RECAP: for the week ending August 19th

August 22, 2016

The Federal Reserve released the minutes from its late-July policy meeting and crude oil moving back into bull market territory. The Russell 2000 Index of small-cap stocks generated marginally positive returns for the week, outperforming large- and mid-cap shares. The minutes from the Fed’s July 26–27 policy meeting showed that Federal Open Market Committee (FOMC) members were divided about when the central bank should raise interest rates again and reaffirmed that the timing of the central bank’s next move remains dependent on the strength of U.S. economic data. FOMC members thought the economy is strong enough to raise rates as soon as September; most Fed policymakers anticipate that growth will accelerate in the second half of 2016. However, others believed that a near-term rate increase would prevent inflation from reaching the Fed’s 2% target. Stock investors seemed to favour the latter view, reading the minutes with a slightly dovish interpretation and not selling.

Price changes in crude oil seemed to drive equities more than the FOMC minutes. The price of Brent crude, the worldwide benchmark, climbed back above $50 per barrel, as oil quickly flipped into a bull market (up more than 20% from recent lows) from a bear market (down more than 20% from recent highs) over the last few weeks.

In Europe equities slumped, weighed down by mining, banking, and insurance stocks, although a rise in oil prices supported some energy stocks. The pan-European benchmark Stoxx 600 Index ended the week lower amid relatively light trading. Rising prices for food, tobacco, and alcohol helped boost the eurozone inflation rate in July to 0.2%, an eight-month high, according to statistics agency Eurostat. While a good sign, the figure still falls far short of the 2% inflation target set by the European Central Bank. Belgium and Sweden recorded the strongest inflation rates—2% and 1.1% respectively—while inflation in Bulgaria and Croatia recorded the largest declines, with both rates falling by 1.1%.

In Asia The Nikkei 225 trended lower, ending the week down 2.2%. For the year to date, the Nikkei has declined approximately 13%, the large-cap TOPIX 100 is off 16%, and the TOPIX Small Index is roughly 15% lower. Rumors are circulating that the Bank of Japan (BoJ) is considering fine-tuning its Japanese government bond (JGB) buying program after it concludes its “comprehensive assessment” of its quantitative easing and negative interest rate policy in September. Speculation has centred on the BoJ adopting a more flexible approach for its JGB purchases, and Reuters reported that a tapering of the stimulus program is unlikely.

Japan’s June quarter gross domestic product (GDP) growth came in well short of analysts’ expectations. The Cabinet Office reported that Japan’s first fiscal quarter economic growth (for the three months ended June 30) was 0.2%, well shy of Wall Street expectations for 0.7% annualized growth and a steep fall-off from 2.0% growth in the prior three-month period. According to HSBC, the miss wasn’t quite as bad as the headline number suggests, as the largest components of the shortfall were exports (largely because of the yen’s strength).

China approved a link between the Shenzhen and Hong Kong stock exchanges that will allow foreign investors to trade in the $6.5 trillion domestic share market and, thus, access to some of China’s highly sought-after technology companies and startups. In an effort to encourage more global trade in its markets, China is also doing away with limits on how much foreigners can invest in the country’s stocks. The link between the exchanges is the latest step China has taken toward the liberalization of the mainland market. By allowing foreigners to trade there, China is addressing limitations to mainland trading flagged by MSCI (a US firm that publishes the MSCI BRIC and MSCI world Indexes.) when it rejected the inclusion of China’s market in the MSCI global indexes earlier this year.

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