Global Markets

Equities around the globe retreated last week — geopolitical worries sent investors scurrying for safe havens. Until last week, investors were resilient to geopolitical concerns before rhetoric between the U.S. and North Korea began to ratchet up.

The escalation in the war of words has shaken markets that had been largely resilient as they swatted away a slew of risks ranging from an investigation into Russia's possible interference in the 2016 U.S. presidential election, to concerns about China's risky debt levels, to stubbornly low inflation in the U.S. (and elsewhere).

All indexes covered here retreated on the week with the heaviest losses occurring on Thursday and Friday. On the week, all indexes were down.

On an historic note — 10 years ago this week marked the beginning of the global financial crisis.

Global Stock Market Recap

Europe and the UK

Equities in Europe and the UK tumbled Friday and on the week. Investors continued to be rattled by the escalating tensions between North Korea and the United States. On the week, the FTSE and CAC were down 2.7 percent while the DAX retreated 2.3 percent and the SMI tumbled 3.2 percent. The FTSE and CAC were down three of five days of the week while the DAX and SMI were lower for four of five days. The VSTOXX, the main European gauge of equity investor anxiety, jumped 26 percent to 23.8 — a near four-month high though it remained near historically depressed levels. Aside from risk avoidance, many stocks began trading ex-dividend. That added to the downward pressure on the indexes and especially on the FTSE.

It was a light week for economic data in Europe as the August vacation season has begun in earnest. Most of the data centered on industrial output and merchandise trade. However, investors were distracted by the ongoing geopolitical dialogue. In any event, Germany's merchandise trade surplus widened and so did French and UK deficits. Industrial output improved in Italy and the UK but declined in Germany and France.

Asia Pacific

Asian stocks dropped across the board on the week as the escalation in tensions surrounding North Korea continued to push investors toward safe haven assets such as the Japanese yen, the Swiss franc and gold. Losses ranged from 0.1 percent (PSEi) to 3.2 percent and 3.4 percent (Kospi and Sensex respectively).

Indian equities declined a fifth consecutive trading day Friday. Sentiment was hit by weak global markets as rhetoric picked up regarding North Korea's missile capabilities. A falling rupee and weak earnings updates from prominent public sector banks also weighed on the Sensex. The Shanghai Composite lost 1.6 percent on the week while the Hang Seng was 2.5 percent lower for its worst weekly performance in 2017. The Hang Seng's weekly decline was the first in five weeks. The index is still the region's best performing equity index and is up 22.2 percent so far this year.

Monthly data from China as usual got heightened attention from investors. The merchandise trade data are closely monitored for growth indications both in the domestic economy (imports) along with the global economy (exports). The latest release for July indicated that both imports and exports advanced much less than analysts anticipated. Exports climbed 7.2 percent on the year in dollar terms while imports rose 11.0 percent from a year ago. Exports were expected to climb 10.8 percent and imports by 17.5 percent. On the inflation front, consumer prices were up a lackluster 1.4 percent on the year (1.6 percent was expected) while producer prices were up 5.5 percent (5.6 percent was expected). Two other key indicators — industrial production and retail sales — will be released on Monday.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its overnight cash rate (OCR) unchanged at 1.75 percent where it has been since last November 2016. The Bank repeated its assurance that policy will be kept accommodative "for a considerable period", suggesting that recent stability in the OCR is set to continue in the months ahead.

The statement accompanying the decision again pointed to "broad-based" global growth and noted that central banks in advanced economies are likely to keep policy stimulus in place for some time. The RBNZ said that the domestic growth outlook was little changed, with expectations that activity will strengthen from its recent "softening" in response to accommodative monetary policy, strong population growth, high terms of trade and fiscal measures announced earlier in the year. Reserve Bank Governor Graeme Wheeler used somewhat stronger language to express the desire for a weaker currency, noting that this is "needed" to deliver more balanced growth after previously saying only that it would be helpful.

The RBNZ has an inflation target range of 1 percent to 3 percent. Second quarter consumer prices (April through June) declined to an increase of 1.7 percent on the year from 2.2 percent in the first quarter. The statement noted that further declines are likely in coming quarters as the effects of earlier increases in food and fuel prices fade. Although the outlook for tradable inflation is considered to be "weak" and that for non-tradable inflation "moderate", officials still expect headline inflation will return to the mid-point of the target range over the medium term. The Bank revised down their headline inflation forecasts slightly from 1.4 percent to 1.3 percent for the three months to June 2018 and from 2.0 percent to 1.9 percent in the three months to June 2019.

The New Zealand dollar dropped against most majors on dovish comments from Governor Wheeler and Assistant Governor McDermott.

Currencies

The U.S. dollar was mixed against its major counterparts, gaining against the pound sterling and the Canadian and Australian dollars but declining against the euro, yen and Swiss franc. The U.S. currency declined after the U.S. ratcheted up the rhetoric against North Korea. On Friday, the yen strengthened above ¥109 for the first time since mid-June and oil extended overnight losses on persistent worries about oversupply while gold prices hit their highest level in over two months.

Rather than looking at bilateral exchange rates, it is useful to look at the currency's moves on a trade weighted basis as well. On that basis, the U.S. dollar has been declining since it reached a most recent trade weighted peak in November 2016. Since then, both the broad and narrow measures have declined every month since. The broad measure includes 26 world currencies while the narrow or major currency measure includes seven — the euro, Canadian dollar, Japanese yen, British pound, Swiss franc, Australian dollar, and Swedish krona.

