11 September 2017
Markets pushed through a difficult month in August, with North Korea’s continuing missile-test program growing increasingly alarming and Hurricane Harvey threatening to derail the US economic recovery.
The month started with tensions high in North Asia as a result of North Korea’s 14th missile test for the year on 28 July, which seemed to bring the continental US into its range, and reports stating that Pyongyang now possessed a miniaturised nuclear warhead. Next, the rogue state warned it was considering an attack on the US Pacific territory of Guam. US President Donald Trump responded by saying any North Korean threat to the US “will be met with fire and fury like the world has never seen”.
Markets did not like that comment, and demand was sparked for perceived ‘safe haven’ assets in the form of gold, the Japanese yen, the Swiss franc and US Treasuries. However, traders had to go in and out of those assets regularly over the month: first, North Korea appeared to walk back its Guam threat, only to finish off August by test-firing three short-range ballistic missiles and launching a longer-range missile over northern Japan. With the Japanese government taking that launch seriously enough to urge its citizens under the missile’s flight path to take refuge in solid buildings or underground shelters, a bout of nerves hit the markets again.
In the midst of geo-political concerns, southern United States was hit by Hurricane Harvey, the first major hurricane to make landfall in the US since 2005. Early estimates put the damage from Harvey at up to US$180 billion (AU$225 billion). The region affected by Hurricane Harvey accounts for one-third of US crude oil refining capacity and about 3% of US GDP—meaning its threat to the slow-but-steady US economic recovery is significant.
Markets also braced late in the month for news on monetary policy coming out of the Federal Reserve’s annual central bankers’ symposium in Jackson Hole, Wyoming. This was an anti-climax, however, given Fed chair Janet Yellen barely mentioned US monetary policy in her speech; while European Central Bank President Mario Draghi was also reticent on the euro’s recent strength.
Figures released in August showed the US economic growth rate hit 3% in the second quarter, revised up from the initial estimate of 2.6%, representing the US economy’s strongest pace of economic growth in more than two years. Consumer spending was the standout, rising 3.3% in the second quarter. The July jobs number was a belter, with the US economy adding a better-than-expected 209,000 jobs in July for the second straight month of 200,000-plus job gains. That took the unemployment rate from 4.4% to 4.3%—the lowest level of unemployment in 16 years—while the participation rate also edged higher, suggesting people are returning to the jobs market.
In a separate survey, private-sector hiring surged in August, with payroll processor ADP reporting that employers added a seasonally adjusted 237,000 jobs during the month. That was up from the 178,000 reported in July, and well ahead of the Econoday consensus forecast of 185,000.
The jobs figure spurred the blue-chip Dow Jones Industrial Average to a record high, helped by upbeat corporate profits for the second quarter in what was described as the best earnings season for US companies in 13 years, as global economic growth picked up. Corporate profits in the second quarter beat estimates at more than three-quarters of the Standard & Poor’s 500 member companies.
In the end, despite US$1 trillion (AU$1.25 trillion) vanishing from global stock market value mid-month, investors focused on this outlook rather than the North Asian security situation. The benchmark S&P 500 index posted its fifth consecutive monthly gain, albeit a rise for August of less than 0.1%; the Dow Jones Industrial Average gained 0.3% over the month; and the tech-heavy Nasdaq Composite Index was up 1.3%, closing August at a record daily close of 6,428.66 points.
The Dow Jones is up 11% year to date, the S&P has climbed 10.5%, and the Nasdaq has surged 19% since the start of the year.
In Europe, the Eurozone economy grew by 0.6% in the June quarter, matching the rate in the previous quarter. Year-on-year growth accelerated from 1.9% to 2.2%, to its fastest pace since 2011. German GDP grew by 0.6% in the most recent quarter, Spain posted 0.9% growth, France reported 0.5% and the Netherlands provided the biggest surprise, surging by an unexpectedly strong 1.5%—a quarterly growth rate more usually associated with booming developing economies. In contrast, UK GDP growth underwhelmed, coming in at 0.3% for the June quarter and 1.7% year-on-year.
In terms of the forward-looking purchasing managers’ index (PMI) surveys, Eurozone manufacturers saw their best month of growth in six-and-a-half years in August, with data firm IHS Markit’s Flash Eurozone Composite PMI edging up to 55.8 in August from 55.7 in July. However, the PMI figure for Eurozone services activity eased from 55.4 to 54.9 in August, the softest figure in seven months, along with a slowdown in new orders growth.
German business confidence slipped slightly in August after posting three record highs in a row, but this was offset by surprisingly strong consumer confidence, which reached its highest level since October 2001 on the survey run by Nuremberg-based GfK institute. Household spending appears to have overtaken exports as the main source of economic growth in Germany.
With European company profits still a strong story, a Reuters poll found that global equity fund managers had lifted their holdings of European stocks to a five-year high. On the markets, the STOXX Europe 600 index lost 1%, with the DAX in Germany down by 0.5% and the CAC 40 in France easing 0.2%. In the UK, the FTSE 100 gained 0.8%.
In Asia, there were conflicting numbers in China, with the manufacturing PMI—the official gauge of China's factory activity—rising from July’s figure of 51.4 to 51.7 for its 13th straight monthly reading in expansionary territory (above 50). The private Caixin China manufacturing PMI, which covers smaller, private firms, recorded a six-month high of 51.6 in August, beating analyst expectations.
However, these results were tempered by a suite of data that missed expectations. China’s official non-manufacturing PMI figure fell to 53.4 in August from 54.5 in July; industrial output for the month of July rose by 6.4% year-on-year, missing analysts’ expectations for a rise of 7.2%; July retail sales rose by 10.4% from a year ago, missing the 10.8% forecast; and January-July fixed asset investment increased 8.3% from a year ago, against Reuters’ poll forecast of 8.6%.
Meanwhile, the Japanese economy grew at an annualised rate of 4% in the June quarter, easily outstripping the 2.5% rise forecast in a Reuters poll. That made six quarters in a row of growth (now the longest expansion in more than a decade), a trend notable for being powered by a rising domestic demand which is offsetting weaker Japanese exports. If the economy grows in the current quarter, it will represent Japan’s best economic growth streak since 2001.
In the June quarter, a record 68% of Japan’s listed companies reported higher net profit than a year ago. In Korea, the company earnings picture is also very strong. According to analyst estimates collated by Bloomberg, the KOSPI index companies will lift their aggregate earnings by 88% this year, to the highest level since 2010.
On the Asian markets, the Nikkei 225 ended August down 2.1%, a second straight monthly decline, and the KOSPI in South Korea fell 1.6%. However, the Shanghai Composite Index gained 2.7% and the Hang Seng in Hong Kong added 2.4% to make it eight consecutive monthly gains, the index’s longest spell of monthly rises since 2007. In Australia, the S&P/ASX 200 Index shed 0.1%.