Global Markets

Once again a combination of geopolitical, tariff and currency worries addled investors. As a result, most equity indexes retreated on the week. Chinese and Hong Kong stocks tumbled over 4 percent while those in Europe slid across the board with declines in the 1 percent to 2 percent range. U.S. equities however, went their own way — the Dow and S&P advanced while the Nasdaq retreated.

Global Stock Market Recap

Europe and the UK

European equities declined last week, dragged down by the situation in Turkey and the tariff tug of war between China and the U.S. Anxiety over the tumbling Turkish lira rattled markets, however positive developments in the United States/China trade dispute calmed nerves Thursday with most European markets also ending the day in positive territory. Qatar promised to invest $15 billion in the Turkish economy to help the country avert a financial crisis. On the week, the FTSE was down 1.4 percent, the CAC slid 1.3 percent, the DAX declined 1.7 percent and the SMI was 0.3 percent lower.

Things calmed after China accepted an invitation from the U.S. for a new round of trade talks to be held August 22 and 23. China's Ministry of Commerce said that a Chinese delegation led by Vice Commerce Minister Wang Shouwen will travel to the U.S. for trade talks to be held with US Under Secretary of the Treasury for International Affairs David Malpass.

The UK released a slew of July economic data during the week — investors looked to the data to validate the most recent Bank of England interest rate increase. The labour market report suggested that little had changed in July from June. ILO data showed joblessness declining a sizeable 65,000 in the second quarter. This put its measure of the unemployment rate at just 4.0 percent, its lowest mark since the three months to February 1975. Employment had a very good period, gaining 42,000 after a hefty 137,000 jump previously. The CPI was unchanged on the month in July and up 2.5 percent on the year. The July data mean that headline inflation has now been above its 2 percent medium-term target for 17 months in a row. However, the sub-2 percent core rate suggests that underlying price pressures, at least for now, remain limited, in line with the stickiness of wages. July retail sales jumped a better than anticipated 0.7 percent and were up 3.5 percent on the year. This will be seen as providing additional justification for August's increase in the BoE’s interest rate and offers hope that Brexit uncertainty is not affecting consumers as much as might have been thought.

Asia Pacific

Asian equities tumbled during the week, dragged down by trade tensions between the United States and China and the ongoing Turkish crisis that has sent the Turkish currency plunging. Things seemed to calm Friday — news of fresh talks between China and the United States underpinned investor sentiment. On the week, only the All Ordinaries (up 0.9 percent) and the Sensex (up 0.2 percent) advanced. Three indexes tumbled more than four percent — the Jakarta Composite (down 4.8 percent) the Shanghai Composite (down 4.5 percent) and the Hang Seng (down 4.1 percent).

The Hang Seng suffered its steepest weekly loss in more than six months as weaker than expected earnings reports slammed the technology sector. Along with the disappointing earnings, China’s data did not match expectations. Retail sales gained less than anticipated in July and were lower than June. Industrial production was unchanged from June and lower than expected for July.

The Turkish lira recovered sharply from Monday's meltdown when it hit a record low below 7.23 to the dollar following U.S. imposed sanctions relating to the trial of an American pastor. A fresh round of U.S.-China trade talks next week (possibly Thursday) and a Friday speech by Federal Reserve Chairman Jerome Powell are in focus for investors after a tumultuous week triggered by the currency crisis in Turkey.

Turbulence in Turkey has crimped investor appetite for emerging market assets, particularly in China and South Africa. Withdrawals from the two countries contributed more than two-thirds of the $1.4 billion in outflows from emerging stocks and bonds in the week ended August 15, according to Institute of International Finance.

Indian shares closed higher on the week even as the rupee hit a record low of 70.1575 against the US dollar on expectations of a possible spillover effect from Turkey’s financial crisis. Investor sentiment improved somewhat after official data showed India's retail price inflation dropped to a nine month low of 4.17 percent in July from 4.92 percent in the previous month, thanks to a significant fall in food prices. With inflation now moving closer to the Reserve Bank of India’s 4 percent target, the RBI is expected to refrain from hiking policy rates for the third consecutive time when it next meets in October. The annual rate of inflation based on wholesale prices also eased, to 5.09 percent in July from a four-year high of 5.77 percent in June.

Currencies

Turkey’s lira weakened again against the dollar Friday after a U.S. warning that Ankara should expect more economic sanctions unless it hands over detained American evangelical pastor Andrew Brunson. The lira has lost nearly 40 percent of its value against the dollar this year, hit by both the diplomatic rift and investor alarm about President Tayyip Erdogan’s influence over monetary policy. The currency crisis has deepened concerns about the broader economy. Turkish markets will be closed from midday on Monday for the rest of the week for the Muslim EID al-Adha festival.

