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ARTICLE ARCHIVES

INTERNATIONAL PERSPECTIVE

A sea of red ink
Econoday International Perspective 8/21/15
By Anne D. Picker, Chief Economist

  

Global Markets

Global equities spiraled downward for a number of reasons last week especially failing growth in China and with it the negative impact on emerging market countries. The yuan devaluation in the previous week combined with the plunge in the Shanghai Composite in the most recent week left investors running for shelter from risky assets. The collapse of commodity prices added to the toxic brew. The final disappointment was the minutes of the July FOMC meeting which did not precisely spell out if the Fed will increase the fed funds rate at its mid-September meeting. Rather, the meeting participants presented both sides of the issue. Almost lost in the cacophony was that on Thursday yet another snap election was called in Greece. Once again there is political uncertainty. The election is currently slated for September 20.

 

Concerns are growing that the supercharged growth which emerging markets like China, Brazil and Russia have enjoyed for much of the past decade is a thing of the past. The slowdown has depressed prices for major commodities like oil and copper to their lowest levels since the financial crisis. Fears have also prompted double-digit declines in the currencies of countries like Indonesia and Malaysia, as foreign investors have pulled their money out and concerned locals have converted their savings into dollars. The prospect that the U.S. Federal Reserve may start to raise interest rates as soon as next month has added to the pressures pushing capital out of developing countries.

 

The big question regarding the markets — is this a pause that refreshes or an out and out rout' Most stock indexes are now down in 2015. One exception ironically is the Shanghai Composite, up 8.4 percent.


 

Global Stock Market Recap

  2014 2015 % Change
Index Dec 31 Aug 14 Aug 21 Week 2015
Asia/Pacific
Australia All Ordinaries 5388.6 5360.0 5224.8 -2.5% -3.0%
Japan Nikkei 225 17450.8 20519.5 19435.8 -5.3% 11.4%
Hong Kong Hang Seng 23605.0 23991.0 22409.6 -6.6% -5.1%
S. Korea Kospi 1915.6 1983.5 1876.1 -5.4% -2.1%
Singapore STI 3365.2 3114.3 2971.0 -4.6% -11.7%
China Shanghai Composite 3234.7 3965.3 3507.7 -11.5% 8.4%
India Sensex 30 27499.4 28067.3 27366.1 -2.5% -0.5%
Indonesia Jakarta Composite 5227.0 4585.4 4336.0 -5.4% -17.0%
Malaysia KLCI 1761.3 1596.8 1574.7 -1.4% -10.6%
Philippines PSEi 7230.6 7408.4 7278.98 -1.7% 0.7%
Taiwan Taiex 9307.3 8305.6 7786.9 -6.2% -16.3%
Thailand SET 1497.7 1413.9 1365.6 -3.4% -8.8%
Europe
UK FTSE 100 6566.1 6550.7 6187.7 -5.5% -5.8%
France CAC 4272.8 4956.5 4631.0 -6.6% 8.4%
Germany XETRA DAX 9805.6 10985.1 10124.5 -7.8% 3.3%
Italy FTSE MIB 19012.0 23248.5 21746.2 -6.5% 14.4%
Spain IBEX 35 10279.5 10879.3 10271.7 -5.6% -0.1%
Sweden OMX Stockholm 30 1464.6 1586.8 1495.4 -5.8% 2.1%
Switzerland SMI 8983.4 9346.6 8798.6 -5.9% -2.1%
North America
United States Dow 17823.1 17477.4 16459.8 -5.8% -7.6%
NASDAQ 4736.1 5048.2 4706.0 -6.8% -0.6%
S&P 500 2058.9 2091.5 1970.9 -5.8% -4.3%
Canada S&P/TSX Comp. 14632.4 14277.9 13473.7 -5.6% -7.9%
Mexico Bolsa 43145.7 43746.7 42163.8 -3.6% -2.3%

 

Europe and the UK

Equities sank for the second consecutive week in what was the weakest trading week so far in 2015. Investors were concerned about the Chinese stock market drop and sluggish growth. The just announced snap elections in Greece also added to the downward pressure on equities. The catalyst for Friday's decline was the weak provisional Chinese manufacturing survey for August. The FTSE lost 5.5 percent, the CAC slumped 6.6 percent, the DAX tumbled 7.8 percent and the SMI retreated 5.9 percent. The FTSE now has retreated for nine consecutive sessions while the DAX has been down six. The CAC and SMI have declined five and four sessions respectively.

 

Greek Prime Minister Alexis Tsipras tendered his resignation late Thursday, paving the way for snap elections next month. Elections are expected to be held on September 20. Tsipras said he felt a moral obligation to place the third bail out deal in front of the people to allow them to judge both what he achieved and his mistakes. The move by Tsipras is seen as an attempt to quell a rebellion in his leftist Syriza party. Rebel MPs of the ruling Syriza party have decided to leave it and form a new party.

