Global Markets

Events on two sides of the globe served to heighten risk last week. Equities yo-yoed in response to tumbling Chinese indexes while in Europe the same held true in response to the Greek saga. Volatility ruled. The 'no' vote in Greece to the austerity measures proposed by the troika (International Monetary Fund, European Commission and European Central Bank) sent equities plunging. That combined with the free fall of stocks in China sent investors scurrying for shelter. A turnaround on Thursday and Friday precipitated rallies in equity indexes and in the process turned negatives for the week into positives in Europe and the U.S. However, in Asia ironically, only the Shanghai Composite ended the week in positive territory.

The IMF revises its global outlook

The International Monetary Fund trimmed its 2015 forecast for global economic growth to take into account the impact of recent weakness in the United States. But the organization said growth prospects for next year remain undimmed despite Greece's debt crisis and volatility in Chinese financial markets. In an update to its World Economic Outlook report, the IMF said the global economy should expand 3.3 percent this year, 0.2 percentage points below what it predicted in April. Growth should speed up to 3.8 percent in 2016 — unchanged from earlier forecasts.

The IMF pinned much of the blame for the lower growth forecast on the United States. The U.S. economy contracted in the first quarter, hurt by unusually heavy snowfalls, a resurgent dollar and disruptions at West Coast ports. The IMF said it expected the U.S. economy to grow 2.5 percent this year — it lowered the U.S. growth forecast last month from 3.1 percent in April. The IMF also said U.S. economic sluggishness had spilled over to Canada and Mexico.

The IMF also maintained its forecasts for a pickup in growth in the Eurozone, despite Greece moving ever closer to the edge of default and an exit from the currency bloc as it races to find a last minute third bailout. The IMF noted that the developments in Greece had so far not resulted in any significant contagion.

In developing economies, the IMF said growth had been dampened by lower commodity prices, tighter financial conditions tied to the economic rebalancing in China and geopolitical factors. The IMF said the market crash suggests China could face greater difficulties as it tries to move from an investment-led economic growth model to one focused on domestic consumption.

Global Stock Market Recap

Europe and the UK

Equity markets were driven by the ebb and flow of Greek news, which soured on Monday and Tuesday as a majority of Greeks voted to reject the most recent bailout terms offered by creditors. However, equities ended the week on a positive note and with gains on the week. Now, investors remain optimistic once again that a solution to the Greek debt crisis is in sight. The continued recovery of the Chinese stock market and the positive performance of the U.S. equity markets also added to the positive mood among investors. The FTSE was up 1.3 percent on the week, the CAC added 2.0 percent, the DAX jumped 2.3 percent and the SMI was 2.5 percent higher. Trading was volatile as can be readily seen in the graph.

Greek Prime Minister Alexis Tsipras submitted a cash-for-reforms proposal to creditors on Thursday that includes spending cuts, pension reforms and tax increases in exchange for a €53.5 billion three year bailout, a third for the country and acceptance of which will pave the way for further negotiations. The Greek Parliament is expected to discuss the proposal Friday evening and the vote outcome is expected early Saturday. Eurozone finance ministers are scheduled to meet on Saturday at 3 p.m. local time in Brussels to review the Greek request. While France and Italy are more optimistic regarding the proposal, Germany continues to be less upbeat thanks to the Greek referendum that rejected austerity measures and their stiff opposition to any relief for Greece. At this writing (Friday 1:00 p.m. ET), German Chancellor Angela Merkel had been silent regarding the new proposal.

Bank of England

Once again the Bank of England's monetary policy committee left the Bank Rate at 0.5 percent and its asset purchase ceiling at £375 billion. Economic news has been rather mixed since the June meeting. The manufacturing sector has underperformed expectations and the labour market has shown some signs of cooling. However, construction and services seem to have picked up steam and wages have accelerated surprisingly sharply. Inflation (annual 0.1 percent in May) has moved back into positive territory but only just and the pound sterling remains uncomfortably strong. Upward revisions to historic GDP growth may have some implications for the MPC's view of the output gap but developments in Greece and China will have encouraged an extra degree of caution. Beginning in August, the BoE will release its MPC minutes at the same time it announces its policy decision rather than waiting two weeks to do so. Also at that time, the BoE will publish its Quarterly Inflation Report.

Asia Pacific

The only equity index in the region to advance last week ironically was the Shanghai Composite thanks to actions by authorities who tried to put a floor under the collapsing index. The Shanghai Composite ended the volatile five days with its best back-to-back gain since 2008. It jumped 5.8 percent on Thursday and added another 4.5 percent on Friday. From a low on Thursday, it rebounded by 15 percent. But it is dubious to call it a relief rally when the authorities allowed half the market to be suspended, banned large stakeholders from selling, persuaded state owned companies to buy back shares and even used its central bank to buy stocks.

