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ARTICLE ARCHIVES

INTERNATIONAL PERSPECTIVE

Equities gyrate and tumble
International Perspective - October 12, 2018
By Anne D. Picker, Chief Economist

  

Global Markets

Investors were definitely risk off this past week. Equities tumbled across the board. And there was little new economic data to distract investors. And there were no central bank meetings to guide investors. But angst set in prior to the onset of earnings season which began Friday. All equity indexes declined on the week with the exception of the Sensex and Jakarta Composite.

 

On Tuesday, the International Monetary Fund cut its global growth forecast to 3.7 percent for this year from its April prediction of 3.9 percent, citing worries over Sino-American trade tensions. Concerns over emerging market assets and fund outflows have also mounted recently amid rising U.S. government bond yields and a strengthening dollar. While the People's Bank of China cut the reserve requirement ratio for most lenders over the weekend to ease cash shortages in the system, the move has dragged the yuan down.


 

Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Oct 5 Oct 12 Week 2018
Asia/Pacific
Australia All Ordinaries 6167.3 6301.1 6006.6 -4.7% -2.6%
Japan Nikkei 225 22764.9 23783.7 22694.7 -4.6% -0.3%
Topix 1817.56 1792.65 1702.5 -5.0% -6.3%
Hong Kong Hang Seng 29919.2 26572.6 25801.5 -2.9% -13.8%
S. Korea Kospi 2467.5 2267.5 2161.9 -4.7% -12.4%
Singapore STI 3402.9 3209.8 3069.2 -4.4% -9.8%
China Shanghai Composite* 3307.2 2821.4 2606.9 -7.6% -21.2%
India Sensex 30 34056.8 34376.99 34733.6 1.0% 2.0%
Indonesia Jakarta Composite 6355.7 5731.9 5756.5 0.4% -9.4%
Malaysia KLCI 1796.8 1777.2 1730.7 -2.6% -3.7%
Philippines PSEi 8558.4 7078.2 7004.8 -1.0% -18.2%
Taiwan Taiex 10642.9 10517.1 10045.8 -4.5% -5.6%
Thailand SET 1753.7 1720.5 1696.2 -1.4% -3.3%
Europe
UK FTSE 100 7687.8 7318.5 6995.9 -4.4% -9.0%
France CAC 5312.6 5359.4 5096.0 -4.9% -4.1%
Germany XETRA DAX 12917.6 12111.9 11523.8 -4.9% -10.8%
Italy FTSE MIB 21853.3 20346.0 19256.0 -5.4% -11.9%
Spain IBEX 35 10043.9 9253.9 8902.0 -3.8% -11.4%
Sweden OMX Stockholm 30 1576.9 1634.9 1536.5 -6.0% -2.6%
Switzerland SMI 9381.9 9042.1 8660.4 -4.2% -7.7%
North America
United States Dow 24719.2 26447.1 25340.0 -4.2% 2.5%
NASDAQ 6903.4 7788.5 7496.9 -3.7% 8.6%
S&P 500 2673.6 2885.6 2767.1 -4.1% 3.5%
Canada S&P/TSX Comp. 16209.1 15946.2 15414.3 -3.3% -4.9%
Mexico Bolsa 49354.4 48052.9 47444.1 -1.3% -4.2%

 

Europe and the UK

European equities — after rebounding early Friday — faded and ended the day lower. Europe’s heavily weighted banking sector erased earlier gains to fall as a mixed reaction to third quarter earnings. Oil stocks also pared gains following crude prices. Defensive industries from telecoms to utilities declined in the afternoon. On the week, the FTSE tumbled 4.4 percent, the CAC and DAX retreated 4.9 percent each and the SMI was 4.2 percent lower. Shares were sent to their lowest levels since December 2016.

 

On Thursday, European markets ended with substantial losses. Wednesday’s losses on Wall Street sparked weakness in the Asian markets, which in turn, spilled over into Europe. Concerns over trade tensions between the U.S. and China continued to weigh on investor sentiment. Rising bond yields added to the downward pressure on equities. Traders are concerned over the possibility of aggressive rate increases by the Federal Reserve.

 

Although new economic data were sparse during the week, Germany’s industrial output declined and the UK merchandise trade deficit widened. However, for the Eurozone as a whole along with France, Italy and the UK, industrial output improved in August.


 

Asia Pacific

Equities rebounded after heavy losses as investors cheered media reports suggesting that the U.S. Treasury Department had not labeled China as a currency manipulator in an internal report. Sentiment was also bolstered after data showed China's exports have so far held up well despite escalating trade tensions with the U.S. China's exports logged double digit growth in September. However, only the Sensex (1.0 percent) and Jakarta Composite (0.43 percent) advanced on the week. Losses ranged from 1.0 percent (PSEi) to 7.6 percent (Shanghai Composite).

