China and Greece causing uncertainty on the markets

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Financial markets around the world were still feeling the aftereffects of China’s devaluation of the yuan last week. This, combined with renewed political uncertainty in Greece, caused stock prices to plummet. Interest on bonds also fell, particularly in the United States.

The markets also became more concerned that the Chinese economy will experience a much greater downturn Ben Steinebach Ben Steinebach Head of Investment Strategy

The Chinese yuan lost only a little of its value (around 4%) as a result of the devaluation. However, the move prompted a series of other currency devaluations in emerging markets, which generally led to much greater losses. The impact was greatest on the currencies of Kazakhstan (a staggering 26%, dragged down by the continuing decline of oil prices), Russia, Ghana, Guinea, Colombia, Belarus, Turkey, Malaysia and Algeria. These currencies all fell by more than 4%, in some cases much more. The markets also became more concerned that the Chinese economy will experience a much greater downturn. Based on provisional data, the index for purchasing managers in China’s industrial sector fell to 47.7 August, down from 47.8 in July. A figure of less than 50 generally indicates contraction in the industrial sector.

Although we expect that the Chinese authorities will succeed in maintaining a reasonable growth rate for the country’s economy, investors evidently do not share this belief. Investors detest uncertainty, and the current concerns are being fuelled by the developments in China and other emerging markets. On Thursday this was compounded by renewed uncertainty about Greece. Prime Minister Tsipras, seeing the support within his own Syriza parties dissolving, has resigned and will call a new election (likely on 20 September). Presumably he will win: the Greek population still holds him in high esteem. Nevertheless, this move has reawakened doubts that the economic reforms will in fact be carried through, and the leading stock indexes worldwide slid 2.5% (Japan) to 5% (Germany). The increased risk aversion was also expressed in falling bond rates on most markets. Where in Europe this was a few basis points only, in the United States the 10-year yield fell from 2.19% to 2.05%. The principal factor driving this decline is that the policymakers of the Federal Reserve are concerned that inflation will remain low. We expect, however, that inflation will soon be around 2% (as targeted by the Fed), fuelled largely by higher rents as the US housing market recovers. Not including food and energy, consumer prices continued to rise at a stable rate of 1.8%, which is already very close to the targeted rate.

Mixed bag of corporate earnings

The international earnings season is nearing its end, though a number of Dutch companies still published their earnings last week. Despite some disappointments, most of the announcements were positive. In the United States, Home Depot and Wal-Mart published their Q2 earnings. Wal-Mart’s figures fell short of the projections, chiefly as a result of disappointing margins in its pharmacy operations. Home Depot’s earnings outperformed the forecasts, boosted by the strong recovery of the US housing market. In the Netherlands Vopak and Brunel reported disappointing earnings – in the case of Vopak this logically follows from the pressure on oil prices. TKH (formerly Twentsche Kabel) also failed to perform as expected, though largely because the expectations were very high. On the whole the corporate earnings were very encouraging. Ahold, Boskalis, BAM and Nationale Nederlanden all outperformed the projections. For Ahold, an important factor was Albert Heijn’s larger market share. Boskalis saw its margins improve more strongly than foreseen, owing to a high utilisation of its operating assets, especially for its dredging operations. The AEX lost no less than 3.1% last week, down to 459.17 on Thursday compared with 473.89 the Friday before. By Friday morning the index had fallen further to around 455 points.

Earnings season virtually over

With the earnings season more or less at an end, the financial markets are shifting their focus back to macroeconomic news, and this week will be busy. No very prominent companies have yet to publish their quarterly earnings this week. In macroeconomic news the monetary conference Jackson Hole, from 27 to 30 August, should be interesting – last week I mistakenly wrote that it would be taking place now. This conference of central bankers and academics always produces interesting insights into the monetary situation. This week will also see the publication of consumer confidence figures in August from a number of sources: in the United States (data from both the Conference Board and the University of Michigan), the European Union, the United Kingdom and Italy. Business confidence will also be in the news a great deal: the purchasing managers indexes for the service sectors for August will be released, as will confidence in Germany (Ifo) and business confidence in the European Union, Belgium and the Netherlands. We also look forward to the latest data about the US housing market: both sales of new homes in July and information about house prices. Lastly, July’s orders for durables in the US and the first revised figures for Q2 economic growth in the United States will be announced.


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