Global Markets

August began with a thud. Equities ended July with a swoon and continued to slide into August. Investors had a lot to contend with last week. There were the ongoing geopolitical concerns in both Ukraine and the Middle East. There was an FOMC meeting and announcement to monitor as investors waited tensely to see if the post-meeting announcement would give any clues to when the Federal Reserve will increase the fed funds rate from its current range of zero to 0.25 percent. And the same week produced the U.S. July employment situation report — the most highly tracked gauge of U.S. growth. The week also produced a chance to relearn history with the first estimate of second quarter gross domestic product report along with revisions back to 1999. The net result — the U.S. continues to motor along albeit not close to top speed.

However, equity investors became nervous and ran for the exits on the last day of July and in the process turned many monthly gains into losses. Disappointing earnings reports contributed to the retreat from risk. Thursday's losses in Europe and the U.S. translated into sharp declines in the Asia Pacific on Friday. Other worries that weighed on investors included Argentina's debt default and the woes of Portuguese lender Banco Espírito. And in Europe especially, the introduction of tougher sanctions against Russia sent German equities especially lower.

On the week, equity indexes were mixed in the Asia Pacific region but dropped in Europe and North America. Losses ranged from a low of 0.2 percent (STI) to 4.5 percent (DAX). Gains ranged from 0.1 percent (PSEi) to 2.8 percent (Shanghai Composite). The Jakarta Composite was closed for the week.

Manufacturing PMIs

July's global manufacturing PMI edged down to a reading of 52.5 from the revised June reading of 52.6. Rates of growth in output and new orders were broadly similar to those signaled in the prior month. The Czech Republic, the U.S. and Taiwan registered the highest PMI readings in July. The UK also remained towards the top of the PMI growth ranking table, despite its rate of expansion moderating. Growth was also above the global average in Canada, India, Indonesia, Ireland, the Netherlands and Spain. The Eurozone PMI held steady at June's seven month low, as expansions in Germany, Italy, Spain, the Netherlands, Austria and Ireland were offset by deeper downturns in France and Greece.

The final manufacturing PMI for the Eurozone weighed in at 51.8, down just a tick from its flash estimate despite larger downward revisions to the national indexes in Germany, Italy and Spain. Manufacturers enjoyed further gains in output and new orders (including export orders) but at rates well below the highs seen at the start of the year. The increase in production was the smallest since September 2013. The employment sub-index was trimmed marginally for the first time in seven months as cuts in Germany, France and Austria more than offset new hiring in Italy, Spain and the Netherlands. Regionally, the best performer was Ireland where the PMI posted a 3-month high of 55.4 ahead of Spain (53.9) and the Netherlands (53.5). France (47.8) and Greece (48.7) were the only countries beneath the 50 growth mark but four of the reporting states posted multi-month lows.

Elsewhere, UK manufacturing activity unexpectedly slowed sharply in July as both output and new order growth slipped. The manufacturing PMI declined to the still healthy reading of 55.4 from 57.5 in June. In India, the manufacturing PMI climbed to 53.0 from 51.5 in June as business conditions improved. Employment deteriorated fractionally, with workforce numbers reduced for the first time since September.

In China, both the 'official' and private sector survey of manufacturing industry conditions confirmed that the sector is steadying. The HSBC PMI climbed to a reading of 51.7 for July from 50.7 in June. The 'official' PMI also increased to a reading of 51.7 from 51. HSBC's index that focuses on small and medium sized enterprises is charting the same path as the government survey, which mainly focuses on large, government-owned companies. The country's factory surveys are seen as a key indicator of wider economy growth, given that China's economy remains heavily dependent on manufacturing.

