Global Markets

Economic data vied with geopolitical concerns and mixed earnings to capture investors' attention. But in the end, escalating geopolitical worries trumped better than anticipated data from the U.S. Another view of U.S. data was the revival of 'good news is bad news' because it means that the Federal Reserve will tighten monetary policy sooner than expected. Elsewhere, five central banks met and all left their respective policies unchanged. Equities retreated in Europe and most of the Asia Pacific but rebounded in the U.S. to end the week on a positive note.

During the week, after imposing a ban on a range of food and agricultural imports, Russia said it was considering banning transit flights by airlines from the European Union and the United States to the Asia-Pacific region. This was in retaliation for the increasing sanctions on Russia as it continues to support the rebels in Ukraine.

Global Stock Market Recap

Reserve Bank of Australia

The Reserve Bank of Australia left its key interest rate at 2.5 percent where it has been since August 2013. Once again, the Board said that in its judgment, "monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."

The Board noted: "Monetary policy remains accommodative. Interest rates are very low and for some borrowers have continued to edge lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices has been slower this year than last year, though prices continue to rise."

Once again the RBA said the Australian dollar was offering less assistance in economic rebalancing than before and the currency remains high by historical standards given the fall in commodity prices. The currency's strength remains a headwind for exporters, especially for those outside of mining.

In its monetary policy report released later in the week, the RBA cut its forecast for economic growth in the year to June 2015 to a range of 2 percent to 3 percent. The RBA's previous estimate was 2.25 percent to 3.25 percent. The downgrade in its forecast follows a report that showed the unemployment rate is at a 12 year high of 6.4 percent, putting the jobless rate higher than that of the US for the first time since 2007.

Reserve Bank of India

As anticipated, the Reserve Bank of India left its key repo rate at 8.0 percent, above the 7.0 percent reverse repo rate and below the 9.0 percent Bank Rate and marginal standing facility (MSF) rate. Banks' cash reserve ratio (CRR) was also held at 4.0 percent. However, the RBI did announce an additional reduction of 50 basis points to 22 percent in the statutory liquidity ratio (SLR) as part of its ongoing efforts to spur bank lending.

Market expectations for a policy easing this year have faded amid worries that, despite a pick-up in rainfall in July, a poor monsoon season will boost food prices over coming months. Similar concerns were clearly a major factor in the policy decision together with uncertainty about the impact of geopolitical volatility on oil prices and the exchange rate. The RBI also expressed caution about strengthening economic growth in the face of continuing supply constraints. The RBI still sees the balance of risks to its own inflation forecast (8 percent by January 2015, 6 percent by January 2016) being on the upside.

The bottom line is that the RBI has little room for maneuver if its inflation objectives are to be met and its clear determination to do so means that any move on interest rates in the near term is much more likely to be up rather than down. Governor Raghuram Rajan is facing a delicate balancing act. On one side, he has to ensure that India's output expands fast enough to allow the country to lift the living conditions of its citizens, while at the same time keeping high inflation at bay.

Bank of Japan

As anticipated, the Bank of Japan left its key interest rate range at zero to 0.1 percent. Financial asset purchases remained unchanged, with the goal of increasing the monetary base at an annual pace of about ¥60 trillion to ¥70 trillion. The BoJ maintained its inflation target at 2 percent but sees a shortfall. It projects the consumer price index to be about 1.25 percent for some time. The BoJ said that the economy "continued to recover moderately as a trend." It did note though, that "exports have shown some weakness." The BoJ said both the income and employment situations are improving steadily, while private consumption and housing have remained resilient.

The BoJ's balance sheet has expanded to 52 percent of gross domestic product since Governor Haruhiko Kuroda unleashed record easing in April 2013, compared with 25 percent for the Fed and 24 percent for the Bank of England. The BoJ held ¥165 trillion of long-term Japanese government bonds as of May 31.

Data reflecting the increase in the sales tax from 5 percent to 8 percent on April 1 were pretty much as expected. Businesses and consumers bought in the first quarter to avoid paying the increased tax. However, the limited data for July reflects an easing of the declines that occurred in the immediate aftermath of the tax increase — but by not as much as expected.

Bank of England

The Bank of England's monetary policy committee left its policy interest rate and its asset purchase ceiling on hold again as expected. The Bank Rate stays at 0.5 percent while the asset purchases ceiling remains at Stg375 billion.

