China has seen the greatest currency devaluation in 20 years as the central bank opened a new front in its battle against the country’s slowing economic expansion. The yuan fell about 2% versus the dollar this week, dragging other currencies in the Asia Pacific region lower amid speculation that other central banks may engage in competitive devaluations. That speculation was heightened as the yuan fell again over the subsequent two days before stabilising, despite the supposed ‘one-off’ nature of the initial devaluation.

Chinese stocks have corrected sharply as a result of new domestic stock market controls and restrictions. This has led to worries about China in a broader sense and thus causing market volatility. This has had a knock on effect on the local economy with luxury goods firms among the biggest underperformers, with makers of high-end cars, watches and handbags falling out of favour. Sales of the latter products are often made to Chinese people traveling abroad, but the higher cost of travel (worse exchange rate, higher airfares etc.) will likely impact that sales channel as well as direct exports.

China has hogged the headlines shadowing other notable events in the week. Having perplexed markets for so long, news that Greece had agreed in principle on the terms of third bailout deal came as a whisper. A subsequent vote by the Greek parliament rubber-stamped an €85 billion deal that will keep Greece in the euro, assuming European leaders also get it through their own legislative processes.

Ireland
Ireland’s economy is a good place, according to the stockbroking firm Goodbody. The firm bumped up its growth forecast to 5.5% in 2015 (from an earlier 4.3% estimate) and projected growth of 4% in 2016 and 2017. Meanwhile, the initial estimate of economic growth in the wider Eurozone came in a little under expectations: 0.3% vs 0.4%. The broad narrative about the region remains in place, with Germany and Spain doing well, while Italy and France are spinning their wheels –the latter recorded zero growth in Q2

Equities
Equities rose in July, due partly to the latest Greek bailout as well as a good start to the Q2 earnings’ results season. Markets have, however, been range-bound since the middle of March. On a technical basis, the global index rose just above its 50-day moving average at month end and remains 5% above the critical 200- day moving average
World equities rose by 2.1% during the month and have given a total return of a 14.0% during the first seven months of 2015. With the exception of Hong Kong (-6.1%), all of the major markets were up in local currency terms during the period ranging from 1.8% in Japan to 4.6% in Europe.

Bonds and Interest Rates
The German 10-year bond yield fell in July from 0.76% to 0.64%. The yield had hit an all-time low of 0.06% in mid-April. Equivalent US rates fell from 2.35% to 2.18%. Irish bond yields are at 1.30% a fall from last month’s 1.36%. Bonds are seeing a significant pick-up in volatility.
The Federal Reserve is now fully expected to begin to increase rates from current record low levels in December 2015, with a 50% chance of lift-off in September. The Bank of England is not expected to move until February 2016. ECB rates are unlikely to change for the foreseeable future

Commodities and Currencies
Commodity prices overall fell heavily in July, down 11% in dollar terms, due to the Chinese economic news. Oil prices fell by 20%. Commodities are now down 12% so far this year with some significant volatility.
The gold price was down 7% on the month, ending at $1,095 per troy ounce.
The euro currency was mixed against the major currencies during July – weaker against the US dollar and the British pound but stronger against the Swiss franc and the Aussie dollar. The €/$ rate moved from 1.12 to 1.10 over the month.

Market August 15

 

Source: Bloomberg. Capital returns in local currency for the week to Friday 14 August 2015.
Past performance is not a guarantee of future results.