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Week in Review: Global Stocks Plunge on China's Growth Setbacks

For the week ended 21 August 2015

  • China’s economic slump deepens
  • Japan’s GDP contracts in Q2
  • US housing data strengthen
  • US manufacturing weakens
  • Wal-Mart struggles, lowers guidance

Global markets were rattled by more bad news from China. Still reeling from last week’s surprise action to let the renminbi exchange rate float more freely, investors sold off stocks and bought “safe-haven” bonds and gold. The bearish mood was exacerbated Friday by the weakest reading from China’s factory sector in six years. The VIX volatility index hit 24 intraday, a high not seen in 2015, and the S&P 500 Index fell into negative territory for the year to date. The yield on the 10-year US Treasury note dropped to 2.04%, the lowest rate since April.

Accompanying the broad and steep selloff in equities were further drops in prices for commodities, including oil and copper. Asian emerging markets were among the hardest hit, feeling the fallout from China’s currency weakness and declining demand for their exports. US West Texas Intermediate crude oil fell to $40 per barrel, while Brent futures traded close to $45.

US and global economic news

China reports sharp drop in factory output
The preliminary Caixin/Markit China manufacturing purchasing managers’ index fell to 47.1 in August, down from July’s final 47.8 and the worst reading since March 2009. The gauge has been below 50, indicating contraction, for six straight months. Although China has officially reported GDP growth of 7.0%, economists believe the actual pace may be closer to half that figure.

Japan’s GDP drops in second quarter
Japan’s economy contracted at a 1.6% annualized rate in the second quarter, dragged down by weaker consumer spending and exports. After an estimated 4.5% expansion in the first quarter, the pace of economic growth has fluctuated, but analysts expect Japan’s GDP to expand during the third quarter.

Russian wages tumble 9.2%
Russian wages dropped 9.2% in July from the previous year, even worse than June’s year-over-year decline of 8.6%. This could add to weakness in consumer spending and further damage Russia’s heavily oil export-dependent economy. The price of crude oil has fallen more than 30% since June, and the ruble has dropped 25% during the past three months.

US housing data at multiyear strength
New US home construction and resales both rose to eight-year highs in July. Residential construction starts increased 0.2% to an annual rate of 1.21 million units, and existing home sales also climbed 0.2% to an annual rate of 5.59 million, their fastest pace since 2007. Sales were 10.3% higher than a year ago. Building permits fell 16.3% to a 1.12-million-unit annual pace after three straight months of major increases. Homebuilder sentiment, a leading indicator, rose to its highest reading since November 2005.

US manufacturing at weakest in two years
The Markit US manufacturing PMI fell from a final July reading of 53.8 to a preliminary figure of 52.9 in August, its weakest pace in almost two years. Economists had expected a slight increase to 54.0.

US inflation edges higher
The US Consumer Price Index edged 0.1% higher in July and 0.2% year over year. Core CPI, excluding food and energy costs, also rose 0.1% in July and 1.8% for the 12-month period. Gasoline prices were 22.3% lower than a year ago.

Fed minutes inconclusive on September action
Minutes from the US Federal Reserve’s July policy meeting gave no clear indication that the Fed will raise short-term interest rates at its mid-September meeting. Though the firming labor market raises the likelihood of a rate hike, persistent low inflation and global economic deterioration could lead the Fed to delay the increase.

Weekly US jobless claims rise to 277,000
Initial jobless claims rose 4,000 to 277,000 for the week ended 15 August. The four-week moving average climbed 5,500 to 271,500. The four-week average has been below 300,000 for 21 straight weeks. Continuing claims dipped 24,000 to 2.25 million for the week ended 8 August.

US and global corporate news

Wal-Mart profit tumbles, revenue flat, expenses rise
Wal-Mart’s quarterly profit fell 15%, as revenue remained flat from a year earlier and expenses rose on higher hourly worker pay, store theft and currency fluctuations. Sales at US stores open for a year rose 1.5% in the second quarter, the fourth quarterly increase after a stretch of declines. The company lowered its earnings-per-share target for the year.

Liberty Interactive to buy Zulily for $2.4 billion
Liberty Interactive
, the media conglomerate that owns home shopping network QVC, announced the acquisition of internet retailer Zulily for $2.4 billion, with the intent to gain access to its younger shoppers and stronger online and mobile presence. Zulily’s shares jumped 46% on the news.

Deere profit falls 40%
Industrial bellwether Deere & Company reported a 40% drop in third-quarter profit as weaker demand for agricultural equipment compounded the stronger US dollar. Total revenue fell 20%. Farm and turf equipment sales, which make up two-thirds of Deere’s revenue, fell 24% in the third quarter, and the firm lowered its forecast for fourth-quarter sales.

H-P posts 13% drop in profit
Hewlett-Packard reported a 13% drop in quarterly earnings. Revenue fell 8%, the 15th sales decline in the past 16 quarters, hurt by weak PC sales and the strong US dollar. The results were the firm’s last before splitting into two companies in November.

The week ahead

  • US new home sales are reported on Tuesday, 25 August.
  • US durable goods orders are released on Wednesday, 26 August.
  • US second quarter GDP is updated on Thursday, 27 August.
  • Japan’s consumer price inflation and unemployment rate are announced on Thursday, 27 August.
  • Canada’s major banks report quarterly earnings throughout the week.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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