Global Markets

That is the question being asked globally. Will the Federal Reserve increase its fed funds rate on September 17 — or not. Two countries on opposite sides of the world dominated equity market news — China's precarious economic health and the United States Federal Reserve's imminent monetary policy decision. With China's markets closed for a national holiday on Thursday and Friday, full attention slewed to Friday's employment report — the last key piece of economic news for the data-driven Fed. The employment report always receives heightened attention by financial markets — but at the risk of poor grammar, the August report attention was even more so. The debate, already at a high pitch, will continue until at last the decision is announced. For the record, U.S. employment was up by a less than anticipated 173,000. However, revisions added 44,000 jobs to the two prior months. Unemployment slid to 5.1 percent.

Two key central banks met — the Reserve Bank of Australia and the European Central Bank. Their policy announcements were expected — no change.

Meanwhile on the week, equities plunged. The sole index that advanced was the SET. Losses ranged from 0.2 percent (Taiex) to 7.0 percent (Nikkei). Only the Nikkei, CAC, DAX and MIB are still positive so far in 2015.

Global Stock Market Recap

Europe and the UK

The European Central Bank gave European equities a helping hand Thursday but the boost did not last long. Equities across the continent were sharply lower Friday and for the week as the volatility over the last month continued. A combination of unease over the health of the Chinese economy and uncertainty over the effect of a Federal Reserve rate increase triggered significant swings across equities and commodities in particular. On Friday, the U.S. jobs report for August offered little clarity to those who expected it to reveal the potential timing of a rate increase.

The European markets ended Thursday's session solidly to the upside. Concerns over China were put on the back burner given the two day holiday shuttering the Chinese markets. Dovish comments from ECB President Mario Draghi and hints that the central bank may consider further stimulus measures provided a shot in the arm to the markets. Earlier in the week, stocks were pressured by events in China including weak manufacturing data and a continued drop in Chinese equities. However, at week's end, full attention was on the U.S. employment report as investors looked for definitive directions to U.S. interest rate policy.

Equities were down for the week after the highly anticipated U.S. employment report showed disappointing job growth. Both the FTSE and CAC tumbled 3.3 percent, the DAX retreated 2.5 percent and the SMI lost 1.5 percent. Despite recent losses, the CAC, DAX and MIB remain positive in 2015.

European Central Bank

As expected, the European Central Bank left its key interest rates unchanged. Accordingly, the benchmark refi rate remains at 0.05 percent, above the minus 0.20 percent deposit rate and below the 0.25 percent marginal lending rate. However, while there was a strong consensus in favor of stable interest rates, there was some uncertainty about what the ECB would do with the unconventional side of its monetary policy. In particular, slowing global growth and volatile stock markets along with a still unconvincing domestic recovery and a renewed fall in Eurozone inflation expectations had at least raised the possibility of some additional boost to the current €60 billion per month QE program.

In practice the Bank opted not increase its asset purchases, but at his post announcement press conference ECB President Draghi went out of his way to stress the flexibility of the existing program in terms of size, composition and duration.

Moreover, increased downside risks to the economic outlook were highlighted and also reflected in the ECB's new economic forecasts. GDP growth projections were revised down from 1.5 percent to 1.4 percent this year, from 1.9 percent to 1.7 percent in 2016 and from 2.0 percent to 1.8 percent in 2017. At the same time, expected HICP inflation was nudged lower to just 0.1 percent from 0.3 percent this year and from 1.5 percent to 1.1 percent next year and from 1.8 percent to 1.7 percent in 2017. The bottom line is that the current policy stance is not expected to achieve the ECB's near-2 percent HICP target even over the medium-term.

Accordingly, speculation that a larger QE program is simply waiting in the wings is unlikely to go away anytime soon. The ECB may not want to expand its asset purchases so far ahead of their tentatively planned completion in September 2016, but its statement certainly laid down the verbal groundwork needed to do exactly that. Monetary policy will remain very accommodative over the foreseeable future and could well be eased still more in the interim.

Asia Pacific

Equities were battered once again. The Nikkei and Sensex were down for a fourth week while both the Shanghai Composite and Hang Seng have now retreated for seven. On the week, all indexes tumbled with the exception of the SET which was up 0.4 percent. The declines could have been worse but the Shanghai Composite was closed for a holiday on Thursday and Friday. The worst performer on the week was the Nikkei which was down 7.0 percent followed by the Sensex which retreated 4.5 percent and the All Ordinaries which was 4.1 percent lower. Uneasiness about China in the first part of the week did most of the damage. A two day national holiday spared regional investors volatility on Thursday and Friday. The Nikkei is the only Asia Pacific index followed here that is still positive in 2015.

