Global Markets

Equities were mixed in August thanks to escalating geopolitical worries and a hurricane that humbled portions of Texas and the energy industry. Of the indexes covered here, 14 advanced and 11 retreated in August. On the week, gains ranged from 0.2 percent (KLCI) to 2.7 percent (Nasdaq). Losses ranged from a decline of 0.2 percent (DAX and IBEX) to 0.9 percent (Kospi and Jakarta Composite).

Markets around the globe were under pressure Tuesday, after North Korea fired a ballistic missile over Japan. However worries abated rather quickly with equities staging a rally on Wednesday. Positive U.S. and European economic data also provided a boost to investor sentiment.

The U.S. was not the only place watching weather reports with dismay. The most devastating floods to hit South Asia in a decade have killed more than 1,400 people and focused attention on the poor planning and lack of preparedness for annual monsoon rains, as authorities struggle to get aid to millions of destitute. And in Texas, hurricane Harvey dominated world media coverage though India, Nepal and Bangladesh have suffered flooding for two months, with hundreds of villages submerged and tens of thousands of people in relief camps short of food and vulnerable to disease.

Most economic news during the week was positive with a few notable exceptions. In Japan, July household spending and industrial production declined more than anticipated. And the U.S. employment did not increase as much as expected. However, the Bureau of Labor Statistics (BLS) has historically had a problem with August's seasonal adjustment. So we need to wait to see what really happened in August when revisions are released in the next two reports. In short, one month does not make a trend.

Global Stock Market Recap

Europe and the UK

Equities were mixed for the week but mostly lower for the month of August. On the week, the FTSE (up 0.5 percent) and the CAC and SMI (both up 0.4 percent) advanced while the DAX retreated 0.2 percent. The indexes were up three of five days. Hovering over the markets during the week were the North Korean missile test, the ongoing impact of hurricane Harvey and the looming U.S. employment report. In August, only the FTSE managed a gain on the month — up 0.8 percent. The CAC, DAX and SMI lost 0.2 percent, 0.5 percent and 1.3 percent respectively.

While a global consensus has formed this year around stronger prospects for European equities, the region's main benchmarks have slipped in the summer as company earnings were measured up against lofty expectations and a surging euro reined stocks back.

The positive finish to the week on Friday was sparked by solid manufacturing data from China, the UK and the Eurozone. Investors' morale was also boosted by a news report saying the European Central Bank is unlikely to rush on a decision on next year's bond purchases and will likely wait until December to unveil a plan to taper its asset purchases. Euro strength is a worry for many policy makers at the European Central Bank, raising the chance that the ECB's asset purchases will be phased out only at a slow rate, according to the report which cited anonymous sources.

Asia Pacific

Equities here were mostly higher for the week boosted by tax reform talk in the U.S. and positive regional manufacturing data. Subdued U.S. inflation data also added to bets that the Federal Reserve will hold off from increasing interest rates again this year. Markets were rattled by the fly over of a North Korean missile on northern Japan on Tuesday. But tensions seemed to ease after Tuesday's declines and equities resumed their mostly upward course. On the week, gains ranged from 0.2 percent (KLCI) to 2.7 percent (SET). Losses ranged from a decline of 0.3 percent (All Ordinaries) to 0.9 percent (Kospi and Jakarta Composite).

The Shanghai Composite was up 1.1 percent on the week to cap its third week of gains after a private survey showed Chinese August manufacturing activity expanded at the fastest pace in six months, buoyed by a surge in export orders and higher prices. On the month, the index added 2.7 percent. The Hang Seng was up 0.4 percent on the week and 2.4 percent in August.

State media said late on Thursday that China's once-every-five year party congress will begin on October 18. That strengthened expectations that Beijing will help maintain a good market environment during this politically sensitive period and remove uncertainty. At the congress, President Xi Jinping is expected to lay out his vision for the next five years and beyond, with focus on areas like economic reform, military modernization and the war on corruption.

Hong Kong shares completed their longest stretch of monthly advances in a decade as upbeat first-half earnings helped the market weather geopolitical tensions and concern about rising valuations. The Hang Seng has advanced every month so far in 2017 for a 27.1 percent gain. The index declined the last three months of 2016 and some market participants remain confident that the Hang Seng will climb some more in 2017. However, tensions related to the U.S. response to the North Korean military threats, caution over the U.S. Federal Reserve's roadmap to policy tightening and looming political developments in China as the Communist Party prepares to meet this fall, are among the major issues on investors' radar.

