Global Markets

Equities were mixed in the last week of summer in thin markets. Geopolitical concerns outweighed better than anticipated U.S. economic data. Economic updates in the Eurozone and Japan, in contrast, were bleak. Japan continues to struggle to overcome the negative impact of the April sales tax increase. In the Eurozone, business and consumer sentiment are sagging while there is virtually no inflation. Germany, which has been the Eurozone's engine of growth, is showing ominous signs of weakening. German GDP contracted in the second quarter and both the ZEW and Ifo surveys show weakening confidence. The sanctions against Russia, given the volume of trade between the two countries, are showing signs of impacting German growth.

Equities were mixed both for the week and the month of August. Most indexes declined in the Asia Pacific region for the week while they advanced in Europe and the U.S. The same held true for the monthly changes.

Global Stock Market Recap

Europe and the UK

European stocks finished a positive week on a lackluster note Friday, as worries about the Eurozone economy overshadowed hopes of stimulus from the European Central Bank. A slew of disappointing data, mostly from Germany, have investors fearing it will be a long way back for Europe regardless of whether the ECB announces quantitative easing in September. With much of Europe 'out of the office' on vacation, there were few corporate headlines to digest. Volume was light. Equities have been rising on expectations that the European Central Bank would increase its stimulus. The FTSE was up 0.7 percent on a holiday shortened week and added 1.0 percent in August. The SMI was up 1.2 percent on the week and 3.0 percent in August.

The CAC jumped 3.0 percent on the week and was up 3.2 percent on the month. The CAC was bolstered by the appointment of new ministers to President François Hollande's government to tackle France's faltering economy. The DAX advanced 1.4 percent on the week despite disappointing economic data. On the month, the index added 0.7 percent. In Germany, the August Ifo survey reading retreated for a fourth month while joblessness increased but not enough to alter the unemployment rate. Underlying the weakness in the Ifo was the European Commission's business and consumer sentiment indexes. Both had deteriorated more than expected. However, investors broadly cited resurgent tensions in Eastern Europe as the main concern.

European stocks had surged higher Monday as market participants cheered uncharacteristically dovish remarks from European Central Bank President Mario Draghi. In a speech at Jackson Hole on August 22^nd, Mr Draghi said the ECB would carry out quantitative easing unless inflation picks up. In his remarks, Mr Draghi suggested a major shift in ECB policy towards reviving growth and not focusing on austerity.

The Eurozone August flash harmonized index of consumer prices continued to slide, this time to an increase of only 0.3 percent from a year ago after a 0.4 percent reading in July. This was the lowest in almost five years. The flash August reading prompted calls for the ECB to take more aggressive steps. The threat of deflation may prompt the ECB to start buying assets in an attempt to return inflation to the bank's target of 2 percent.

According to a Reuters study, European asset managers cut their exposure to stocks in August as expectations of rate increases in the United States pushed many to book profits while equities remained near record highs. Reuters surveyed 11 European chief investment officers and fund managers and found the average recommended allocation to equities in balanced portfolios dropped to 45.7 percent from 49 percent a month earlier — the lowest since September 2013. Within global equity portfolios, the poll showed European investors allocating more to emerging markets and the U.S. at the expense of Europe and the UK. One respondent cited uncertainty over a referendum on Scottish independence next month as making British assets less attractive.

Asia Pacific

Equities were mixed for the day on Friday as well as the week and the month. Geopolitical concerns regarding the deteriorating situation in Ukraine weighed on investors and offset positive U.S. economic data. Investors here also are keeping a wary eye on the Middle East. With most economic data being released at the end of the week, investors were cautious. Volume was light in the traditional last week of summer.

Japan's Nikkei index retreated after a slew of economic data continued to show the negative impact of April's sales tax increase to 8 percent from 5 percent and in the process cast doubts on Prime Minister Shinzo Abe's economic revival plan. The index retreated 0.7 percent on the week and lost 1.3 percent in August for its first monthly decline since April. July household spending swooned for a fourth consecutive month, this time by 5.9 percent. Retail sales edged up a meager 0.5 percent on the year — the first increase since March — when consumers rushed to buy ahead of the sales tax increase. Even industrial production for July disappointed — it crept up 0.2 percent on the month and was down 0.9 percent from a year ago. Core consumer prices excluding only fresh food were up 3.3 percent on the year for the second month. The increase excluding the sales tax was estimated at 1.3 percent, about the same as the Bank of Japan's forecast. The news will certainly give the Bank of Japan something to discuss before its policy announcement on Thursday.