 

The Nikkei was down 4.6 percent on the week marking its biggest weekly drop since March. The Topix ended the day marginally higher Friday but retreated 5.0 percent on the week.

 

Indian shares rebounded Friday to post their biggest single day intraday gain in over two years as a recovery in the rupee and tumbling oil prices helped ease investors' concerns surrounding inflation and the twin deficits.The rupee was trading at a one-week high of 73.62 per U.S. dollar after Thursday's close of 74.12.

 

Hong Kong equities declined for a third consecutive week on jitters over rising U.S. bond yields and a sell-off in the technology sector. The Hang Seng ended the week 2.9 percent lower despite closing 2.1 percent higher on Friday. Mainland Chinese trade figures showed, however, China’s trade surplus with the United States hit a record high in September, providing a likely source of contention with U.S. President Donald Trump over trade policies and the currency. The data indicated solid expansion in China’s overall imports and exports, suggesting little damage from the tit-for-tat tariffs with the United States so far.

 

Stocks tumbled after returning from a week-long market holiday and after the People’s Bank of China — the central bank of China — cut banks’ reserve requirement ratios over the weekend in a move to free up capital in an ongoing effort to ease concerns about slowing economic growth and the impact of the trade war with the U.S. The decision is aimed at reducing financing costs for small and medium and private firms. However, the PBoC says it is not changing the stance or increasing downward pressure on the renminbi. Sunday’s move will inject a net 750 billion yuan ($109.2 billion) in cash into the banking system.

 

On Sunday, the People’s Bank of China (PBOC) announced a 100-basis-point cut to banks’ reserve requirement ratio, stepping up efforts to support the economy and calm market worries. Reserve requirement ratios (RRR) — currently 15.5 percent for large institutions and 13.5 percent for smaller banks — would be cut by 100 basis points effective October 15.

 

China’s RRR cut reinforces expectations for more policy easing ahead, putting China on a divergent path of monetary policies with the United States where 10-year treasuries yields hit seven-year highs as the Federal Reserve keeps raising rates.


 

Currencies

The U.S. dollar declined against most of its major counterparts — the yen, euro, pound sterling and Australian dollar. It was unchanged against the Swiss franc and advanced against the Canadian dollar.


 

Selected currencies — weekly results

2017 2018 % Change
Dec 29 Oct 5 Oct 12 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.705 0.711 0.9% -8.7%
New Zealand NZ$ 0.709 0.644 0.651 1.0% -8.2%
Canada C$ 0.796 0.772 0.767 -0.7% -3.6%
Eurozone euro (€) 1.194 1.152 1.156 0.3% -3.2%
UK pound sterling (£) 1.344 1.312 1.315 0.3% -2.2%
Currency per U.S. $
China yuan 6.534 6.869 6.922 -0.8% -5.6%
Hong Kong HK$* 7.816 7.837 7.835 0.0% -0.2%
India rupee 64.081 73.768 73.571 0.3% -12.9%
Japan yen 112.850 113.680 112.220 1.3% 0.6%
Malaysia ringgit 4.067 4.150 4.154 -0.1% -2.1%
Singapore Singapore $ 1.338 1.383 1.378 0.3% -2.9%
South Korea won 1070.630 1130.500 1131.270 -0.1% -5.4%
Taiwan Taiwan $ 29.775 30.847 30.859 0.0% -3.5%
Thailand baht 32.696 32.818 32.750 0.2% -0.2%
Switzerland Swiss franc 0.979 0.9917 0.991 0.0% -1.3%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

August goods production (ex-construction) advanced a monthly 1.0 percent following declines in both June and July. The 1.0 percent gain was more than enough to reverse July's marginally smaller revised 0.7 percent drop. As a result, annual workday adjusted growth climbed from 0.3 percent to 0.9 percent, although this was still well short of the rates seen earlier in the year. Solid monthly gains were apparent across all of the main subsectors. Durable consumer goods were up 1.5 percent and both non-durables and capital goods 1.4 percent. Intermediates lagged with a 0.4 percent advance while energy increased 1.9 percent. Regionally, the performance was rather more mixed with healthy rises France (0.3 percent) and, in particular, Italy (1.7 percent) and Spain (0.8 percent) contrasting with a flat performance in Germany. Elsewhere, all member states made positive contributions.


 

Germany

August industrial output fell a further 0.3 percent on the month and that after a steeper revised 1.3 percent drop in July. Production has now contracted for three months in a row and in seven months out of the last nine. At minus 0.4 percent, annual growth even slipped into negative territory. The damage was done by capital goods which followed July's 2.5 percent monthly slump with a 0.7 percent drop. This masked a 0.1 percent rise in basics and a 1.4 percent bounce in consumer goods. Elsewhere, the headline data were depressed by a 1.8 percent slide in construction but boosted by a 1.3 percent gain in energy. Manufacturing output was off just 0.1 percent but this came after a 1.9 percent tumble last time.


