Global Markets

Global markets mostly retreated last week amid ongoing events that are making investors reticent to take on more risk. Below are just a few of the worries. Geopolitical concerns dominate the list.

Russia is withdrawing troops from Ukraine but is also applying economic pressure on Ukraine's energy supplies. Likewise, the West is ramping up its sanctions against Russia with the White House saying it does not have "conclusive evidence that Russia has ceased its efforts to destabilize Ukraine". This came after a fragile ceasefire agreement was threatened by renewed shelling from both pro-Russian separatists and Ukrainian government forces.

Turning to the Middle East, President Barack Obama outlined his strategy for attacking ISIS which he likened to a "cancer". In a speech Wednesday night he laid out his expansion of the U.S. campaign against the Islamic militant group from Iraq into Syria. He emphasized that U.S. involvement will be different from the wars in Iraq and Afghanistan, focusing on air strikes and support for local forces.

Scotland also jolted the markets. Polls on Thursday's upcoming election show a narrow margin between those favoring independence from the UK and those who would maintain the current relationship.

Markets are also anxious about this week's Federal Reserve policy meeting as the end of the bond buying program nears and the Bank considers increasing its policy fed funds rate. The FOMC has said that its fed funds rate range, which is currently zero to 0.25 percent, will stay low for a 'considerable time' after it completes the monthly bond purchases. Analysts are expecting a less 'dovish' statement this time given recent economic data.

The efficacy of ECB's new stimulus and worries about China's growth also cannot be ignored.

Global Stock Market Recap

Europe and the UK

Equities retreated last week as a host of events conspired to dampen risk-taking. While there was some offsetting 'good' news, it was not enough to overcome investors' concerns. The FTSE was down 0.7 percent while the CAC and DAX both lost 1.0 percent. The three indexes had posted gains in the previous four weeks, The SMI, however, managed to edge up 0.1 percent on the week. The news from Europe has been overshadowed to some extent by renewed expectations that the Federal Reserve is going to raise interest rates sooner than forecast. Last week also was marred by concerns about the Scottish referendum and further signs of a slowdown in China.

Equities failed to rally Friday despite some promising economic news from the Eurozone. Markets were cautious ahead of the September 18^th Scottish referendum on independence from the UK. Eurozone job creation continued to increase in the second quarter according to Eurostat. Employment was up 0.2 percent from the prior quarter, when it edged up 0.1 percent. July Eurozone industrial production recovered at a stronger than expected pace — it was up 1 percent on the month in July, reversing a 0.3 percent decline in June.

Investors still have lingering questions about whether the European Central Bank's stimulus measures will kick start the region's stagnant economy. These doubts outweighed prospects for peace in Ukraine, keeping European stock investors on the sidelines. ECB President Mario Draghi has said the Bank will buy asset backed securities and covered bonds to funnel cash into an economy which stalled in the second quarter and where lending has been shrinking for more than two years.

Asia Pacific

Equities were mixed last week — geopolitical concerns and caution before the upcoming FOMC meeting contributed to the outcome. Also weighing on many investors is the prospect that China's growth could be stalling. The Hang Seng dropped 2.6 percent on the week while the All Ordinaries slid 1.2 percent. The Taiex retreated 2.0 percent. However the Nikkei rallied 1.8 percent as the yen fell to its weakest level against the U.S. dollar since September 2008. A lower yen boosts exporters' repatriated profits and helps them to compete more effectively in overseas markets. Investors in Japan exhibited optimism about the global economy amid speculation that Japan's $1.2 trillion Government Pension Investment Fund will buy more domestic shares.

The Shanghai Composite advanced 0.2 percent on the week thanks to Friday's 0.9 percent gain after aggregate financing data missed analyst estimates adding to weak August data including declines in imports as well as producer prices along with slowing growth in money supply. China will release August data on industrial output, fixed asset investment and retail sales over the weekend.