The Hang Seng retreated 1.5 percent on the week ahead of an expected decision from Beijing on the weekend on how the city can elect its chief executive. In August, the index slipped 0.1 percent. The Shanghai Composite declined 1.1 percent on the week despite Friday's 1.0 percent gain after local media reports boosted investors' hopes that the government would introduce reforms at state owned defense firms. The Shanghai Composite added 0.7 percent on the month.

The All Ordinaries slipped 0.3 percent on the week but was virtually unchanged in August. Here too, investors were wary of the geopolitical situation. They also were looking ahead to the Reserve Bank of Australia's monetary policy announcement Tuesday along with the release of second quarter growth data. Weak commodity prices for iron ore weighed on major firms' prices.

Currencies

The news this week was the continued slide of the euro, especially after ECB President Mario Draghi's August 22 speech in Jackson Hole, Wyoming. He said that inflation expectations in the Eurozone had fallen. The speech in turn fueled bets that officials will increase monetary stimulus when the ECB meets on September 4^th. This was underlined by the August flash harmonized index of consumer prices release that indicated inflation slipped further and is now up 0.3 percent on the year. The ECB's target inflation rate is 2.0 percent.

The U.S. dollar was up against the yen, euro and Swiss franc last week. However, it was down against the pound sterling, Canadian and Australian dollars. Canada's dollar extended gains after the economy expanded at the fastest pace in three years. The 'loonie' appreciated after second quarter gross domestic product expanded by an annualized pace of 3.1 percent.

With the Swiss franc near its strongest level against the euro in almost 21 months, the Swiss National Bank may intervene for the first time in two years to defend its cap of CHF1.20 against the shared currency. Demand for the franc increased after European Central Bank President Mario Draghi stepped up his rhetoric this month on policies needed to combat weak inflation, edging the ECB closer to quantitative easing. The conflicts between Ukraine and Russia as well as those in the Middle East have also increased appetite for the Swiss currency, which investors favor during times of crisis. The SNB said that it last intervened in September 2012 to defend the ceiling. SNB President Thomas Jordan has repeatedly said he will exclude no measures to shield the cap, with the introduction of negative interest rates a "possible option." The SNB set the cap in September 2011 after investors, anxious about the euro area debt crisis, pushed the franc nearly to parity with the euro.

Selected currencies — weekly results

Indicator scoreboard

EMU

July M3 money supply increased 1.8 percent on the year. It was the third month in a row that broad money growth accelerated. The 1.8 percent annual rate was up 0.2 percentage points from June's upwardly revised pace and constituted the strongest performance since September 2013. The pick-up was enough to boost the aggregate's 3-month moving average measure from 1.2 percent to 1.5 percent. Lending to the private sector was still 1.6 percent lower on the year but even this was an improvement on the (steeper revised) 1.8 percent contraction posted last time. Borrowing by households was a tick better off at minus 0.5 percent and within this, loans for house purchase slipped just 0.1 percent after a 0.4 percent drop at quarter-end. Borrowing by non-financial corporations recorded an unchanged minus 2.3 percent annual rate while lending to non-monetary financial intermediaries (excluding insurance companies and pension funds) was down 4.9 percent after a 5.9 percent fall last time.

August EU Commission's economic sentiment indicator (ESI) was 100.6, down 1.5 points from a slightly weaker revised July reading and at its lowest level so far in 2014. However, the measure remains above its 100 long run average value and is still only a couple of points short of the year to date high. August's drop reflected broad based losses among the component variables. In particular, consumer confidence declined 1.6 points to a 6-month low of minus 10.0 and morale in industry was off 1.5 points at minus 5.3, its worst reading since last September. Retail saw a steeper 2.3 point drop, construction was down 0.2 points and services off 0.5 points. Regionally there were declines in national ESIs in France (0.6 points), Germany (1.9 points) and more significantly in Italy (4.1 points) which, at 97.8, joined France in posting a sub-100 reading. Spain was unchanged at 103.5.

