Global Markets

Equities gyrated throughout the week with steep losses incurred globally on any given day. The initial reason for the plunge began two weeks ago on August 11 when the People's Bank of China shocked markets by abruptly devaluing the yuan. As the Shanghai Composite continued to swoon as it had been since June, the PBoC lowered its policy interest rates on August 25 for the fourth time this year.

Also addling investors is the upcoming FOMC meeting on September 16 and 17 at which time many analysts expected — at least until the market turbulence — that the Fed would begin its normalization policies and increase the fed funds rate. However, many have questioned the move in the wake of this week's volatility despite strong U.S. economic data. Key FOMC members have said they have not made up their minds — after all, there are three more weeks of economic data to be released before the FOMC meets — and the Fed is data-driven.

Global Stock Market Recap

Europe and the UK

The week was marked by sharp gyrations which saw the German DAX for example gyrate about 1,600 points between its highs and lows. However, at week's end all the indexes followed here advanced with the exception of the SMI — it retreated 0.2 percent. The story for the month of August (minus one day) shows a different picture. The monthly declines ranged from 6.6 percent (MIB and OMX) to 8.9 percent (DAX).

Investors turned cautious at the end of the week, despite a second day of gains in the Chinese stock market. After the large directional swings of this trading week, investors are uncertain what lies ahead in the coming days. Traders are monitoring the Kansas City Fed's annual meeting in Jackson Hole, Wyoming for direction from FOMC members regarding a possible fed funds rate increase at the upcoming September meeting.

After a weak Wednesday, the European markets rallied sharply higher Thursday. Investors were encouraged by the sharp rally in China following the precipitous drop in the nation's equities over the past few days. Investors were also pumped up by the thought that the Federal Reserve may delay hiking interest rates until at least December on comments from Fed officials.

Asia Pacific

Surprisingly after the chaotic week, equities were mixed but solidly lower in August. Five of 12 indexes advanced from a week ago and one — the SET — was virtually unchanged. Gains ranged from 1.0 percent (All Ordinaries) to 3.3 percent (Kospi). Losses ranged from 0.5 percent (STI) to 7.9 percent (Shanghai Composite). Monthly drops with one more trading day remaining ranged from 12.3 percent (Hang Seng) and 11.8 percent (Shanghai Composite) to 4.6 percent (Kospi).

It was very bad start to the week as equities tumbled throughout the region. The Shanghai Composite lost 8.5 percent on 'Black Monday'. As an encore, it tumbled 7.6 percent Tuesday but eased to a loss of only 1.3 percent Wednesday after the People's Bank of China eased interest rates after Tuesday's close. The index rallied the last two days of the week thanks to government intervention Thursday to halt the biggest selloff since 1996. China's central bank strengthened the yuan's reference rate by the most in five months Friday, a move that suggests policy makers are trying to "save face" before the September 3 parade to celebrate the 70 anniversary of its World War II victory over Japan according to some analysts. On the week, the index lost 7.9 percent and plunged 11.8 percent with one day of trading remaining in August.

Chinese stocks surged for two straight trading days amid suspected government buying. To quiet worries about its slowing growth, Beijing took several easing measures in the week to get its economy back in gear, including an interest rate cut and liquidity injections. The move follows a decision earlier this month to devalue the yuan, which could make exports more competitive, as China struggles to meet its growth target of about 7% for the year.

The Nikkei was down 1.5 percent on the week. It too rallied at week's end as the yen weakened in response to a slew of July data painting a mixed picture of the economy. However, the All Ordinaries advanced 1.0 percent on the week despite the downdraft from China, Australia's major trading partner. The Kospi logged its best weekly gains in nearly three years, gaining 3.3 percent.

People's Bank of China

The People's Bank of China finally acted Tuesday and lowered the benchmark one year lending rate by 25 basis points to 4.6 percent with immediate effect. The move ended days of suspense as investors wondered what action the Bank would take to stem the stock market's collapse and the fading economy.