Some analysts predict further moves to come from the People's Bank of China, which often makes policy announcements over the weekend, such as another rate cut or relaxation of the amount of cash banks must hold as reserves (RRR).

The Hang Seng was dragged down by the events in mainland China, losing 4.5 percent on the week. The Hang Seng caught a draft from Shanghai and declines accelerated. However, although the index benefited from Beijing's actions, it was unable to recoup losses as the Shanghai had done.

Despite doubts on the potency of Beijing's aggressive rescue efforts to produce a durable recovery, other Asian indexes ended mostly higher Friday on hopes that authorities will step up efforts to prevent the fallout from spilling over into the real Chinese economy. However, the gains Friday were too little too late to repair the damage from earlier in the week.

The Nikkei reacted to the Chinese issues along with the stalemate between Greece and the EU. The index lost 3.7 percent on the week. Tokyo stocks plummeted on Wednesday, with the Nikkei index falling by its widest margin this year to close at a nearly two-month low, amid heightened concerns over the impact of a Chinese economic slowdown on Japan as Shanghai stocks plummeted.

Australian stocks saw a relief rally after the outcome of the Greek referendum drew only a muted reaction on Wall Street overnight. The RBA's rate decision came in line with expectations, offering further support to sentiment. Leaving the cash rate unchanged, the board judged that its policy was appropriate for the time being to foster sustainable growth and inflation consistent with the target.

Reserve Bank of Australia

As expected, the Reserve Bank of Australia kept its policy interest rate at 2.0 percent where it has been since May alongside an accommodative statement. Regarding the Australian dollar, the RBA acknowledged that it had declined noticeably against a rising U.S. dollar over the past year, though less so against a basket of currencies. The statement once again said that further depreciation of the currency seems both likely and necessary, particularly given the significant declines in key commodity prices.

In its statement, the RBA noted that although the economy continued to grow over the past year, it is growing at less than its long term average and is likely to be operating with a degree of spare capacity for some time. With very slow growth in labour costs, inflation is forecast to remain consistent with its target range of 2 percent to 3 percent over the next one to two years, even with a lower exchange rate.

Currencies

The U.S. dollar advanced against the pound, Swiss franc and the Canadian and Australian dollars. It was unchanged against the yen but slipped against the euro. The U.S. currency moves reflected reactions to the situation in China regarding its equity indexes and in Europe, regarding the ongoing Greek crisis. For example, when the Chinese stock indexes were boosted Thursday and Friday, the safe haven yen retreated against the U.S. dollar. When optimism overtook investors in Europe, the euro rallied.

The Japanese yen, which tends to strengthen in times of market uncertainty or volatility, was down on Thursday after the Shanghai Composite gained 5.8 percent during the trading session. The yen's decline could be temporary, as some analysts worry that Thursday's stock market rally stemmed less from improving economic fundamentals in China and more from regulatory changes put in place to halt the equities meltdown.

In Europe, the safe haven yen and Swiss franc declined on Thursday after Chinese stocks rebounded and worries about Greece eased somewhat as Europe awaited reform proposals from the country to back its request for another three year loan. The yen and Swiss franc typically rally when there is financial or geopolitical stress as investors seek out safer and more liquid investments.

Selected currencies — weekly results

Commodities

U.S. oil drillers added rigs for a second consecutive week. An additional 5 rigs were drilling for oil in the week to July 10, following last week's addition of 12 which was the first uptick in seven months. However, this week's addition leaves the total at 645 and down 918 from a year ago. Although many oil market participants anticipate strong demand growth and say vulnerability among many of these companies will support oil prices (that have rebounded since hitting a low of $43 a barrel in March), others say the latest data are fresh signs of the resilience of U.S. shale oil which could make way for another sharp fall in prices.

According to the International energy Agency, U.S. production recorded the sharpest declines in growth from record highs in 2014 and early 2015 (amid lower oil prices that have prompted cut backs in spending and drilling). However, output growth remains positive at around 300,000 b/d for the year as a whole.

Indicator scoreboard

Germany

May manufacturing orders were down 0.2 percent on the month following a significantly larger revised 2.2 percent jump in April. From a year ago, orders were up 4.8 percent. May's monthly decline was attributable to a 0.8 percent reversal in capital goods and a 1.2 percent drop in consumer & durables. Basics advanced 1.2 percent. Domestic orders were off 0.6 percent on the back of a 2.9 percent slump in capital goods but overseas demand edged 0.2 percent firmer despite a 1.5 percent slide in the Eurozone.