August flash harmonized index of consumer prices decelerated to an increase of 0.3 percent on the year from 0.4 percent last time. It was its lowest level since October 2009. However, the slowdown in the headline rate was not mirrored in the core measure which excludes energy, food, alcohol and tobacco. This gauge of underlying pressures ticked up 0.1 percentage points to 0.9 percent, its strongest reading since the 1.0 percent posted in April. Among the major sectors, the strongest downward impact came from energy where prices were off 2.0 percent after a 1.0 percent decline at the start of the quarter. Elsewhere, non-energy industrial goods inflation climbed 0.3 percentage points to 0.3 percent while services recorded a 0.1 percentage point dip to 1.2 percent. Food, alcohol and tobacco charges were unchanged with an annual decline of 0.3 percent.

July joblessness bucked its recent declining trend with a seasonally adjusted increase of 4,000 to 18.409 million. The increase, which followed a revised 168,000 decline in June, was small enough to leave the unemployment rate steady at 11.5 percent. There was better news on youth unemployment which was down 10,000 on the month after a 34,000 drop at the end of last quarter. However, at 23.2 percent the jobless rate here remains unacceptably high.  Using Eurostat methodology, among the major EMU members, the national unemployment rate was up 0.3 percentage points at a record equaling peak of 12.6 percent in Italy and 0.1 percentage points higher at 10.3 percent in France. However, Germany and Spain both saw their rates move a tick lower to 4.9 percent and 24.5 percent respectively. There was also a further improvement in Cyprus (14.9 percent after 15.0 percent) and in Portugal (14.0 percent after 14.1 percent). Top of the ladder was still Greece (27.2 percent in May) while Austria (4.9 percent) shared the lower rung with Germany.

Germany

August Ifo index slid 1.7 point to 106.3, its lowest level since July 2013. Both the current conditions and expectations components were down. Current conditions were down 1.8 points at 111.1, also their poorest mark in more than a year and the fourth month in which the measure has failed to make any headway. More worryingly, a 1.7 point decline in expectations was their fourth drop in as many months and the sixth in the last seven. At 101.7, this component has not been any softer since May 2013. Outside of a minor improvement in construction, morale deteriorated ominously in all of the major sectors with particularly marked declines in retail and manufacturing.

August unemployment increased 2,000 and followed an unrevised 12,000 drop in July. Now joblessness has risen in three of the last four months. However, August's rise was too small to impact the unemployment rate which again held steady at 6.7 percent. It was not all bad news as seasonally adjusted vacancies were up an unusually robust 11,000 after a 2,000 advance at the start of the quarter. However, the more tardy ILO data revealed a healthy 46,000 monthly bounce in July employment. This was its strongest gain since February and its second largest increase in more than a year.

Italy

Second quarter real gross domestic product posted an unrevised 0.2 percent quarterly contraction. Confirmation of the flash estimate means that the Italian economy fell back into recession after just one quarter's worth of positive growth at the end of last year. The annual decline in real GDP was revised by just a tick to a 0.2 percent. Among the GDP expenditure components, private consumption managed a minimal 0.1 percent quarterly advance but capital investment was down 0.9 percent and government consumption was off 0.1 percent. As a result, final domestic demand subtracted 0.1 percentage points from the quarterly change in total output. Weakness in home demand saw renewed inventory accumulation which boosted GDP by 0.2 percentage points. Headline growth was also negatively impacted by a worsening in the real foreign trade balance as exports fell 0.1 percent from the first three months of the year and imports climbed 1.0 percent. Taken together, this meant net exports subtracted 0.2 percentage points.