The meeting's minutes will be available in two weeks on August 20^th but a week before, the new Quarterly Inflation Report (QIR) will be released and will be scrutinized especially closely for signs of widening cracks among the monetary policy committee members. The August QIR will provide updated economic forecasts which will be instrumental in shaping this month's decision.

Splits on the MPC so far have been centered on how quickly the output gap is closing and on when the first Bank Rate increase should be delivered. Until now, such differences have not been enough to undermine policy unanimity when it comes to the actual vote. However, with June CPI inflation at 1.9 percent — just a tick below its 2 percent medium-term target — the more hawkish members (notably Ian McCafferty and Martin Weale) might just have broken ranks should estimates of spare capacity been revised much lower.

European Central Bank

There were no surprises from the European Central Bank. Having already provided a sizeable monetary stimulus at its June meeting, the ECB opted to keep policy steady again and wait to see how its latest measures will impact the regional economy. The key refinance rate remains pegged at its record low of 0.15 percent and the rates on the deposit and marginal lending facilities stay at minus 0.10 percent and 0.40 percent respectively.

Economic news over the last couple of months has been mostly disappointingly weak — notably among the three largest member states — and speculation about further easing will not go away in a hurry. However, those hoping that ECB Chief Draghi's press conference might contain some hints that the central bank is beginning to view outright quantitative easing in a more favorable light were disappointed. Draghi's tone was predictably dovish — it had to be with (flash) HICP inflation falling to only 0.4 percent on the year in July — but his statement offered little new. Clearly the ECB wants time to assess the effects of the June rate cut and TLTRO's and in-house resistance to QE at this time remain quite sizeable.

Europe and the UK

European equities were down for a second week. It was the first back-to-back weekly losses since March. The FTSE and DAX retreated for four of five days for a second week while the CAC and SMI were down for three days. The FTSE declined 1.7 percent, the DAX dropped 2.2 percent, the CAC was down 1.3 percent and the SMI was 1.6 percent lower. Geopolitical worries resulted in investors retreating from risk. Germany's DAX, because of strong German trade with Russia, is highly sensitive to Western tensions with Moscow.

On Thursday, ECB President Mario Draghi disappointed when he said that policy makers await additional data before injecting cash into the struggling Eurozone economy. Risk aversion deepened after U.S. President Barack Obama authorized air strikes against ISIS militants in northern Iraq to protect American personnel and civilians under siege.

Economic data proved disappointing. July PMIs were lackluster and Germany's manufacturing orders and industrial production data added to growth worries for the Eurozone. A particularly gloomy note was that Italy's gross domestic product contracted for a second consecutive quarter. Italy's lapse into recession combined with the poor German data to deepen fears that the Eurozone's economic recovery is stalling.

Investors dashed for the safety of German government debt, which notched up another record high on political tensions. Analysts noted that there has been a continued escalation both in the Middle East and in the Ukraine and Russia. Up until recently, markets had been able to ignore these geopolitical tensions.

Russia banned a range of food imports from the U.S. and Europe. The restrictions include all cheese, fish, beef, pork, fruit, vegetables and dairy products. The curbs are targeted at nations that have imposed or supported sanctions against Russia and also include Canada, Australia and Norway.

Asia Pacific

Declines gathered pace as the geopolitical situations intensified, overshadowing positive economic data. The declines culminated on Friday as fears that the crises in Iraq and Ukraine could hit global growth, overshadowing signs of a strengthening U.S. labor market. Investors' nervousness was heightened after U.S. President Barack Obama authorized air strikes against ISIS militants in northern Iraq to protect American personnel and civilians under siege. On the week, all indexes retreated with the exception of the Shanghai Composite and SET. The largest losses were incurred in Japan and Korea where the Nikkei dropped 4.8 percent and the Kospi lost 2.0 percent on the week. The Nikkei lost 3 percent on Friday and the most in five months as news of U.S. airstrikes against Sunni extremists in northern Iraq sparked a sharp increase in the safe haven yen.

The Shanghai Composite was up 0.4 percent after a jump in July exports almost doubled expectations. Exports were up 14.5 percent while expectations were for a much more modest increase of 7.3 percent. However, earlier in the week, the Shanghai Composite declined after data from Markit and HSBC showed that growth in the country's services sector declined to its weakest level since records began, reflecting the impact of a continued slowdown in the property market. The services PMI for China came in at the 50 mark in July, down from 53.1 in June and marking its lowest reading since November 2005. The composite index fell to 51.6 from 52.4 in the previous month.