The Turkish banking watchdog has taken steps to stabilize the currency, limiting futures transactions for offshore investors and lowering limits on swap transactions. But some economists have called for more decisive moves. Turkey and its firms face repayments of nearly $3.8 billion on foreign currency bonds in October according to Société Générale. Deep concerns remain about the potential for damage to the economy. Turkey is dependent on imports, priced in hard currency, for almost all of its energy needs. Turkish firms have borrowed in dollars and lira to take advantage of lower interest rates for years. But the sell-off has increased the cost of servicing that debt, particularly for companies whose revenues are solely in lira.

Turkey’s lira fell Friday morning in what market participants described as illiquid trading conditions. The currency had been rebounding for most of the week after hitting a record low Monday, but concerns remain over the country's economic position, its domestic politics and its spat with the U.S. The Trump administration warned that it is prepared to impose more penalties on Turkey if it doesn’t release Brunson.

The U.S. dollar advanced against the pound sterling on the week. It declined against the euro, yen, Swiss franc and the Canadian and Australian dollars for the week.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

Second quarter gross domestic product was up a quarterly 0.4 percent rate, up from the first estimate of 0.3 percent. Annual growth was nudged 0.1 percentage point higher to 2.2 percent, a 0.3 percentage point drop from its first quarter mark. The second flash report still lacks any details on the GDP expenditure components but it does provide some information on the performances of individual members. The headline revision was essentially attributable to Germany where quarterly growth weighed in at an unexpectedly strong 0.5 percent. This outpaced the sluggish 0.2 percent rate posted by both France and Italy and was only just short of Spain where growth dipped a tick to 0.6 percent. Elsewhere, there were robust performances by some of the smaller member states, notably Slovakia (1.0 percent), Lithuania (0.9 percent), Cyprus and Latvia (both 0.8 percent). Importantly, all countries providing data posted positive quarterly (and annual) growth.

Germany

Second quarter gross domestic product provisionally expanded at a 0.5 percent quarterly rate. However, annual workday adjusted growth dipped 0.1 percentage points to 2.0 percent, its lowest reading since the fourth quarter of 2016, due to a slightly weaker revised performance in the second half of 2017. Meantime, unadjusted, the yearly rate was 2.3 percent after a 1.4 percent print last time. The only additional information provided was that domestic demand made a positive contribution to quarterly growth while net exports had a negative impact. Within the former, household and government current spending made ground as did investment in machinery and equipment and construction.

August ZEW survey found a slight improvement in analysts' views of the German economic situation, apparently reflecting a less pessimistic assessment of EU-U.S. trade relations. At 72.6, the current conditions index was just 0.2 points above its July reading and the second lowest reading since December 2016. However, this was at least the first increase since January. At the same time, expectations rebounded 11.0 points to minus 13.7. This was a 3-month high and, similarly, the first time that the forward-looking gauge has risen since the start of the year. However, the index remained well below its long-run average (23.0).

France

Second quarter joblessness declined 48,000 to 2.538 million in mainland France. This reversed only slightly more than half of the first quarter's 85,000 rise but was still steep enough to reduce the unemployment rate by 0.2 percentage points to 8.7 percent. This equaled its second lowest mark since the first quarter of 2009. Including overseas territories, joblessness stood at 2.699 million after 2.474 million. The rate here was 9.1 percent, just a tick short of its first quarter print and still 0.2 percentage points above its fourth quarter reading.

United Kingdom

July claimant count joblessness rose 6,200 after a slightly larger revised 9,000 increase in June. This left the unemployment rate at 2.5 percent, historically very low but still above its 2.1 percent all-time trough recorded in January/February 2017. More reliably, the ILO data showed joblessness declining a sizeable 65,000 in the second quarter. This put its measure of the unemployment rate at just 4.0 percent, its lowest mark since the three months to February 1975. Employment gained 42,000 after a hefty 137,000 jump previously. However, potentially of most significance, vacancies in the three months to July climbed 20,000 from February to April. This made for a 51,000 advance from a year ago and, at 829,000, the highest level on record. This suggests that the demand for labour remains robust and shortages may be becoming more of an issue. Average annual earnings growth over the three months to June was only 2.4 percent, down a tick from last time and the weakest print since the third quarter of 2017. Excluding bonuses, the rate was 2.7 percent, also a tick short of its marginally firmer revised reading in March to May.

