Global Markets

After showing signs of steadying early in the week, investors once again took flight from risk and sold equities. The reasons for the sell off remain softening economic growth and the European debt situation. A much looked forward to meeting between German Chancellor Angela Merkel and French President Nickolas Sarkozy failed to produce the results the markets were looking for.

They stopped short of increasing the bloc's rescue fund but vowed to stand side-by-side in defending the euro and laid the groundwork for future fiscal union. Their message was that the focus should be on further economic integration rather than signing bailout checks and suggested that straying from eurozone rules and fiscal targets would no longer be tolerated. They rejected the issuance of euro bonds, but said "Euro bonds can be imagined one day, but at the end of the European integration process, not at the beginning." But many experts believe a common bond is the only way to ensure affordable financing for euro zone members struggling with debt.

Last week’s losses reflected an accumulation of bad news, including feeble economic data in the United States and Europe and signs that some banks are having trouble borrowing on the interbank market. On the week, only two indexes in the Asia Pacific region — SET and PSEi — were positive. Losses ranged from 1.1 percent (Hang Seng) to 8.6 percent (DAX).

Global Stock Market Recap

Europe and the UK

Equities tumbled to fresh two year lows amid anxiety about the region's fragile banking sector. As the week began, there was a semblance of recovery from the previous week’s chaotic selling. But selling pressures reasserted themselves after economic data proved disappointing on both sides of the Atlantic and the results of Tuesday’s summit meeting between French and German leaders disappointed. Equities dropped as worries about the European debt situation escalated and first estimates of second quarter growth disappointed — especially in Germany where growth shriveled to only 0.1 percent on the quarter from 1.3 percent in the previous quarter. Banks especially suffered their worst week since 2009 as investors worried about their liquidity and exposure to sovereign debt. A temporary ban on short selling by France, Italy, Belgium and Spain did little to relieve the pressures on the indexes.

German Chancellor Angela Merkel and French President Nicolas Sarkozy failed to quell market fears about the ability of eurozone leaders to contain the region's sovereign debt woes. The two leaders announced plans for closer eurozone integration. However, the plans did not include boosting the size of the eurozone's rescue fund or beginning sales of euro bonds. The two leaders unveiled plans for closer eurozone integration, including deficit limits and biannual summits but said joint euro bonds could only be a longer-term option.

The leaders were under heavy pressure to restore confidence in the eurozone after the dramatic market slump. However, they stopped short of increasing the eurozone's EFSF rescue fund but vowed to defend the euro. Their message was that the focus should be on further economic integration rather than signing bailout checks. The two leaders also proposed taxing financial transactions. Traders had hoped for signals that the issuance of common euro bonds or an increase of the EFSF, were possible options.

Bank of England monetary policy committee members Spencer Dale and Martin Weale ended their push for an increase in interest rates this month as the euro area crisis and signs of a global economic cooling threatened to hurt growth in Britain. The nine member MPC voted unanimously to hold the key rate at a record low 0.5 percent and its asset purchase program ceiling at Stg200 billion according to the minutes of the August 3^rd and 4^th meeting.

Asia Pacific

Most equity indexes tumbled last week as the flight from risk circled the globe. Only the SET and PSEi advanced while the KLCI was unchanged on the week. For the rest of the indexes followed here, it was a sea of red ink with losses ranging from 1.1 percent (Hang Seng) to 4.1 percent (Sensex and STI). The Kospi especially is an example of the wide swings in value that occurred during the week. The index, after plunging over 6.2 percent Friday, was down only 2.7 percent for the week thanks mainly to Tuesday’s gain of 4.8 percent. Japanese stocks, down 2.7 percent, were hard hit by the rising value of the yen against both the U.S. dollar and euro as investors sought safety.

Exporters in Asia watched as weak economic data fanned worries that the global economy could fall into recession again. Weak economic data in both Europe and the U.S. showed slowing and disappointing growth. Escalating worries over European banks' access to short term funding also kept investors on the edge. Industrial metal and crude oil extended declines, while gold prices rallied to a fresh record high. In Australia, worries that global demand for commodities will weaken hit energy and other resource stocks.