The All Ordinary declined 2.1 percent on the week to end at a five week low. Equities here were hit by geopolitical concerns and by the news that the Reserve Bank of Australia cut its growth and inflation forecasts for the year, reflecting declining mining investment and ongoing fiscal consolidation. Added to that were the disappointing labour force data that reinforced the current weakness in the economy.

Currencies

The U.S. dollar was up against its major counterparts for the week with the exception of the Swiss franc. On Friday, the Swiss franc strengthened after U.S. President Barack Obama authorized targeted airstrikes in Iraq, adding to the allure of safe haven assets amid the geopolitical ructions in Ukraine and the Middle East.

Strategists have raised their yen forecasts at the fastest pace among major currencies on speculation the Bank of Japan will delay extending its monetary stimulus program until next year at the earliest. The euro gained against 13 of its 16 major peers even after European Central Bank President Mario Draghi said on Thursday that "fundamentals for a weaker" exchange rate are better than they were few months ago.

Canada's dollar declined after a report showed the nation's employers added fewer jobs in July than forecast, adding to concern the economy is faltering. The currency weakened for a second day against its U.S. counterpart after employment increased by only 200 jobs — projections were for an increase of 25,000.

Earlier in the week, the U.S. dollar climbed to a nine month high against the euro after a report from ISM showed the country's non-manufacturing sector accelerating at its fastest pace since 2005. The euro's weakness had been exacerbated by a strengthening U.S. economy and the coming end to the Federal Reserve's quantitative easing program. News that U.S. GDP expanded at a faster pace than expected also buoyed the dollar recently.

Selected currencies — weekly results

Indicator scoreboard

Germany

June manufacturing orders dropped 3.2 percent on the month following a minimally smaller revised 1.6 percent drop in May for the first back-to-back contraction since April/May 2013. Compared with a year ago, orders in June were down 2.3 percent, a sharp setback from annual growth of 5.8 percent in mid-quarter. June's monthly reversal was largely attributable to weakness in capital goods which slumped 6.4 percent after a 0.9 percent decline last time. Consumer and durable goods were down a relatively modest 0.4 percent and basics were up 1.6 percent. Overseas markets did much of the damage, off 4.1 percent from May as orders from the Eurozone ominously nosedived 10.4 percent. The rest of the world saw no change and domestic demand was down 1.9 percent.

June total industrial output was up 0.3 percent after declining a marginally smaller revised 1.7 percent in May. On the year, production was 0.5 percent lower after a 1.1 percent annual increase last time. Excluding construction, output was up 0.2 percent and down 0.3 percent on the year. Headline growth would have been much stronger but for a 0.9 percent monthly contraction in capital goods, compounding a 0.3 percent decline in May. However, output was up a solid 1.7 percent in consumer goods and was up 0.5 percent in intermediates. Construction advanced 1.2 percent and energy 0.8 percent. Even so, manufacturing expanded just 0.1 percent after a 1.6 percent drop in May.

June seasonally adjusted merchandise trade surplus narrowed to €16.3 billion from €18.8 billion in May. Unadjusted merchandise trade surplus was €16.5 billion, down from May's €17.8 billion and down from E17.0 billion in June 2013. Even though the balance was down from May, unadjusted exports were up 0.9 percent after declining 1.1 percent in May. Similarly, imports were up 4.5 percent after shrinking 3.4 percent the month before. Compared with a year ago, exports were up 1.1 percent while imports gained 2.1 percent. This was the highest monthly increase in imports since November 2010. In June, Germany exported €54.8 billion to the EU while it imported €51.1 billion from those countries. Compared with June 2013, exports to the EU countries increased by 2.6 percent while imports were up 5.0 percent. Exports to countries outside the EU were €38.6 billion while imports from those countries totaled €25.8 billion. Compared with June 2013, exports to third countries decreased by 0.9 percent and imports increased 3.2 percent.

France

June industrial production rebounded 1.3 percent on the month after sinking a revised 1.6 percent in May. On the year, output was down 0.4 percent after plunging a revised 3.4 percent the month before. Manufacturing output was up 1.6 percent after a 2.3 percent decline last time. Most of May's declines reversed themselves in June with the exception of refining which dropped 2.6 percent after sinking 8.4 percent last time. Food and agriculture was up 0.4 percent totally reversing the previous month's 0.4 percent decline. Electronics and machines were up 1.9 percent after declining 2.6 percent in May. Transport equipment jumped 4.6 percent after dropping 3.5 percent. Other manufactured goods were up 1.3 percent after sliding 2.2 percent the month before.

