Global Markets

New stock index highs dominated news for most of the week. But on Friday Asian/Pacific shareowners resorted to profit taking while those in Europe and North America had the benefit of better than expected data to cheer them on. Earlier in the week, stock markets around the world surged (especially on Thursday) to record highs as investors increased their bets that the summer's credit squeeze would not trigger a sharp global economic slowdown. Many indexes that had major losses in August have regained those losses and then some. For example at the end of business on October 11^th, the Nikkei had gained 14.3 percent and managed to be above its 2006 level for the first time since July 31^st.

The immediate cause for last week’s rally has been attributed to the key role played by central banks (including the Federal Reserve’s rate cut last month) combined with better economic news from the U.S. — especially the employment report on October 5 and Friday’s retail sales report. They have encouraged some investors that the global economy will remain resilient. While the fallout from the credit squeeze may still have some way to run, analysts said equities had been boosted by reentry catch-up buying from investors who had previously reduced their equity exposure in the turmoil. The gains were led by Asia, as investors sought stocks that would benefit from the region's growth. Benchmark indexes in Australia, South Korea, Singapore, Indonesia and India also set new highs. The Hang Seng Index in Hong Kong breached 29,000 for the first time, taking its gains for the year to 44.5 percent.

All indexes followed here were up on the week. Now let earnings season begin in earnest!

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were up on the week although not in the dramatic fashion set by their Asian/Pacific cousins. While the FTSE and DAX were down in holiday-thinned trading on Monday, they registered positive gains during the rest of the week. The CAC alternated between losses and gains. On Friday, a last minute rally turned what had been a negative day into a positive one for the FTSE and DAX, thanks to the upside lead on this side of the Atlantic. The CAC did not catch up in time. Investors alternately took profits but at the same time sought direction after the Federal Reserve’s minutes failed to give a signal about future interest rate moves.

In London, the strength of the resources sector outweighed the downward pull of real estate and property stocks. And in Europe, evidence that the economy is withstanding high oil prices and the weak dollar gave a positive spin to stocks. Recent economic reports from eurozone members have been surprisingly strong. French and Italian industrial production combined with German manufacturing orders and output data showed impressive positive bounces. The much larger than expected 1.2 percent increase in eurozone August industry production suggested that recent economic growth has been more robust than previously thought, increasing the region's likely resilience to the stronger euro as well as the global credit squeeze.

Asia/Pacific

Many Asian/Pacific stock indexes continued to soar into the stratosphere until profit taking took hold on Friday, when all indexes followed here declined — several from record highs. Friday’s losses were in part due to declines in U.S. indexes the day before. Another reason given for the decline is speculation that China will increase its policy interest rate very soon as it continues its efforts to cool its torrid economy. China reported a $23.9 billion September merchandise trade surplus that can lead to higher inflation.

On Thursday, markets across the Asia-Pacific region continued to create new records for the fourth straight session. While banking and energy stocks led the Chinese market to a new record close, South Korea's Kospi settled at a new high on Bank of Korea’s GDP forecast upgrade. Foreign interest in resources stocks took Australian stocks to yet another record-setting close. Singapore, Hong Kong, Indonesian and Indian markets also ended in record territory.

But on Friday, the All Ordinaries, Kospi and Nikkei were down for the first day of the week, albeit after their impressive earlier gains. And the Hang Seng, which set a record high on Thursday, was also under selling pressure. The index ended the week below the 29,000 mark achieved earlier. Japanese investors continue to keep their eyes focused on U.S. economic data in search of signs of improvement in U.S. economic and business sentiment.

On the week, all six indexes followed here were up anywhere from 0.2 percent (Topix) to 3.6 percent (Hang Seng). Since reaching its low for 2007 on August 17^th of 20,387, the Hang Seng has gained 41.5 percent — after China liberalized controls and announced that individuals would be allowed to buy securities in Hong Kong.

Bank of Japan marks time again

As expected, the Bank of Japan left their policy interest rate unchanged at 0.5 percent. It has been at that level since February. Although the BoJ continues to want to rationalize interest rates by increasing them, its ability to do so is constrained by the Fed’s rate cut last month by 50 basis points to 4.75 percent and difficulty in reading the tea leaves about the U.S. economy. And the minutes of that FOMC meeting said that future actions would depend on evolving market developments and how economic prospects were affected by them. If the U.S. Fed is uncertain, it is no surprise that the BoJ policy board is also — mainly because policy makers do not have enough material to pass judgment. Some analysts think the Bank might still raise rates later this year, possibly in December while others think they will wait until 2008. The BoJ will publish its economic outlook on October 31^st and is expected to retain the inclination toward gradually raising interest rates.

In his post meeting press conference, Bank of Japan governor Toshihiko Fukui (his term expires in March 2008 in another potential complication for BoJ policy) said that uncertainty over the world economy continues. He said that the Bank “must carefully examine developments of the global economy and financial markets as they are still unstable, although the global economy is likely to keep expanding.” Fukui also ruled out the possibility that the Group of Seven will influence the BOJ in its policy decisions saying that “We will determine policy based on our own view of the economy and prices.” Fukui added that the BOJ will conduct monetary policy in a timely manner, while closely watching risk factors facing the Japanese economy.