Currencies

Despite efforts of the Swiss National Bank to lower the value of the Swiss franc against both the euro and dollar, the currency strengthened for a third day on Friday. The slide in stocks combined with concerns about the health of the global economy have boosted demand for the safest assets. The franc rose against all but one of its 16 major peers Friday even after the SNB said this week it may take further steps to curb the currency’s strength. The franc’s gain in the past three days failed to erase its weekly decline against the euro as investors were mindful that the SNB may introduce new measures to damp demand for the franc. SNB Vice President Thomas Jordan has said the Bank is assessing a whole range of options to prevent the franc from rising excessively.

The SNB said Wednesday that it would expand existing measures to counter the escalating value of the Swiss franc by expanding bank sight deposits and that it would take further measures against the currency's strength if necessary. "The measures taken thus far by the Swiss National Bank (SNB) against the strength of the Swiss franc are having an impact. Nevertheless, the Swiss franc remains massively overvalued," the SNB said in a statement. It said it would expand banks sight deposits to 200 billion francs from 120 billion francs. To achieve the new target level the SNB said it would repurchase outstanding SNB Bills and employ foreign exchange swaps. The SNB has already slashed interest rates to zero and last week said it would use forex swaps to accelerate the increase in Swiss franc liquidity.

The yen rallied to the strongest level since World War II against the dollar as the U.S. economic slowdown and Europe’s debt crisis heightened worries that global growth is fading. On Friday, the dollar fell to a record ¥75.95 against the yen at one point during Friday morning trading, dipping below the previous record of ¥76.25 reached on March 17^th in the immediate aftermath of the March 11^th earthquake and tsunami. Investors, spooked by growing concerns about a global economic slowdown and the turmoil in the financial markets, continue to pour money into the relative safety of the Japanese currency. The specter of prolonged monetary easing in the U.S. is shrinking the interest rate gap between that country and Japan, fueling yen buying.

The Japanese government intervened on August 4^th to stem the yen's rapid rise, spending roughly ¥4.5 trillion to purchase dollars. The Bank of Japan also decided on further monetary easing by expanding its asset purchase program by ¥10 trillion. The impact of the intervention evaporated in less than a week. The strong yen could cast a pall over the Japanese economy, which is beginning to rebound from the aftermath of the March disaster.

Selected currencies — weekly results

Indicator scoreboard

EMU

Flash second quarter gross domestic product weakened to 0.2 percent on the quarter from 0.8 percent in the previous quarter. On the year, GDP was up 1.7 percent, down from the 2.5 percent gain the quarter before. Being the flash estimate, Eurostat did not offer any details of the expenditure components of real GDP. Among the big four states, quarterly growth slowed in Germany, France and Spain. However, Italy managed to grow more rapidly, increasing 0.3 percent and up from the 0.1 percent of the two previous quarters. However, Germany’s growth slumped to a surprising 0.1 percent after increasing 1.3 percent the quarter before. In France, GDP was flat on the quarter after growing 0.9 percent. Spanish expansion edged down to a sluggish 0.2 percent from 0.3 percent the quarter before. Of the smaller countries reporting, there were solid performances by Finland (1.2 percent), Austria (1.0 percent), Estonia (1.8 percent) and Belgium (0.7 percent).

June seasonally adjusted merchandise trade deficit expanded to E1.6 billion from E0.8 billion in May. The unadjusted surplus was E0.9 billion, up from E0.7 billion in May. The deterioration in the seasonally adjusted balance was due to a drop of 4.7 percent in exports while imports were down a lesser 4.1 percent. On the year, exports were up 5.3 percent while imports were up 3.8 percent.

July harmonized index of consumer prices was down 0.6 percent and up 2.5 percent on the year as anticipated. Core HICP excluding food, alcohol, energy and tobacco eased to an annual increase of 1.2 percent after increasing 1.6 percent in June. Energy prices spiked 11.8 percent after jumping 10.9 percent on the year in the previous month. Excluding only energy, the core was up 1.5 percent annually. Prices in most sub-categories increased. Communications prices however, were down a further 1.6 percent after dropping 1.2 percent in June. Clothing prices dropped 2.9 percent on sales after increasing 1.0 percent on the year the month before. Among the member states, prices edged up to an annual increase of 2.6 percent from 2.4 percent in Germany. However, prices in France edged down to an increase of 2.1 percent from 2.3 percent the month before. Prices in Italy dropped from a 3.0 percent increase in June to 2.1 percent in July. Prices in Spain were up 3.0 percent in both June and July.