July consumer prices were unchanged on the month but still lifted the annual inflation rate by a tick to 2.5 percent, its first rise since November last year. The main positive contribution to the minor acceleration in the yearly rate came from recreation and culture, which added 0.1 percentage points, alongside transport (0.04 percentage points) and food and non-alcoholic beverages (0.03 percentage points). The principal negative effect was in miscellaneous goods and services (minus 0.06 percentage points). As a result, the core CPI dipped a further 0.1 percent from June which left its 12-month rate steady at 1.9 percent, equaling its lowest reading since March.

July retail sales were up a monthly 0.7 percent that more than reversed an unrevised 0.5 percent decline in June and put annual sales growth at 3.5 percent, up from 2.9 percent last time. Excluding auto fuel, purchases advanced a sharper monthly 0.9 percent, also more than offsetting June's 0.6 percent drop and boosting yearly growth to 3.7 percent from 2.9 percent. July's monthly headline gain was dominated by the non-food subsector which, excluding auto fuel, increased 0.7 percent. Non-store retailing (4.9 percent) was particularly buoyant and clothing and footwear (1.5 percent) as well as the other stores category (2.4 percent) also saw strong demand. Food was up just 0.1 percent for a second consecutive month while auto fuel sales fell 1.5 percent.

Asia/Pacific

Japan

July merchandise trade balance shifted from a surplus of ¥721 billion in June to a deficit of ¥231 billion. Exports were up 3.9 percent on the year, slowing from 6.7 percent in June while imports accelerated from 2.5 percent to 14.6. Weaker annual growth in exports in July was largely driven by weaker demand from the United States and the European Union. Exports to United States fell 5.2 percent after dropping 0.9 percent in June. Exports to the European Union slowed from 9.3 percent to 6.4 percent. Regional demand was more mixed, with exports to China and Taiwan recording weaker growth but exports to Korea, Hong Kong and Singapore improving. Auto exports fell on the year in both value and volume terms as they did in June. The timing of ship exports also made a significant contribution to the fall in headline annual growth. The increase in imports was largely driven by petroleum imports. Although these fell in volume terms in July they did so to a lesser extent than in June, while the annual growth in their value picked up from 20.2 percent to 40.3 percent. Imports of chemicals, machinery, motor vehicles, and electrical machinery also picked up strongly in July.

Australia

July employment declined 3,900 after a revised increase of 58,300 in June. The unemployment rate declined from 5.4 percent to 5.3 percent, its lowest level since 2012 while the participation rate slid from a revised 65.6 percent to 65.5 percent. Employment was driven by part-time employment, down 23,200 on the month after increasing by a revised 15,000 previously. Full-time employment, in contrast, rose 19,300 in July after a revised increase of 43,200 in June. Over the last 12 months, full-time employment has increased by 194,700 persons, while part-time employment has increased by 105,600 persons.

China

July industrial production was up 6.0 percent on the year, unchanged from June. On the month, output rose 0.48 percent after an increase of 0.35 percent in June. Steady headline industrial production growth in July reflects some small but off-setting moves across sectors and industries. Manufacturing production increased 6.2 percent on the year, up from 6.0 percent in June, with stronger growth in output of steel products, chemicals, electric machinery and communication equipment but a sharp deceleration in auto production. Growth in the utilities sector slowed from 9.2 percent in June to 9.0 percent in July, while mining output fell from 2.7 percent to 1.3 percent.

Americas

Canada

July consumer prices were up 3.0 percent from a year ago after increasing 2.5 percent in June. The July reading was the highest since September 2011. While continued strength in energy prices contributed most to the annual increase, higher prices for various services, including air transportation and travel tours, also contributed to consumer price increase in July. The Bank of Canada's preferred measures of core inflation remained stable in July. All eight major components rose on the year. The transportation index (8.1 percent) was the largest contributor to the increase. On a seasonally adjusted monthly basis, the CPI rose a monthly 0.5 percent in July, following a 0.2 percent increase in June. Six of eight major components increased, while the clothing and footwear index declined and the health and personal care index was unchanged.

Bottom line

Although there was a full slate of global economic data, the situation in Turkey received most of the attention as investors worried that the tumult there would have a contagion effect on other emerging currencies. The results of the full slate of economic data were mixed globally.

The Kansas City Fed’s annual symposium will begin on Friday August 24 with a presentation by Fed Chair Jerome Powell. He will speak on monetary policy in a changing economy. The theme of the conference is a close look into the root causes of stubbornly low inflation, slow wage growth and tepid productivity gains, all of which have dogged growth in the United States and other developed economies for years.

Investors get a first look at August flash composite PMIs for Japan, the Eurozone, Germany and also the U.S. The minutes from the latest European Central Bank’s monetary policy meeting will be released. The latest FOMC meeting minutes will also be released.

Looking Ahead: August 20 through August 24, 2018

Anne D Picker is the author of International Economic Indicators and Central Banks.