Currencies

The Canadian dollar continued to climb last week after strong U.S. data eased fears of a global slowdown. The Canadian dollar or loonie is at a 31-year high. The currency touched $1.0285 in Friday morning Toronto trading — the highest since October 1976. The loonie (so called because of the picture of a loon on the currency) reached parity with the U.S. dollar on September 20 for the first time since 1976 thanks to the commodities boom.

After rallying against the euro, the U.S. dollar declined when the September Federal Reserve meeting minutes failed to rule out the possibility of further rate cuts. The minutes revealed that the decision to cut the fed funds target rate by 50 basis points to 4.75 percent was unanimous. The FOMC said that inflation concerns remained and that any future action depended on the economic outlook. In short, it refused to commit to any policy prior to studying new economic information as it became available. The yen weakened after the Bank of Japan kept its policy interest rate unchanged.

Rhetoric ahead of Friday’s Group of Seven finance ministers meeting supports a stronger U.S. dollar. The currency has depreciated about 16 percent against the euro since the start of 2006. And although some of the concerns about the U.S. economy have been assuaged by recent data, continued worries have eroded the dollar despite the talk. The U.S. currency has lost about 7 percent against the euro this year as slowing growth and the first Federal Reserve interest-rate reduction since 2003 dimmed the allure of many dollar-denominated assets.

Indicator scoreboard

EMU — Second quarter revised gross domestic product growth remained at 0.3 percent and 2.5 percent when compared with the same quarter a year ago. This compares with figures of 0.7 percent and 3.1 percent respectively in the first quarter. Private consumption was up 0.5 percent, gross fixed capital formation fell 0.2 percent (albeit after a 1.9 percent jump in the first quarter) while inventory accumulation subtracted 0.2 percentage points. Germany and France both matched the headline gain and Spain grew an impressive 0.9 percent but Italy managed a rise of just 0.1 percent.

August industrial output (excluding construction) was up 1.2 percent and 4.0 percent when compared with the same month a year ago. All of the major sectors posted solid gains led by durable consumer goods area (3.8 percent). Nondurables were up 1.6 percent with intermediates rose 1.3 percent and capital goods 1.1 percent. Energy production expanded 0.8 percent.

Germany — August manufacturing orders were up 1.2 percent after sinking a revised 6.1 percent in July. When compared with the same month a year ago, orders were up 4.2 percent. Nearly all of the pick-up was attributable to overseas demand — up 2.4 percent while domestic orders edged up by just 0.1 percent. On the year, foreign orders were up 5.1 percent while domestic orders were up 3.2 percent. Capital goods were up 1.7 percent followed by consumer goods, up 1.1 percent and basic goods, up 0.7 percent.

August industrial production excluding construction was up 1.7 percent and 5.7 percent when compared with the same month a year ago. All of the major output categories posted solid increases with the consumer sector (4.1 percent) leading the way. Manufacturing was 1.8 percent while intermediates were up 1.5 percent, capital goods 1.2 percent and basic goods 1.5 percent. Construction bounced 2.0 percent. 

August seasonally adjusted merchandise trade surplus was €15.3 billion, down from €16.5 billion in July. Imports jumped 5.6 percent while exports were up 3 percent. Exports to non-EU nations were up 13.4 percent on the year compared with 10.1 percent for the EMU-13 bloc. On a non-seasonally adjusted basis, the trade surplus was €14.1 billion in August, down from €17.9 billion in July.

France — August merchandise trade deficit narrowed to €2.8 billion from €3.2 billion in July. The deficit for the first eight months of 2007 is up 16 percent over the same period in 2006. Exports in August were up almost 2 percent while imports were up 0.7 percent. A decline in the energy deficit was the largest contribution to the smaller deficit. The shortfall on consumer goods widened to €949 million from €727 million.

August industrial production was up 0.3 percent and 2.6 percent when compared with last year. Holiday effects always make interpretation of August data tricky but with the July jump being revised still higher (1.7 percent from 1.3 percent), the French industrial sector looks to have recovered well from a flat second quarter. The July/August production average stands a healthy 1.8 percent above the second quarter mean while manufacturing is up an even more robust 2.0 percent. For August alone, output of consumer goods and autos were both up 0.9 percent while energy output was up 1.2 percent. Construction was up 0.4 percent and capital goods, 0.3 percent. These were more than enough to offset the 0.6 percent decline in semi-finished goods. Manufacturing edged up 0.1 percent from July.

Italy — August industrial output was up 1.3 percent and 3 percent when compared with last year. Consumer goods output increased 3.6 percent split quite evenly between durables (3.2 percent) and non-durables (3.3 percent). Intermediate goods (1.8 percent) also performed well but less promisingly, capital goods fell (0.2 percent) and production in this sector is still 0.8 percent below the level at the start of the year. Manufacturing output rose 2.7 percent and energy was up 0.7 percent.

