On Tuesday, stocks world wide sank. The immediate cause or trigger began in Asian trading when China's Shanghai Composite index dropped almost 9 percent - its biggest single decline in 10 years. On the previous day, the index had registered a new high. An apparent cause of the Shanghai slide was a rumor of a planned tax on capital gains from shares, which was subsequently denied.
Recently recorded six-year highs elsewhere became a memory as fears of overvaluation, slowing economic growth (especially in the U.S.) and political tensions with Iran combined to spook investors who then dumped stocks. The declines spread to Europe and the UK and then to the U.S., Canada and emerging markets. Many indexes wiped out what had been February's healthy gains and then some. Many lost all of 2007's gains. But the end of February did not end the declines. Volatility that had been largely absent reared its head and investors who had become lulled by the relatively smooth circumstances were rattled by the new experience. Rationally, an index which accounts for perhaps less than 2 percent of world capitalization should not have caused such an upheaval. But people are still arguing over the reasons for the 2000, 1987 and 1929 crashes so it would be premature to even attempt to assign blame for last week's declines. Perhaps it could be as simple as people wanting to take profits after recent gains.
Financial stocks led the decline as the fall out spread to Europe. As in Asia, financial stocks were pounded on the Continent - particularly those geared to emerging markets as investors became risk averse. Fears of overvaluation have come amid a series of record highs for several Asian equity markets, including China and South Korea, and six-year peaks for many of Europe's indexes. Meanwhile, concerns about possible action on Iran, the world's number two oil producer, intensified as a UN conference began in London to discuss possible sanctions. Adding to the downbeat sentiment, former Federal Reserve Chairman Alan Greenspan said on Monday that it was "possible" the U.S. economy may fall into recession later this year. Current Chairman Ben Bernanke soothed feathers in his congressional testimony Wednesday, but the positive effect from his remarks was very short term.
At week's end, many of the indexes followed here were still being hard hit. On the week, all 13 were down with only the STI, all ordinaries, Topix and DAX remaining above year-end levels.
Global Stock Market Recap
The table below shows the monthly index changes for January and February of 2007.
Europe and the UK
The FTSE closed at a fresh six-year high on Monday as did Europe's CAC and DAX - but it was all down hill from there. European shares sank the most in 3-1/2 years after an overnight plunge in Chinese and other Asian stocks rattled investor confidence and sparked a slide in equities. Stocks that generate a high proportion of sales in China such as BHP Billiton, Rio Tinto Group and Standard Chartered Plc paced the declines amid concerns the Chinese government would tighten investment controls (it was later denied). European stocks extended the declines into Wednesday despite some recovery in U.S. markets. The losses continued for the rest of the week, despite intermittent efforts to stabilize. Only the FTSE managed to barely break even on Friday. The FTSE was down 4.5 percent on the week while the CAC lost 5.1 percent and the DAX, 5.6 percent. Both the FTSE and CAC are below year-end levels while the DAX is barely even for the year.
Asia/Pacific
The week began calmly with Asian stocks meandering between minor losses and gains. But on Tuesday, Shanghai shares tumbled the most in 10 years on concern the Chinese government would introduce measures to cool the stock markets when the National People's Congress meets on March 5th. Some analysts thought that after very good returns, the market wanted to take a rest by using any excuse to sell. China's Shanghai and Shenzhen 300 Index slumped 9.2 percent from a record high. It had jumped 13 percent in the previous six sessions. On the week, three of the six indexes tracked here had dropped below their year-end levels. All were down on the week ranging from losses of 3.8 percent (Kospi) to 7 percent (STI).
North America
Equities were no different here as all indexes headed south as the tidal wave of selling reached North American shores. Canadian stocks were particularly hard hit as resource producers' shares sank. Investors were concerned that Chinese demand for commodities might slow. China is the biggest consumer of copper and aluminum, and the second largest user of crude oil. Declines were accentuated as U.S. economic data pointed to slowing growth in the biggest economy, also Canada's most important trading partner. Declining copper and crude oil prices placed downward pressure on raw-material and energy companies, which account for more than 40 percent of the S&P/TSX Composite Index.
