1. LOOKING BACH ON AUGUST 2015
While Greek politicians campaign as holiday-makers lounge in the sun, Chinese
authorities seem to slowly be running out of policy options. Indeed, throwing
money at a crumbling stock market did not halt its decline, and neither did
devaluing the currency (in small instalments). Fortunately, or not, the refugee
crisis in Europe is diverting our attention from financial matters, though not
enough to prevent markets from distancing themselves from a September hike
by the Fed.
Only two major central banks met in August, and both of them declined to
change their policy rate. The Bank of England was relatively dovish, despite one
member dissenting, choosing to focus on a subdued rate of inflation. The
Reserve Bank of Australia was in a similar frame of mind (after having cut twice
this year), reverting to a neutral stance to acknowledge a weaker currency and
better employment conditions.
As the year goes by, it seems the Fed is engaging in a form of wishful thinking
as the macro-economic statistics fail to point to above trend levels of growth and
inflation. The first half of August delivered relatively weak numbers, such as only
215k new jobs on non-farm payrolls, and a soft manufacturing ISM reading
(though services were better). Jobless claims were hardly changed throughout
the month relative to July, and both the Empire manufacturing survey and the
Chicago purchasing managers’ index came in below expectations. There were,
however, stronger readings, such as a number of the housing statistics (most
notably existing home sales) and both durable goods and retail sales. All was
quiet on the inflation front, with the headline number up only 0.2% year-on-
year, and the core reading unchanged at 1.8%.
UK releases were equally balanced, highlighting, as in the US, the lack of vigour
of the current expansion. This was evident in the main statistic, the services
PMI, missing expectations, albeit by less than a point (57.4 v. 58). The
construction number was also weaker but manufacturing better than expected.
Industrial production and retail sales also missed their targets, though the latter
are still growing at a 4.2% annual pace. On the strong side, the CBI orders and
sales releases were better than thought. Unemployment is unchanged at 5.6%,
headline inflation was a notch higher at +0.1% YoY and the second take on Q2
GDP matched the first at +0.7% QoQ.
The euro advanced PMI numbers were better than last month, though consistent
with growth barely above 1%. To this effect, sales and industrial production
were weaker than expected, and Q2 GDP measured at +0.3% (+1.2% YoY).
Once again, Spain, and to a lesser extent Germany, seems to advance at a

2. healthy pace while France lags even further. Inflation is 0.2% for the zone, with
core unchanged from last month at 1%.
Yield markets were quite volatile, trending lower for most of the month before
snapping back in August’s last days. The US 10-year eventually added 4bps to
2.22% while the 2-year rate gained 8bps to reach 0.74%. In the UK, the 10-
year was up 8bps at 1.96% and the 2-year 12bps higher at 0.69%. The euro
curve was a bit steeper with the 10-year Bunds adding 13bps at 0.80% while
the 2-year rate gained 3bps to reach -0.20%. The French 10-year rate widened
22bps to top 1.15% while Italy was 19bps higher at 1.96% and Spain 27bps
higher at 2.11%.
The Fed’s lack of resolve was trumped by the Chinese stock market meltdown,
which hurt risk assets around the globe. US stocks shed over 6% (-4% YTD),
but fared better than the UK (-7% and -5% YTD) or Europe (-9%, but still +5%
YTD). EM stocks shed 9%and are now beyond -14% for the year. US IG credit
spreads widened by almost 12 points, to 82, while their European counterparts
added 9 points to 72.
Commodities continue to exhibit much volatility, especially energy. After three
months of negative returns, oil advanced, WTI being the best performing
contract as it added over 4%, to $49.2/bbl (Brent +4% at $54.2/bbl), while
natural gas shed 1%. Gold rebounded healthily, adding 3.6% at $1,135/oz;
metals saw nickel lose a whopping 9%, while copper was only down 1%, and
other big moves were suffered by soy (-9%) and hogs (-13%).
Some of the volatility was felt in currencies, where the dollar index dropped
1.6%. Sterling also lost about 2% while the euro added as much. The BRICs
were collectively very poor with the yuan down 2.7%, the real 5.5% weaker, the
rupee down 3.5% and the rouble 3.9% lower.