Hong Kong stocks extended their longest run of losses in more than two years, with the Hang Seng declining for a sixth day on Friday. Asset managers are concerned that economic indicators from the Chinese mainland could deteriorate further this month even as the prospects for corporate profits seem to be improving. Capital is also being withdrawn by investors seeking liquidity to buy into Alibaba Group's initial public offering.

The Bank of Japan drove short term interest rates below zero, a dramatic step in its already unprecedented effort to stoke inflation and a likely sign it will continue its aggressive asset purchases. The BoJ bought three-month bills for more than their redemption value on Tuesday, essentially paying to lend money to the market. The Bank's first purchase at a yield less than zero underscores its determination to pay literally any price to help reflate the long-moribund economy. Saying they cannot disclose individual transactions, BoJ officials would not confirm the negative yield purchases which were part of a market operation that bought ¥500 billion of short term bills.

Having paid such a high price, the BoJ will likely have to extend their purchases as banks know it is determined to meet its target of asset purchases, potentially pushing negative yields out to longer dated debt, according to analysts. Negative yields are a consequence of the current massive asset purchases that are aimed at ending 15 years of deflation by doubling base money in the economy and pushing consumer price inflation to 2 percent during the fiscal year beginning in April. Although the BoJ pioneered quantitative easing in the early 2000s, negative yields represent new territory for a central bank that already buys the equivalent of 70 percent of all new government debt issued.

Reserve Bank of New Zealand

As widely expected the Reserve Bank of New Zealand left its official cash rate unchanged at 3.5 percent. The RBNZ had previously increased the OCR by 25 basis points each in March, April, June and July. Governor Graeme Wheeler said, "It is prudent to undertake a period of monitoring and assessment before considering further policy adjustment." He also noted that the RBNZ expects that some further policy tightening will be necessary to keep future average inflation near the 2 percent target of its 1 to 3 percent target range and ensure that the economic expansion can be sustained.

In his statement, Wheeler noted that the New Zealand economy is expected to grow at an annual pace of 3.7 percent in 2014. The New Zealand economy continues to be supported by reconstruction activity in Christchurch while a high level of net immigration is adding to domestic demand as well as productive capacity. Wheeler noted that economic growth is projected to moderate in response to recent commodity price declines and the impact of policy tightening. But a high exchange rate continues to restrain growth in the traded sectors. Further he said that the exchange rate has not adjusted to lower commodity prices and its current level is "unjustified and unsustainable."

The New Zealand dollar or Kiwi, which neared an all-time high in July, declined to its lowest level in seven months after the decision as investors pared bets on higher interest rates and the RBNZ reiterated its view that the kiwi's level is "unjustified and unsustainable." Wheeler paused after his four rate increases fueled gains in the exchange rate and kept inflation more contained than the RBNZ expected. Wheeler said he expects "a further significant depreciation" in the New Zealand dollar, which "has yet to adjust materially to lower commodity prices." The Chairman has been talking down the currency for quite some time now but since mid-July the jawboning appears to have had some impact.

The RBNZ's rate pause comes as Prime Minister John Key seeks a third term in a general election on September 20. Opinion polls show the election will be close, raising the risk of a change to the RBNZ's inflation fighting mandate. The main opposition Labour Party wants the RBNZ to target the current account deficit in addition to inflation and use pension contributions as a new policy tool to reduce upward pressure on the currency.

Currencies

The U.S. dollar was up last week as traders raised bets the Federal Reserve will increase interest rates in mid-2015 amid a strengthening economy. The Fed, which meets September 16 and 17, is considering the timing of its first rate increase since 2006. The central bank has said since March that rates would stay low for a "considerable time" after it completes monthly bond buying intended to spur economic growth. Purchases are on track to end this year. The dollar was up for the week against all of its major counterparts with the exception of the euro. The euro recovered slightly on the week after sinking the end of the previous week. The currency dropped after the ECB lowered its key interest rate again and said it would purchase asset backed securities.