U.S. stocks were not immune to the sell off. Shares tumbled the most since 2001 and raised concerns that the four-year bull market might be over. A drop in durable goods orders exacerbated Tuesday's decline. U.S. stocks remained under pressure through the week. The sell off snapped a long period of dormant volatility and Wall Street's fear gauge, the Chicago Board Options Exchange's Vix index, soared. The Vix, based on S&P 500 index option prices, had spent six months resting near record lows.
On the week, the Dow sank 533 points or 4.2 percent, the Nasdaq was down 147 points or 5.8 percent, S&P/TSX dropped 480 points or 3.6 percent while the Bolsa plummeted 2,185 points or a hefty 7.7 percent.
Currencies
The yen jumped 3.5 percent against the dollar - its best performance in a year. It also rallied 3.2 percent against the euro and was 4.3 percent higher against the pound sterling. The Japanese currency rallied even more against high yielding currencies such as the Australian and New Zealand dollars. The move hurt the carry trade. Investors borrow cheap yen and Swiss Francs and use the proceeds to buy higher yielding assets in Australia and New Zealand for example. But investors had to cut back on their positions as global equities sank and they were forced to cover their losses by liquidating these positions. The yen's increase in value exacerbated stock market declines. A higher yen hurts exporters - their goods become less price competitive while repatriated profits decline.
Indicator scoreboard
EMU - M3 money supply was up 9.8 percent when compared with last year. The European Central Bank's preferred money supply measure - three-month moving average compared with the same three months a year ago - was up 9.7 percent. This is more than double the ECB's reference growth rate of 4.5 percent.
January harmonized index of consumer prices dropped 0.5 percent and was up 1.8 percent when compared with last year. This was the fifth month that inflation was below the ECB ceiling of 2 percent. The HICP dropped on a monthly basis due to declines in recreation and culture prices as well as clothing. Core HICP which excludes only energy was up 1.7 percent on the year while the core excluding food, alcohol, tobacco and energy was up 1.7 percent.
February flash harmonized index of consumer prices increased by 1.8 percent when compared with the same month a year ago. As with all flash releases, no details were available. This was the sixth month that the HICP increase was below the ECB's inflation ceiling of 2 percent.
January unemployment rate declined to 7.4 percent from 7.5 percent in the previous month. The unemployment rate a year ago was 8.3 percent. Unemployment in Germany, Finland and France was down while other EMU members' rates were unchanged. Greece and Italy did not report.
January producer price index was up 0.1 percent and up 2.9 percent when compared with last year. Core PPI excluding energy and construction was up 0.4 percent and 3.4 percent on the year. Energy prices were down 1 percent on the month and up 1.2 percent on the year. All non-energy index components were up on the month.
EU - February economic sentiment index climbed to 109.7 from 109.2 in January. Services sentiment was unchanged at 20 while consumer sentiment edged up to minus 5 from minus 7 in the previous month. Industrial confidence was unchanged on the month at a reading of 5. Retail sentiment edged down to minus 2 from minus 1 in the previous month.
Germany - February unemployment dropped by 79,000 pushing the unemployment rate down to 9.3 percent from 9.5 percent in January. The unemployment rate slipped down to 7.8 percent from 7.9 percent in the West while declining to 15.4 percent in the East from 15.7 percent the previous month. Employment data lag unemployment by a month. In January, employment increased by 43,000 jobs.
January total retail sales plunged 9.7 percent and were down 4.8 percent when compared with last year. Excluding gasoline stations and auto dealerships retail sales sank 5.1 percent. Germans previously brought forward purchases of big items such as cars and refrigerators to avoid paying the January 1 increase in value added tax to 19 percent from 16 percent.
France - January unemployment rate remained at 8.6 percent for the second month. However the number of job seekers increased by 1,000. Unemployment as defined using the International Labour Organisation excludes those job seekers that did any work during the month. The improvement in unemployment is attributed to public training and work programs along with measures that weed out inactive jobseekers from the official lists.