At the same time, it cut the one year savings rate also by 25 basis points to 1.75 percent. The reserve requirement ratio was dropped by 50 basis points with effect from September 6. The reserve requirement ratio is the level of cash commercial banks must park at the bank. The discount rate had last been lowered in April. Interest rates were last lowered on June 27. The yuan was devalued on August 11 in its attempts to prop up the swooning economy

Currencies

The U.S. dollar advanced against most of its major counterparts. The U.S. currency increased against the euro, pound, Swiss franc and the Canadian and Australian dollars. It declined against the yen which is considered a safe haven currency. Both the yen and euro jumped against the dollar as equities tumbled. However, both declined as equity moves calmed and the string of positive U.S. data boosted the dollar.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

July broad money supply growth was up a stronger than expected 5.3 percent. Annual growth was up 0.4 percentage points from a weaker revised June reading and equaled its fastest pace since February 2009. As a result, the 3-month moving average rate held steady at 5.1 percent. The pick-up in annual M3 growth reflected stronger borrowing by the non-bank private sector which expanded 1.0 percent after a 0.6 percent rate in June. Within this, lending to households grew 1.3 percent, up from 1.2 percent last time, with loans for house purchase unchanged at 1.6 percent. Borrowing by non-financial corporations was 0.4 percent, a marked acceleration from June's minus 0.1 percent mark, while lending to non-monetary financial corporations, excluding insurance companies and pension funds, jumped from minus 1.9 percent to 0.5 percent.

August EU Commission measure of economic sentiment improved to a reading of 104.2 from its unrevised July reading of 104.0. The August reading is its highest level since the middle of 2011. This month's modest improvement was led by increased optimism in the consumer sector, services, retail and construction. However, confidence in industry sank to its weakest mark since February. Regionally for the larger four member states developments were quite mixed. A 0.9 point rise to 100.3 in the French ESI and a 1.7 point gain to 110.4 in the Spanish index contrasted with a 0.2 point decline to 105.8 in Germany and a 0.6 point drop to 105.8 in Italy. However, the inflation update was not so promising. In particular, manufacturers' factory gate price expectations fell from minus 0.1 to minus 2.4, their weakest reading in four months, while comparable service sector expectations were only unchanged (2.1) and so matched their lowest point since February. At the same time, households' inflation expectations dropped more than a point to 3.1, also a 4-month trough.

Germany

Second quarter economic growth was unrevised from its flash estimate. Real GDP expanded 0.4 percent from the first quarter and stood a workday adjusted 1.6 percent above its year ago level. The minor quarterly acceleration in total output masked a slowdown in both private consumption and gross capital expenditure. The former was up just 0.2 percent, or half the rate achieved at the start of the year, while the latter fell 0.4 percent, its first decline since the third quarter of 2014. Construction investment grew only 0.1 percent after a 1.9 percent spurt and construction spending slumped 1.2 percent following a 1.8 percent gain last time. As a result, with government expenditure edging 0.2 percent firmer, overall domestic demand subtracted a surprisingly large 0.3 percentage points from the quarterly change in total output after having added a cumulative 1.4 percentage points in the previous two periods. Inventory accumulation hit growth by 0.4 percentage points, possibly reflecting caution about the economic outlook, and effectively means that the economy would not have expanded at all but for a jump in sales overseas. Thus, exports rose 2.2 percent or nearly double their 1.2 percent first quarter pace. Accordingly, with imports up only 0.8 percent, net exports boosted headline growth by 0.7 percentage points and so more than reversed their cumulative minus 0.5 percentage point contribution from the fourth and first quarters.

August Ifo economic sentiment edged up just 0.3 points to 108.3, its second consecutive rise and its firmest reading since May. However, the latest reading was still within the tight 107.5 to 108.7 range seen since March. The uptick here was attributable to a 0.9 point gain in current conditions which, at 114.8, posted their strongest level in more than a year. However, expectations dipped a tick to 102.2, and to all intents and purposes have been trending sideways since the start of 2015. Morale deteriorated in manufacturing (11.0 after 11.4) and wholesale (13.2 after 14.1) but rose in construction (minus 2.9 after minus 4.4) and, in particular, retail (10.8 after 4.0). Unadjusted service sector confidence climbed from 26.0 in July to 30.6.