Italy

Second quarter flash gross domestic product was down 0.2 percent on the quarter and was down 0.3 percent from the same quarter a year ago. First quarter GDP was revised down to a contraction of 0.1 percent on the quarter and a decline of 0.4 percent on the year. There are no details of the GDP components available in the flash estimate but from the output side Istat pointed to broad based weakness with quarterly declines in agriculture, services and industry.

United Kingdom

June industrial production was up 0.3 percent on the month and 1.2 percent from a year ago. Manufacturing also added 0.3 percent on the month and was up 1.9 percent on the year. The increase in manufacturing output reflected gains in just five of the 13 subsectors. Transport equipment, which was up 3.9 percent, had the strongest positive impact ahead of basic metals & metal products (1.9 percent). Food, drink & tobacco advanced 0.5 percent. Gains here were partially offset by declines in apparel & leather (8.4 percent) pharmaceuticals (1.4 percent) and coke & refined petroleum (4.9 percent). Among the other major sectors within total industrial production, electricity, gas, steam & air conditioning expanded 0.9 percent from May and water supply & sewerage was up 1.0 percent. Mining & quarrying contracted 1.0 percent and oil & gas extraction fell 1.3 percent.

June trade deficit widened out from a revised Stg9.15 billion to Stg9.413 billion. Excluding oil and erratics, the deficit widened to Stg 8.283 billion from Stg7.675 billion. Exports were down 1.6 percent while imports were down 0.4 percent. The decline in exports reflected declines of Stg0.2 billion in fuels, a Stg0.2 billion decline in semi manufactured goods and a Stg0.2 billion slide in finished manufactures. Within fuels, oil exports fell by Stg0.1 billion and within finished manufactures, aircraft & ships combined fell by Stg0.2 billion. Erratics, which include aircraft & ships, accounted for around 60 percent of the overall fall in exports. The decline in imports reflected a Stg0.4 billion fall in fuels. Imports of manufactured goods as a whole rose by £0.1 billion, however, there were significant individual declines within manufactures. Imports of aircraft fell £0.6 billion and imports of medicinal & pharmaceutical products were down Stg0.3 billion. These decreases were offset by increases elsewhere including imports of cars and silver. Exports of goods to the EU remained unchanged while imports increased. Both exports and imports with countries outside the EU declined.

Asia/Pacific

Australia

June retail sales were up a greater than expected 0.6 percent on the month. Analysts expected an increase of 0.4 percent. Sales declined in May by 0.3 percent and were virtually unchanged in April. On the year, sales were up 5.5 percent. Household good retailing was up 1.7 percent, food retailing gained 0.5 percent, other retailing advanced 0.9 percent and clothing, footwear & personal accessory retailing was up 1.4 percent. However sales declined in cafes, restaurant & takeaway food services (down 0.6 percent) and department stores (down 0.5 percent). Turnover was up in New South Wales (0.9 percent), Victoria (0.6 percent), Western Australia (1.1 percent), South Australia (0.5 percent), Tasmania (1.3 percent) and the Northern Territory (0.3 percent). Queensland was relatively unchanged while sales declined in the Australian Capital Territory (down 0.5 percent). Sales in the June quarter slipped 0.2 percent after increasing 1.3 percent in the March quarter.

June merchandise trade deficit was A$1.7 billion after incurring a revised deficit of A$2.0 in May. The sum of seasonally adjusted balances for the three months to June 2014 was a deficit of A$4.8 billion, a turnaround of A$7.7 billion on the surplus of A$3.0 billion for the three months to March 2014. Exports were up 0.5 percent on the month and 0.9 percent from the same month a year ago while imports were down 0.8 percent on the month but up 4.8 percent from a year ago. Exports of rural goods were up 4.0 percent on the month while exports of non-rural goods were down 2.0 percent. Exports of metal ores & minerals and transport equipment declined while other minerals and metals (excluding non-monetary gold) were up. Imports of capital goods declined 3.0 percent while consumption goods were down 1.0 percent. Intermediate and other merchandise goods and services gained.

