of increase in food prices and housing costs, the latter due to end of a one-off rebate, partly offset by a decline in transport costs. Singapore’s official core inflation index, which excludes accommodation and private road transport, rose to 1.7% (y/y) in May from 1.4% the previous month.

Developing Economies…East Asia and Pacific: China's manufacturing activity contracted at a faster pace in June as the flash manufacturing purchasing managers' index fell to 48.3 from 49.2 in May. Readings below 50 suggest contraction of the sector. The index is now at its lowest level in nine months. Both new orders and new export orders contracted at a faster pace.

Middle East and North Africa: Egypt’s foreign-exchange reserves increased to just more than USD16bn at the end of May, up 11.4% (m/m), the strongest on record, and an increase of 3.4% (y/y), the first annual increase since January 2011. The rise in reserves was entirely due to aid inflows from countries such as Qatar, which delivered a USD3.0bn low-interest loan in May. Qatar's aid package follows the Libyan assistance received in April.

South Asia: Pakistan’s central bank cut its reference rate by 50 basis points to 9%.  This was the first cut since December 2012, when the central bank cut the reference rate by same magnitude but was forced to pause afterwards, limited by rising inflation and risks to the balance-of-payments position.