Selected currencies — weekly results

Indicator scoreboard

EMU

July industrial production excluding construction was up 1.0 percent for its first increase since April. On the year, it was up 2.2 percent. July's rebound was led by the capital goods sector which registered a 2.6 percent monthly jump after a modest 0.2 percent increase last time. Intermediates (0.5 percent) and consumer nondurables (1.2 percent) also fared well but there were declines in consumer durables (1.2 percent) and energy (1.3 percent). Much of the headline gain could be attributed to a welcome acceleration in Germany where production climbed 1.9 percent on the month. However, elsewhere among the larger countries performances were ominously much less impressive with France posting a meagre 0.2 percent advance, Spain only flat and Italy down 1.0 percent.

United Kingdom

July industrial production was up 0.5 percent on the month and 1.7 percent from a year ago. Manufacturing was up 0.3 percent and was up 2.2 percent on the year. Within manufacturing, eight of 13 subsectors posted monthly advances in output. Among these, the largest contribution was made by pharmaceuticals which registered a 4.0 percent increase and alone added 0.2 percentage points to the change in total manufacturing. Additionally, computer, electronic & optical equipment expanded 2.2 percent and food & tobacco, 1.0 percent. The main negative impact came from transport where production contracted 1.3 percent. Elsewhere within overall goods production, mining & quarrying advanced a monthly 0.4 percent and electricity, gas, steam & air conditioning was up 3.4 percent but water & waste management retreated 1.7 percent.

The July trade gap widened by Stg0.8 billion to Stg10.2 billion — the worst deficit since April 2012. Excluding oil & erratics, the shortfall was Stg8.5 billion, up from Stg8.3 billion last time. The headline deterioration reflected a 3.2 percent monthly jump in imports which easily eclipsed a 1.2 percent gain in exports. Regionally most of the damage was done by trade with non-EU countries where the deficit increased from Stg3.8 billion in June to Stg4.3 billion. This compares with a Stg0.2 billion worsening in net exports to the rest of the EU which now show red ink of Stg5.8 billion. The July data yield an overall goods deficit of Stg28.7 billion over the latest three months, up Stg2.9 billion from the previous period and a reflection of weaker exports (down Stg0.5 billion) and stronger imports (up 2.4 billion).

Asia/Pacific

Japan

Second quarter gross domestic product was revised down to a contraction of 1.8 percent on the quarter from the initial estimate of 1.7 percent. On an annualized basis, GDP contracted 7.1 percent rather than 7.0 percent. When compared with the same quarter a year ago, GDP was unchanged. Second quarter capex was revised to a 5.1 percent quarterly drop from the initial estimate of a decline of 2.5 percent. The capex subtracted 0.7 points from GDP instead of the original 0.4 percent. However, inventories contributed a revised 1.4 percentage points, up from the original 1.0 point. Second quarter consumption subtracted 3.2 points. The annualized drop of 7.1 percent was the country's worst showing for economic growth since the financial crisis. The drop surpasses the contraction seen in the aftermath of the 2011 earthquake and tsunami when the annualized rate dropped 6.9 percent.

July tertiary index was unchanged on the month and down 1.8 percent from a year ago. Among the industries that gained on the month were wholesale and retail trade (up 1.3 percent), scientific research, professional & technical services (up 1.9 percent), real estate & goods rental & leasing (up 0.2 percent), medical, health care & welfare (up 0.1 percent) and learning support (up 0.5 percent). However, the following industries declined on the month. They were finance & insurance (down 1.0 percent), accommodations, eating & drinking services (down 1.5 percent), miscellaneous services (down 1.1 percent), information & communications (down 0.6 percent), electricity, gas, heat supply & water (down 1.3 percent), living-related & personal services & amusement services (down 0.8 percent) and compound services (down 0.9 percent).

August producer prices were down 0.2 percent on the month. This was the first monthly decline since February before the sales tax increase took effect on April 1. On the year, the PPI slowed to an increase of 3.9 percent from 4.3 percent in July. While prices were up for all sub-categories with the exception of electronic components & devices (down 1.3 percent on the year), the increases were less than in July for the most part. Petroleum & coal products were up 8.4 percent on the year after jumping 11.7 percent in July. Japan has been forced to import fuels since its nuclear generators were shut down after the earthquake and tsunami in March 2011. Food, beverage & feedstuff prices eased to 3.1 percent on the year from 3.2 percent. Metal prices eased to an increase of 5.8 percent from 6.1 percent.