Global Stock Market Recap

Europe and the UK

European equities sank for a third straight session on Friday sending the indexes down for the week. European markets along with those around the globe were spooked by geopolitical tensions and concerns about the European banking system. News that Argentina had missed a debt repayment deadline also weighed on sentiment as did increased sanctions on Russia instituted earlier in the week. On the week, the FTSE declined 1.7 percent, the CAC was down 3.0 percent, the SMI lost 1.9 percent and the DAX tumbled 4.5 percent. The DAX was particularly hard hit from fallout of the tougher sanctions imposed on Russia. Russia and Germany have close trading ties with about 25 percent of the country's energy needs coming from Russia. The FTSE slipped 0.2 percent in July while the CAC and DAX dropped 4.0 percent and 4.3 percent respectively. The SMI declined 1.7 percent.

Investors seemed to pay little attention to European economic data, focusing rather on the key U.S. reports for employment and growth along with the results of the U.S. FOMC meeting. Disappointing earnings contributed to the downward draft. However, in London, traders said that data showing that British manufacturing grew at its slowest pace in a year in July were keeping investors on the 'back foot.' The FTSE hit a 2014 peak in mid-May (6,894.88) which marked its highest level since December 1999. Many traders had expected the FTSE to hit a record high of 7,000 but its failure to breach the 6,900 mark so far this year has led some traders to book profits above the 6,800 level.

Asia Pacific

Asian stocks declined across the board on Friday, joining a global sell-off begun in the Thursday global market day. The causes behind the swoon were diverse, as a number of issues that have knocked markets in recent weeks flared up at the same time including Argentina's recent bond default and Portugal's second largest bank by assets posting a record quarterly loss after it found more bad loan exposure than expected. Geopolitical concerns also remained prominent especially in Ukraine and the Middle East. Data showing a pickup in Chinese manufacturing activity helped to cap overall losses to some extent. Despite Friday's losses, most indexes here advanced on the week and in July.

Australian shares dropped sharply Friday after previously hitting a six month high. In the process, the retreat wiped out the week's gains and the All Ordinaries ended 0.5 percent lower. However, for the month of July, the index was up 4.5 percent. The Shanghai Composite advanced for a third consecutive week, this time adding 2.8 percent. The index had a stellar July, increasing 7.5 percent. The Nikkei increased 0.4 percent on the week even after declining on both Thursday and Friday. For July, the index was up 3.0 percent.

The Sensex was down four of five days as fresh concerns about the state of the credit markets, lingering geopolitical worries and the looming end of economic stimulus from the U.S. Federal Reserve weighed on investors' risk appetite. The index lost 2.5 percent on the week but gained 1.9 percent on the month. Investors here were cautious ahead of the Reserve Bank of India's monetary policy review on Tuesday.

Currencies

The U.S. dollar was up against its major counterparts including the euro, pound, Swiss franc and the Canadian and Australian dollars. It slipped against the yen. However, it dropped from a four month high after the U.S. added fewer jobs than forecast in July. The slower than expected increase in employment reduced speculation that the Federal Reserve will move up the pace interest rate increases forecast for next year. An index of developing nation currencies declined to a four month low after Argentina defaulted, hurting the appetite for riskier assets.

In recent months speculation on the course of monetary policy at the Fed has intensified after core inflation picked up from a low point in March and unemployment fell sharply. If those trends continue, the Fed could be forced to alter their forward guidance and turn more hawkish according to analysts.

On Wednesday, the euro declined to a nine month low against the U.S. dollar after the U.S. economy bounced back with a 4 percent growth rate in the second quarter, fuelling speculation on when the Federal Reserve will increase interest rates. This lifted the dollar against almost every major currency. The euro has been on a weakening trend since the European Central Bank started talking overtly about quantitative easing and loosened monetary policy earlier this summer, partly on concerns over the common currency's strength.

