Global Markets

New economic data were light last week. However, there was plenty of news for investors to home in on. Investors focused on a two day China-United States trade negotiation meeting, FOMC minutes from the Federal Reserve’s July 31 and August 1 meeting and Fed chair Powell’s Friday speech at the Kansas City Fed’s annual Jackson Hole, Wyoming symposium.

Wither tariffs

U.S. and Chinese officials ended two days of negotiations in Washington on Thursday that were aimed at easing trade tensions with no apparent progress. The talks — which had been shrouded in low expectations — marked the first attempt to patch up differences on trade between Washington and Beijing since June, when economic relations between the two countries soured leading to an escalating tariff war. Even as officials of the two countries met in Washington, $16 billion in new tariffs on Chinese imports were enacted by the Trump administration, a move that was immediately matched by Beijing with retaliatory measures of the same scale.

The tariffs, scheduled weeks ago, did not interfere with the start of a second day of trade talks in Washington led by Chinese Commerce Vice Minister Wang Shouwen and David Malpass, the U.S. Treasury undersecretary for international affairs.

President Donald Trump has threatened to put duties on almost all of the more than $500 billion of Chinese goods exported to the United States annually unless Beijing agrees to sweeping changes to its intellectual property practices, industrial subsidy programs and tariff structures, and buys more American goods. That figure would be far more than China imports from the United States, raising concerns that Beijing could consider other forms of retaliation, such as making life more difficult for American companies in China or allowing its currency (yuan) to weaken further to support its exporters.

Though it is too early for trade damage to show up in much economic data as yet, tariffs are beginning to increase costs for consumers and businesses on both sides of the Pacific, forcing companies to adjust their supply chains and pricing, with some U.S. companies looking to decrease their reliance on China.

And the much anticipated Powell speech in Wyoming basically stuck to the Fed’s mantra of gradual rate increases. Powell is not seeing risks of the U.S. economy overheating or of signs that inflation is looming. Rather he told the annual Jackson Hole symposium that the Fed is attempting to navigate between the twin risks — moving too quickly and needlessly shortening the economic expansion and conversely lifting rates too slowly and risking a “destabilizing overheating”.

Global Stock Market Recap

Europe and the UK

Equities advanced last week even though traders were reluctant to make any major moves prior to Friday’s remarks by Federal Reserve Chairman Jerome Powell at the Kansas City Fed's economic policy symposium in Jackson Hole, Wyoming. Traders also continued to keep a close eye on the trade dispute between the U.S. and China. The two-day trade talks between the Chinese delegation led by the country's Commerce Vice Minister Wang Shouwen and David Malpass, the U.S. Treasury undersecretary for international affairs ended without any progress. However, while traders were encouraged by some positive economic data from both Germany and France, concerns over trade tensions between the U.S. and China kept gains in check.

On the week, the FTSE was up 0.3 percent, the CAC gained 1.6 percent, the DAX advanced 1.5 percent and the SMI was 0.5 percent higher.

Brexit

The EU’s lead Brexit negotiator Michel Barnier has promised to intensify negotiations with the UK as the two sides enter the final stages of talks over the UK’s planned exit next March. He said that negotiations are entering the final stage after his third meeting with Dominic Raab, his UK counterpart in Brussels Tuesday. “The EU and UK will negotiate continuously from now on”, said Mr Barnier. The two men have agreed to meet in Brussels again next week as negotiators focus on sticking points including the future of the Northern Ireland border. Brexit talks have intensified as negotiators eye an autumn summit to agree on a withdrawal agreement. To set up talks, the EU’s 28 leaders will discuss Brexit at a summit in Salzburg, Austria next month.

Greece finally emerged out of its final bailout program helping it to re-enter the financial markets to raise its own funds for the first time in eight years. "Greece is now in a position where it can enjoy the full extent of euro area membership, abiding by the same rules as every other euro country," Eurogroup President Mario Centeno said. However, Greece's troubles are not over yet. It is emerging from the bailout with the Eurozone's highest debt burden, at about 180 percent of GDP as of 2017. 

Asia Pacific

Asian Pacific equities advanced on the week with the exception of those in Australia. But shares were mixed at week’s end as trade war tensions and the prospects of a no-deal Brexit threatened to deepen the risks to global growth. The All Ordinaries retreated 1.1 percent. Gains ranged from 0.11 (STI) to 3.2 percent (Jakarta Composite). The Shanghai Composite added 2.3 percent while the Nikkei was 1.5 percent higher on the week.

Asian stocks outside of Japan declined Friday, trimming the week's gains as hopes that negotiations between the U.S. and China would help to ease trade tensions faded after a round of talks ended with no apparent progress. While officials were meeting, new tariffs went into effect. New tariffs totaling $16 billion were imposed on Chinese imports — they were immediately matched by Beijing with retaliatory measures of the same scale. The tariffs, scheduled weeks ago, did not interfere with the start of a second day of trade talks in Washington.

On Friday, Australian shares reversed earlier losses to finish little changed after government lawmakers elected Treasurer Scott Morrison as the next Prime Minister replacing Malcolm Turnbull and ending a week of political uncertainty. But it was too little and too late for equities to finish in positive territory for the week. They declined after the political battle saw the then prime minister unseated and replaced by New Australian Prime Minister Scott Morrison who promised generational change in the warring Liberal party. He sought to end an internecine battle that has scarred the conservative government ahead of an election due by May 2019.