July machine orders excluding volatile orders were up 3.5 percent on the month after increasing 8.8 percent in June. Manufacturing orders were up 20.3 percent while nonmanufacturing orders excluding volatile ones slid 4.3 percent. The increase in manufacturing orders was led by gains for power generating machinery, airplanes and machine tools. The Cabinet Office kept its overall assessment for core machinery orders, saying, "machinery orders are fluctuating."

Australia

August seasonally adjusted unemployment rate decreased 0.3 percentage points to 6.1 percent, down from 6.4 percent in July. The seasonally adjusted labour force participation rate increased 0.4 percentage points to 65.2 percent in August 2014. The seasonally adjusted number of people unemployed decreased by 33,500 to 755,100. Employment jumped 121,000 to 11,703,500, the biggest gain. The number of full-time positions grew by 14,300, while part-time positions soared by 107,000. Employment for the eight months of 2014 was up 236,500. The seasonally adjusted underemployment rate was 8.5 percent in August 2014, an increase of 0.7 percentage points from May 2014. Combined with the unemployment rate of 6.1 percent, the latest seasonally adjusted estimate of total labour force underutilization was 14.6 percent in August 2014, an increase of 1.0 percentage point from May 2014.

China

China's August merchandise trade surplus was a record $49.83 billion, up from July's $47.30 billion. Exports were up 9.4 percent while imports retreated 2.4 percent. Exports to the U.S. were up 11.4 percent from a year ago while imports were down 3.2 percent. Exports to the EU were up 12.1 percent and imports were 4.4 percent higher on the year. Exports to Japan were down 3.1 percent while imports were up 5.2 percent.

August consumer prices were up 2.0 percent on the year, below expectations of an increase of 2.1 percent and less than July's 2.3 percent increase. This headline CPI is still much lower than the official target of 3.5 percent indicating the government will maintain its relatively loose monetary policy stance. On the month, the CPI was up 0.2 percent. For the year to date, the CPI was up 2.2 percent. Urban CPI was up 2.0 percent on the year after increasing 2.3 percent in July while the rural CPI slipped to a gain of 1.9 percent from 2.1 percent in July. Several of the sub-categories increased less than last time. Food prices eased to a gain of 3.0 percent from 3.6 percent in July. Non-food prices were up 1.5 percent after 1.6 percent. However, clothing prices were up 2.8 percent after 2.6 percent in July.

August producer price index was down 1.2 percent from a year earlier. That was more than the 0.9 percent PPI decline in July. It was the 30th consecutive month that producer prices have declined. On the month, the PPI slipped 0.2 percent. For the year to date, the PPI was down 1.6 percent. All prices were down with the exception of consumer prices. Consumer prices were up 0.2 percent. All sub-categories recorded higher prices with the exception of durable good where prices were down 0.8 percent. Elsewhere, production materials were down 1.7 percent while mining & exploration sank 4.4 percent on the year. Ferrous metals dropped 5.7 percent and non-ferrous metals retreated 1.3 percent.

Bottom line

Most of the week was spent anticipating key events that will take place this coming week. However, the Reserve Bank of New Zealand left its key interest rate at 3.5 percent and warned against its overvalued currency. In economic news, Eurozone industrial output was up in July. However, in the UK, its trade deficit soared and industrial and manufacturing production gained.

The FOMC meets in the U.S. and announces its policy decision on Wednesday. Investors will closely listen to Chair Janet Yellen's post meeting press conference for clues to when the Federal Reserve might increase interest rates. Expectations are for a slightly hawkish statement. The vote in Scotland takes place on Thursday. Needless to say, it too will be closely watched.

Looking Ahead: September 15 through September 19, 2014

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