Global Markets

Global equities erased the losses incurred by the UK's vote to leave the European Union. The prospect of both increased central bank and government stimulus elevates demand for commodities and other risk assets. Japanese Prime Minister Shinzo Abe said he planned to add fiscal spending following his party's election victory. And even though the Bank of England refrained from changing its monetary policy this time, expectations for additional stimulus when it meets on August 4 is virtually unanimous. On the week, all indexes followed here advanced.

Bank of England — no policy change just yet

The Bank of England ignored market expectations and left its key interest rate at 0.5 percent where it has been since March 2009 and left its asset purchase ceiling at £375 billion. The monetary policy committee announced its decision less than 24 hours after a new British government was sworn into place. With a new Quarterly Inflation Report (QIR) to be published in just three weeks simultaneously along with another MPC meeting, the Bank preferred to wait until it has more data before making a move. The MPC prefers to tie policy shifts to the QIR.

According to the minutes, the vote was not unanimous with only one dissenter, Gertjan Vlieghe, who called for an immediate 0.25 percentage point reduction in rates. Rather, it seems that the Bank is considering a range of (unspecified) measures that might be used to provide the economy with a post-Brexit prop and the majority of MPC members thought it only prudent to look at these in detail before coming to any policy decision. That said. The majority also thought it likely that an easing would be introduced in August.

Meantime, the minutes indicate that the Bank's regional agents have found evidence of firms starting to delay investment projects and postpone recruitment. They also found signs of a possible sharp slowdown in housing activity.

By the next meeting there will be at least some survey data available on how the economy has responded to the Brexit vote and, if very weak, speculation could well focus on a larger 50 basis point cut that would put the Bank Rate at zero. This would probably leave the pound's positive response to Thursday's announcement decidedly short-lived.

A couple of unknowns in the post-Brexit vote have been answered. With surprising speed, a new prime minister has been agreed upon and sworn in after David Cameron resigned from the post in the aftermath of the leave vote on June 23. Theresa May, the newly appointed prime minister, wasted no time in appointing key cabinet ministers including a minister with the unenviable task to negotiate Britain's exodus from the European Union.

However, there are many uncertainties before any negotiation can begin. The referendum voted upon on June 23 is not binding on the government — it is only advisory. The referendum result was close and no one seems certain who has the power to follow through by triggering the "infamous" Article 50.

The prime minister could, after discussion with the government, take the decision to trigger Article 50, advise Queen Elizabeth that this is the recommended course of action and then try simply to announce the decision to the other parliamentarians. However, the decision would then have to be debated by members of parliament (MPs) in the House of Commons.

Most UK politicians, in particular PM May, have suggested that Article 50 will not be invoked before 2017, but the other EU member states (the "EU-27") are trying to exert pressure for quicker action. David Davis, the minister in charge of the Brexit negotiations, has suggested that the process should be completed by the end of 2018 but such are the complexities involved that this looks highly optimistic. The EU-27 has firmly said that discussions can only start after Article 50 is invoked. Exactly what shape will emerge from the negotiations is anyone's guess.

Global Stock Market Recap

Europe and the UK

European equities advanced last week and wiped away the losses that occurred immediately after the Brexit vote of June 23. The largest gains were on Monday after Japan's election results and signs that the UK would have a new prime minister earlier than expected. And indeed Theresa May was sworn in as prime minister on Wednesday. But the rally faded as the week wore on and after the Bastille Day terrorist attack in Nice, France. Investors were surprised on Thursday when the Bank of England did not ease its monetary policy but deferred any action to its August meeting when the Bank's Quarterly Inflation Report will be released.

It was a very light week for new economic data — all disappointing. The merchandise trade surplus narrowed while industrial production in Italy and in the Eurozone retreated in May.

Asia Pacific

Equities staged a vigorous rally last week with all the indexes followed here up more than 1.5 percent (KLCI). The Nikkei soared 9.2 percent while the Hang Seng added 5.3 percent. The Nikkei gain was the best weekly advance in six and a half years. The Shanghai Composite was 2.2 percent higher. Better than expected Chinese data helped outweigh the news of a horrific terrorist attack in Nice, France at week's end. China's second quarter gross domestic product along with June industrial production and retail sales all were better than expected by analysts.

