Equities continued their dour ways into the first week of the New Year. While shares were mixed on Wednesday and Thursday, shares plunged on Friday after the U.S. employment situation report was much weaker than analysts’ expected. Growing fears that the U.S. economy could be heading into recession translated into a dreadful start to the year for equities. Weak employment growth reignited talk of recession and possible aggressive rate cuts by the Federal Reserve and other central banks. With the likelihood of lower interest rates in the U.S. looming, the U.S. dollar dropped also as the currency markets began to price in a larger federal funds interest rate cut than initially expected. Now analysts are talking about a possible 50 basis point cut to 3.75 percent instead of the possible 25 basis point cut to 4 percent — but there will be a lot of new data in the weeks leading to the January 29 and 30 meeting to help the FOMC make its decision.
Both gold and oil hit new highs with Nymex West Texas Intermediate surpassing $100 a barrel in intraday trading while gold broke through its $850 an ounce high of January 1980 for the first time, in part due to dollar weakness along with geopolitical uncertainties.
For the record — 2007
All stock indexes followed here with the exception of those in Japan managed to register respectable gains in 2007 despite the dreadful fourth quarter. Japanese investor confidence was eroded by nagging fears over the persistence of deflationary pressures and concerns that its economy could sink into recession — and indeed the economy as measured by gross domestic product declined in the second quarter only to rebound rather weakly in the third.
The graph above illustrates the stellar overall performance of equity key indexes since 2002 — the last year when they all declined. The only aberration in the intervening years is the Dow’s 0.6 percent decline in 2005 — a decline so small that it is hardly visible given the magnitude of the annual gains elsewhere.
In the U.S., Europe and the UK, the credit crunch resulted in sharp declines in equity markets in August. But once the Federal Reserve responded to the credit crisis and started to loosen monetary policy, equities rallied strongly as investors took comfort from the fact that interest rate cuts have usually proved a strong a buy signal for stock markets. However, renewed weakness set in as equity markets moved towards the end of the year and as it became apparent that the widespread paralysis affecting money markets and interbank lending threaten to turn a financial crisis into a global economic downturn. Policymakers responded by embarking on a series of more aggressive and coordinated efforts to boost liquidity in money markets.
|
Index |
2006 |
% Change (Q/Q) |
% Change |
|
|
Dec 29 |
Q1 |
Q2 |
Q3 |
Q4 |
2007 |
Asia |
|
|
|
|
|
|
|
Australia |
All Ordinaries |
5644.3 |
5.9% |
5.5% |
4.3% |
-2.4% |
13.8% |
Japan |
Nikkei 225 |
17225.8 |
0.4% |
4.9% |
-7.5% |
-8.8% |
-11.1% |
|
Topix |
1681.1 |
1.9% |
3.6% |
-8.9% |
-8.7% |
-12.2% |
Hong Kong |
Hang Seng |
19964.7 |
-0.8% |
10.0% |
24.7% |
2.5% |
39.3% |
S. Korea |