Germany

Second quarter flash gross domestic product edged up 0.1 percent and was up 2.7 percent on the year. This was a significant slowdown from the first quarter’s growth of 1.3 percent and 4.6 percent on the year. The second quarter pace was the slowest since the 2009 recession. As usual the Federal Statistics Office provided no details to explain the headline advance. However, the FSO cited total investment and inventory changes as sources for growth with offsets coming from foreign trade, private consumption and construction investment. The German national accounts release also included a revision to the historical GDP series. These revisions suggest 1) that the recession in 2008 was deeper than previously thought, 2) German GDP has not yet recovered to its pre-crisis peak and 3) the German output gap is now wider than previously thought, pointing to more spare capacity.

July producer prices jumped 0.7 percent after a 0.1 percent increase in June. The monthly boost lifted the annual rate to 5.8 percent. The latest jump was led by a 1.9 percent monthly increase in energy. Basic goods edged up 0.1 percent. Capital goods were up 0.1 percent while consumer goods gained 0.2 percent. The PPI excluding energy rose a monthly 0.2 percent with a year-ago gain of 3.8 percent.

United Kingdom

July consumer prices were unchanged on the month and up 4.5 percent on the year. Core CPI was also unchanged on the month and up 3.1 percent on the year. In June prices edged down 0.1 percent and were up 4.2 percent on the year. All goods prices were down 0.5 percent on the month and up 4.5 percent on the year while services prices jumped 0.7 percent and 4.4 percent. According to ONS, upward pressure on prices was exerted by miscellaneous goods & services where prices increased by 0.3 percent this year compared with a decline of 0.5 percent between the same two months a year ago. The upward effect came from a wide variety of goods and services but by far the largest contribution came from financial services. Although clothing & footwear prices dropped 3.5 percent this year, it was much less than last year’s drop of 4.9 percent. Other categories also contributed including furniture, household equipment & maintenance, housing & household services and recreation & culture. Weakness in food & non-alcoholic beverages produced downward effects from a wide range of products including fish, fruit and mineral waters, soft drinks & juices.

July claimant count unemployment jumped a larger than expected 37,100, its steepest gain since May 2009 after increasing by 31,300 in June. This brought the total claimant count level to 1,464,000. The claimant unemployment rate climbed to 4.9 percent from the upwardly revised level of 4.8 percent in June. The ILO definition showed unemployment jumping by 39,000 in the three months to June after declining 37,000 over the three months to May. The jobless rate on this measure jumped to 7.9 percent from 7.7 percent in the previous three months. Average earnings as measured by the three month moving average accelerated to 2.6 percent from 2.3 percent in May. For the single month of June, average earnings increase jumped to 2.9 percent from 2.5 percent the month before. The financial sector once again is the main cause of the overall pick-up.

July retail sales edged up 0.2 percent, slightly less than expected. On the year, sales were flat. June sales were revised to an increase of 0.8 percent from the previous estimate of 0.7 percent. Excluding auto fuel, sales were also up 0.2 percent on the month but were 0.2 percent lower on the year. Sales appear to have been dented by prices that rose at their fastest pace in more than 15 years. The implied retail sales deflator excluding auto fuel was up 3.1 percent after increasing 2.3 percent the previous month. The largest price gains were seen in non-food especially in clothing & footwear. Sales in the predominantly non-food sector were up 0.7 percent on the month. However, sales in clothing & footwear and household goods slipped 0.3 percent each. Non-store retailing sank 0.9 percent.