The Nikkei jumped after Prime Minister Abe won a landslide victory in the upper house of the Diet election. The election results showed that his Liberal Democratic Party increased its control of the upper house. The coalition's firmer grip means policy makers can more easily approve a bigger fiscal stimulus package this autumn. After a convincing win, Prime Minister Shinzo Abe said he would order a fresh round of fiscal stimulus to shore up spending and push consumer prices higher. Mr Abe came to power in 2012 promising "three arrows" of monetary stimulus, fiscal stimulus and structural economic reform. But he has struggled to break Japan's deflationary mindset and inflation is still close to zero.

Equities were boosted by speculation the Bank of Japan also could be preparing to ease monetary policy further. That comes against the backdrop of a weakening yen and on reports that former fed chair Ben Bernanke visited the Bank of Japan and may have met with the Bank's governor Kuroda. Markets were aflutter that a potential meeting between Mr Bernanke and Mr Kuroda might involve a discussion about easing monetary policy. The effectiveness of the BoJ's previous attempts at "shock and awe" monetary policy wore off long ago, so expectations are that what comes next will have to be quite substantial.

PM Abe did meet with Mr Bernanke and he told him that the Bank of Japan's monetary easing has been working and that Abenomics "will work even better if we add fiscal spending" to it. Mr. Abe is widely expected to compile a large scale fiscal package in the autumn that his aides and officials say will likely top ¥10 trillion.

Currencies

The pound sterling steadied against both the U.S. dollar and the euro during the week after one of the many unknowns that addled investors was resolved. The currency's plunge began as they were counting the votes to the referendum on June 23 but eased during this week. With surprising speed, a new UK prime minister is in place and key cabinet ministers have been appointed. The pound sterling climbed after the Bank of England kept interest rates unchanged Thursday. This prompted speculation that the Bank may take a more careful approach in its measures to support the UK economy. This was the BoE's first rate decision since the Brexit vote to leave the European Union. Carney said shortly after the referendum that easing would probably be needed over the summer, which left investors to speculate on the timing of the decision.

The yen retreated last week as investors anticipated new stimulus measures in Japan in the coming months. The yen declined after Japanese Prime Minister Shinzo Abe's ruling coalition, led by his Liberal Democratic Party, on Sunday increased its control of the upper house of the Diet. The coalition's firmer grip means policy makers can more easily approve a bigger fiscal stimulus package this autumn. Stimulus tends to weigh on a currency by making it less attractive to investors seeking yield. The yen's decline helps reverse some of the currency's recent rally fueled by uncertainty over the UK's vote to leave the European Union on June 23. A stronger yen complicates Japan's efforts to boost economic growth.

The U.S. dollar was down on the week against the euro, pound sterling and the Australian and Canadian dollars. The currency was up against the yen and unchanged against the Swiss franc.

Selected currencies — weekly results

Indicator scoreboard

Asia/Pacific

Japan

May machine orders excluding volatile ones declined 1.4 percent on the month. Expectations were for an increase of 2.6 percent. From a year ago, orders tumbled 12.7 percent after sliding 8.9 percent in April. Manufacturing orders were down 6.4 percent while nonmanufacturing orders (excluding volatile ones) were 0.3 percent lower. Orders from overseas were down 14.8 percent. Total orders plummeted 11.5 percent.

June producer prices slipped 0.1 percent on the month and tumbled 4.2 percent from a year ago as anticipated. The annual change has been negative since April 2015 as Japan continues to languish in deflation. Petroleum and coal products continue to weigh on the index, sinking 21.0 percent from a year ago. Also exerting downward pressure were nonferrous metals, down 17.6 percent. Chemicals & related products were 8.7 percent lower from a year ago. According to the Bank of Japan, the PPI is expected to continue to decline for the time being thanks to movements in international commodity prices.

Australia

June employment increased by 7,900, less than the 10,000 expected. The unemployment rate increased 0.1 percentage point to 5.8 percent as expected.  The labour force participation rate was 64.9 percent. June part time employment declined 30,600 while full time employment increased 38,400, the biggest gain since November 2015. Unemployment increased 9,900. The number of unemployed persons looking for full-time work declined 9,200 and the number of unemployed persons only looking for part-time work increased 19,000. The seasonally adjusted employment to population ratio remained steady at 61.1 percent in June 2016.