United Kingdom — August industrial production was up 0.1 percent and 0.7 percent when compared with last year. The main cause of the performance gap was mining and quarrying which slumped 2.7 percent thanks to a 3.8 percent drop in oil and gas output. Across the major sectors there were broad based gains in all areas except intermediate goods which saw a 0.4 percent contraction. Durables goods rose 0.7 percent with capital goods close behind at 0.6 percent and nondurables up a more modest 0.2 percent. Manufacturing output was up 0.4 percent and 0.6 percent on the year. Of the 13 main sub-sectors, nine posted increases and four declined. The most significant contributions came from coke & petrol and chemicals & man-made fibers which expanded by 3.5 percent and 1.7 percent respectively. Engineering grew 0.7 percent but metals were off 0.7 percent, in line with textiles & clothing, while food & drink slipped by 0.5 percent.

September producer output prices were up 0.1 percent and 2.7 percent when compared with last year. While the modest increase was in part a function of weaker petroleum product prices (down 0.2 percent), the core index was itself only up 0.2 percent and in line with the trend over the last six months or so. Producer input prices surged 3.2 percent — the largest leap since January 2005. Driving the increase was soaring crude oil prices which jumped on the back of a variety of factors including reduced OPEC production, colder weather and lower stocks in the U.S. and other production concerns. Weather effects were also apparent in the food sector where a 3.1 percent increase in home prices reflected heavy rainfall in the summer and a consequent drop in supply of grains, notably wheat.

August merchandise trade deficit narrowed to £6.9 billion from an upwardly revised record of £7.4 billion in July. With oil rig maintenance contributing to the widening out in the oil deficit to £0.5 billion from £0.3 billion, the underlying improvement was all the more marked. All of the improvement came from the non-EU bloc where the bilateral deficit shrank by £0.5 billion to £3.9 billion. Despite a strong currency, total goods exports edged up 0.5 percent to reach their highest level since August 2006 while imports slipped 1.2 percent.

Asia/Pacific

Japan — September corporate goods price index was down 0.1 percent but up 1.7 percent when compared with last year. On the month, prices were down 1.4 percent for petroleum & fuel products as well as nonferrous metals. Textile products however were up 1.1 percent on the month. Most price categories were up on the year with the exception of electrical machinery, transportation equipment and precision instruments.

Australia — September employment was up by 13,000 after increasing by 34,300 in August. This was the 11^th straight month that employment has increased. Full time employment declined by 17,200 while part time employment increased by 30,100. The unemployment rate declined to 4.2 percent from 4.3 percent in August. The number of unemployed declined by 11,600. The participation rate edged down to 65.0 percent from 65.1 percent in the prior month.

Americas

Canada — August merchandise trade surplus climbed to C$4.1 billion from C$3.4 billion in July. Exports were down 1.8 percent while imports dropped even more — by 3.9 percent. The decline in imports was widespread with the only exceptions being energy (up 0.1 percent) and agriculture and fishing (2.1 percent). The most marked drop was in the automotive industry (8.1 percent) where motor vehicle parts slumped to their second lowest level in 10 years, followed by industrial goods & materials (6.2 percent) and machinery & equipment (2.8 percent). Machinery & equipment exports posted the largest gain (6.6 percent) closely followed by agriculture & fishing (5.4 percent), which hit a new high helped by strong demand from China. All of the other major sectors were down. As a result, the bilateral surplus with the U.S. widened out to C$6.7 billion from C$6.4 billion while the deficit with other countries narrowed to C$2.6 billion.

Bottom line

Economic data for the most part were positive last week with the eurozone showing more vitality than anticipated while U.S. data dampened fears of an economic meltdown. The Bank of Japan once again had to postpone normalization of interest rates, leaving their key interest rate at 0.5 percent. The yen sagged.

This week brings key UK labor market data and survey data that should give a clue to business sentiment and the impact of the credit crunch in Germany. And in the U.S., housing and inflation data will dominate. And the markets will hone in on earnings results to see what impact the credit crunch might have had on corporate profits. At week’s end is the Group of Seven meeting. The post meeting statement should be more interesting for what it does not say than what it does.

Looking Ahead: October 15 through October 19, 2007

Central Bank activities
October 17	United States	Federal Reserve Beige Book Released
Other meetings
October 19	Washington, DC	Group of Seven Finance Ministers Meeting
The following indicators will be released this week...
Europe
October 16	EMU	Harmonized Index of Consumer Prices (September)
	Germany	ZEW Business Survey (October)
	UK	Consumer Price Index (September)
October 17	UK	Average Earnings (August)
		Claimant Unemployment (September)
		ILO Unemployment (August)
October 18	EMU	Merchandise Trade Balance (August)
	UK	Retail Sales (September)
October 19	Germany	Producer Price Index (September)
	Italy	Merchandise Trade Balance (August)
	UK	Gross Domestic Product (Q3.07 preliminary)
Asia/Pacific
October 17	Japan	Tertiary Index (August)
October 19	Japan	All Industry Index (August)
Americas
October 16	Canada	Manufacturing Shipments (August)
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