In the recent months, inflation has increased, despite this the CPI figures are still close to zero. This suggests a good environment for commodities. There has also been an improvement in the supply/demand balance in the recent months, but a peak in the value of the US dollar and an improvement in China would serve as a positive sign for markets. However, it is important to note here that the growth picture is unchanged, as it continues to support an overweight position in stocks relative to bonds. The ongoing Chinese economic slowdown along with dollar strength continues to weigh on the market.
The last week saw equities being stabilized, instead of investors being very nervous ahead of much awaited Federal Reserve meeting expected next week. However, Fed is not increasing interest rates in September, but will do so in coming months, leading to underweight bonds. The interest rate rise is expected because the job openings were at a record high of 5.75 million in July; its highest level in the last 5 years. Furthermore, according to the Federal Reserve’s model, higher wages and inflation follows when the economy reaches full employment.
Stronger dollar, lower crude oil prices and flat producer prices for August pointed to minor inflation. According to William Dudley, the President of New York Federal Reserve, the latest consumer sentiment index reading, which was at its lowest for a year was an important indicator of whether the economy was affected by market volatility or not.
In Europe, the month of July saw German exports rising to a record high. However, there was a decline in investments in the second quarter, but strong exports offset this decline. The Second Quarter also saw the GDP in the Eurozone grow by 0.4%, more than predicted. The Bank of England lowered its estimate for the economic growth for Quarter 3 to 0.6% from 0.7%. The Bank of England also voted 8-1 to hold interest rates at 0.5%. The Japanese economic outlook wasn’t good, as the orders for core machinery fell unexpectedly 3.6% from the previous month along with the GDP for the second Quarter being revised down to a decline of 3.6%. There is a bounce back in the Euro, which has hurt earnings. Overall, the European economy is improving slowly, supported by the European Central Bank policy.
The month of August saw Chinese foreign trade worsening, with annual exports declining by 5.5% in dollar terms. As the People’s Bank of China intervened in the currency market to support the renminbi amid rising capital outflows; the Chinese foreign exchange reserves fell by US$94 billion in August, which was the biggest monthly drop. On a positive note, China took measures such as income tax being waived off on dividends for shareholders along with announcing plans of introducing a market-wide circuit breaker system to stabilize the local market. Most importantly, the National Development and Reform Commission of China approved two new railway projects worth around US$11 billion.
The Standard & Poor’s downgraded Brazil’s investment grade credit rating to BB-plus, which it had held since April 2008. The reason behind degrading the ratings was the difficulties faced by the government in tackling growing debt along with increasing political turmoil.
The stock market performance for the last week was relatively a lot better than the previous week. The FTSE 100 increased by 1.24%, NASDAQ was up by 2.96%, the S&P 500 was up by 2.07%, the Dow up by 2.05%, Hang Seng was up by 3.18%, Sensex 30 was up by 1.62%, Nikkei 225 was up by 2.65% and Shanghai was up by 1.27%. In Europe, German and French stocks showed improvement. The Saudi, Qatar and the UAE stock market also showed positive results. At the same time, Gold and Brent Crude showed a decline.