China continues to cause turmoil on the markets

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Global financial markets remained jittery this past week, as they continued to fret over a slowdown of the Chinese economy. This even led to a change in expectations of the US and eurozone central banks’ policy.

The financial markets painted a gloomy picture for most of the week Ben Steinebach Ben Steinebach Head of Investment Strategy

The Purchasing Managers’ Index in the Chinese industrial sector fell to 49.7 in August from 50 in July. This minor decline was enough to shake up the financial markets once again. Investors are very concerned about the state of the Chinese economy, as weakening economic growth could have a negative impact on the export potential of other countries. Turbulence on the global equity markets has caused the European Central Bank (ECB) and the US Federal Reserve (Fed) to question their own policies.

ECB considers expanding its bond-buying programme

In a press conference this past Thursday, ECB president Mario Draghi expressed his concerns about the situation in China. He wants the Chinese authorities to provide more information during the G-20 meeting this weekend in Ankara, Turkey. The ECB has responded in part by lowering forecasts for economic growth and inflation for the coming years. Mr Draghi implied that an obvious move would be to expand the bond-buying programme, but kept silent on further details. One of the options would be to extend the programme beyond September 2016.

US interest rate hike also uncertain

Until recently, we thought the Fed would raise its most important rate – the Fed funds rate – at its next meeting on 17 September. The first increase in nine years would normalise the rate, making it more fitting for the favourable development of the US economy. Turbulence on the global equity markets has strengthened doubts about whether the Fed will take this step, and this in turn is igniting fears of even greater turbulence. We therefore expect the Fed to postpone its decision until December, or perhaps even until next year.

Good macroeconomic figures leave the markets cold

The financial markets painted a gloomy picture for most of the week. The mood perked up following the ECB’s press conference, and some markets closed even higher than the previous Friday’s closing level. There was little news last week from listed companies that could nudge prices in any direction. Air France-KLM announced a reorganisation designed chiefly to downsize and to boost efficiency of the airline’s Dutch operations. Last weekend members of the Fed and the Bank of England held speeches at the monetary conference in Jackson Hole, Wyoming; these, too, had little impact on the markets. Good figures presented by purchasing managers in Europe were basically snowed under by disappointing numbers from their counterparts in the US and China. Investors responded to this even more negatively.

AEX recovers following Mario Draghi’s comments

The leading equity markets moved virtually in step with one another this past week, showing a decline in the first few days of the week followed by a slight recovery on Thursday. Most markets closed on Thursday on balance lower than they did the previous week Friday. The same is true for the different US indices, for the Asian markets (which again suffered major losses) and also – although to a lesser extent – for most European markets. Only the German and Italian markets closed slightly higher. The AEX finished Thursday 0.3% higher, at 444.55, after closing under 435 points on Tuesday and Wednesday. The effect of Mario Draghi’s words wore off by Friday, though, when the index dipped under 440 points.

Hopefully the G-20 will give the markets a boost

We do not expect much news to provide guidance in the week ahead. The corporate results season is over, barring a few exceptions, and we do not anticipate many important figures on the macroeconomic front. The G-20 meeting starts today in Ankara. The big question is whether China will open up about the state of the Chinese economy and how policy-makers will respond. Both the Fed and the ECB have urged openness this past week. We expect relatively little other news to provide guidance. The most important macroeconomic news – the monthly US employment and unemployment figures – will already have been announced by the time this blog is published.

We are looking forward to the coming week’s inflation figures in China, the UK, Germany, the Netherlands and the US. In addition, the UK, France, Italy and the Netherlands will publish data on industrial production. The board of the British central bank will meet to discuss monetary policy, but we do not anticipate any rate hikes in the UK or in the US. At the end of the week, the University of Michigan will publish new figures on US consumer confidence in September. The equity markets in the US and Canada are closed on Monday for Labor Day.

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