Equity markets, particularly in Asia, continued to be volatile during last week. Investors also to keep an eye on china as a round of new measures were announced to attempt to stabilize the equity markets and manage the swings in the price of the Yuan.
Opinions about whether the Federal Reserve should begin raising short-term interest rates have come from multiple of sources, these include the World Bank and the International Monetary Fund. And both have urged the Fed not to act given market turmoil.
It was a quiet week for economic data. European and Asian data were mixed. Japan’s data disappointed with signs that deflation has not yet been slain while machine the data present the Bank of Japan with major problems at its upcoming meeting.
The UK and Europe
European equities were up for the first three days of the week but closed lower for the last two days. Despite the retreat, only the IBEX (Spain’s stock market) declined on the week. The losses at the end of the week were blamed to investor uncertainty before the release of the Chinese data over the weekend and the Federal Reserve meeting on the 16th and 17th. The FTSE added 1.2 percent, the DAC was up 0.6 percent, the DAX advanced 0.9 percent and the SMI gained 1.4 percent.
Economic data was on the light side last week and what was realised, came out mixed. In the UK, industrial production slipped 0.4 percent in July as declines in manufacturing and oil/gas sectors stayed in a down trend. Manufacturing output fell 0.8 percent, the third decline in the last four months and the lowest level since May 2014.
In the Eurozone, the output data was mixed. German industrial production stayed steady YoY, it rose 0.7 percent in the latest month, but that followed a 0.9 percent decline in June and leaves output at approximately the same level as last December. French industrial production fell 0.8 percent, the third decline in the last four months and the lowest level since last November. Manufacturing output dropped 1.0 percent. However, the Italian. Industrial production jumped 1.1 percent after sliding 1.0 percent in June. It was the fourth solid gain in the last six months and leaves industrial production in an uptrend.
Bank of England
As expected the Bank of England’s monetary policy committee left monetary policy on hold. The Bank Rate remains at 0.5 percent. There was again only one objector, Ian McCafferty who, as in August, wanted an immediate 25 basis point tightening.
The minutes of the meeting, which were released at the same time as the announcement showed concern about the slowdown in the global economy, particularly in China. However, while also acknowledging some recent softening in the UK labour market data, in general, the BOE saw output growth and productivity on the rise.
Despite the week’s volatility, most equity indexes ended up on the week. The week ended on an uninspired note, as uncertainty in the run-up to the Federal Reserve’s meeting killed the positive sentiment that was generated from signs of stability in Chinese stock markets. The Nikkei added 2.7 percent on the week while the Shanghai Composite was 1.3 percent higher.
Chinese Premier Li Keqiang tried to reassure investors over the health of China’s economy, telling the World Economic Forum last Thursday that his country’s economy is not heading for a hard landing, recent volatility will not affect its economic path and reforms are on track.
While expectations regarding the Fed interest rate increase continue to stay in the air, more stimulus measures and calm words from China have helped stabilize their stock markets.
The Nikkei added 2.7 percent this week after declining the previous four weeks this is due to a 7.7 percent increase last Wednesday. The rise was the index’s biggest daily gain since October 2008. The Nikkei had been down for four straight weeks prior to this week.
However, equities ended on a cautious note as investors remained cautious ahead of the Bank of Japan’s monetary policy meeting scheduled for Monday and Tuesday and the Federal Reserve’s FOMC meeting Wednesday and Thursday. Although Japan’s second quarter GDP was revised upward to a decline of 0.3 percent for the second quarter.
Reserve Bank of New Zealand
As expected, the Reserve Bank of New Zealand cut rates by 0.25 percent to 2.75 percent. This was the third 0.25 percent this year. The RBNZ said the cut was due to the softening of the economy and the need to keep inflation near the 2 percent target. It said that some future easing seemed likely but will be data dependent.
They stated that global economic growth remains moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies. “Concerns about softer growth, particularly in China and East Asia, have led to elevated volatility in financial markets and renewed falls in commodity prices.”
The Bank noted that the economy was adjusting to the sharp decline in export prices and the decline in the exchange rate. The economy is now growing at an annual rate of around 2 percent. However, several factors continue to support growth, including robust tourism, strong net immigration, the large pipeline of construction activity in Auckland and other regions, and, importantly, lower interest rates and the depreciation of the New Zealand dollar.
The U.S. dollar was mixed last week, declining against the euro, pound, Swiss franc and Australian dollar but up against the yen. The dollar was unchanged against the CAD. The dollar remained volatile due to market feelings about what the Federal Reserve will do on September 17th. Trading has been choppy.
The Australian dollar continues to retreat as declining commodity prices hit the country’s economy. It should be noted that earlier complaints by the Reserve Bank of Australia that the currency was too strong were mellowed out in its last statement, the RBA noted that the currency is adjusting to the significant declines in key commodity prices
According to the International Energy Agency (IEA), Non-OPEC production is expected to record its biggest decline in more than two decades in 2016 as low oil prices drive demand for crude from OPEC countries. The agency noted that the oil price collapse is closing down high-cost production in the UK, U.S., and Russia. The Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly ‘inefficient’ production according to the IEA. The lower price environment is forcing the market to “behave as it should” by shutting in production and inducing demand. The IEA said. Producers outside the U.S. are also adjusting to lower oil prices.