A look back over macroeconomic events for the week ending 14/08/2015. China surprised markets by devaluing its currency, while Greece and the Eurozone finance ministers approved the latest bailout.
China devalued the yuan on Tuesday, surprising the markets with a 1.9% fall in peg level against the US dollar. At the same time, the People’s Bank of China (PBoC) announced that it would take note of the closing market level from the previous day when setting the daily peg. The currency is allowed to trade within a certain band around the peg each day, but previously the peg has remained relatively static. To reinforce the point, the PBoC devalued the currency again on Wednesday before paring back some of the weakness towards the end of the week, in an effort to signal that this volatility is likely to be two-way. The yuan closed the week 2.9% weaker against the dollar, a limit move in terms of magnitude, but an important signal nonetheless. This comes in light of China’s aim of being included in the IMF’s Special Drawing Rights currency basket, which requires greater flexibility of the exchange rate. For several months our house view has been that China will look to devalue the yuan, but is less concerned about having a floating currency, and more about regaining some of its export competitiveness.
The €86 billion Greek bailout was approved by the Greek Parliament and Eurozone finance ministers, though not without further difficulty as the Syriza Prime Minister Alexis Tsipras struggled to get agreement from large sections of his own party who were elected on an anti-austerity platform. It is becoming increasingly likely that the saga will force fresh elections later this year. With these approvals in place, ratification is now required by several European countries, most notably Germany where Chancellor Angela Merkel is facing a rebellion from parts of her coalition. Although such a rebellion is not enough to block approval, it could deal political damage to the leader and make future deals more difficult.
Other macro events
- Eurozone GDP missed expectations, coming in at 0.3% from 0.4% expected QoQ (and in the previous quarter) but this still gave an annualised rate of 1.2% growth, the fastest since 2011.
- Completing the pack of developed market GDP results, Japan Q2 GDP was reported overnight, showing a 0.4% contraction. This was slightly better than expectations for a 0.5% contraction, but highlights the difficulty the government is facing maintaining economic recovery.
- Equities – Equity markets were generally weaker given the concerns over China devaluing. In the UK, the FTSE All-Share index fell -1.61%, with Europe (excluding the UK) and Japan similarly down -2.03% and -1.75% (TOPIX) respectively. The closet market to the action, Hong Kong’s Hang Seng index, fell -3.03%. Meanwhile, the US equity market was much less affected, managing to limit the fall to just -0.16%.
- Bonds – As equities fell, sovereign bond yields also fell. 10-year gilts yields were six basis points lower at 1.87%, whilst 10-ear US treasuries were four basis points lower at 2.19%
- Commodities – Oil remains weak, with Brent at $48.60 and WTI just below $42/below. Copper was little changed at $2.36 whilst gold was slightly firmer relative to last week, back above $1,100.
- Currencies – The US dollar weakened marginally against other currencies, falling 0.48% versus the pound. The Japanese yen also fell on the week, down 0.39% against sterling.
Monday: After the Japanese GDP print overnight, there is little else of particular note for Monday
Tuesday: Starts with Chinese house price data, then UK inflation figures are out – headline is expected to be negative month-on-month (falling 0.3%) from flat before, though core inflation is expected to remain stable at 0.8%. In the afternoon we will see further US housing data released.
Wednesday: Japanese trade data are released early in the morning, followed by European construction output. In the afternoon, US inflation data are released and importantly the US FOMC minutes will be published – though these relate to a meeting prior to last week’s China devaluation.
Thursday: UK retail sales figures are expected to show further increases, to 4.4% year on year from 4.0% previously. In the US initial jobless numbers add to the employment mix followed by the Conference Board’s leading index, more US housing data and the Philadelphia Fed Manufacturing index.
Friday: Caixin General Manufacturing PMI is released early in the morning, then the Eurozone produces flash Manufacturing and Services PMI (both to remain in reasonable expansion territory) before finishing the day with Consumer Confidence data, which are expected to remain weak.