PBEM is handled in player order. Eg, player 1, player 2, player 3, ..., player N.
If the combat occurs on your turn, you can watch little dots zip around (strategic combat). If it happens on someone else's turn, you just get the report with a list of ships invovled and damage percentages. There is currently no "battle replay" option.
I have suggested to Malfador that they allow for a "tactical view strategic battle" option. Basically, if would fire up the tactical combat engine and view, but only allow "end turn" and "complete combat" options. This would allow players to watch what their fleets/ships are doing, and to later adjust strategies to correct AI stupidity. It would also just be cool.
John