May industrial production was unchanged on the month after increasing a smaller revised 0.6 percent at the start of the quarter. However, weakness in the year ago data saw annual workday adjusted growth nearly double to 2.1 percent. May's headline stagnation masked a respectable 0.4 percent monthly advance in manufacturing within which increases in consumer goods (1.3 percent) and capital goods (0.4 percent) comfortably more than offset a 0.2 percent slide in intermediates. Otherwise, energy slumped 3.1 percent from April and construction was off 0.5 percent.

May seasonally adjusted merchandise trade surplus was €22.8 billion, up from a marginally smaller revised €21.5 billion excess in April. The unadjusted black ink stood at €19.5 billion, down from €21.2 billion at the start of the quarter. The modest improvement in the adjusted surplus was attributable to stronger exports which rose 1.7 percent on the month, their best performance since last December, to a new record high. This comfortably offset a 0.4 percent gain in imports that only reversed part of April's 0.8 percent decline. Exports have now expanded for four consecutive months and stand 4.6 percent higher on the year. Annual import growth was 3.0 percent.

France

May seasonally adjusted merchandise trade deficit expanded from an upwardly revised €3.3 billion in April to €4.0 billion in May, the second largest deficit of 2015 to date. The latest deterioration reflected a combination of weaker exports and stronger imports. The former fell 0.6 percent on the month, their first drop since January, and would have declined more sharply but for a strong performance in the aviation subsector. Compared with May 2014, overall exports were up 5.4 percent. Imports on the other hand expanded a monthly 1.2 percent to stand just short of March's record high with transport equipment and intermediate goods seeing especially strong local demand. Annual import growth was a relatively mild 2.7 percent.

May industrial production excluding construction was up 0.4 percent on the month following a smaller revised 0.8 percent drop in April and was the first gain since February. With base effects particularly favorable, annual growth accelerated sharply, hitting 2.8 percent and equaling its highest mark since May 2011. May's monthly advance was led by manufacturing where output was up 0.6 percent. Transport equipment (2.3 percent) enjoyed an especially robust period and there were gains too in electronics & machines (0.3 percent) and the other manufactured goods category (0.8 percent). However, food & agriculture contracted 0.5 percent and the volatile refining subsector fell 2.7 percent. Construction increased 1.0 percent.

United Kingdom

May industrial production was 0.4 percent higher on the month following a marginally weaker revised 0.3 percent gain in April. Annual growth was 2.1 percent, up from 1.2 percent last time. By contrast, manufacturing posted a 0.6 percent decline to compound the unrevised 0.4 percent drop seen at the start of the quarter. Output here was 1.0 percent firmer on the year, an improvement on April's 0.1 percent increase but only due to an even steeper slide a year ago. Within manufacturing eight of the 13 subsectors recorded monthly decreases among which a 3.7 percent slump in basic metals & metal products subtracted 0.3 percentage points. The strongest increase was in basic pharmaceutical products & pharmaceutical preparations which posted a 7.9 percent jump, apparently in part due to healthy export demand. Elsewhere overall goods output was boosted by a 4.9 percent monthly gain in mining & quarrying as well as a 0.8 percent rise in water supply, sewerage & waste management and a 0.6 percent advance in electricity, gas, steam & air conditioning.

May merchandise trade deficit narrowed to £8.00 billion from April's £9.39 billion and equaled the smallest print since June 2013. However, the headline improvement was in large part due to a stronger performance by the more volatile sectors as, excluding oil and other erratic items, the deficit narrowed by only Stg0.23 billion to £7.50 billion, although this too constituted a 2-year low. The reduction in the overall shortfall was wholly attributable to weaker imports which fell a sizeable 4.1 percent on the month. Exports dipped 0.1 percent and were down 2.3 percent excluding oil and other erratic items. The deficit with the rest of the EU stood at £6.4 billion down from £7.0 billion last time and with the rest of the world at £1.6 billion after £2.4 billion.

Asia/Pacific

Japan

May seasonally adjusted machine orders (excluding volatile items) advanced for a third consecutive month. They were up 0.6 percent on the month and 25.6 percent on the year. Core orders were up 19.3 percent based on the original series. This was in stark contrast to expectations of a monthly 5.0 percent drop. Core machine orders are considered a proxy for private capital expenditures. The upward move followed a 3.8 percent gain a month before. The government repeated its assessment that machine orders are picking up. Nonmanufacturing orders excluding volatile items declined 4.0 percent while manufacturing orders jumped 9.9 percent. All orders including volatile items dropped 6.2 percent on the month. Manufacturing orders likely softened on weaker export demand while the sluggish domestic economy weighs on nonmanufacturers.

June producer price index dropped a greater than anticipated 2.4 percent on the year – analysts expected the index to decline 2.1 percent. On the month, the PPI retreated 0.2 percent. Excluding the impact of the consumption tax increase, the index was 2.5 percent lower. The decline in part was from the continuing impact of the drop in petroleum & coal product prices which were down 20.3 percent from a year ago after sinking 21.3 percent in May. Iron & steel were also lower but by 3.1 percent while lumber & wood products were 3.2 percent lower than a year ago.