Asia/Pacific

Japan

First estimate of second quarter GDP slid a less than expected 0.3 percent on the quarter or at an annualized rate of 1.3 percent. On the year, GDP was down 0.9 percent. First quarter GDP dropped a revised annualized rate of 3.6 percent. Growth dropped 0.9 percent and 0.7 percent on the year in the first quarter. Government officials said that a combination of a high yen against the euro and dollar and slower overseas growth hit exports. Services were down on lower rents after the earthquake while nondurable goods spending dropped on lower power use. Private consumption was hit as well in the aftermath of the earthquake. Domestic demand was up 0.4 percent on the quarter with private demand picking up 0.3 percent. However, private consumption and consumption of households both slipped 0.1 percent. Private residential investment dropped 1.0 percent while private non-residential investment edged up 0.2 percent. Exports dropped 4.9 percent on the quarter. The domestic demand deflator dropped by 0.9 percent for the second quarter.

July unadjusted merchandise trade surplus was Y72.5 billion, up from Y68.6 billion in June. On the year, exports were down 3.3 percent while imports were up 9.9 percent. On a seasonally adjusted basis, the merchandise trade deficit narrowed to Y130.5 billion from Y196.5 billion in June. On the month, exports were up 0.8 percent while imports were down 0.4 percent. On an unadjusted basis, exports to China edged down 1.0 percent while imports were up 6.7 percent when compared with the same month a year ago. To all of Asia, exports were down 2.7 percent while imports jumped 8.5 percent. Exports to the U.S. dropped 8.2 percent while imports declined 5.3 percent. However, exports to the EU were up 6.0 percent while imports were up 7.7 percent.

Americas

Canada

June manufacturing sales dropped 1.5 percent to C$45.3 billion — the lowest level since November 2010. Sales have now declined for three consecutive months after growing steadily since May 2009. On the year, sales were up 2.3 percent. Constant dollar manufacturing sales were down 1.6 percent on the month in June. Lower sales were reported in 15 of 21 industries representing 77.5 percent of total manufacturing. Sales in six provinces declined. Durable goods sales plunged 1.9 percent while nondurables were 1.2 percent lower. Petroleum and coal sales are behind much of June's decrease. Sales of petroleum & coal products sank 6.6 percent. The decrease reflected price declines of 2.6 percent and lower volumes as a result of ongoing shutdowns for retooling at various plants. Miscellaneous manufacturing plummeted 16.1 percent after rising 2.4 percent in May. The decline mainly reflected a drop in sales by manufacturers of jewelry and silverware. Machinery sales declined 4.2 percent after a 7.8 percent increase in May. Despite the drop, machinery sales remained strong and have risen in 14 of the past 17 months. On the upside, sales in the chemical industry were up 5.8 percent, reflecting gains in the pesticide, fertilizer & other agricultural chemical industry.

July consumer prices were up 0.2 percent and 2.7 percent in the 12 months to July primarily the result of higher prices for gasoline and food purchased from stores. This follows a 3.1 percent annual increase in June and a 3.7 percent advance in May. Energy prices advanced 12.9 percent on the year following a 15.7 percent increase in June. Gasoline prices jumped 23.5 percent compared with the 28.5 percent gain in June. Food prices were up 4.3 percent for the second month. The core CPI excluding food and energy was unchanged on the month and increased 1.2 percent in the 12 months to July. The Bank of Canada's core index advanced 0.2 percent on the month and 1.6 percent in the 12 months to July, following a 1.3 percent gain in June. On a seasonally adjusted monthly basis, consumer prices increased 0.1 percent following a 0.3 percent decline the previous month. The transportation index, which includes gasoline, remained unchanged following a 2.4 percent decline in June. The food index continued to rise, increasing 0.5 percent after advancing 0.3 percent in June. The shelter index was up 0.4 percent while the recreation, education & reading index increased 0.2 percent. On an annual basis, prices for most major components increased at a slower rate in July. The changes in the transportation index (6.5 percent) and the food index (5.1 percent) were the main contributors to the advance in the CPI.

Bottom line

Equities sank once again as worries about the European sovereign debt situation escalated despite the Merkel/Sarkozy meeting Tuesday. Estimates of second quarter growth in Europe were generally weaker than anticipated while in the U.S. a plethora of economic indicators did little to encourage risk taking.

Globally it is a light week for new economic data so investors that are not on vacation will have to look elsewhere for trading clues. Friday’s speech by Fed Chairman Ben Bernanke at the Kansas City Fed’s annual meeting in Jackson Hole Wyoming will be anticipated all week.

Looking Ahead: August 22 through August 26, 2011

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