Global Markets

Equity markets were particularly anxious last week as they waited for the minutes from the latest FOMC meeting that was held the end of July. Uncertainty over the Fed's intentions weighed on stock markets in the U.S. and abroad and pushed up Treasury yields over the past few weeks. Investors were searching for a clarification of timing. The question of the week was when will the Federal Reserve begin curtailing its bond purchase program. According to the minutes, there is no time table for cuts in its quantitative easing program. The Federal Reserve continues to say that its decisions are data driven — and this one is no exception. With recent data mixed and some key data points revised lower (such as today’s new housing sales data), precision remains difficult. Although most indexes rallied Thursday and Friday, few managed to recover losses that were incurred earlier in the week.

Emerging markets in Asia are having a difficult time as investors shift capital back to less risky markets in the U.S. and Europe. Driving the flight of funds were the minutes from the last FOMC meeting, which left unchanged market expectations that the Bank would beginning to taper its asset buying program as early as September. That sentiment sent the 10 year Treasury note yield to a two year high in intraday trading on Thursday while at the same time, the U.S. currency climbed in value.

Emerging markets, which rely heavily on cheap dollars to fund large current account deficits, were hit hard by the increase in Treasury yields. The currencies of India and Turkey hit new record lows and their stock markets and bond prices also declined. The currencies of Indonesia, Malaysia and Thailand hit multi-year lows as well, while share markets across Asia outside Japan dropped to a six week low.

Data from Malaysia confirmed the worsening fundamentals of emerging markets, showing an economic slowdown and an evaporating current account surplus. That pushed the ringgit to three year lows. The Thai baht too fell to three year lows, forcing the Bank of Thailand to reassure markets it would act if needed, while the Korean won fell to two week lows. Selling also hit the Mexican peso which lost 2 percent on Wednesday while Russia's ruble sank to almost a four year low against a euro-dollar basket and data showed Bank of Russia dollar sales of $3.7 billion in August.

Global Stock Market Recap

Europe and the UK

Despite strong rallies on Thursday and Friday, both the FTSE (down 0.4 percent) and CAC (down 1.3 percent) declined on the week while the DAX (up 0.3 percent) and SMI (up 0.6 percent) advanced. The driving force behind the gains on the last two days of the week was better than expected European and UK economic data. The strong German GDP data for the second quarter was unrevised, while the British GDP result was revised upward. Both grew 0.7 percent on the quarter. The recent stream of good news from the Eurozone reduced the need for a further interest rate reduction according to the European Central Bank's Ewald Nowotny. Trading volume has been low — it is August when many go on vacation in Europe.

Markets have been increasingly jittery in recent weeks on the prospect that the U.S. Federal Reserve will start reducing its stimulus program, which had lifted global equities. But that was offset Friday by fresh signs of a pickup in the pace of economic growth, with data showing the UK economy had grown more than first thought in the second quarter. The data followed a batch of upbeat macroeconomic data from around the world during the week.

The Bundesbank, Germany’s central bank, caused something of a flurry in otherwise subdued summer markets Monday when it said that the European Central Bank's forward guidance that rates will not rise for an extended period of time is not an unconditional commitment. The Bundesbank said that the ECB's Governing Council had not tied its hands by committing to keep rates low. The bank said, however, that at the same time "were there to be a weaker development, then a cutting of rates would not be excluded."

Asia Pacific

Equities were down last week with exception of the All Ordinaries and Nikkei which managed to edge up 0.3 percent and 0.1 percent respectively. The Nikkei continued to be volatile, trading on the related ups and downs in the value of the yen. At week’s end, equities were boosted by the mostly better than anticipated flash PMI indexes in China, Europe and the U.S. Investors were more optimistic that global economies would be able to weather possible Federal Reserve cut back on its stimulus. There was little new economic data other than the flash PMIs as August winds down.

Elsewhere, while several of the emerging market equity indexes advanced on Friday, the gains barely made a dent in losses incurred earlier in the week. The volatile Sensex rebounded on both Thursday and Friday, jumping 2.3 percent and 1.1 percent respectively to make serious inroads to its losses. The index lost only 0.4 percent on the week. The Indonesia Jakarta Composite plunged 8.7 percent on the week as investors bailed out of investments in that country and its currency sank after worse than estimated economic data and a current account deficit that widened to a record in the second quarter.