United Kingdom

The second estimate of second quarter economic growth was unrevised. GDP expanded 0.7 percent on the quarter and was up 2.6 percent on the year. Household consumption was up 0.7 percent after a 0.9 percent increase in the first quarter and within a 0.9 percent advance in gross fixed capital formation, business investment expanded a solid 2.9 percent, up from 2.0 at the start of the year. With government final consumption spending posting a second consecutive 0.9 percent increase, domestic demand would have been a good deal more robust but for a hefty drop in inventories. Exports were surprisingly robust, rising 3.9 percent after a 0.4 percent gain previously. With imports up only 0.6 percent, this meant net trade added 1 percentage point to the quarterly change in total output.

Switzerland

Second quarter real GDP followed an unrevised 0.2 percent decline at the start of the year with a 0.2 percent quarterly increase that left annual growth unchanged at the first quarter's marginally stronger revised 1.2 percent. Expectations that the economy slipped into technical recession last quarter proved overly pessimistic. Quarterly growth came from a 0.3 percent increase in household consumption together with a 1.5 percent rise in equipment and software investment. Construction investment edged 0.1 percent higher and general government consumption was up 0.2 percent. Inventories had a negative impact, with a 0.8 percent contraction after a 0.1 percent drop last time. Exports held up surprisingly well. Excluding valuables, overseas sales of goods slipped just 0.2 percent while services expanded 0.9 percent. Imports of goods ex-valuables slumped 3.6 percent but services were up 3.0 percent.

Asia/Pacific

Japan

July household spending disappointed and declined for a sixth month out of seven this year. Spending slipped 0.2 percent on the year after dropping 2.0 percent last time. Analysts expected an increase of 0.5 percent. In 2015, only spending in May bounced up 4.8 percent. Prior to the May reading, spending had declined for 13 consecutive months. Spending in most categories increased with the exception of education. It tumbled 3.9 percent and housing, 5.3 percent. Spending on clothing & footwear rebounded from a 13.3 percent drop with a 1.2 percent gain. Culture & recreation jumped 5.6 percent after sliding 1.9 percent in June. Transportation & communication expenditures were up 1.8 percent after a 1.1 percent increase last time.

July national consumer prices were virtually unchanged as Japan continues to struggle with deflation. July consumer prices were down 0.1 percent on the month but up 0.2 percent from a year ago. Excluding fresh food, the CPI was unchanged both on the month and year. Excluding both food and energy, the CPI was up 0.1 percent and 0.6 percent. Prices for electronics good jumped 1.9 percent after increasing 0.4 percent in June. TVs also increased on the year. This time TV prices were up 5.3 percent after increasing 3.3 percent in June. However, energy costs continue to weigh on the index. Energy prices dived 8.7 percent after sinking 7.0 percent in June. At these levels, the Bank of Japan's 2 percent inflation target continues to look some way off and will put pressure on policy makers to consider increasing their quantitative easing program.

Unlike the household spending measure, July retail sales were up 1.6 percent from a year ago after increasing 1.0 percent in June. It was the fourth consecutive increase. Sales were not as robust as they were in the prior two months with May increasing 3.0 percent and April, 4.9 percent. Auto sales were up for a fourth month, this time increasing 3.5 percent after jumping 7.9 percent in June. Food & beverage sales were also up for a fourth month. They increased 4.0 percent. Machinery sales rebounded with an increase of 3.3 percent after declining 3.9 percent in June. Fuel sales were down for the tenth straight month, dropping 9.1 percent after sinking 10.5 percent in June.

Japan's labour force tightened in July. The unemployment rate slipped down to 3.3 percent after rising to 3.4 percent in June. Employment increased 240,000 from a year ago. The labour force participation rate was unchanged at 59.6 from the previous year. The employment rate was up on the year to 57.6 percent.

Bottom line

It was a highly volatile week for financial markets thanks to uncertainties about how the Chinese economy is really performing and whether the Federal Reserve will increase interest rates in September. Undoubtedly, these two themes will continue to impact investor behavior in September. Key Fed officials were on the fence in their statements, which should not have surprised anyone. Most economic data were favorable in the U.S. and Europe.

The upcoming week is a busy one. The Reserve Bank of Australia and the European Central Bank will announce their respective monetary policy decisions. No policy changes are expected. Both Canada and Australia report second quarter growth data. They are the last of the major countries to do so. Canada and the U.S. report labor market data. August PMIs for manufacturing and services will be released for a slew of countries around the world. However, the focus will remain on China's stock market and the reactions to its movements globally.

Looking Ahead: August 31 through September 4, 2015

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