Australia

June unemployment rate edged down to 6.0 percent from a revised 5.9 percent in May. The seasonally adjusted labour force participation rate increased less than 0.1 percentage points to 64.8 percent in June 2015. The number of people employed was up by 7,300 to 11,768,600 in June 2015 (seasonally adjusted). Details were better, as full-time jobs rose 24,500. Part-time jobs fell by 17,200. The seasonally adjusted number of people unemployed increased by 12,800 to 756,100 in June 2015. This was driven by unemployed people who looked for full-time work, which increased by 27,200 to 541,200.

China

June consumer prices were up a better than expected 1.4 percent from a year ago. This is far below the official 3 percent target. On the month, the index was unchanged. For the year to date, the CPI was up 1.3 percent for a third month. Urban consumer prices were up 1.4 percent while rural prices added 1.2 percent from a year ago. Among the subcategories, only prices for transportation & communication were down, losing 1.5 percent and declining 1.3 percent in May. Food prices were up 1.9 percent after rising 1.6 percent the month before. Non-food prices increased 1.2 percent after 1.0 percent. Clothing prices were up 2.9 percent, about the same as the last few months.

Producer prices deflated for a 40th consecutive month, dropping 4.8 percent from a year ago in June. In May, the PPI was down 4.6 percent. The sustained decline in producer prices reflects the downturn in China's housing market, which had led to excess supply of the materials used in the housing boom. The PPI was down 0.4 percent on the month and 4.6 percent for the year to date. Raw materials procurement, fuel & power dropped 5.6 percent while consumer goods were down 0.2 percent. Ferrous metals sank 11.2 percent and ferrous metals were down 5.3 percent on the year.

Americas

Canada

May merchandise trade deficit was C$3.34 billion, up from a marginally upwardly revised C$2.99 billion in April. The headline deterioration reflected a 0.6 percent monthly decline in exports, their fifth fall in a row, and a 0.2 percent rise in imports. Sales into the key U.S. market dipped 0.3 percent which, with purchases from across the border 0.5 percent higher, saw the bilateral surplus narrow to C$2.12 billion from C$2.34 billion last time. At the same time the real trade position also worsened as exports volumes dropped 2.5 percent on the month and price adjusted imports gained 0.3 percent. Within the monthly slide in total nominal exports, the main areas of weakness were electronics & electrical parts (minus 4.8 percent) and industrial machinery, equipment & parts (minus 3.5 percent) alongside metal ores & non-metallic minerals (minus 9.2 percent) and metal & non-metallic mineral products (minus 5.8 percent). However, aircraft & equipment rose 10.3 percent and motor vehicles & parts advanced 2.7 percent. Nominal imports were hit by aircraft & equipment (minus 12.4 percent), metal ores & non-metallic minerals (minus 10.9 percent) and industrial machinery, equipment & parts (minus 5.0 percent) but most other subsectors saw gains.

June employment declined 6,400 after May's sharp increase. The unemployment rate was unchanged at 6.8 percent while the participation rate was a tick lower at 64.8 percent. June's drop in headcount masked widely divergent developments in full-time and part-time positions. While the former saw a 64,800 surge the latter slumped some 71,200. Similarly, a 42,200 gain in public sector net hiring contrasted with a 26,300 reversal in the private sector and a 22,000 drop in the number of self-employed. Employment was down just 1,900 in the goods producing sector although within this manufacturing shed 7,200. Construction recorded an 8,000 increase and natural resources were up 3,500 but utilities dipped 1,600 and agriculture was off 4,600. Meantime, services lost a net 4,500 workers, mainly reflecting a near-17,000 drop in other services and a 13,700 slide in business, building & other support services. Partial offsets were provided in public administration, transportation & warehousing and professional, scientific & technical services (6,900).

Bottom line

Investors were mesmerized by the events in China and Greece once again, resulting in market volatility around the globe. Both the Bank of England and the Reserve Bank of Australia left their respective monetary policies unchanged. June employment reports from Australia and Canada were mixed. Fed Chair Janet Yellen's speech on Friday largely reiterated earlier comments and possibly presaging some of her upcoming congressional testimony.

The Banks of Canada and Japan along with the European Central Bank hold monetary policy meetings this week. None are expected to alter their current policies. A highlight especially after the gyrations in Chinese stock indexes will be China's second quarter growth estimate along with June industrial output and retail sales data. UK consumer and producer price indexes and labour market report will also garner investor attention especially given how it might influence future BoE policy. Fed Chair Janet Yellen gives her semi-annual testimony to the House of Representatives Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday.

Looking Ahead: July 13 through July 17, 2015

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