Weekly wrap: Market volatility could persist as US economic data and Syrian concerns remain in focus – 03.09.2013

Source: Henderson Global Investors

Geopolitical concerns were the dominant driver of market movements over the week. Equities globally lost ground as speculation grew about US military action in Syria following a suspected chemical attack. While Britain, France, Canada, and the Arab League voiced their support, China and Russia were opposed, ratcheting up the tension. Although the immediacy of an intervention faded from Thursday, gilts, treasuries and bunds were the week’s outperformers on ‘safe haven’ buying; Brent crude oil prices reached six-month highs, at US$117 per barrel. Given the ‘risk-off’ backdrop, emerging market currencies underperformed. Those countries with large current account deficits, such as India, continued to suffer the most.

News that the US economy was on a firmer footing provided some respite. The second estimate of second quarter gross domestic product (GDP) was revised upwards from 1.7% to 2.5% (annualised rate). Separately, initial claims for unemployment benefits fell by 6,000 in the prior week. August consumer confidence gauges were more mixed; the US Conference Board’s measure ticked up to 81.5, while Thomson Reuters/University of Michigan’s sentiment gauge declined to 82.1 from July’s reading of 85.1. UK data was encouraging. The Confederation of British Industry announced that British retail sales smashed forecasts in August and that UK services firms enjoyed the fastest rise in business volumes since 2007. Meanwhile, Bank of England governor Mark Carney reiterated his pledge on low interest rates. In Asia, the Japanese inflation rate, excluding food and energy, fell 0.1% year-on-year in July, weighing on the Nikkei.

In China this morning, Markit/HSBC’s manufacturing purchasing manager’s index (PMI) moved back into expansion territory in August at 50.1. This comes hot on the heels of Sunday’s strong official PMI reading of 51. However, market volatility could persist this week as US economic data and Syrian concerns remain in focus. Eyes will be on the release of the US Employment Report at the end of the week. Expectations are that the unemployment rate will stay at 7.4%, although the steady pace of job creation could continue. Analysts are forecasting that 175,000 non-farm jobs will have been created in August. If these numbers are strong, this could spur the Federal Reserve (Fed) into tapering its asset purchases later this month. Other key reports in the US include August’s Institute for Supply Management manufacturing and non-manufacturing surveys on Tuesday and Thursday, respectively; both could show small retracements from July’s strong readings. Trade data for July is scheduled for Wednesday.

Central banks in Europe, UK, Japan, Australia and Mexico meet this week. No adjustments are expected to their main policy rates, but investors will be listening for any change to the European Central Bank’s outlook at its press conference on Thursday. A second estimate of second quarter euro area GDP is due mid-week, updating the preliminary 0.3% reading; hopes are for further confirmation that Europe is out of recession. On Friday July German industrial production data is revealed. In the UK, August’s manufacturing and services PMI surveys (Monday and Wednesday) will provide further clues about the strength of the British economy.