Kospi |
1434.5 |
1.3% |
20.0% |
11.6% |
-2.5% |
32.3% |
Singapore |
STI |
2985.8 |
8.2% |
9.8% |
4.5% |
-6.0% |
16.6% |
Shanghai |
Shanghai Composite |
2675.47 |
19.0% |
20.0% |
45.3% |
-5.2% |
96.7% |
Europe |
|
|
|
|
|
|
|
Britain |
FTSE 100 |
6220.8 |
1.4% |
4.8% |
-2.1% |
-0.2% |
3.8% |
France |
CAC |
5541.8 |
1.7% |
7.5% |
-5.6% |
-1.8% |
1.3% |
Germany |
XETRA DAX |
6596.9 |
4.9% |
15.8% |
-1.8% |
2.6% |
22.3% |
North America |
|
|
|
|
|
|
|
United States |
Dow |
12463.2 |
-0.9% |
8.5% |
3.6% |
-4.5% |
6.4% |
|
Nasdaq |
2415.3 |
0.3% |
7.5% |
3.8% |
-1.8% |
9.8% |
|
S&P 500 |
1418.30 |
0.2% |
5.8% |
1.6% |
-3.8% |
3.5% |
Canada |
S&P/TSX Comp |
12908.4 |
2.0% |
5.6% |
1.4% |
-1.9% |
7.2% |
Mexico |
Bolsa |
26448.3 |
8.7% |
8.4% |
-2.7% |
-2.5% |
11.7% |
|
|
2007 |
2008 |
% Change |
|
Index |
Dec 31 |
Dec 28 |
Jan 4 |
Week |
Year |
Asia |
|
|
|
|
|
|
Australia |
All Ordinaries |
6421.0 |
6309.4 |
6385.4 |
-0.6% |
-0.6% |
Japan |
Nikkei 225 |
15307.8 |
15257.0 |
14691.4 |
-4.0% |
-4.0% |
|
Topix |
1475.7 |
1469.2 |
1411.9 |
-4.3% |
-4.3% |
Hong Kong |
Hang Seng |
27812.7 |
27626.9 |
27519.7 |
0.5% |
-1.1% |
S. Korea |
Kospi |
1897.1 |
1878.3 |
1863.9 |
-1.8% |
-1.8% |
Singapore |
STI |
3482.3 |
3398.1 |
3437.8 |
-0.2% |
-1.3% |
Shanghai |
Shanghai Composite |
5261.56 |
5101.78 |
5361.57 |
1.9% |
1.9% |
Europe |
|
|
|
|
|
|
UK |
FTSE 100 |
6456.9 |
6434.1 |
6348.5 |
-2.0% |
-1.7% |
France |
CAC |
5614.1 |
5602.8 |
5446.8 |
-3.2% |
-3.0% |
Germany |
XETRA DAX |
8067.3 |
8002.7 |
7808.7 |
-3.2% |
-3.2% |
North America |
|
|
|
|
|
|
United States |
Dow |
13264.8 |
13450.7 |
12800.2 |
-4.2% |
-3.5% |
|
NASDAQ |
2652.3 |
2692.0 |
2504.7 |
-6.3% |
-5.6% |
|
S&P 500 |
1468.4 |
1484.5 |
1411.6 |
-4.5% |
-3.9% |
Canada |
S&P/TSX Comp. |
13833.1 |
13596.1 |
13778.6 |
-0.3% |
-0.4% |
Mexico |
Bolsa |
29536.8 |
29638.4 |
28317.9 |
-4.7% |
-4.1% |
Markets were closed in Germany and Japan on Monday, December 24
All markets were closed except those in Japan and China on Tuesday, December 25
Markets in Australia, Hong Kong, Canada, UK, Germany and France were closed on Wednesday, December 26
Markets were closed in Germany, Japan, China and South Korea on Monday, December 31
Markets were closed in Japan on Wednesday, January 2 and Thursday, January 3 |
Stocks sank Friday after the gloomy U.S. employment situation report that showed new jobs increasing by only 18,000 — significantly below market expectations. The unemployment rate jumped from 4.7 percent to 5 percent. U.S. stocks sank at the opening bell and took the CAC, DAX and FTSE with them. Although the ISM non-manufacturing index met expectations, it only managed to temporarily temper some of the losses. European stocks were already down on the week while the FTSE was about even. The purchasing managers manufacturing surveys in Europe and the UK weakened, dampening investor spirits. But in the UK, the services survey was stronger than expected on Friday but the gains that accrued were quickly washed away by the poor U.S. employment report. On the holiday shortened week, the FTSE was down 2.0 percent, and the CAC and the DAX each lost 3.2 percent.
