Global Markets

Equities were mixed in a volatile week with thin trading as the August vacation period wound down. Investors were concerned about the situation in Syria and the possibility that the Federal Reserve might begin to cut back on its bond purchases at its mid-September meeting.

The prospect of U.S. led military action in Syria took its toll on market sentiment, fueling worries about Middle Eastern crude oil supply. But concern eased slightly at week's end as prospects of an imminent Western-led attack on Syria lessened after the British parliament voted against military strikes in Syria and the White House issued a statement saying President Obama's decision will be guided by what is in the best interests of the U.S.

Equities were mostly lower for the week and month of August. On the week, losses ranged from 0.8 percent (S&P/TSX Composite) to 4.6 percent (IBEX). The All Ordinaries edged up 0.2 percent on the week while the Kospi climbed 3.0 percent. In August, the All Ordinaries was up 1.8 percent, the Kospi gained 0.6 percent, the Shanghai Composite jumped 5.2 percent, the MIB was up 1.2 percent and the S&P/TSX advanced 1.3 percent. All other indexes followed here lost ground in August. The losses ranged from 0.7 percent (Hang Seng) to 9.0 percent (Jakarta Composite and SET).

Global Stock Market Recap

Europe and the UK

Most equities here finished the week and month on the downside. Investors were unwilling to take positions due to the uncertainty surrounding the situation in Syria. Oil stocks and banks were among the weakest performing stocks at the end of the week. On the week, the FTSE lost 1.2 percent, the CAC and SMI were down 3.3 percent and the DAX dropped 3.7 percent. The indexes dropped 3.1 percent, 1.5 percent, 1.0 percent and 2.1 percent in August respectively. It should be noted that only the Italian MIB managed to increase in August — by 1.2 percent.

The Bank of England (BoE) will allow banks that maintain healthy capital to reduce the level of their required liquid asset holdings, releasing £90 billion of additional credit. BoE governor Mark Carney told a gathering of investors and entrepreneurs on Wednesday that major banks and building societies, which meet the minimum 7 percent capital threshold, will be allowed to cut their holdings of liquid investments. In his first policy speech as the BoE governor, Carney said that banks have been asked to repair their balance sheets so that their capital ratios at least reach a threshold of 7 percent by the turn of the year. Also, if the ongoing economic recovery seems to be falling short of the strong growth that is required, the Bank will carefully consider measures to stimulate the recovery further, he said.

Asia Pacific

While stocks were up broadly Friday, it was too late for many of them to reverse losses incurred earlier in the week and especially for the month of August. After soaring the first four months of the year, the Nikkei has retreated for the second four months. In August, the Nikkei lost 2.0 percent thanks to the 2.0 percent decline last week as investors braced for possible unilateral military action by the United States against Syria within days. The slew of July data — even though for the most part better than anticipated — did not help to lift morale on the last day of the month.

While the Hang Seng retreated 0.7 percent on the week, the Shanghai Composite was up 2.0 percent. The same pattern held for the month — the former was 0.7 percent lower while the latter jumped 5.2 percent and was the best performer in this region for the month. China had a good month as signs of economic stabilization and a strong reporting season helped push up stocks in Chinese companies. The Kospi was up 3.0 percent for the week to close at a nearly three month high, helped by continued foreign fund buying as concerns over Syria eased and overnight data showed the US economy grew at a faster pace in the second quarter than previously estimated. On the month the index was up 0.6 percent.

But it was the emerging markets that were hit the hardest during August. Both the SET and Jakarta Composite were down 9.0 percent for the month while the PSEi lost 8.5 percent. The Philippines along with Indonesia registered the worst monthly declines since the global financial crisis in 2008.The three fast growing countries — known as the "TIP" economies — had seen a surge of buying over the past couple of years that has sent valuations skyward and ranked them among Asia's top performers earlier this year. Many investors still remain optimistic, saying the gains had been too far and fast and a pullback is natural. The trigger for the selloff has been rising yields on dollar denominated assets and uncertainty over the future policy of the Federal Reserve that has spooked global investors. That has left risky markets less appealing and prompted cash to be pulled out, creating havoc for small emerging markets.