Asian emerging market stocks continue to be battered from just about every direction. Commodities have crashed this year, EM currencies are being crushed by the U.S. dollar's increasing value as a first Fed interest rate increase approaches, growth is stumbling, and now China's stock market ructions and stagnating economy have provided the EM slide with fresh impetus. Unsurprisingly, Asian markets are at the epicenter, and Asian equities are on one of their worst runs in decades. Softness in U.S. data helped EM assets gain some traction early in the second quarter, but the gains have evaporated as the prospect of Fed lift-off nears and commodity prices continue their swoon.

Even with the Chinese market shut for two days last week, it proved to be difficult for the rest of the Asian equity markets. Australian and Japanese shares had a particularly rough time. And the Hang Seng suffered its seventh consecutive week of declines making for its longest weekly losing streak since the depths of the financial crisis in 2008. Seven weeks also makes for the second longest losing streak on record.

Exchanges across Asia reported that selling by foreign investors outweighed buying in August. Foreigners sold billions of dollars more in stocks than they bought in South Korea and Taiwan. On India's Bombay Stock Exchange, net selling by foreigners reached its highest amount for one month since 2002, the earliest date for which comparable data are available.

Foreigners' caution stems from a perceptual shift on growth in emerging Asian countries. The Asian markets that drove global growth after the 2008 financial crisis became new destinations for stock investing. With China's economic expansion providing a further boost, benchmark indexes set record highs in the first half of 2015. But demand from China had sustained emerging market exports, so increasing awareness of the slowdown there threw cold water on growth expectations.

Foreigners have an outsize presence in many Asian stock markets, accounting for 40 percent of turnover in Indonesia. But even Asia's larger markets, such as India and Singapore, have market capitalizations a fraction of the size of Japan's, making low liquidity an obstacle to recovery. A lack of investors prevents selling pressure from being fully absorbed. Inflows and outflows of foreign money accelerate market trends, creating a risk of wider losses. Liquidity could be drained further if foreigners remain net sellers. Investors will have few chances to rethink their decisions even if money returns to Asian markets. With visibility limited, foreigners could remain at a loss for some time.

Reserve Bank of Australia

As expected the RBA kept its policy interest rate unchanged at 2.0 percent at its September meeting. The RBA last cut rates in May, taking the benchmark interest rate to a historic low of 2 percent. It also trimmed rates in February. Australia is grappling with the end of a long commodities boom, but at the same time, the Bank has to tread carefully in order to avoid further fueling the country's already high house prices.

The RBA also maintained its revised language regarding the Australian dollar. In its previous (August) policy statement the RBA altered its tone on the currency quite significantly, saying it was "adjusting to the significant declines in key commodity prices" as opposed to previous language which said that "further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices."

According to the post-meeting statement, economic and financial conditions will tell the Bank if its current stance is fostering growth. The RBA noted that available information suggested that a moderate economic expansion continues. However, the economy is likely to operate with some space capacity for a time. Inflation is expected to stay within the RBA's inflation range of 2 percent to 3 percent even with the lower exchange rate.

Currencies

The U.S. dollar advanced against all of its major counterparts except the yen. The currency was up against the euro, pound sterling, Swiss franc and the Canadian and Australian dollars. The Australian dollar fell below the key $0.70 level on Friday. As noted in the RBA announcement above, the Bank is no longer talking down the currency but seems satisfied with its level. The graph on the left portrays the currency's decline against its U.S. counterpart during the past year.

The euro fell sharply against the U.S. dollar after the European Central Bank raised the prospect it could ease further, putting more distance between itself and the Federal Reserve. Remarks by ECB President Mario Draghi reinvigorated the belief that monetary policies in Europe and the U.S. were on diverging tracks. The ECB downwardly revised Eurozone growth and inflation forecasts and Mr Draghi signaled that the Bank was ready to take steps, if warranted, to rouse the region's economy. While the euro is retreating, the yen which is deemed a safe haven climbed, much to the distress of the Bank of Japan and the government. They had been trying to stimulate the economy via increasing exports. However, the higher value makes Japanese goods less competitive and at the same time cuts the value of repatriated profits.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

The number of people out of work dropped 213,000 in July to reduce the unemployment rate by 0.2 percentage points to 10.9 percent, its lowest reading since February 2012. For once, the headline drop was not largely attributable to the strength of the German labour market as the unemployment rate there held steady at 4.7 percent (albeit still the lowest in the region). Rather, in addition to a suspiciously steep 0.5 percentage point drop to 12.0 percent in Italy, there were significant declines among a number of the smaller member states: Croatia (15.1 percent after 15.4 percent), Malta (5.1 percent after 5.3 percent) and Portugal (12.1 percent after 12.3 percent). Elsewhere among the larger economies performances were mixed with a 0.2 percentage point decline in Spain (to 22.2 percent) contrasting with a 0.1 percentage point increase in France (to 10.4 percent). The unemployment rates are calculated using Eurostat's definition of unemployment.

