August started with emerging market equities continuing to struggle in dollar terms. While the Japanese and European equities supported the global equity markets; small caps and growth were outperformed by defensive large cap sectors.
The oil rig count (rough proxy for activity in the industry) rose for the third time in a month. There was also a drastic drop in US crude inventories and the US oil production peaked in March as suggested by the government data. Despite all this, energy shares fell down to a three-year low due to the tumbling oil prices.
Despite the biggest oil companies shelving hundreds of billions of dollars of spending on new projects; the impact on production is only expected to take effect in the later part of this year. On the other hand, Chinese production fell to a three-year low, which has an impact on the US demand outlook, because US is the world’s second biggest oil consumer.
Saudi Arabia has announced its plan to raise $27 billion by the end of this year by returning to the international bond market. In its first sovereign issuance since 2007, $4 billion in local bonds have already been issued by the Saudi government. Ever since the oil price began to plunge, Saudi Arabia has used $65 billion to maintain government spending from its fiscal reserves and in order to balance its budget, Saudi Arabia requires an oil price of $105 a barrel.
The month of July saw an increase of 0.2% month-on-month hourly earnings after remaining unchanged for June. July also brought 215,000 new jobs in the US labor market, as forecasted by the market. According to a key Fed member; the right time to raise the interest rates for the US central bank could be September. First default for the US commonwealth came when Puerto Rico missed most of a $58 million bond payment, as expected. Led by energy bonds (which makes up a major chunk of the US market), the high yield market lost ground.
While the economic activity in Japan and Australia proved to be positive, the manufacturing PMI surveys across much of Asia was unwelcoming for global economic growth. The levels for China, South Korea, Malaysia, Indonesia and Taiwan were all below the 50 line which separates expansion from contraction. However, it is important to note here that Chinese shares responded positively to new restrictions on short selling, which is a positive sign.
Despite the manufacturing sector facing contractions in France and Greece in July, the Eurozone overall saw a broad expansion in the manufacturing sector. In the STOXX Europe 600, almost 58% of the banks reported positive earnings and beating the sales target. The Greek stock market sold-off sharply as expected, resuming its operations after being closed for 5 weeks.
Thursday saw seven out of eight Bank of England policy committee opposing an increase in the British pound, as a result the British pound weakened. Simultaneously, for the first time the Bank of England has released its minutes and published its Quarterly Inflation report.
It is also important to note that the Reserve Bank of Australia kept interest rates on hold without any mention of future rate cuts. On the other hand, the growing pessimism about Brazil led the EM bonds to fell for the week. While, the falling oil prices weighed on the bonds issued by oil exporters Brazil, Colombia, Venezuela and Russia.