Both the Nikkei and Topix continued to fluctuate inversely to the value of the yen for the most part. The Nikkei (up 1.2 percent) and Topix (up 1.3 percent) advanced during the week despite Tuesday's declines after North Korea launched a ballistic missile over Japan, reigniting geopolitical worries. The missile flew over the northern Japanese island of Hokkaido.

Currencies

The U.S. dollar was mixed against its major counterparts for the week. It was down against the pound sterling and the Canadian and Australian dollars. However, it advanced against the euro, yen and Swiss franc. On Friday, the losses in the U.S. dollar immediately after the August jobs report that came in below expectations were fleeting. The U.S. economy added 156,000 jobs last month, while the unemployment report ticked up to 4.4 percent from 4.3 percent in July. But the dollar rebounded strongly against the euro after a news report said the European Central Bank may not have a plan ready to reduce monetary stimulus until December. Some analysts speculated whether the European Central Bank will try to talk the rallying currency lower at its meeting Thursday.

The Canadian dollar was the best performer among major currencies after second quarter gross domestic product jumped a greater than expected annualized rate of 4.5 percent shifting forward expectations for the next Bank of Canada rate increase. Investors don't have long to wait — the BoC meets Wednesday and while no rate increase is expected then, investors will be looking for guidance in the Bank's statement.

Headline consumer price inflation in July remained quite weak at 1.2 percent on the year and the core measures have only tentatively bottomed. So, in spite of the solid GDP report, it would seem reasonable for the BoC to await further data on inflation as well as the speed of adjustments in the housing market.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

August flash harmonized index of consumer prices was up 1.5 percent on the year. This was up 0.2 percentage points from final July to achieve its strongest reading since April. However, the pick-up in the headline measure was not matched in the key core rates. Hence, the narrowest yardstick, which excludes energy, food, alcohol and tobacco, saw its yearly change hold steady at 1.2 percent. While omitting just energy and unprocessed food the rate was similarly flat at 1.3 percent. The pick-up in overall HICP inflation was largely attributable to energy where the rate climbed 1.8 percentage points to 4.0 percent. This alone added almost a couple of ticks to the change in the overall figure. Elsewhere, inflation in non-energy industrial goods and services was stable at 0.5 percent and 1.6 percent respectively. Food, alcohol and tobacco also held steady at 1.4 percent.

August manufacturing PMI reading was 57.4, unrevised from the flash estimate and indicating that activity rates in the sector are among the strongest since 2011. The 0.8 point increase from July reflected faster growth in output and new orders, both recording some of their best performances in more than six years. The latter benefitted from strength in domestic and overseas markets alike with little sign so far of any real impact on external demand from euro appreciation. Further evidence of pressure on capacity was apparent in a fresh advance in backlogs despite another good month for employment and vendor delivery times continued to lengthen. Business confidence actually dipped to an 8-month low but was still historically high. Inflationary signals were firm with input cost inflation accelerating for the first time in six months and factory gate prices similarly picking up speed from July. Regionally, with the exception of Spain (52.4 and an 11-month low), all of the reporting countries posted multi-month highs. Austria (61.1) was top of the pack ahead of the Netherlands (59.7) and Germany (59.3). Italy (56.3) and Ireland (56.1) also fared well and France (55.8) was not far behind. Greece (52.2) lagged but still secured a 108-month peak.

France

Second quarter gross domestic product was unrevised in line with the flash estimate. Total output expanded 0.5 percent from the January to March period and matched that period's rate. However, annual growth was trimmed a tick to 1.7 percent. As previously reported, domestic final demand again added 0.4 percentage points to the quarterly change in GDP, largely thanks to gross fixed capital formation which rose an upwardly revised 0.7 percent on the back of strength in both businesses (0.7 percent) and housing (1.0 percent). Household consumption was up an unrevised 0.3 percent while government spending was just 0.1 percentage points firmer. Inventories subtracted a slightly reduced, but still sizeable, 0.5 percentage points following a 0.7 percentage point boost last time. The biggest lift still comes from net foreign trade. However, with exports shaded to a 2.5 percent rate and imports nudged up to 0.4 percent, the net impact was 0.6 percentage points, a couple of ticks short of the flash estimate.