Currencies

The U.S. dollar was up against its major counterparts with the exception of the yen last week. The yen gained against the majority of its most traded peers as investors bet the financial turmoil that has been weighing on emerging market assets in August has longer to run, fueling demand for Japan’s currency as a safe haven. The yen strengthened against all but one of its major counterparts last week.

India’s rupee had its biggest monthly loss in 20 years on concern that a deepening economic slowdown will deter investors. The currencies of India, Mexico and Turkey have all slid more than 2 percent against the dollar last week as stimulus reduction speculation sapped demand for higher yielding assets at the same time that the prospect of expanded conflict in the Middle East dampened risk taking.

India’s rupee gained 1.3 percent to close at 65.705 per dollar in Mumbai on Friday after slumping to a record 68.8450 on August 28. On that day, the rupee plummeted the most in two decades to a record low as a surge in oil prices threatened to worsen India's current account and push the economy toward its biggest crisis since 1991. The currency declined 3.6 percent on the week, 8.2 percent in the month of August and is down 16.3 percent year to date.

India’s budget and current account deficits are responsible for the rupee’s slide, Finance Minister Palaniappan Chidambaram said. The government is taking steps to contain the shortfall in the broadest measure of trade to within $70 billion in the year through March 2014, he added, compared with an unprecedented $87.8 billion the previous period. India’s gross domestic product was up a less than expected 4.4 percent in the three months ended June 30, the least since the first quarter of 2009.

Selected currencies — weekly results

Indicator scoreboard

EMU

July M3 money supply was up 2.2 percent from a year ago. The three month moving average, which is the ECB's preferred measure, was up 2.5 percent from the same three months a year ago but down 2.8 percent from the previous three months. Lending was especially weak with overall loans to the private sector contracting at a 1.9 percent 12-month rate after a 1.6 percent drop last time. The rate of borrowing by households actually edged up to 0.1 percent although within this lending for house purchase was a little weaker at 0.7 percent. Lending to non-financial corporation was particularly soft, declining 3.7 percent from a year ago after a 3.2 percent drop at the end of last quarter. Finally, borrowing by non-monetary financial intermediaries (excluding insurance corporations and pension funds) slumped 2.3 percentage points to a minus 5.5 percent annual rate.

August economic sentiment indicator (ESI) gained 2.7 points to a reading of 95.2 — the highest since March 2012 — and the fourth consecutive monthly increase. The ESI's latest improvement reflected increased optimism in all of the major sectors except construction where the sub-index dropped 1.1 points to minus 33.5. Consumer confidence was up nearly 2 points at minus 15.6 and morale in industry gained 2.7 points to minus 7.9. There was also a much needed bounce in retail which saw a 3.3 point increase to minus 10.7 as well as a 2.5 point increase in services to minus 5.3. Regionally the headline sentiment gain was broad-based with fourteen member states posting new increases. Within this, all of the five larger economies made progress with the Netherlands up 5.2 points, Germany 3.3 points, Italy 2.0 points, France 1.6 points and Spain 0.8 points.

August flash harmonized index of consumer prices eased to 1.3 percent, down 0.3 percentage points from the July pace and just a tick above the 1.2 percent April low. The underlying picture was essentially stable with the HICP excluding energy, food, alcohol & tobacco up 1.1 percent on the year, matching its modest increase at the start of the quarter. Inflation in the non-core part of the basket dropped 0.2 percentage points to 3.3 percent with energy having the largest impact on the headline rate, sliding from 1.6 percent in July to minus 0.4 percent. Non-energy industrial goods prices were up 0.3 percent on the year while services saw a 1.5 percent gain.

July unemployment declined a seasonally adjusted 15,000 to 19.231 million in July. This was its second consecutive monthly decline following a 35,000 drop in June. However, the latest decline was not enough to move the jobless rate which held steady at 12.1 percent for the fifth month in a row. A 0.1 percentage point decline in the German rate to 5.3 percent helped but Spain held onto June's 0.1 percentage point drop to 26.3 percent and Portugal saw a 0.2 percentage point slide to 16.5 percent. The Italian rate also dipped to 12.0 percent and in France unemployment held steady at 11.0 percent. Still, it was not all good news as the Dutch rate climbed another 0.2 percentage points to 7.0 percent and Cyprus was up 0.3 percentage points at 17.3 percent, an increase of 1.5 percentage points since April.