 

Markets across Europe have taken a hit as Beijing struggles to manage the slowing of its economy. But investors see Germany as the most vulnerable. As the fallout from a slowdown spreads around the globe, Germany's stock market has suffered more than most. The DAX has fallen 10.5 percent so far in August and is on course for its worst month since August 2011. The reason is that the DAX contains lots of car makers and industrial firms that rely heavily on Chinese demand. Many have seen sharp declines since China's surprise devaluation of its currency last week. A slowing economy and a weaker yuan reduce Chinese purchasing power, while the slide in the currency also makes the country's exports more competitive. The declines come at a time when European stocks remain broadly popular with investors and major markets — including Germany — are still sitting on gains for the year.


 

Asia Pacific

Equities tumbled with many indexes hitting multi-month lows Friday, as weak Chinese PMI manufacturing data added to worries that the Chinese government does not have the tools to avoid a hard landing. While the yuan held steady, weakening economic data, rising capital outflows and signs that Chinese leaders are concerned about the country's growth prospects raised many questions and fears about the future growth prospects in the economy. Regionally, equity indexes were down across the board with the Shanghai Composite plunging 11.5 percent and the Hang Seng, 6.6 percent. Losses in the week in Hong Kong, Taiwan and Indonesia pushed these markets into bear territory, defined as a drop of more than 20 percent from a recent peak.

 

The Nikkei retreated 5.3 percent with export oriented stocks succumbing to selling pressure as the U.S. dollar fell to its lowest level in nearly six weeks against the yen in response to the sluggish data out of China. Second quarter Japanese GDP contracted and the merchandise trade deficit in July ballooned. Exports increased but at less than occurred in June. Export growth slowed thanks to faltering Chinese demand and other key markets.

 

As measured by China's August flash manufacturing PMI, the sector continued to struggle as the contraction accelerated with a reading of 47.1, down from 47.8 in July and representing a 77-month low. New orders decreased at a faster rate, as did new export orders, employment, output prices, stocks of purchases and quantity of purchases. The latest signals of China's stalling economic growth triggered steep losses in equities as doubts build about Beijing's ability to get the Chinese economy back into gear. Worries about China's growth in recent days have unnerved investors across Asia, the U.S. and Europe, pressured emerging market currencies and commodities and driven cash toward safer assets like gold. Analysts say they are on the lookout for fresh stimulus efforts from China, possibly as early as this weekend.

 

Concern about China has gathered momentum in recent weeks, both because of its stock market rout and a surprise move to devalue the yuan — a step that would make its exports more competitive. China's slowdown continues to heap pressure on commodities prices, which have plumbed new lows in recent weeks. Crude oil is hovering above $40 a barrel and industrial metals from copper to aluminum hit six-year lows in the past two weeks.


 

Currencies

The U.S. dollar was mixed last week, gaining against the Australian and Canadian dollars but sinking against the euro, pound sterling, yen and Swiss franc. Many emerging market currencies are at their weakest since the 1998 Asian financial crisis. And this week Vietnam and Kazakhstan in effect devalued their currencies in attempts to remain competitive. And as funds flow out of all these emerging markets, it exacerbates concerns about their economic prospects which in turn can impact commerce and sentiment in the more developed world. Some investors think this may convince the Federal Reserve to hold off raising interest rates this year and the dollar is losing ground against its developed economy peers as a result. The minutes of the most recent FOMC meeting suggested to many investors that the FOMC will hold off increasing rates in September also sent the dollar lower.

 

China's yuan declined after the International Monetary Fund dealt a setback to the currency's role on the global stage. The International Monetary Fund late Wednesday signaled that China's currency will not be added to its basket of reserve currencies for at least a year, after the executive board approved an extension for the currency basket of currencies that includes the U.S. dollar, Japanese yen, pound and euro. For months, investors and analysts were betting on a stable yuan as China lobbied the International Monetary Fund for inclusion in the emergency lender's basket of currencies, known as the Special Drawing Rights. Recognition as a reserve currency would be a symbolic win for China's currency and policy makers on the global stage. Now, the IMF's latest move adds to investors' worries about Chinese policy makers' actions to rein in its unpredictable stock market and consistently manage its currency policy.