The Reserve Bank of Australia published minutes of its monetary policy meeting held on August 6^th. At that meeting, the RBA reduced its key interest rate by 25 basis points to 2.5 percent to help the economy counter the impact of a fading mining boom. The wording suggested that the Board had moved back to a neutral stance. The minutes noted that the Board will continue to assess the outlook and adjust policy as needed. The minutes also said — "Regarding the communication of this decision members agreed that the Bank should neither close off the possibility of reducing rates further nor signal an imminent intention to reduce rates further."

Currencies

The U.S. dollar was mixed last week, rising against the pound sterling and the yen along with the commodity currencies of Australia and Canada but declining against the euro and Swiss franc. The dollar was up against all Asian emerging country currencies followed here. Both India’s rupee and Indonesia’s rupiah led the decline as foreign funds pulled money from regional assets on speculation the Fed will curtail its stimulus. The rupee had its worst week since 2011 and the rupiah dropped by the most since 2008 after the Federal Reserve released minutes from its last FOMC meeting. Thailand entered a recession in the second quarter and Malaysia’s current account surplus shrank 70 percent, prompting the baht and the ringgit to reach the weakest levels since 2010.

The rupiah was up as Indonesia’s government released a policy package including relaxing mineral export rules, offering tax holidays and simplifying the investment-permit process. The rupee lost almost 15 percent this year against the dollar, the worst performer among Asia’s 11 most-active currencies. The Reserve Bank of India is buying long dated government debt today in an attempt to stabilize markets after rising volatility threatened to hurt an economy that is already growing at near the slowest pace in a decade.

Selected currencies — weekly results

Indicator scoreboard

EMU

August flash PMI composite output index climbed a surprisingly large 1.2 points to 51.7, its highest level in twenty-six months. The PMIs for both manufacturing (up 1 point at 51.3) and services (up 1.2 points at 51.0) posted gains with the former also securing a 26-month peak and the latter, a 24-month high. Manufacturing output was up 1.1 points to 53.4, well above the 50 expansion threshold and indicative of the fastest production growth since May 2011. However, total new orders only edged higher as the second monthly increase in manufacturing (best since May 2011) was almost offset by another decline in services. Backlogs similarly rose in goods producing industries and dropped in services, in this case by enough to ensure an overall decline although even this was the smallest in twenty-six months. However, jobs news remained disappointing with broad stability in service sector payrolls contrasting with an accelerated decline in manufacturing to produce a combined drop at a somewhat faster rate than in July. Regionally developments were mixed. Within the core, Germany (composite output index 53.4) saw output grow at its fastest rate since January while in France (47.9) production contracted more sharply than in July. Elsewhere in the Eurozone output expanded for the first time since May 2011. China and the U.S. included in graph above for comparative purposes.

Germany

Second quarter gross domestic product was up an unrevised 0.7 percent and was up 0.5 percent on the year. The first look at the breakdown of the GDP expenditure components showed a 0.5 percent quarterly increase in household consumption, more than twice the increase recorded in the first quarter, and a solid 1.9 percent advance in gross fixed capital formation following a string of quarterly declines. Within the latter, investment in machinery & equipment was up 0.9 percent and construction expanded 2.6 percent. With government current spending 0.6 percent stronger and inventories subtracting 0.1 percentage points, domestic demand grew a quarterly 0.6 percent after a 0.2 percent increase last time. Net foreign trade added 0.2 percentage points to the quarterly change in total output as exports climbed 2.2 percent and imports 2.0 percent.