Selected currencies — weekly results

Indicator scoreboard

Germany

June seasonally adjusted trade surplus was €21.2 billion, up from an unrevised €20.3 billion in May to equal its strongest reading since May 2016. Unadjusted, the surplus was €22.3 billion, a slight worsening from the €24.5 billion recorded a year ago. Within the adjusted data, both sides of the balance sheet contracted for the first time since last September. Exports declined 2.8 percent on the month, their first drop in 2017, while imports were off a sharper 4.5 percent for only their second decrease since September 2016. Compared with a year ago, export growth was just 0.7 percent after 14.1 percent in May while imports were up 3.6 percent, down from 16.3 percent last time.

June industrial production excluding construction dropped 1.1 percent on the month, reversing almost all of May's 1.2 percent gain. Annual growth slowed from 4.9 percent to 2.5 percent, the weakest print since March. The monthly decline in overall production was more than matched by the key manufacturing sector where output was down 1.4 percent, its first decline since December last year. Weakness was broad-based with capital goods down 1.9 percent, intermediates 1.2 percent and consumer goods 0.7 percent. With construction also sliding 1.0 percent, the only advance was in energy where production expanded 1.4 percent.

United Kingdom

June deficit on total goods trade widened out from a smaller revised Stg11.31 billion in May to Stg12.72 billion. The shortfall with the rest of the EU climbed more than Stg0.4 billion to Stg8.25 billion while the deficit with the rest of the world weighed in at Stg4.47 billion, up from Stg3.49 billion last time. The headline deterioration reflected a 2.8 percent monthly decline in exports compounded by a 1.6 percent increase in imports. Over the last three months, both sides of the balance sheet expanded by 0.3 percent. Moreover, the underlying picture was not much better with the shortfall excluding oil and other erratic items rising from Stg11.10 billion to Stg12.02 billion, a 4-month high. However, at 1.7 percent, at least the quarterly increase in underlying exports was nearly three times the advance in imports (0.6 percent).

June industrial production was up 0.5 percent on the month following a downwardly revised flat reading in May. On the year output was up 0.3 percent after declining 0.2 percent the month before. Manufacturing was unchanged on the month. However, increases in pharmaceuticals (3.3 percent), chemicals (3.5 percent) and other manufacturing & repair (4.0 percent) were essentially offset by declines in machinery & equipment (4.3 percent), transport equipment (3.6 percent) and rubber & plastics (1.9 percent). Elsewhere within total industrial production, electricity & gas dropped 0.9 percent but water supply was up 0.8 percent and mining & quarrying, 4.1 percent.

Asia/Pacific

Japan

June private sector machinery orders (excluding volatile items) dropped 1.9 percent on the month (seasonally adjusted) in June after tumbling 3.6 percent in May. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, orders retreated 6.6 percent. The monthly change was driven by the manufacturing sector where orders dropped 5.4 percent. Manufacturing orders also fell 3.2 percent on the year in June after an increase of 1.0 percent in May. In contrasts, non-manufacturing orders (excluding volatile items) rose a monthly 0.8 percent but dropped 6.9 percent on the year.

China

July merchandise trade surplus widened from $42.75 billion in June to $46.74 billion. On the year, exports slowed from an 11.3 percent gain in June to 7.2 percent in July while imports slowed from 17.2 percent to 11.0 percent. The decline in exports was largely driven by weaker demand from the United States and the European Union, with recent gains in the domestic currency damaging the competitiveness of Chinese exporters. Exports to the United States rose 8.5 percent in July, well down from 19.7 percent in June, while exports to the EU slowed from 15.1 percent to 9.5 percent. This was partly offset by slightly stronger exports to Japan, up 6.6 percent on the year in July compared with 5.5 percent in June. In year-to-date terms, the trade surplus amounted to $231.68 billion for the first seven months of 2017, almost 25 percent below the $307.54 billion surplus recorded in the same period for 2016. In yuan terms, the trade surplus increased from CNY294.3 billion in June to CNY321.2 billion in July. Exports grew 11.2 percent on the year, down from 13.3 percent in June, while imports slowed from 23.1 percent to 14.7 percent.

July consumer prices were up 1.4 percent on the year, down from 1.5 percent in June. The index rose 0.1 percent on the month after a decline of 0.2 percent in June. The small decline in the headline inflation rate was driven by a smaller increase in non-food prices, down from 2.2 percent in June to 2.0 percent in July. This, in turn, largely reflects transportation & communication costs, which fell 0.2 percent in July after increasing by 0.1 percent in June. Most other non-food categories saw little change in their inflation rates. Food prices fell 1.1 percent on the year compared with a drop of 1.2 percent in June. The urban CPI was up 1.5 percent on the year in July compared with an increase of 1.7 percent in June, while the rural CPI was up 1.0 percent, unchanged from the previous month.

Bottom line

Equities tumbled as the volume of U.S. and North Korean rhetoric picked up. China's July data for merchandise trade disappointed investors with exports and imports missing expectations by a considerable margin. As expected, the Reserve Bank of New Zealand left its monetary policy unchanged.

The pace of new economic data releases increases in the week of August 14. Among the key releases will be second quarter gross domestic product data from Japan, Germany, Italy and the Eurozone. China will post its July data for industrial output and retail sales. Both the Federal Reserve and European Central Bank publish minutes from their respective most recent meetings. The latest UK consumer and producer prices and retail sales will be released as investors ponder the next step by the Bank of England. Australia's July employment data will be checked to see if the positive trend of the last several months continues.  

Looking Ahead: August 14 through August 18, 2017

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