Germany

August Ifo economic sentiment improved to a reading of 107.5, up more than a point from its July reading — its fourth successive monthly increase. It is now at its highest level since April 2012. August's advance was led by a 1.9 point increase in the current conditions component to 112.0, its strongest reading since June last year. The expectations gauge also made some headway, gaining almost a point to 103.3. This was its highest level in seven months. At a sector level the performances were mixed. A solid pick-up in confidence in manufacturing and an even sharper jump in wholesale contrasted with drops in construction and retail. Morale in services was also down slightly.

Asia/Pacific

Japan

July retail sales declined for the first time since April. Retail sales were down 0.3 percent from a year ago. Auto sales were down 6.2 percent after sliding 6.5 percent in June. It was the third consecutive month that auto sales declined. Machinery sales tumbled 7.4 percent after gaining 2.7 percent in June. Fuel sales advanced 7.9 percent after a gain of 5.2 percent in June. Also increasing on the month were sales of food & beverages (up 1.1 percent), fabrics, apparel & accessories (up 0.9 percent) and drugs & toiletries stores (also up 0.9 percent).

July consumer price index was up 0.2 percent on the month and up 0.7 percent from a year ago. Core CPI excluding only fresh food edged up 0.1 percent and 0.7 percent on the year. Excluding both food and energy, the CPI was unchanged on the month and edged down 0.1 percent from a year ago. Costs for imports have increased given the weakening value of the yen. Energy costs jumped 8.7 percent after increasing 7.0 percent on the year. A large portion of Japan’s energy supplies are imported and the declining value of the yen has increased the cost of energy. Television prices however, dropped 5.3 percent on the year after sinking 5.5 percent in June. Transportation and communication prices were up 2.6 percent.

July unemployment slipped to 3.8 percent from 3.9 percent the month before. This is the lowest level since October 2008. The number of unemployed persons declined 330,000 or 11.5 percent from the same month a year ago. The total number of unemployment was 2.55 million. The number of employment increased 340,000 or 0.5 percent from a year ago. Payroll jobs in the month of July were up 10,000 from the previous month. The labour force participation rate was unchanged at 59.2 percent.

July household spending edged up 0.1 percent from a year ago after slipping 0.4 percent in June. This was the first increase since April. Spending was mixed. Food spending was up 2.8 percent from a year ago while housing plunging 12.1 percent. Furniture & household utensils though were up 10.3 percent. Both medical spending and education spending were down with the former sinking 5.3 percent and the latter, down 8.9 percent. Spending on culture & recreation climbed 6.5 percent. Heat waves boosted demand for air conditioners while the wealth effects and higher summer bonuses prompted some households to spend more on domestic and overseas holiday tours as well as eating out. But the increase was low as spending on home maintenance, automobiles and tuitions continued to decline from year-earlier levels.

July industrial production was up 3.2 percent on the month but only 0.2 percent from a year ago. This was the first monthly increase since May. General-purpose, production and business oriented machinery was up 5.5 percent on the month after dropping 2.8 percent the month before. Electronic parts and devices were up 7.8 percent more than reversing June’s 7.0 percent decline. Transport equipment was up 1.9 percent after declining 3.8 percent in June and 3.7 percent in May. Metal oxide semiconductor ICs (Memory) jumped 24.7 percent on the month. Digital transmission equipment jumped 48.9 percent and Midget passenger cars advanced 16.4 percent.

India

Second quarter gross domestic product was up 4.4 percent from a year ago — the smallest rate of growth since the first quarter of 2009. This was the third consecutive quarter that economic growth fell short of the 5 percent. Most areas showed renewed signs of slowing activity. In particular, manufacturing output declined 1.2 percent on the year and mining & quarrying fell 2.8 percent. Utilities output weighed in at 3.7 percent after a 6.2 percent increase in the year ago period and construction growth more than halved to just 2.8 percent. In addition, trade hotels, transport & communications expanded 3.9 percent, well down on last year's 6.1 percent increase. Fortunately, community, social & personal services held up well (9.4 percent) and financing, insurance, real estate & business services (8.9 percent) also performed respectably.