FTSE, DAX and CAC in 2007
Of the three, the DAX was the most exuberant index for the year, increasing 22.3 percent. Last year’s gains were supported by several factors including economic growth (and a steadily declining unemployment rate), currency developments, corporate restructuring and takeover activity. The FTSE was up 3.8 percent while the CAC managed a 1.3 percent gain. Unlike in Asia where the heaviest losses were in the fourth quarter, the heaviest losses here occurred in the third quarter. The CAC was the heaviest loser in the second half of the year. In the fourth, the FTSE edged down 0.2 percent while the CAC was down 1.8 percent. The DAX, however, was up 2.6 percent in the fourth quarter.
Although Japanese markets were open only briefly on Friday — the first day of 2008 trading there — stocks plunged. Markets in Japan had been closed since December 28, 2007 to celebrate the New Year. The Nikkei closed 4 percent lower while the Topix sank 4.3 percent. The immediate cause was the slumping dollar and fears of a U.S. recession. With the dollar trading below ¥109 to the dollar, exporter reliant shares such as auto makers were dumped. The higher value of the yen (conversely the lower value of the dollar) hurts exporter sales and profits when they are repatriated to Japan. Another contributor to the gloom was the surge in oil prices last week and the impact that would have on growth. And of course, slower U.S. growth could negatively impact growth elsewhere.
Shares in Asia started 2008 on a gloomy note as an unexpected contraction in Singapore’s economy (see Indicator Scoreboard below) and a downgrade in South Korea’s growth forecast stoked concerns that the region might be feeling the first effects of a U.S. downturn. Geopolitical worries following Benazir Bhutto’s death helped to push oil prices up. On the week, equities in Hong Kong and Shanghai were up while those in Australia, South Korea, Singapore and Japan declined.
2007 a good equities year — except in Japan
The Hang Seng, Kospi, STI and All Ordinaries all registered double digit gains in 2007. The gains were 39.3 percent, 32.3 percent, 16.6 percent, 13.8 percent respectively. The Shanghai Composite almost doubled — it was up 96.7 percent for the year. The hefty gains occurred despite fourth quarter declines by all with the exception of the Hang Seng. However, Japanese equities had a disappointing year with the Nikkei down 11.1 percent and the Topix down 12.2 percent. All of the declines occurred in the third and fourth quarters.
The dollar was down against all major currencies with the exception of the pound sterling last week. Sterling has been hit by economic fears for the UK, which in turn has resulted in a series of record lows against the euro. The yen was the star performer of the major currencies as increased risk aversion led to carry trade unwinding. The dollar declined sharply on Wednesday after the ISM manufacturing index unexpectedly fell below the 50 breakeven level. In Europe, the euro was buoyed by the relative good showing by its purchasing managers manufacturing activity survey. Although the PMI was at its second weakest level since August 2005, the index remained in positive territory at 52.6. This was in contrast to the UK where weak purchasing manager’s data suggested there may be a need for further rate cuts from the Bank of England. Sterling fell to a record low against the euro on the news.
The euro has fast gained ground against the dollar in international official foreign exchange reserves in recent months according to the International Monetary Fund. Reflecting its increasing strength on foreign exchange markets, the euro's share of known foreign exchange holdings climbed to 26.4 percent in the third quarter of this year and up from 25.5 percent in the previous three months and from 24.4 percent in the third quarter of 2006. The dollar's share of known official foreign reserves, calculated in dollar terms, declined to 63.8 percent in the third quarter, down from 66.5 percent in the same three months of 2006. The period covered by the latest IMF figures included the eruption of the subprime mortgage crisis and the financial market turmoil.
It was a quiet two weeks in Europe and Asia. In Asia, the main monthly Japanese indicators were released including the consumer price index and industrial production. The CPI got a positive boost from rising oil prices while industrial production continued to be volatile from month to month. In Europe, M3 money supply and flash harmonized index of consumer prices show that the ECB’s concerns about inflation will continue.
EMU — November M3 money supply was up 12.3 percent for the second month. The three month moving average to November edged up to 11.9 percent from 11.7 percent for the previous three months. Loans to the private sector eased to 11 percent on the year but remained above 10 percent for the 22nd consecutive month.
