This past week confirmed, if anyone doubted it, that the equity correction is underway. But judging by last week's losses, overseas markets seemed to care more about the U.S. subprime problem and weakening growth than those in the U.S. Indeed the worry of the week shifted from carry trade to subprime loans. But on Thursday, indexes in Asia, Australia and Europe staged an enthusiastic one-day rally while those in the U.S. struggled to make any gains at all, thanks in part to Fed Chairman Alan Greenspan's comments on the U.S. subprime mortgage market. Although he has been retired for over a year, his remarks have been anything but retiring and have stirred investors as he warned that rising defaults in subprime mortgage markets could spill over into other areas of the economy.
Stocks on both sides of the pond have been positively stimulated by a spate of mergers and acquisitions. This shows that corporations have remained more confident on their outlook than skittish investors in recent days. U.S. economic news flow has been decidedly mixed, showing, for example, a much bigger-than-forecast increase in February producer prices, an unexpected drop in jobless claims to the lowest level in five weeks and surveys showing sluggish manufacturing activity in the New York and Philadelphia regions. The industrial production report on Friday, however, questioned some of the perceived sluggishness.
On Friday, futures and options on indexes and stocks expired in major markets. In Europe it was triple witching and in the U.S., quadruple witching added to stock volatility - a normal occurance on 'witching' days. On the week, only the Kospi and all ordinaries managed to gain. Only three of the fourteen indexes listed below are still above their year end levels - the all ordinaries, STI and Bolsa.
Global Stock Market Recap
Europe and the UK
Investors flip flopped from gloom and doom on Wednesday to a much more positive thought process on Thursday. Stocks staged the biggest rally in eight months after takeovers accelerated. Concern that the surge in U.S. loan defaults would hurt growth precipitated Wednesday's decline that sent indexes plummeting. But financial companies such as Bear Stearns and Lehman Brothers assuaged concern that defaults among the riskiest borrowers would drag down profits at banks and other lenders along with economic growth. The companies are the largest U.S. underwriters of mortgage bonds. The reasons given for this optimism were worldwide job creation and earnings strength. Analysts opined that the sell off was a continuation of a bull market correction. However, investors were muted on Friday with equities giving back some of Thursday's gains while they awaited important U.S. data releases - the CPI and industrial production. Both reports appeared to ease investors' worries and European and UK indexes rebounded in afternoon trading (late morning in the U.S.) but not quite enough to offset losses incurred earlier in the day.
Asia/Pacific
Despite yet another turbulent week for equities, two of the six indexes followed here were up on the week - the all ordinaries and Kospi barely edged up 0.1 percent and 0.3 percent respectively. The worst performers were in Japan where the Topix dropped 3.1 percent while the Nikkei gave back 2.4 percent. Since the week ending February 23rd, Asian indexes have given back their 2007 gains and then some. The Hang Seng has had a turbulent year thus far after gaining over 34 percent in 2006. Just in March, the index is down about 8.5 percent even though for the year it is down 5.1 percent.
Japanese indexes are also down, in part due to the repatriation of foreign capital to the U.S. and Europe and to safer climes closer to home. Since the week ending February 23rd, the Nikkei has declined by 8.1 percent. Since the index gained only 6.9 percent in 2006, it is now below its year ending level in 2005. Many investors dumped Japanese shares on Wednesday because they were once again concerned that funds from the West would be withdrawn further from riskier assets overseas. A rebound in the yen's value in the past few days has also generated worries that Japanese exports will become less competitive overseas, eroding the earnings of the major exporters. For the week, the Nikkei fell 2.4 percent, a third week of declines. The Topix lost 3.1 percent, its second worst week this year.
Currencies
The U.S. dollar lost ground against all major currencies last week as doubts about subprime lending exposure and growth viability continued to plague investors. And against the euro and Swiss franc, the U.S. dollar sank to three-month lows as investors continued to fret that the subprime mortgage market problems could spill over into the wider economy. The Swiss franc also benefited as investors unwound carry trades in the face of a renewed sell-off in global equity markets. The Swiss franc, like the yen, has been used as a source of low cost funds for carry trade transactions. Investors have unwound carry trades during the last several weeks because of increasing market volatility. Carry trades involve using low yielding currencies such as the Swiss franc and the yen to purchase high yielding and riskier assets.
The yen seemed to fluctuate inversely to equity performance. On Thursday for example, as stocks gained their poise, the yen declined. The yen lost ground after the global equity markets rallied and helped ease fears that another round of volatility could trigger further carry trade unwinding. The yen has been benefiting from the recent global stock market decline because investors cut back carry trade positions as risks increased.
Indicator scoreboard
EMU - January industrial production was down 0.2 percent but up 3.7 percent when compared with last year. Strong German output was more than offset by declines in several other Member States. Capital goods output was up 0.8 percent while non-durable consumer goods output was flat and durable consumer goods declined by 1.5 percent. Energy output sank 2.6 percent.
February harmonized index of consumer prices was up 0.3 percent and 1.8 percent when compared with the same month a year ago. This was the sixth straight month that the HICP was under the ECB's 2 percent inflation ceiling. On the month, the increase was due to higher prices for recreation & culture along with hotels & restaurants. Prices also increased for health and heating oil. HICP excluding energy was up 2 percent while the core HICP which excludes energy, food, alcohol and tobacco was up 1.9 percent on the year.