Morrison, who was treasurer under outgoing Prime Minister Malcolm Turnbull, emerged the surprise winner in a three-way challenge for the leadership of the Liberal party brought on by a right-wing rival this week. Stepping up to become Australia’s sixth prime minister in less than 10 years, Morrison has inherited leadership of a coalition between the Liberal and National parties whose one-seat majority will have to be defended when a by-election is held for a safe Sydney seat that Turnbull is set to vacate. Morrison’s victory was welcomed by financial markets, which have been shaken by the political instability. Australian shares edged higher on Friday, rebounding after three days of losses.

Currencies

The U.S. dollar retreated against all of its major counterparts with the exception of the yen last week. In prepared remarks for a much anticipated speech in Jackson Hole, Fed Chair Jay Powell said he saw “no clear sign of acceleration” of inflation above 2 percent and that “there does not seem to be an elevated risk of overheating.” The U.S. dollar extended its decline after the Federal Reserve chair said he does not reckon the American economy is overheating, renewing his call to only “gradually” raise interest rates.

The Australian dollar jumped Friday after Scott Morrison won a Liberal Party leadership battle, paving the way for the treasurer to replace Malcolm Turnbull as prime minister. The Australian dollar was up against the U.S. dollar after Mr Morrison won a ballot of Liberal MPs, beating Peter Dutton, former home affairs minister, and Julie Bishop, foreign minister. The Australian dollar typically ignores local politics but the week’s drama in Canberra does seem to have hurt the currency. But history suggests the Australian dollar will soon return to its traditional fundamental drivers.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

The August flash composite PMI edged up to 54.4 from 54.3 in July. The flash composite PMI indicated that the EZ economy continued to grow. Companies’ expectations of future growth slipped to the lowest for nearly two years. But the increase indicated a marginal acceleration of output growth. However, the output increase was the third weakest since January 2017 and was markedly lower than the expansions seen earlier in the year. Although growth rates improved slightly in manufacturing and services, both remained among the weakest in at least one-and-a-half years. New order growth picked up marginally in both sectors but, measured overall, was nevertheless the third-weakest since December 2016. Manufacturing was where new export orders registered the smallest monthly rise in two years. Future expectations of business activity deteriorated to a 23-month low, slumping to a 34-month low in manufacturing and a 21-month low in the service sector. Optimism was subdued by recent signs of cooling demand, higher prices and rising political concerns.

Germany

Second quarter seasonally adjusted gross domestic product was up 0.5 percent on the quarter and 2.0 percent on the year. Non-seasonally adjusted GDP was up an unrevised 2.3 percent on the year. The final consumption expenditure of households rose by 0.3 percent and government final consumption expenditure increased by 0.6 percent on the previous quarter. Capital formation was higher, too. Fixed capital formation in machinery and equipment increased by 0.3 percent and in construction by 0.6 percent on the first quarter of 2018. Overall, domestic uses increased markedly by 0.9 percent compared with the first three months of the year. According to provisional calculations, exports of goods and services were up 0.7 percent compared with the first quarter of 2018. There was a notably larger increase in imports (+1.7 percent) over the same period. On the year, positive contributions to growth came from domestic demand in the second quarter of 2018. After price adjustment, the final consumption expenditure of both households and government rose by 1.0 percent. Compared with the second quarter of 2017, gross fixed capital formation in machinery and equipment grew by 5.4 percent (price adjusted). Gross fixed capital formation in construction was up 3.2 percent.

Americas

Canada

Following an upwardly revised 2.2 percent increase in May, retail sales edged down 0.2 percent in June. Sales were down in 6 of 11 subsectors, representing 52 percent of total retail trade. On the year, sales were up 3.8 percent. In volume terms, real sales were down 0.3 percent and were up 0.7 percent on the year. Lower monthly sales at gasoline stations and motor vehicle and parts dealers more than offset higher sales at food and beverage stores and building material and garden equipment and supplies dealers. Excluding the first two subsectors, retail sales were up 0.3 percent. On a quarterly basis, retail sales were up 1.0 percent in the second quarter following a 0.5 percent decline in the first quarter. In volume terms, retail sales increased 0.9 percent in the second quarter.

Bottom line

Equities advanced for the week with the exception of the Australian All Ordinaries. It was a quiet week for new economic data. However, what data were released was mixed. In the U.S., housing data disappointed while durable goods — after removing transportation components — advanced. Initial jobless claims continued to decline. Flash PMI data were mostly lower. The U.S. and Chinese meeting on tariffs made no discernable progress. And Fed Chair Jerome Powell’s Jackson Hole speech contained nothing market moving.

The last week of summer is here already! While the calendar isn’t full, many important events will be released. In Japan, July retail sales, unemployment and industrial production will be released. And in Europe, France and Italy post second quarter growth data. And in Canada, second quarter GDP will finally be released. The data will be closely parsed — the Bank of Canada meets the following week.

Looking Ahead: August 27 through August 31, 2018

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