 

Selected currencies — weekly results

2014 2015 % Change
Dec 31 Aug 14 Aug 21 Week 2015
U.S. $ per currency
Australia A$ 0.8170 0.7373 0.733 -0.6% -10.3%
New Zealand NZ$ 0.7801 0.654 0.669 2.3% -14.2%
Canada C$ 0.8614 0.7638 0.760 -0.6% -11.8%
Eurozone euro (€) 1.2098 1.1109 1.137 2.3% -6.1%
UK pound sterling (£) 1.5585 1.565 1.570 0.3% 0.7%
Currency per U.S. $
China yuan 6.2055 6.3912 6.389 0.0% -2.9%
Hong Kong HK$* 7.7546 7.756 7.752 0.0% 0.0%
India rupee 63.0437 65.0075 65.833 -1.3% -4.2%
Japan yen 119.8200 124.28 122.140 1.8% -1.9%
Malaysia ringgit 3.4973 4.0805 4.169 -2.1% -16.1%
Singapore Singapore $ 1.3246 1.4065 1.408 -0.1% -5.9%
South Korea won 1090.9800 1180.58 1194.820 -1.2% -8.7%
Taiwan Taiwan $ 31.6560 32.151 32.656 -1.5% -3.1%
Thailand baht 32.8800 35.276 35.660 -1.1% -7.8%
Switzerland Swiss franc 0.9942 0.9762 0.9483 2.9% 4.8%
*Pegged to U.S. dollar
Source: Bloomberg

 

Commodities

Crude oil prices continue to fall with no signs that the global supply glut is at all ebbing. The market is also bracing for the entrance of millions of barrels of Iranian crude into global supply, as the nuclear agreement promises to lift the severe sanctions that have been in place for years. Demand concerns persist given the risk of a Chinese hard landing. The U.S. oil price tumbled Wednesday when the amount of crude held in the nation's commercial stockpiles unexpectedly increased last week according to data released by the U.S. Energy Information Administration. Brokers and analysts attributed the surprise increase to a rise in imports. That underscores belief that the world's largest crude exporter, Saudi Arabia, and the Organization of the Petroleum Exporting Countries will continue pumping even as prices decline.

 

Other recent data from the EIA and also the International Energy Agency suggest oversupply is somewhere between 500,000 and three million barrels a day worldwide and could linger for longer than what was once commonly expected. Many had thought the plunge in oil prices would force producers to spend less and cut back. However, producers have found it more cost effective to pump more oil from fewer but more-efficient wells than to slow output.


 

Indicator scoreboard

Eurozone

August flash manufacturing purchasing managers' index remained flat at 52.4, matching the previous month. GDP growth in the Eurozone slowed to 0.3 percent in the second quarter of this year, and so far the signals over how countries in the common currency bloc are faring in the third quarter are mixed. The August flash composite PMI edged up to a reading of 54.1 from 53.9 in July — the 26 successive monthly gain. Both the manufacturing and service sectors contributed, with rates of expansion accelerating for both. The services PMI reading was 54.3, up from 54.0 in July. By country, output growth accelerated in Germany, with the pace remaining above its second quarter average. Subsequently, job creation hit a 44-month peak. The performance of France remained subdued in comparison, but still positive overall with economic output rising for the seventh straight month. However, while the French service sector continued to expand, manufacturing production fell further into contraction. Readings from the U.S., Japan and China have been added for comparison in the graph.


 

United Kingdom

July consumer prices retreated 0.2 percent from June while the annual inflation rate remained at zero, but remain within the tight minus 0.1 to 0.1 percent range seen since February. That exceeded the forecast of no change, which was also the expected outcome of Bank of England staff, as reported in the August Quarterly Inflation Report. Clothing & footwear prices jumped an annual rate of 1.7 percent. The increase reflected a return to the seasonal pattern of clothing pricing after a larger than usual decline between June and July of 2014. That lifted core inflation to an annual rate of 1.2 percent, its fastest pace since February after a 0.9 percent gain in June. Food & non-alcoholic beverage prices declined an annual rate of 2.7 percent. The sector has not experienced a price increase in 15 months, the longest stretch on record according to ONS.


 

July factory gate prices were unchanged from June and were down 1.6 percent on the year. Core factory gate prices, which exclude the more volatile food, beverage, tobacco & petroleum products, were up 0.3 percent in the year to July, compared with 0.1 percent last month. Petroleum products declined 15.8 percent on the year. At the same time, input costs decreased 0.9 percent after declining 1.3 percent on the month in June. This made for a 12.4 percent annual decrease. Core input prices, which exclude the more volatile food, beverage, tobacco and petroleum products, dropped 4.9 percent on the year to July 2015, compared with a fall of 4.7 percent in the year to June 2015. The fall in crude oil prices, which plunged by 39.9 percent from July of 2014, was the dominant factor in declining input prices.


 

July retail sales inched up a less than expected 0.1 percent and were up 4.2 percent on the year, Both estimates were slightly below expectations. Sales were lifted by gains in household goods stores, but failed to rebound sharply from a setback in June. Sales at household goods stores jumped 3.6 percent, boosted by in-store promotions. Volumes of electrical & household appliances increased 5.1 percent on the month while furniture & lighting products improved 3.8 percent. Household goods vendors accounted for 8.3 percent of total retail sales volumes. Excluding fuel, sales were up 0.4 percent last month and 4.3 percent when compared with the year before. Automotive fuel sales volumes slumped 2.6 percent, possibly due to a decline in driving over the school holidays. Activity at predominantly food retailers, making up 42 percent of total sales, declined 0.2 percent last month for a 1.3 percent annual increase.