Americas

Canada

July industrial product prices were 0.3 percent higher on the month and were 1.4 percent higher on the year. The second successive 0.3 percent monthly advance was mainly attributable to a 1.1 percent bounce in the cost of petroleum & coal products. Excluding this sector the IPPI was up 0.2 percent from the end of the second quarter and was 0.7 percent above its level in July 2012. The other monthly increases of note were in motor vehicles & transportation equipment (0.5 percent) where the exchange rate was a major factor, and meat, fish & dairy products (0.9 percent). The only declines of any real size were in chemicals & chemical products (0.6 percent) and miscellaneous manufactured products (1.1 percent). Raw material and fuel costs surged 4.2 percent on the month, their steepest increase since April 2011. Annual growth of the RMPI jumped from July's 4.0 percent to 7.6 percent. Mineral fuels were to blame and costs here were up 9.1 percent from June, without which the headline index would have slipped 0.1 percent on the month and declined 1.1 percent on the year. Other sizeable monthly gains were seen in wood and ferrous metals (both 1.8 percent). The major offset came from vegetable products (down 2.8 percent).

Second quarter gross domestic product was up 0.4 percent on the quarter (1.7 percent annualized rate) and 1.4 percent on the year. Flooding and industrial unrest were two key factors holding back economic growth last quarter. Household consumption was up 0.9 percent on the quarter, more than triple the rate registered in the previous period, and alone added some 0.5 percentage points to the increase in GDP. However, gross fixed capital formation followed a 0.4 percent drop at the start of the year with a 0.3 percent decline, reflecting mainly a 1.1 percent contraction in general government. Businesses investment edged down 0.1 percent. At the same time, government final consumption climbed 0.6 percent, twice its pace of the previous period. Final domestic demand was up 0.6 percent, comfortably eclipsing a disappointing 0.1 percent gain last time. Inventories were unwound to the tune of 0.2 percent of GDP. Exports advanced just 0.2 percent on the quarter, well short of the first quarter's 1.3 percent surge and only half the pace of imports. As a result, the current account deficit widened by more than C$1 billion from the first quarter to C$14.6 billion, the first increase in the red ink since the third quarter of last year. In sum, net exports subtracted nearly 0.2 percentage points from quarterly growth. In terms of output, service sector industries expanded a quarterly 0.7 percent but the goods producing sector posted a decline of 0.5 percent.

June monthly GDP contracted 0.5 percent on the month and the steepest decline since March 2009. The decline followed five consecutively monthly increases. On the year, growth dropped to 0.9 percent from 1.5 percent in May. However, the same special factors (floods in southern Alberta and strike action in the Quebec construction sector) that served to depress output in June should provide a boost to this quarter. The headline decline in GDP was led by the goods producing sector where output declined 1.1 percent on the month (and 0.5 percent on the year). Within this, manufacturing was off 1.3 percent, construction 1.9 percent and mining, quarrying & oil & gas extraction 0.3 percent. A partial offset was provided by just agriculture, forestry & fishing (0.3 percent). Services contracted a monthly 0.3 percent in large part reflecting a 2.4 percent downturn in wholesale trade and a 1.4 percent reversal in retail. Transportation & warehousing was down 0.7 percent and arts, entertainment & recreation slumped 4.3 percent. The only monthly increases of note were in company & enterprise management (0.8 percent) and real estate, renting & leasing (0.4 percent).

Bottom line

The last week of the month of August was dominated by the situation in Syria and whether the West would retaliate against the country because of its use of chemical weapons. Investors also continued to fret over the possibility of a reduction in Federal Reserve stimulus when it next meets in mid-September. Trading volumes have been thin as they usually are in August. Economic data reports were mixed globally.

A plethora of central bank meetings will dominate the news this week. The Reserve Bank of Australia is expected to leave policy unchanged after cutting its key interest rate by 25 basis points to 2.5 percent in August and just a few days ahead of national elections on September 7^th. No change in policy is expected from the Banks of Japan, Canada and England or from the European Central Bank. PMIs for manufacturing, services and the composite will dominate data releases globally. In the U.S., however, investors will be focused on Friday’s employment situation report as traders continue to weigh each data release in terms of what it might mean for the FOMC’s next monetary decision.

Looking Ahead: September 2 through September 6, 2013

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