August retail sales were up 0.4 percent after declining 0.2 percent in June. Sales were up a workday adjusted 2.7 percent on the year, up from 1.7 percent last time. July's monthly rebound was led by a 0.8 percent jump in purchases of auto fuel and without this, non-food sales were just 0.1 percent higher having only stagnated in June. Food recorded a 0.2 percent advance. Regionally the advance was dominated by a 1.4 percent monthly jump in Germany. Spain (0.6 percent) also made a positive contribution but France (down 0.2 percent) saw its first decline since March. Elsewhere, there were solid gains in Estonia (2.5 percent), Malta and Portugal (both 1.1 percent) but Slovakia (down 0.2 percent) struggled.

Germany

August unemployment declined 7,000 following a marginally smaller revised 8,000 increase in July but was not enough to reduce the unemployment rate from the 6.4 percent historic low at which it has been since April (according to Germany's method of calculating the unemployment rate). Prospects for future job creation were modestly positive as vacancies followed a 9,000 monthly increase at the start of the quarter with a further 4,000 gain in August.

July manufacturing orders followed a smaller revised 1.8 percent monthly increase in June with a steeper than expected 1.4 percent decline. With base effects strongly negative, seasonally and workday adjusted growth plummeted from 6.8 percent to minus 0.6 percent, the first negative reading since February. July's monthly drop was disappointingly broad-based and while consumer & durables dominated (down 6.3 percent), capital goods were down 1.6 percent and basics 0.2 percent. However, the headline decline masked a 4.1 percent monthly increase in domestic orders within which capital goods surged 8.7 percent. Rather, weakness was concentrated in overseas demand which dropped 5.2 percent after a 4.4 percent gain last time. Within this, consumer & durable goods (down 10.3 percent) were especially soft and capital goods (down 6.7 percent) were not far behind. Even then, there were sharply contrasting performances between the Eurozone and the rest of the world with the former posting a healthy 2.2 percent overall rise and the latter, a 9.5 percent slump.

Asia/Pacific

Japan

Output continues to limp along on weak export growth. Industrial production disappointed, sinking 0.6 percent on the month. Expectations were for an increase of 0.2 percent. On the year, output crept up 0.2 percent. Among the industries that mainly contributed to the decrease were electronic parts and devices, transport equipment and information and communication electronics equipment. According to the METI survey, output is expected to increase 2.8 percent in August with the following industries contributing to the rise: information & communication electronics equipment, general purpose, production & business oriented machinery and transport equipment.

Australia

Second quarter GDP increased a less than expected 0.2 percent on the quarter – analysts expected an increase of 0.4 percent. From a year ago, GDP was up 2.0 percent, also below expectations. Reduced mining and construction activity, coupled with a decline in exports, were the main factors in the slowdown in economic growth. Australia has not experienced a recession since 1991. Positive contributions to GDP growth came from the domestic final demand components of household and government consumption. The financial, transport and health industries each contributed 0.1 percentage point to GDP growth. Gross fixed capital formation was up 0.4 percent on the quarter but sank 3.3 percent from a year ago. Final consumption expenditures were up 0.9 percent and 2.9 percent from a year ago.

July retail sales surprised and slipped 0.1 percent – expectations were for an increase of 0.4 percent on the month. Sales advanced 0.6 percent in June. From a year ago, sales were up 4.2 percent after increasing 4.9 percent in June. Among categories that increased on the month were clothing, footwear & personal accessory retailing (2.9 percent), department stores (1.3 percent) and cafes, restaurants & takeaway food services (0.3 percent). Food retailing was relatively unchanged. Household goods retailing (down 1.9 percent) and other retailing (down 0.6 percent) retreated after increasing the month before. Sales were up in Queensland, Western Australia and the Northern Territory. Tasmania was relatively unchanged. There were declines in New South Wales, South Australia, Victoria and the Australian Capital Territory.

July's merchandise trade deficit narrowed to A$2.48 billion from a deficit of A$3.05 billion in June. Exports were up 2.3 percent and 0.3 percent on the year while imports inched up 0.1 percent and 5.3 percent from a year ago. The value of iron ore, the country's top export, was A$4.097 billion in July, down from A$4.542 billion in June, but revenue from gold, natural gas, wheat, copper, nickel, lead and silver saw increases. Net exports under merchanting were up A$2 million. Rural goods exports dropped A$76 million while nonrural goods exports were down A$9 million. An increase in capital-goods imports was offset by a decline in intermediate goods. Capital-goods exports rose as a result of exports of civil aircraft and confidentialized items. Intermediate goods imports fell owing to fuels and lubricants.