United Kingdom

Second estimate of second quarter gross domestic product was revised up to a quarterly gain of 0.7 percent from the original estimate of0.6 percent. When compared with the same quarter a year ago, GDP was up a revised 1.5 percent (originally estimated at up 1.4 percent). All of the major GDP expenditure components made positive contributions to quarterly growth led by household consumption for which a 0.4 percent increase was the strongest since the final quarter of 2012. Gross fixed capital formation followed a 0.2 percent gain at the start of the year with a 1.7 percent rise — its best showing in five quarters — and government consumption was up 0.9 percent. With inventories subtracting 0.2 percentage points, total domestic expenditure advanced 0.3 percent on the quarter and was 0.4 percent higher than in the same period last year. Exports were up 3.6 percent on the quarter, their strongest performance since the end of 2011. With imports climbing 2.5 percent, this saw net foreign trade add 0.3 percentage points to quarterly growth. In terms of output, industrial production advanced a quarterly 0.6 percent within which manufacturing gained 0.7 percent and extraction industries 1.4 percent. Utilities were down 2.4 percent but water & sewerage was up 2.3 percent and construction climbed 1.4 percent. Services expanded 0.6 percent led by a 1.7 percent increase in distribution, hotels & catering. Transport and storage & business services (both 0.6 percent) also fared well. The GDP deflator was down 0.3 percent on the quarter making for an annual whole economy inflation rate of 1.8 percent.

Asia/Pacific

Japan

July merchandise trade deficit expanded to ¥1.024 trillion from a year ago. This was the 13^th straight monthly deficit as high energy imports for power generation continued to outpace a gradual recovery in exports. Exports were up for a fifth month on the year, rising 12.2 percent from a year ago. Imports jumped 19.6 percent. The large increase came as petroleum imports, which total more than ¥1 trillion rose 2.4 percent. Exports to Asia were up 9.1 percent from a year ago for the fifth straight increase while exports to China were up 9.5 percent for the fourth consecutive increase. Exports to the U.S. soared 18.4 percent for the seventh straight increase while those to the EU were up 16.6 percent for a second straight increase. On a seasonally adjusted basis, the trade deficit was ¥944 billion. Exports were down 1.8 percent on the month and up 9.1 percent on the year. Imports were up 2.7 percent and 17.9 percent.

Americas

Canada

June retail sales dropped 0.6 percent after jumping 1.8 percent in May. Sales were up 3.1 percent on the year. Except for higher prices, the sales would have looked a good deal softer as, following three successive gains, volumes slumped 1.2 percent from May to stand just 1.9 percent higher on the year. Among the major subsectors, monthly declines were seen in food & drink (1.2 percent), building material & garden equipment (1.9 percent) and clothing & accessories (1.8 percent). General merchandise was down 0.8 percent, miscellaneous retailers lost 1.3 percent and sporting goods, hobby, book & music slid 1.1 percent. On the positive side, autos & parts were up 0.2 percent, their sixth straight monthly increase, as were gasoline sales.

July consumer price index edged up 0.1 percent and was up 1.3 percent from a year ago. Core CPI excluding food and energy inched down 0.1 percent on the month for a 1.1 percent annual increase. At the same time the BoC's preferred measure was only unchanged from June to stand 1.4 percent higher on the year. Seasonally adjusted the overall CPI posted a 0.2 percent monthly gain while both the ex-food and energy index and BoC gauge were up 0.1 percent. Within the basket, the largest increase was posted by household operations, furnishings & equipment (0.4 percent) ahead of recreation, education & reading (0.3 percent). Most other categories posted either minimal increases or no change at all and there were declines in alcohol & tobacco (0.3 percent) and shelter (0.1 percent).

Bottom line

Equities mostly declined last week as investors worried about what would be said in the FOMC minutes. Mostly favorable economic data in the industrial countries helped to neutralize the impact of the minutes. Growth in both Germany and the UK picked up in the second quarter — certainly good news. Further, flash PMI readings tended to substantiate growth going forward and not just for Germany and the UK. China’s PMI surprised in edged over the breakeven point with a reading of 50.1 indicating that manufacturing is stabilizing — certainly good news to supplier countries.

The last week of summer is already here! As always, the last week of the month is a busy one with new economic data from Europe and the usual slew of releases from Japan. Investors will shift their attention to FedSpeak as they gear up for the FOMC September meeting.

Looking Ahead: August 26 through August 30, 2013

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