Asia
Japan - January industrial production was down 1.5 percent but was up 3.1 percent when compared with last year. Transportation equipment led the drop in production sinking by 10.2 percent while information and communication electronics equipment output dropped 6.3 percent. Production set a new record in each of the previous three months. Inventories fell 0.9 percent, the first drop in six months signaling companies are reducing accumulated stockpiles. Shipments declined 0.3 percent and the ratio of inventories to shipments dropped 3.6 percent.
January retail sales fell 0.8 percent from a year earlier. Unseasonably warm weather hit clothing and accessory sales.
February Tokyo consumer price index was down 0.4 percent and unchanged when compared with last year. Core CPI excluding food and energy was down 0.3 percent and down 0.1 percent on the year. Prices for all categories were down with the exception of those for housing, fuel and miscellaneous items. January nationwide CPI was down 0.2 percent and was unchanged on the year. The core CPI excluding food and energy was down 0.6 percent and 0.2 percent on the year.
January household spending was up 0.6 percent when compared with last year. This was the first increase in spending in more than a year.
January unemployment rate was 4 percent, unchanged from the previous month. The jobs-to-applicants ratio, which shows how many positions are available to a job seeker, fell to 1.06 in January from a revised 1.07 a month earlier. The number reached a 14 year-high of 1.09 in July and jobs have outnumbered applicants for more than a year. Employment was up by 90,000 when compared with the same month a year ago.
Australia - January retail sales climbed 0.9 percent and were up 6.6 percent when compared with January a year ago. Household good sales were up 2.9 percent while department store spending was up 0.7 percent.
Americas
Canada - January industrial product price index edged down 0.1 percent and was up 2.8 percent when compared with last year. Prices for petroleum and coal products and primary metal products were down on the month, but higher motor vehicle prices partially offset the monthly decline. On the year, upward pressure came largely from higher primary metal products and pulp & paper product prices. The upward movement was slowed by a drop in prices for petroleum and coal products and lumber and other wood products.
January raw materials price index sank 3.1 percent, but was up 2.8 percent when compared with last year. The decrease was due to lower costs for mineral fuels and non-ferrous metals. If mineral fuels had been excluded, the RMPI would have declined 1.2 percent on the month but would have risen by 21.1 percent. Non-ferrous metals accounted for most of the on the year increase, with prices rising 55.6 percent, mainly on the strength increases in the prices of zinc, radio-active concentrates, copper and nickel.
The value of the Canadian dollar against its U.S. counterpart declined 1.9 percent in January. As a result, the total IPPI excluding the effect of the exchange rate would have declined 0.6 percent instead of 0.1 percent. On the year, the value of the Canadian dollar dropped 1.6 percent against the U.S. dollar. If the impact of the exchange rate had been excluded, producer prices would have been up 2.3 percent on the month rather than their actual increase of 2.8 percent.
Fourth quarter gross domestic product was up 0.4 percent and 2.3 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 1.4 percent. Personal consumption expenditures were up 0.8 percent and 4.3 percent on the year. Business investment was up 1 percent and 5.2 percent on the year. Non-residential investment was the main contributor with a 14 percent increase in engineering investment, principally in a near-doubling of investment in oil and gas extraction in the Alberta oil sands.
December monthly gross domestic product was up 0.4 percent and 2.0 percent when compared with the same month a year ago. Services were up 0.5 percent while manufacturing gained 0.9 percent and retail trade, 2.1 percent.
Bottom line
Equities and currency markets claimed investor focus while the plethora of new economic data provided a sideline to reinforce some positions. Soothing talk from Fed Chairman Ben Bernanke only briefly calmed things, providing an antidote to remarks made by former Fed Chairman Alan Greenspan who implied the U.S. could face a recession as growth slowed. The sell-off, which began on Tuesday, more than eradicated all this year's gains for most stock indexes, as investors fled risky assets and volatility surged after months of dormancy.
The first full week in March brings its usual onslaught of central bank meetings. The Banks of Canada and England along with the Reserve Bank of Australia and the European Central Bank will make policy announcements. Only the ECB is expected to increase rates. The graph below shows Bank key interest rates as we begin the week. On the whole, central banks did not seem perturbed by market turbulence.
Looking Ahead: March 5 through March 9, 2007
Anne D Picker is the author of International Economic Indicators and Central Banks.
The domino effect