Asia/Pacific

Japan

July household spending was down 0.2 percent on the year after increasing by 2.3 percent in June. The main factor driving down headline growth was weaker spending on housing, down 4.6 percent on the year and partly reversing a large increase of 25.1 percent in June. Officials attributed the strength in house spending in June in part to a surge in home renovation spending due to lower than usual rainfall during the month. Spending on other major categories was mixed, with year-on-year growth strengthening for fuel, light and water charges, clothing and footwear, furniture and household utensils, and transportation and communication, but weakening for food, medical care and education. Excluding the impact of this weaker spending on housing, underlying consumption and income growth both saw some improvement in July. A measure of core household spending — which excludes housing, motor vehicles and other volatile items and tends to track more closely the consumption component of gross domestic product — showed a stronger annual increase of 0.5 percent, up from 0.1 percent in June.

July industrial production dropped 0.8 percent on the month after increasing 2.2 percent in June. On the year, output was up 4.6 percent. The monthly decline reflected stronger output of general-purpose, production & business-oriented machinery, electrical machinery and chemicals. However, this was offset by weaker output of electronic parts and devices, ceramics and related products, and petroleum and coal products.

Americas

Canada

The industrial product price index (IPPI) declined a monthly 1.5 percent in July, mainly due to lower prices for motorized and recreational vehicles. The raw materials price index (RMPI) decreased 0.6 percent, mostly attributable to lower prices for metal ores, concentrates and scrap. On the year, the IPPI was up 1.3 percent while the RMPI was up 4.5 percent. The IPPI posted its largest decline since December 2014 following a 1.1 percent decrease in June. The decline in the IPPI was widespread. Of the 21 major commodity groups, 18 were down, 1 was up and 2 were unchanged. The ongoing appreciation of the Canadian dollar weighed on industrial prices. If the exchange rate had remained constant, the IPPI would have decreased 0.4 percent instead of 1.5 percent. On the year, the increase in the IPPI was largely due to higher prices for energy & petroleum products which have been up on the year since December 2016. The IPPI excluding energy & petroleum products rose 0.9 percent from a year ago.

Second quarter gross domestic product soared an annualized 4.5 percent — the largest gain since the third quarter of 2011. With two consecutive quarters of very strong growth — 4.5 percent in the second quarter and 3.7 percent in the first — Canada will likely well exceed the Bank of Canada's expectation of 2.8 percent growth for all of 2017. GDP was up 1.1 percent on the quarter following a 0.9 percent gain in the first quarter. Household final consumption expenditure and exports of goods were important contributors to second quarter growth. Household spending on goods advanced 1.9 percent, with outlays on durables, semi-durables and non-durables all increasing. Outlays on services rose 0.5 percent. Overall, household final consumption expenditure advanced 1.1 percent in the second quarter after increasing 1.2 percent the previous quarter. Growth in export volumes accelerated to 2.3 percent following a 0.4 percent gain in the first quarter. Exports of goods rose 2.8 percent, with energy products (9.2 percent) contributing the most to the increase. Exports of services edged down 0.1 percent as commercial services fell 0.6 percent. Imports rose 1.8 percent, about half the pace of the previous quarter. Imports of goods increased 2.5 percent while those of services declined 1.0 percent. Business gross fixed capital formation slowed to 0.5 percent growth, following a 3.1 percent increase in the first quarter.

Bottom line

Geopolitical concerns along with natural disasters dominated news during the week. However, there were numerous releases of economic data globally to catch investors' attention. They included the final global manufacturing reports. The data indicated that growth improved globally. Among the disappointing results were Japan's July consumer spending and industrial output along with several U.S. indicators including employment and earnings.

Three important central bank policy meetings will occur next week — the Reserve Bank of Australia and the European Central Bank are expected to leave their respective policies unchanged while the Bank of Canada's statement will be read closely for hints of future policy actions given the much better than anticipated second quarter growth. In Europe, merchandise trade and industrial production dominate the data release schedule. Australia releases its second quarter gross domestic product and Japan reports its revised GDP. Canada's labour force survey for August will be posted as well.

Looking Ahead: September 4 through September 8, 2017

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