Selected currencies — weekly results

Indicator scoreboard

EMU

July economic sentiment index was essentially unchanged at 102.2, up from June's upwardly revised reading of 102.1. Industry morale improved 0.5 points to minus 3.8 but declined 0.9 points to minus 8.4 in the consumer sector, in line with the flash estimate released in the prior week. Confidence in retail was off 0.6 points to minus 2.5 and was 1.2 points weaker at 3.6 in services but was up 3.5 points to minus 28.2 in construction. Regionally there were few significant changes. The national ESI dipped 0.5 points to 106.0 in Germany and was down 0.6 points at 103.5 in Spain. However, the declines here were essentially offset by increases in France (0.5 points to 95.8) and Italy (1.6 points to 101.9). Once again, France was the only member of this group to post a reading below the common 100 long-run average.

July flash harmonized index of consumer prices was up 0.4 percent on the year after increasing 0.5 percent last time. It was the weakest reading since October 2009. The underlying picture was only marginally firmer. The core HICP which excludes food, alcohol, tobacco and energy held steady at an annual rate of 0.8 percent while without only energy prices it accelerated just a tick to 0.6 percent. Services, easily the most robust part of the economy, saw inflation unchanged at 1.3 percent while non-energy industrial goods picked up just 0.1 percentage points to zero. Among the more volatile components, energy charges were 1.0 percent lower on the year (from up 0.1 percent in June) and food, alcohol & tobacco prices 0.3 percent weaker (minus 0.2 percent).

June unemployment declined 152,000 which was enough to reduce the headline unemployment rate from 11.6 percent in May to 11.5 percent. There was also good news on youth unemployment where the rate dipped from a lower revised 23.2 percent in May to 23.1 percent. Nationally the picture remained predictably mixed with Austria (5.0 percent), Germany (5.1 percent) and Malta (5.6 percent) registering rates well short of those in Greece (27.3 percent in April) and Spain (24.5 percent). The improvement in the peripherals should not be dismissed. In Portugal the rate has fallen 0.7 percentage points since March to 14.1 percent (16.6 percent a year ago) and over the same period the Spanish rate has dropped 0.6 percentage points. Similarly, even the Cypriot rate is 0.7 percentage points below its level three months ago.

Germany

June retail sales rebounded 1.3 percent on the month and was the largest since the start of the year and followed a significantly smaller revised 0.2 percent decline in May. Unadjusted annual growth still decelerated sharply from 2.4 percent to just 0.4 percent but this was biased down by workday effects. For the second quarter as a whole, volumes were 0.3 percent lower than in the first quarter when they climbed a solid 1.5 percent.

France

June household spending on manufactured goods was up 1.3 percent on the month following a marginally steeper revised 0.5 percent decline in May. Purchases on the year were up 2.0 percent after declining 0.4 percent last time. Total spending on goods was up 0.9 percent after increasing 0.7 percent in May. On the year, total spending was up 1.8 percent. June's recovery was led by the auto sector where sales reversed much of May's 3.5 percent monthly drop with a 2.1 percent gain. Textiles, up an even sharper 3.0 percent, posted their second successive advance and the other products area crept 0.1 percent higher. The only disappointment was household goods which were off 1.5 percent on the month although this came after a hefty 2.9 percent increase last time.

Asia/Pacific

Japan

June unemployment rate was 3.7 percent, up 0.2 percent from May and above consensus forecasts for 3.5 percent. Employment was up 560,000 from a year ago after increasing 580,000 in May. Employment was unchanged on the month as the slowdown from the sales tax increases takes a toll on the labour force. The ratio of job offers to job seekers at government placement offices rose to 1.10 in June from 1.09 in May, showing there were 110 job offers for every 100 people looking for work. The figure remains the highest in 22 years, since June 1992 when the index was also at 1.10.

June household spending declined 3.0 percent from a year ago after sliding 0.4 percent in May and 8.0 percent in April. Spending plunged after the increase in the sales tax took effect on April 1st. Most spending categories declined. Food spending was down 3.7 percent, furniture & household utensils sank 6.8 percent and medical care dropped 9.7 percent. However, housing spending jumped 9.6 percent on the year. Clearly consumers continue to curtail their spending albeit at a slower pace. Retail sales, also released in the week, depict a similar pattern.