 

United Kingdom

August industrial production was a sluggish 0.2 percent monthly advance following an upwardly revised 0.4 percent rise in July. Annual growth edged up from 1.0 percent to 1.3 percent. Manufacturing declined a monthly 0.2 percent — the worst performance since April and trimmed yearly growth from 1.4 percent to 1.3 percent, a 3-month low. The monthly decline was largely attributable to decreases in chemical products (2.3 percent), wood and paper (1.7 percent) and machinery and equipment (1.4 percent). Electrical equipment and pharmaceuticals (both minus 1.0 percent) also had a bad month. Coke and petroleum (1.0 percent) alongside metals (0.8 percent) and textiles and leather (also 0.8 percent) were the best performing subsectors. Elsewhere, total industrial production was boosted by electricity and gas (1.8 percent), water supply (0.6 percent) and mining and quarrying (2.1 percent).


 

August shortfall on global goods trade was £11.20 billion, up from July's larger revised £10.39 billion. However, excluding oil and other erratic items the deficit was £10.40 billion, a slight improvement on July's £10.77 billion. The headline deterioration was due to imports where a 3.1 percent monthly rise easily more than eclipsed a 1.4 percent increase in exports. Even so, the latter at least secured their fourth consecutive monthly advance. Regionally, the deficit with the rest of the EU actually narrowed slightly from £7.25 billion to £6.98 billion, its smallest to date in 2018. However, this was easily offset by a widening in the shortfall with the rest of the world from £3.14 billion to £4.22 billion, a 4-month high.


 

Asia/Pacific

Japan

Japan's private sector machinery orders (excluding volatile items) increased 6.8 percent on the month (seasonally adjusted) in August, slowing from an increase of 11.0 percent recorded in July. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. In original terms, machinery orders (excluding volatile items) advanced 12.6 percent on the year, down from 13.9 percent in July. On a seasonally adjusted basis, orders were up 13.1 percent on the year after increasing 9.2 percent in July. Manufacturing orders increased 6.6 percent on the month in August after increasing 11.8 percent in July, while non-manufacturing orders (excluding volatile items) advanced 6.0 percent after increasing 10.9 percent previously.


 

China

September merchandise trade surplus in U.S. dollar terms widened from $27.91 billion in August to $31.69 billion in September. Year to date, the trade surplus was $221.4 billion in September, well down from $296.6 billion for the same period last year but with large bilateral surpluses remaining with the United States and European Union. Exports rose 14.5 percent on the year, up from 9.8 percent in August. Seasonally adjusted exports advanced 9.8 percent on the month after dropping 2.6 percent in August. Imports were up 14.3 percent on the year after advancing 20.0 percent in August. Seasonally adjusted imports rose 11.9 percent on the month after falling 3.0 percent previously. In domestic currency terms, China's trade surplus widened from CNY179.75 billion in August to CNY213.2 billion in September. Exports increased by 17.0 percent on the year in September after advancing 7.9 percent in August, while imports in yuan terms slowed from 18.8 percent to 17.4 percent.


 

Bottom line

Equities tumbled last week as investors sold shares and sought safe havens to protect their investments. Most data were positive including Japan’s core machine orders, China’s merchandise exports and imports and industrial output in the Eurozone, France, Italy and the UK. Germany however, was down for a third month. There were no central bank decisions.

 

Key UK data will be released next week including the consumer and producer price indexes and the labour market report. China also reports key data including third quarter GDP, consumer and producer prices, industrial production and retail sales. But investors will be watching the markets including bond yields and the behavior of equities as earnings reports are released.


 

Looking Ahead: October 15 through October 19, 2018

Central Bank activities
Oct 17 United States FOMC Minutes
 
The following indicators will be released this week...
Europe
Oct 16 EZ Merchandise Trade (August)
Germany ZEW Survey (October)
UK Labour Market Report (September)
Oct 17 UK Consumer Price Index (September)
Producer Price Index (September)
Oct 18 UK Retail Sales (September)
 
Asia Pacific
Oct 15 India Merchandise Trade (August)
WPI (September)
Oct 16 China Consumer Price Index (September)
Producer Price Index (September)
Oct 18 Japan Merchandise Trade (September)
Australia Unemployment (September)
Oct 19 Japan Consumer Price Index (September)
China Gross Domestic Product (Q3. 2018)
Industrial Production (September)
Retail Sales (September)
 
Americas
Oct 17 Canada Manufacturing Sales (August)
Oct 19 Canada Consumer Price Index (September)
Retail Sales (August)

 

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


 

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