 

Asia/Pacific

Japan

As expected, second quarter gross domestic product contracted 0.4 percent at an annualized pace of 1.6 percent. However, when compared with the year ago quarter, GDP was up 0.7 percent for the first increase since the first quarter of 2014. On the quarter, the decline is the first since the third quarter of 2014. Japan's economy was hit by sluggish exports and consumption as well as a drawdown of high inventories, which boosted growth in the January to March quarter. Most components declined. Domestic demand's contribution subtracted 0.1 percentage point while the net export contribution subtracted 0.3 percentage points. Consumption subtracted 0.8 percentage points and capex, 0.1 percentage point. However, private inventories contributed 0.1 percentage point, the same as public investment. Personal consumption, which accounts for around 55 percent of GDP, slumped 0.8 percent on the quarter for the first drop in four quarters. Demand for durable goods declined sharply while the long rainy season dampened overall spending. Private-sector inventories, which pushed up first growth by a revised 0.5 percentage points, raised second quarter GDP by just 0.1 percentage point. In its most recent statement, the Bank of Japan said Japan's economy "has continued to recover moderately". The central bank however downgraded its full-year growth forecast to 1.7 percent from 2 percent.


 

July merchandise trade deficit expanded to ¥268.1 billion — analysts were expecting a deficit of only ¥33.5 billion. July's deficit widened from ¥70.5 billion in June. This was the fourth consecutive monthly deficit. Exports were up 7.6 percent on the year after increasing 9.5 percent last time. They were however, up for the 11th straight month while imports slumped 3.2 percent for the seventh straight drop. Exports to Asia and China were up for a fifth consecutive month. The former was up 6.1 percent on the year while the latter added 4.2 percent. Exports to the EU, up for the eighth straight month, gained 10.0 percent. Exports to the U.S. jumped 18.8 percent. It was the 11th consecutive increase. On a seasonally adjusted basis, the trade deficit widened to ¥368.8 billion from ¥283.4 billion. A weaker yen is helping exports keep up their winning streak, despite merchandise volumes being lower than a year ago. Merchandise export volumes were down 0.7 percent from a year ago, versus a flat reading from June.


 

Americas

Canada

July consumer price index was up 1.3 percent on the year, slightly higher than the 1.0 percent gain in June for the largest gain of the year. An easing in energy price deflation was behind the increase as were gains in meat prices and apparel. The headline gain, nevertheless, was slightly lower than expected. The Bank of Canada's core rate was up 2.4 percent on the year after a 2.3 percent increase in June. This rate continues to remain above the Bank of Canada's 2.0 percent target. Month-on-month, the CPI rose 0.1 percent while the core rate was unchanged on the month.


 

June retail sales were up a higher than expected 0.6 percent on the month, boosted by higher prices that offset flat volumes. Excluding autos, sales were up a monthly 0.8 percent for a second straight month. Excluding both autos and gasoline, sales were 0.5 percent higher following May's 0.8 percent gain. Gasoline stations, boosted by higher prices, posted the strongest monthly gain in Canadian dollar terms at 2.6 percent — but were down 13.2 percent on the year. From a year ago, retail sales were up 2.2 percent for the first half of the year although volumes were up only 0.4 percent. Sales were up 11 subsectors representing 64 percent of Canadian retail trade. Sales at electronics & appliance stores jumped a monthly 9.4 percent on strong phone sales. Sales at general merchandise stores rose 0.3 percent. Clothing was flat and building materials were down.


 

Bottom line

Equities tumbled on the week along with commodities. The major catalysts were slowing global growth and the continued weakening of the Chinese economy. The Federal Reserve minutes from its most recent FOMC meeting disappointed investors. The minutes did not give a clear indication of a possible policy move in September.

 

As is always the case in the last week of the month, many key data will be reported. But financial market machinations may take precedence.


 

Looking Ahead: August 24 through August 28, 2015

The following indicators will be released this week...
Europe
August 25 Germany Gross Domestic Product (Q2.2015 final)
Ifo Survey (August)
August 27 Eurozone M3 Money Supply (July)
Germany Retail Sales (July)
August 28 Eurozone EC Consumer & Business Confidence (August)
UK Gross Domestic Product (Q2.2015 second estimate)
 
Asia/Pacific
August 28 Japan Household Spending (July)
Unemployment (July)
Retail Sales (July)
Consumer Price Index (July)
 
Americas
August 28 Canada Industrial Product Price Index (July)

 

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


 

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