The MSCI Pacific Index fell 1.6% in the week to 14 August as regional equities were hit by a shock devaluation of the Chinese renminbi.
Markets with heavy exposure to China suffered on concerns that a weaker renminbi would add to the pressure on sales resulting from the Chinese economic slowdown. Commodity prices also slumped, contributing to a 2.1% decline for Australia’s mining-heavy All Ordinaries.
Japan’s Topix lost 0.9%. Exporters slid early in the week amid worries that China was embarking on a currency war that would increase competitive pressures for Japanese companies in overseas markets. However, these fears faded following assurances from Beijing that it did not see the need for a persistent weakening of the renminbi.
Strong corporate earnings releases also helped to offset worries about China. Net profits for companies listed on the first tier of the Tokyo Stock Exchange grew 37% in the April-June quarter, according to SMBC Nikko Securities.
Hong Kong’s Hang Seng dropped 2.3%. Hong Kong’s economy grew faster than expected in the second quarter as rising wages and low unemployment boosted spending. However, growth slowed vs. the previous three months, with stronger domestic consumption partially offset by a decline in luxury spending by Chinese tourists—a trend likely to continue given the weaker renminbi.
Singapore’s Straits Times ended the week 2.6% lower.
A surprise devaluation of the Chinese renminbi rattled Wall Street in the week to 14 August. However, the three main benchmarks all closed slightly higher, with the Dow Jones gaining 0.6%, the S&P 500 adding 0.7% and the technology-heavy Nasdaq up 0.1%.
Commodity prices and global stock markets fell sharply after the People’s Bank of China (PBoc) undertook the biggest devaluation of its currency in almost two decades, and followed this with two further, smaller moves. However, fears of a currency war (in which countries manipulate their exchange rates to boost export demand) receded later in the week as the Chinese authorities said there was no basis for a persistent weakening of the renminbi.
Despite the weakness in resource prices, materials and energy stocks were among the strongest performers amid hopes for further stimulus from Beijing. Industrial stocks also had a positive week after billionaire investor Warren Buffett’s Berkshire Hathaway agreed to buy engineering group Precision Castparts for USD 37.2 billion, in a deal that was viewed as a vote of confidence in US manufacturing.
In other company news, Google unveiled a corporate restructuring that will see the internet search business become a subsidiary of a conglomerate renamed Alphabet. The company has come under pressure from investors over the costs and capital expenditure it has taken on as it diversifies away from its core business. Although the changes formalise this agenda of heavy investment in technology growth markets, the share price jumped as Wall Street welcomed greater clarity on the company’s future.
The actions of the PBoC prompted speculation that the Federal Reserve may hold off from raising interest rates next month, as had been widely expected, given mounting global deflationary pressures. However, positive US economic data releases at the end of the week were viewed as putting a September move back on the cards.
Factory production rose more than forecast in July as car assembly jumped to its highest level since 1978. Total industrial production, which includes mines and utilities, also climbed as oil drilling rose for the first time since September.
US retail sales rose 0.6% month on month (m/m) in July amid higher demand in almost all categories, from clothing to cars. The May and June readings were revised higher, with sales in June now calculated to have been unchanged m/m, compared with a previous report of a 0.3% decline.
The MSCI Europe Index fell 2.6% in the week ending 14 August, as European markets bore the brunt of China’s shock decision to devalue its currency.
Among the major European markets, Germany’s DAX underperformed, closing 4.4% lower, while the French CAC 40 dropped 3.8%, Spain’s IBEX 35 lost 2.7%, the UK’s FTSE 100 was down 2.5% and Italy’s FTSE MIB fell 1.9%. The Swiss SPI held up better, down just 0.6% on the week.
Europe was hit hard by China’s unexpected currency devaluation, as investors weighed up the impact on the eurozone’s fragile export-driven recovery. A cheaper renminbi makes European goods more expensive for Chinese consumers and reduces the value of Chinese sales when they are converted back into euros.
European carmakers and luxury goods companies with high Chinese exposure were among the worst hit stocks in the week, while the German stock market, which has a relatively high weighting to exporters, suffered some of the biggest falls.
European mining and oil stocks also struggled following the Chinese devaluation on fears that the move will reduce Chinese commodity demand. Oil prices were down sharply, with US West Texas Intermediate falling to just USD 42 per barrel—its lowest level since 2009—while copper prices also remained close to a six-year low.
Mining and energy had been a drag on the eurozone recovery even before the Chinese currency devaluation, with weakness in both sectors contributing significantly to a 0.4% month-on-month decline in eurozone industrial production in June, according to data released last week by Eurostat.
The disappointing industrial production data was reflected in a slowdown in eurozone economic growth in the second quarter, as gross domestic product grew by 1.25% between April and June (quarter on quarter, seasonally-adjusted annualised rate)—down from the 1.5% growth achieved in the first three months of the year. German growth remained robust at 1.8%, but the French economy slowed to a standstill, while the Dutch economy grew just 0.3%.
In the UK, meanwhile, the latest labour market report was seen as reducing the pressure on the Bank of England to raise interest rates. The unemployment rate held steady at 5.6% in the three months to June, but job growth slowed and headline pay fell in the quarter, while productivity rose strongly.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.7% in the week to 14 August as China’s decision to devalue its currency dominated headlines.
In China, the decision by the People’s Bank of China (PBoC) to devalue the renminbi by the most in almost two decades was positive for mainland stocks, with the Shanghai Composite up 5.9% on the week, although the MSCI China Index was down 1.2%.
The move sent shockwaves through global markets, raising concerns about the extent of China’s economic weakness and sparking worries about possible competitive devaluations in other Asian markets. However, the PBoC said the decision to allow the renminbi to weaken was part of a process to implement a more market-driven framework for the currency and insisted that there was no basis for a further devaluation.
The weaker Chinese currency had a negative impact on markets with significant exposure to China. Commodity exporters were among the worst hit, with Mexico’s IPC down 2.5% and Brazil’s BOVESPA 2.3% lower. Brazil, which is facing growing economic problems, was further hit by moves to impeach president Dilma Rousseff on corruption allegations.
South Korea’s KOSPI (-1.3%) and Taiwan’s TAIEX (-1.6%) were also hit by the Chinese devaluation. Korea’s currency fell to its lowest level in almost four years against the US dollar as expectations built for another interest rate cut following China’s surprise move.
Russia’s RTS rose 0.3% despite a sharp drop in oil prices and the news that the Russian economy had shrunk by 4.6% in the second quarter. The market was supported by a strong earnings announcement from index heavyweight Gazprom Neft on the back of higher gas production.
India’s BSE Sensex was down 0.6%, hit early in the week by currency fluctuations following China’s currency moves, before falling wholesale inflation sparked hopes that the central bank would cut interest rates.
Bonds & Currency
A shock currency devaluation by the People’s Bank of China caused investors to seek safety in core government bonds at the start of the week.
However, assurances that Beijing was not embarking on a persistent weakening of the renminbi calmed the mood, and US, UK, German and Japanese 10-year yields ended the week little changed.
*Source: J.P. Mogan Asset Management
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