Germany - March ZEW Survey improved to 5.8 from 2.9 in February. Current conditions index eased to 69.2 from 70.9 in the previous month. ZEW said the improvement reflected strong domestic order growth and signs of stable consumer confidence. Respondents said market turbulence during the first week of March was a necessary correction after the recent months' increases. ZEW surveyed 296 German financial experts for their opinions on current economic conditions and the economic outlook for major industrial economies between and February 26 and March 12.
Britain - February producer output price index was up 0.3 percent and 2.2 percent when compared with last year. Core output prices, which exclude food, tobacco, alcohol and petroleum, were up 0.5 percent and 2.7 percent on the year. The main factor for the price jump was an increase of 10.7 percent in the price charged for recovered secondary raw materials, primarily reflecting more expensive scrap metal. Producer input prices were up 1.3 percent and were down 1.1 percent on the year, mainly because of a 5.3 percent increase in crude oil.
January merchandise trade deficit narrowed to £3.783 billion from the previous month's deficit of £4.527 billion. The goods only deficit eased to £6.226 billion from £6.945 billion in December. Goods exports were down 0.3 percent but imports dropped by 2.9 percent. The deficit declined with non-EU countries such as the U.S. and Canada. The trade in services surplus was virtually unchanged at £2.443 billion. Excluding oil and erratic items, the trade deficit narrowed to £5.674 billion in January from £6.477 billion the previous month.
Average earnings for the three months to January were up 4.2 percent when compared with the same three months a year ago. In the three previous months to December, average earnings were up 4 percent. In January, earnings were up 4.7 percent on the year, a significant jump from December's on the year increase of 3.9 percent. Bonuses in the financial sector added to the increase. Excluding bonuses, average earnings were up a modest 3.6 percent.
February claimant count unemployment edged down by 3,800 after declining by 13,300 in January. The claimant unemployment rate remained at 2.9 percent for the second month. Unemployment as measured by the International Labour Organisation unemployment methodology was down by 3,000 for the three months ending in January when compared with the previous three months that ended in December. The ILO unemployment rate remained at 5.5 percent for the fourth month.
Asia
Japan - Fourth quarter gross domestic product was up 1.3 percent and 2.5 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 5.5 percent. Surging exports provided the impetus for increased capital spending for factories and machinery, which was up 3.1 percent. However, consumer spending remains weak and was up 1 percent. The GDP deflator sank 0.5 percent from the same quarter a year ago.
January tertiary sector activity index was up 1.6 percent and 1 percent when compared with last year. Tertiary industries account for about 60 percent of the entire economic output and include the following 11 industries - utilities, transport, telecommunications, wholesale & retail, finance & insurance, real estate, restaurants & hotels, as well as medical, health care & welfare.
Australia - January merchandise trade deficit narrowed to A$876 million from A$1.378 billion in December. Exports were up 1.9 percent while imports dropped by 0.8 percent. Both non-rural and other goods exports were up 3 percent while rural goods were down 1 percent. Services exports were up 1 percent as were services imports. Capital goods imports were down 3 percent while consumption goods were up marginally.
February employment was up by 22,000 after declining by 4,800 in January. The unemployment rate edged up to 4.6 percent from 4.5 percent thanks to an increase in the number of people looking for work. Full time jobs were up by 20,700 while part time employment gained 1,300. The participation rate, which measures the labor force as a percentage of the population aged over 15, gained 0.1 percentage point to 64.9 percent.
Americas
Canada - January factory shipments were down 2.1 percent both on the month and on the year. Shipments were down in 12 of 21 sectors, representing 57 percent of total output. Two sectors (transportation equipment and petroleum and coal industries) combined to account for about 96 percent of the decline. Taking price fluctuations into account, the volume of shipments fell 1.5 percent on the month. Durable goods shipments dropped 2.8 percent while nondurable shipments declined 1.3 percent thanks to the decline in the petroleum and coal sector. Excluding the impact of the declines in transportation equipment and petroleum and coal, shipments in all other industries edged down 0.2 percent on small and widely dispersed movements. New orders were down 2.3 percent and 0.7 percent on the year. New orders were up in 16 of 21 industries with the largest gain in the computer and electronics industry, up 23.4 percent. Unfilled orders increased 2.6 percent and 5.3 percent on the year. The transportation equipment sector, in particular aerospace and motor vehicles, typically accounts for half of all unfilled orders in the manufacturing sector.
Bottom line
Volatility returned to equities with a vengeance last week illustrating that nerves are taut and investors wary. The event of the week was the smoldering fallout from subprime mortgage loans that are now in default and threatening to bring down lenders. Investors fled from financial stocks on alternate days.
After a quiet week on the central bank front, action picks up with both the Federal Reserve and the Bank of Japan holding two day meetings this week. Fed followers will avidly parse the post meeting statement on Wednesday looking for a morsel that could give a clue about the FOMC's thinking. And the few indicators of import during the week underline the spotlights that will be shining on the two banks.
Looking Ahead: March 19 through March 23, 2007
Anne D Picker is the author of International Economic Indicators and Central Banks.
Trading with trepidations