July unemployment surprised and jumped 0.3 percentage points to 6.4 percent from 6.1 percent in June. The higher unemployment rate resulted from increased participation with the number of persons in the labour force increasing by 43,400 and the number of employed decreasing by 300. Analysts expected an increase in employment of 12,000. The participation rate edged up 0.1 percentage points to 64.8 percent. The seasonally adjusted number of employed workers decreased 300 to 11,576,600. Seasonally adjusted part-time employment declined by 14,800 to 3,499,200 while full time employment increased by 14,500 to 8,077,400. For the seven months in 2014, employment is up 109,300. The employment to population ratio, which expresses the number of employed as a percentage of the civilian population aged 15 years and over, decreased 0.1 percentage points to 60.7 percent. The Australian labour market has now contracted in two of the past three months.

China

China's July merchandise trade surplus climbed to $47.30 billion from $31.60 billion in June. Exports jumped 14.5 percent on the year, up from 7.2 percent the month before. Imports slid 1.6 percent on the year after increasing 5.5 percent in June. On a seasonally adjusted basis, exports were up 5.1 percent on the month after declining 2.6 percent in June. On the year, adjusted exports were up 12.8 percent after 6.1 percent the month before. Imports dropped 5.8 percent on the month and were down 1.6 percent on the year. Exports to the European Union were up 17.0 percent from a year ago after increasing 13.1 percent in June. Imports from the EU were up 7.6 percent after increasing 13.9 percent the month before. China's exports to the U.S. were up 12.3 percent in July after increasing 7.5 percent in June. Imports from the U.S. were up 6.0 percent after declining 1.9 percent in June. Exports to Japan were up only 2.9 percent on the year after slipping 0.6 percent in June. Imports edged up 0.1 percent after increasing 6.6 percent in June.

Americas

Canada

June merchandise trade balance posted a surplus of C$1.86 billion. The end of quarter improvement followed an upwardly revised surplus of C$0.58 billion. June's improvement reflected a 1.1 percent monthly increase in exports combined with a 1.8 percent drop in imports. Net volumes similarly turned sharply higher as real exports gained 1.0 percent while imports declined 1.7 percent. However, the bilateral surplus with the U.S. narrowed by C$0.4 billion as sales to the key overseas market were only flat on the month while purchases from across the border jumped 1.5 percent. Rather, the main area of strength was in trade with the EU where the deficit narrowed from C$1.4 billion to C$0.5 billion. Within the overall monthly advance in nominal exports there were increases in metal & non-metallic mineral products (9.7 percent), metal ores & non-metallic minerals (5.2 percent) and energy products (2.5 percent). However, at the same time there were declines in forestry products & building & packaging materials (6.0 percent), motor vehicles & parts (6.3 percent) and electronic & electrical equipment & parts (2.7 percent). Imports were hit by heavy monthly declines in metal ores & non-metallic minerals (25.3 percent), electronic & electrical equipment & parts (4.5 percent) and industrial machinery, equipment & parts (3.3 percent).

July employment inched up only 200 jobs after declining 9,400 in June. The unemployment rate was 7.0 percent, down from 7.1 percent the month before. The decline here reflects fewer people looking for work. The participation rate was 65.9 percent, down from June's 66.1 percent for the lowest rate since October 2001. The weakness was centered in full-time positions which dropped a steep 59,700 from June's increase of 33,500. The decline is the largest since October 2011. Offsetting the decline was a 60,000 jump in part-time positions, one that reverses a 43,000 drop in June. By sector, the goods producing sector shed 34,000 reflecting a 42,000 decline in construction where the year-on-year decline is at 3.7 percent. Manufacturing was positive, up 11,500. The services sector added 34,300 jobs with education services up 32,000 and culture and recreation up 15,000.

Bottom line

Most global equity indexes retreated last week mostly on geopolitical concerns. U.S. economic data brought out the good news/bad news reaction — selling on good news because of fears that the Federal Reserve will tighten monetary policy sooner than anticipated. Five central banks met and left their respective policies unchanged.

Investors will closely study the Bank of England's Quarterly Inflation Report for clues to future moves by the monetary policy committee. Investors want to know when the BoE will begin its monetary policy tightening as well. Flash second quarter growth data will be published for the Eurozone and member countries. Japan will also release its preliminary estimate. Over the weekend, China releases its consumer and producer price data for July and later in the week, industrial production and retail sales. However, traders will be closely monitoring the many geopolitical situations that have addled investors this summer.

Looking Ahead: August 11 through August 15, 2014

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