Weekly wrap: Tapering fears usurped by geopolitical tensions – 27.08.2013

Source: Henderson Global Investors

Global markets were in a sour mood most of the week given concerns over a lack of liquidity to support the economy when the US Federal Reserve (Fed) begins to taper its stimulus programme. The much awaited minutes of the Fed’s July policy meeting, released on Wednesday, did not provide any further clues on the timing of tapering. Markets continued to slip until a bunch of healthy manufacturing data from China, the eurozone and the US — all of which improved in August — helped to improve sentiment.

The Chinese manufacturing sector unexpectedly returned to growth this month; the HSBC Flash Purchasing Managers’ Index (PMI) rose to 50.1 in August from 47.7 in July. The 50-point mark separates expansion from contraction. The preliminary reading for the euro area composite PMI at 51.7 beat both expectations and last month’s reading, while US manufacturing activity hit a five-month high as the flash PMI rose to 53.9.

Emerging markets saw heavy capital outflows, hurt by the rise in US Treasury yields, which tend to set the benchmark for borrowing costs across the globe. Most hurt were countries that are more reliant on inflows to finance large current account deficits. However, the rout in emerging markets eased somewhat towards the end of the week as upbeat data suggesting an improvement in the global economy lifted the mood.

The major topic dominating the debate at the Jackson Hole Economic Symposium was the effects of the Fed’s policy on the rest of the world and in particular the sell-off in emerging markets. A couple of speakers urged the Fed to continue buying mortgage-backed securities, even if they taper Treasury bond-buying.

While the UK market was closed for a public holiday on Monday 26 August, other markets were preoccupied with the escalating geopolitical tensions in Syria and concerns for a possible western military intervention. In the US, the biggest drop in orders for durable factory goods in almost a year, down 7.3% in July, took investors by surprise. Safe haven buying helped US Treasury prices rise, and yields to fall to below 2.8% for the first time in seven sessions. In other data, the release of the German Ifo business climate index brought a respite on Tuesday morning, as the index, which rates the current German business climate and sets out expectations for the next six months, rose to 107.5 in August from 106.2 in July.

For the rest of the week, data of significance for the US includes consumer confidence indicators (Conference Board and the University of Michigan) for August — which are likely to have deteriorated slightly, and a second revision to Q2 gross domestic product (GDP) growth, expected to be revised up to 2.2% quarter-on-quarter annualised, from 1.7% originally.

Numbers to watch in Asia include Q2 GDP releases for Philippines and India while Korea and Thailand report current account numbers for July. In Europe, following the strong PMI of last week other confidence indices (European Commission, INSEE) should show an overall improvement, while the flash consumer price inflation (CPI) measures for Germany and the euro area are expected to tick lower in August.