June retail sales slid 0.6 percent from a year ago after slipping 0.4 percent last time and dropping 4.3 percent in April. Once again, sales were negatively impacted by the April 1st sales tax increase. As you would expect, big ticket item sales continued to decline. Car sales dropped 3.9 percent after declining 3.8 percent in May and 9.9 percent in April. Retail machinery sales slumped 6.5 percent after declining 7.5 percent in May and 11.9 percent in April. Apparel sales retreated 2.5 percent after increasing by that amount in May. Food and beverage sales were up 1.6 percent after 2.3 percent the month before.

June seasonally adjusted industrial production was down a greater than expected 3.3 percent on the month and was up 1.8 percent from the previous year. Analysts expected output to decline 1.2 percent. Among the industries that declined in June were transport equipment (down 3.4 percent), general purpose, production & business oriented machinery (down 3.0 percent) and information & communication electronics equipment (down 9.0 percent). Commodities that contributed to the decline included large passenger cars, reaction vessels and plastic products for machine tools & parts. METI downgraded its view of output, now saying it is weakening. However, the forecasts for July indicate that output is anticipated to increase 2.5 percent and add 1.1 percent in August.

Australia

Producer prices for final demand (excluding exports) in the June quarter slipped 0.1 percent on the quarter and were up 2.3 percent from the same quarter a year ago. The quarterly decline was mainly due to declines in prices received for other transport equipment manufacturing (down 3.5 percent), computer & electronic equipment manufacturing (down 3.4 percent) and other agriculture (down 5.7 percent). The declines were partly offset by increases in the prices received for building construction (1.2 percent) and pharmaceutical & medicinal product manufacturing (5.2 percent). Intermediate demand prices dropped 0.5 percent on the quarter and were up 2.7 percent on the year. Prices declined for petroleum refining & petroleum fuel manufacturing, oil & gas extraction and coal mining. They were partly offset by higher prices received for sheep, beef cattle & grain farming &dairy cattle farming and printing & printing support services. Preliminary demand prices dropped 0.8 percent on the quarter and were up 3.0 percent on the year. Prices declined for petroleum refining & petroleum fuel manufacturing, metal ore mining and oil & gas extraction. The declines were partly offset by price increases for sheep, beef cattle & grain farming & dairy cattle farming and printing & printing support services.

Americas

Canada

May monthly gross domestic product was up 0.4 percent on the month and 2.3 percent on the year. May's expansion was almost equally split between the goods producing and service sectors with the former posting a 0.5 percent monthly gain and the latter advancing a marginally slower 0.4 percent. Manufacturing output was up 0.8 percent, its largest rise since February, while mining, quarrying & oil & gas extraction grew 0.7 percent and construction 0.5 percent. Partial offsets were provided by utilities (down 0.9 percent) and agriculture, forestry, fishing & hunting (down 0.2 percent). Service sector growth was dominated by a 1.2 percent monthly increase in wholesale trade and a 1.0 percent increase in transportation & warehousing. Elsewhere, activity in real estate & rental & leasing advanced 0.6 percent and in the other services category 0.7 percent. Retail trade increased 0.5 percent with no monthly declines of any note.

Bottom line

Equities tumbled on a confluence of events and a mixed bag of economic data and earnings reports. The Federal Reserve as expected left the fed funds rate range at zero to 0.25 percent and decided to continue reducing its bond buying programs by another $10 billion to $25 billion.

The calendar is full this week with central bank meetings in Australia, India, Japan, the UK and the Eurozone. Composite PMIs will be released for China, Japan, India, the Eurozone, France and Germany. Services PMIs will be reported for the U.S. and UK. Merchandise trade and industrial output are also on deck. Investors will be wondering if last week's setbacks were only a momentary event.

Looking Ahead: August 4 through August 8, 2014

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