India

Second quarter gross domestic product expanded 7.0 percent from a year ago, down from 7.5 percent in the January to March period and well short of expectations. (Note that doubts about the accuracy of the GDP data persist in the wake of substantial methodological changes introduced earlier this year.) Growth came mainly from the trade, hotel, transport & communications subsector where activity was up 10.3 percent on the year. Manufacturing and agriculture both achieved a 6.5 percent rate and government expanded 8.9 percent. However, expansion rates elsewhere were relatively sluggish including utilities at 5.0 percent; financial, insurance, real estate & professional services at 6.3 percent; and construction at just 4.4 percent. Mining & quarrying grew only 1.0 percent.

Americas

Canada

Second quarter GDP contracted 0.1 percent on the quarter or at an annualized decline of 0.5 percent. First quarter contracted at a revised 0.2 percent and ensured the first back-to-back contraction in real GDP since the first and second quarters of 2009. Annual growth halved to 1.0 percent, equalling its weakest rate since the fourth quarter of 2009. Among major components of domestic demand, household spending was up a respectable 0.6 percent on the quarter after a meagre 0.1 percent increase in the first quarter. However, gross fixed capital formation fell 1.6 percent, compounding the 2.2 percent drop last time, as business investment declined a further 2.0 percent (non-residential was down 3.1 percent). With government final consumption 0.3 percent firmer, final domestic demand was only flat, although this was a significant improvement over the first quarter's 0.5 percent contraction. Meantime, inventories were run down sharply and subtracted 0.3 percentage points from the quarterly change in GDP. Overall growth would have been a touch weaker but for a positive contribution from net foreign trade. Although exports edged up just 0.1 percent, imports fell 0.4 percent to ensure a modest net 0.1 percentage point boost.

July merchandise trade deficit was C$0.59 billion after a larger revised C$0.82 billion shortfall in June. The improvement was due to a 2.3 percent monthly bounce in exports that more than offset a 1.7 percent increase in imports. The real trade balance also strengthened as export volumes climbed 1.0 percent and imports rose 0.5 percent. However, the surplus on trade with the U.S. shrank from C$4.36 billion to C$3.59 billion as sales across the border advanced 2.1 percent and purchases climbed 4.3 percent. Within the overall monthly gain in exports, there were sizeable increases in aircraft & other transportation equipment & parts (19.2 percent), motor vehicles & parts (9.9 percent) and industrial machinery, equipment & parts (5.5 percent). However metal ores & non-metallic minerals (down 11.6 percent) and energy (down 5.7 percent) declined. Imports were boosted by solid increases in aircraft & other transportation equipment & parts (22.9 percent), energy (12.8 percent) and metal ores & non-metallic minerals (10.9 percent). Metal & non-metallic mineral products (down 9.6 percent) were the only decline.

August employment was up 12,000 for the best performance in three months but with the participation rate up a tick at 64.0 percent, the jobless rate was up 0.2 percentage points to 7.0 percent. This was its first increase since February and its highest level since last August. Last month's increase in employment was largely due to a 54,400 jump in full-time jobs while part-time positions dropped 42,400. Private sector payrolls expanded a modest 6,300 and government added 27,200 but the number of self-employed was down 21,600. Goods producing industries dropped 5,200 — manufacturing posted a 3,200 decline and construction a 3,600 decrease. Other changes were only minor although natural resources advanced 2,300. Consequently, it was a 17,200 spurt in services that was responsible for the headline increase in employment. Here, much of the work was done by education (11,100), and public administration (14,000). Health care and social assistance (8,000) also climbed significantly but trade (1,300) was little changed and transportation & warehousing (down 5,500) struggled. Professional, scientific & technical services (down 9,600) similarly had a poor month as did information, culture & recreation (down 8,600).

Bottom line

Equities continued to decline thanks to weakening economic data from China and uncertainty regarding the timing of the Federal Reserve's increase in interest rates. The Federal Reserve is looking to increase rates while other central banks including the European Central Bank are going in the opposite direction and are looking for ways to stimulate growth.

The upcoming week's economic data focuses on industrial output and merchandise trade. August data from China for merchandise trade and the consumer and producer price indexes will be carefully dissected for signs of improved growth. Japan's revised estimate of second quarter growth is expected to show a deepening contraction. The Banks of England and Canada will announce their respective monetary policies. Investors will be watching the BoC carefully — the country just slipped into a technical recession.

Looking Ahead: September 7 through September 11, 2015

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