Asia/Pacific

Japan

July consumer price index was unchanged on the month and up 3.4 percent from a year ago. Excluding fresh food, the index edged up 0.1 percent and was up 3.3 percent on the year. Excluding the sales tax, the core CPI was up 1.3 percent on the year. The core measure that excludes both fresh food and energy was unchanged on the month and up 2.3 percent on the year. Energy prices were up 8.8 percent on the year (up 9.6 percent in June) while prices for TVs vaulted 11.8 percent after increasing 8.0 percent the month before. Electronics goods were up 9.1 percent after 8.0 percent.

July household spending sank 5.9 percent on the year for the fourth consecutive drop. Spending on furniture & household utensils declined 14.6 percent while clothing & footwear were down 7.4 percent on the year. Food expenditures declined 4.1 percent while transportation & communication were 5.2 percent lower. Spending continues to show the impact of the April sales tax increase from 5 percent to 8 percent.

Unemployment in July surprised and increased to 3.8 percent from 3.7 percent last time. Employment was up 460,000 from a year ago. Employment increased 560,000 in June. The labour force participation rate increased 0.4 percent to 59.6 percent while the employment rate also added 0.4 percent to 57.3 percent.

July retail sales were up 0.5 percent on the year for the first increase since March, prior to the increase in the sales tax. Auto sales slumped 0.6 percent after dropping 3.7 percent the month before. However fuel sales were up 1.4 percent after increasing 2.7 percent in June. Retail machinery sales dropped 3.9 percent after sinking 6.8 percent. Food and beverage sales added 1.2 percent after 1.6 percent in June. Apparel sales were up 0.6 percent in a sign of life after swooning 2.5 percent the month before.

July industrial production edged up 0.2 percent on the month but declined 0.9 percent from a year ago. Among the industries that increased output on the month was general purpose, production & business oriented machinery (up 6.3 percent), petroleum & coal products (up 3.1 percent) and textiles (up 1.3 percent). According to METI's Survey of Production Forecast in Manufacturing, production is expected to increase 1.3 percent in August and increase 3.5 percent in September. Industries that are expected to contribute to the increase in August are chemicals, electronic parts & devices and information & communication electronics equipment.

India

Second quarter gross domestic product expanded a stronger than expected 5.7 percent on the year, up significantly from the 4.6 percent rate recorded in the previous period. This was the country's fastest growth since the first quarter of 2012. The upswing was dominated by a 10.4 percent increase in output in financing, insurance, real estate & business services and a 9.1 percent advance in community, social & personal services. There was also a 10.2 percent jump in activity in the utilities sector. Manufacturing expanded 3.5 percent, ahead of mining & quarrying (2.1 percent) but short of both construction (4.8 percent) and agriculture, forestry & fishing (3.8 percent). Trade, hotels, transport &communication increased 2.8 percent.

Americas

Canada

Second quarter gross domestic product increased 0.8 percent on the quarter or at an annualized pace of 3.1 percent. On the year, GDP was up 2.5 percent. The acceleration in economic activity was largely attributable to a pick-up in final domestic demand which, having surprisingly stagnated in the first quarter, expanded 0.7 percent. Within this most of the work was done by household consumption which was up 0.9 percent. Gross fixed capital formation was up 0.2 percent, essentially accounted for by residential structures, while general government final expenditures edged just 0.1 percent higher. Inventory accumulation was strongly negative, subtracting 0.5 percentage points. The external sector provided a boost to economic activity as exports surged a quarterly 4.2 percent and imports climbed 2.7 percent. This saw a net contribution of 0.4 percentage points, effectively matching the boost last time. However, the improvement in net exports was masked by a broadly stable current account deficit which, at C$11.9 billion, was just C$0.2 billion less than in the January to March quarter.

Bottom line

Equities were mixed in thin volumes. Economic news was mixed. Data disappointed in Europe and Japan but mostly pleased in the United States. Investors at times paid more attention to the ongoing geopolitical crises than to economic data.

The first week of September brings an avalanche of new economic data along with five major central bank meetings and announcements. The Reserve Bank of Australia, the Banks of Canada, England and Japan and the European Central Bank will all make monetary policy announcements. However, attention will most likely be focused on the ECB given Mario Draghi's comments at Jackson Hole and subsequent poor economic data from the Eurozone.

Looking Ahead: September 1 through September 5, 2014

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