China

June consumer price index was up 1.9 percent from a year ago after increasing 2.0 percent in May. The increase was the slowest since January. On the month, the CPI slipped 0.1 percent after declining 0.5 percent the month before. For the year to date, the CPI was up 2.1 percent. Both urban and rural CPIs were up 1.9 percent on the year. The former was up 2.0 percent in May while the latter increased 2.1 percent. Food prices eased to an increase of 4.6 percent after jumping 5.9 percent in May and 7.4 percent in April. Pork prices, the biggest driver of consumer prices in the past few months, rose 30.1 percent, down from 33.6 percent in May. However, recent flooding in major pork producing regions has devastated the pig population and may result in higher prices over the new few months. Non-food prices were up 1.2 percent after 1.1 percent. The only sub-index to decline was transportation & communication which was 1.8 percent lower after declining 2.6 percent in May.

June producer price index was down 2.6 percent on the year after declining 2.8 percent in May. The PPI has been negative for about 4 and a half years. On the month, the PPI slipped 0.2 percent after three months of increasing prices. For the year to date, the PPI dropped 3.9 percent. All categories of the PPI were negative with the exception of food & related products and clothing & related products. Consumer goods were unchanged from a year ago after declining 0.3 percent the month before. Prices of ferrous metals, nonferrous metals and raw chemical materials were down 5.7 percent, 7.2 percent and 4.2 percent respectively from a year ago.

June merchandise trade surplus was $48.11 billion, above $44.6 billion expected. Exports valued in dollar terms fell 4.8 percent from a year ago after sinking 4.1 percent in May. Imports in US dollars plummeted 8.4 percent, down markedly from the previous month's reading of minus 0.4 percent. Although exports to major trading partners including the US, Japan and Asean did rise slightly on the month, exports to most top markets dropped when compared with a year ago. Shipments to the US suffered the most in dollar terms thanks to a drop of 10.4 percent, while exports to the EU, Asian, South Korea and Japan all fell by around 3 to 4 percent for the period. Shipments to Hong Kong dropped nearly 7 percent. Half-year figures on dollar trade also provided by customs showed imports had fallen 10.2 percent in the first six months of 2016, while exports were down 7.7 percent for the period. China's yuan denominated exports grew 1.3 percent on the year after increasing from 1.2 percent in May while imports declined 2.3 percent during the period, reversing growth of more than 5 percent in May. The merchandise trade balance was 311.2 billion yuan, below expectations of 320 billion yuan.

Second quarter gross domestic product was up 6.7 percent from a year ago for the second consecutive quarter. This is the slowest since the depths of the financial crisis in the first quarter of 2009. Expectations were for growth of 6.6 percent. In March, China's parliament approved a full-year growth target of 6.5 percent to 7 percent, down from 2015's target of around 7 percent. A buoyant property market combined with government spending on infrastructure has softened the blow from the manufacturing slowdown. Manufacturers have cut spending on new factories which in turn has led to sharp slowdown in investment by privately-owned companies. For the first half of 2016, GDP was up 6.7 percent compared with 7.0 percent for the first half of 2015. On a seasonally adjusted basis, GDP was up 1.8 percent from the first quarter.

June industrial production was up 6.2 percent from a year ago after increasing 6.0 percent in April and May. Expectations were for an increase of 5.9 percent. Output was up 0.47 percent on the month after increasing 0.44 percent in May. For the first half of the year, industrial production was up 6.0 percent when compared with the previous year. Mining output was down 2.4 percent after declining 2.3 percent in the previous month. Manufacturing was unchanged from May increasing 7.2 percent on the year. Among the major industries, output increased from the previous month for general equipment, electrical machinery and communications equipment.

Bottom line

Global equities advanced on the week on the prospect of new stimulus and a new prime minister in the UK. The pound sterling climbed and then stabilized. China reported its key economic data with GDP, industrial production and retail sales all beating analysts' expectations. Most U.S. data were positive.

The European Central Bank meets Thursday and is expected to leave its policy unchanged. ECB president Mario Draghi will undoubtedly be asked a question about Brexit in his post-meeting press conference. A special UK July flash manufacturing PMI will be released to capture the very early reaction to the Brexit vote in addition to the regularly scheduled releases for Japan, Germany, France, the Eurozone and the United States.

Looking Ahead: July 18 through July 22, 2016

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