December flash estimate of the harmonized index of consumer prices was up 3.1 percent when compared with the same month a year ago. The reading was far above the ECB’s 2 percent inflation ceiling. As usual there were no details provided in the flash report but it is clear from the national data that higher energy and commodity prices are behind the persistently elevated levels.
Germany — November unemployment dropped by 78,000 after declining by 57,000 in November. The unemployment rate declined to 8.4 percent from 8.6 percent in the previous month. Payrolls were up 36,000 after increasing 32,000 in November. Unemployment was down 57,000 in the West and 21,000 in the East. Over the quarter just ended, the total number of unemployed declined fully 179,000.
Japan — November nationwide consumer price index was down 0.2 percent but up 0.6 percent when compared with last year thanks to surging oil prices. Core consumer prices which exclude fresh food, edged up 0.1 percent and 0.4 percent from a year earlier. Food prices sank 1.1 percent on the month but were up 0.9 percent on the year. Fuel, light & water charges were up 0.9 percent and 2.2 percent on the year. December Tokyo consumer price index was up 0.2 percent and 0.4 percent on the year. Excluding fresh food, the core CPI was up 0.1 percent and 0.3 percent on the year. The Tokyo index is often seen as a precursor for the national index.
November household spending was down 0.6 percent when compared with last year after increasing for three consecutive months. Spending by households headed by wage earners sank 2.1 percent on the year. Household spending is an important gauge of personal consumption, which accounts for roughly 55 percent of gross domestic product. The propensity for wage earner households to consume, a ratio which measures the amount of disposable income that goes to household spending, was 82.8 percent, up from 82.4 percent in October.
November industrial production sank a more than anticipated 1.6 percent after increasing by 1.7 percent in the previous month. Output was up 1.6 percent when compared with the same month a year ago. Industries that contributed to the decline included general machinery, electronic parts & devices and other industry. Commodities that mainly contributed to the decline were metal oxide semiconductor IC, semiconductor products machinery and printing machinery. According to the production forecast for December which was also included in the report, output is expected to soar by 3.2 percent thanks to expected increases in general machinery, transport equipment and electronic parts & devices.
November unemployment rate unexpectedly slid to 3.8 percent from 4 percent in the previous month. The number of unemployed was down 5 percent on the year. Employment was up 0.4 percent or by 230,000 from the same month a year ago. The labor force participation rate remained at 60.4.
November retail sales were up a far greater than expected 1.6 percent when compared with the same month a year ago. This was the fourth consecutive month of gains and the longest such streak since 2005. Contrary to expectations, large scale retail stores were up 1.9 percent.
Singapore — Fourth quarter preliminary gross domestic product dropped 3.2 percent after gaining 4.4 percent in the third quarter. GDP was up at a slower 6 percent when compared with the same quarter a year ago after rising 9 percent in the third quarter. The decline was due to a slowdown in the manufacturing sector which decelerated from 10.3 percent in the third quarter to 0.5 percent on the year in the fourth. Services industries were up 8.3 percent for the second consecutive quarter. However, construction soared 24.4 percent after jumping 19.2 percent on the year in the third quarter.
Canada — November industrial product price index jumped 0.6 percent but was down 0.6 percent when compared with last year. This was the first monthly gain in seven months and almost solely reflected higher prices for petroleum and coal products (7.2 percent), outside of which the index would have fallen 0.2 percent. Primary metals prices were down 1.8 percent on the month with copper especially weak (down 16.3 percent). Refined zinc was also sharply lower (16.4 percent) while motor vehicles and other transport equipment similarly declined (0.5 percent). Other declines were registered by lumber & other wood products (0.5 percent), pulp & paper (0.3 percent) and electrical & communications (0.8 percent). The appreciation of the Canadian dollar was once more an important factor in keeping prices in check.
November raw material price index surged some 3.4 percent and was up 15.7 percent on the year. The leap was wholly attributable to higher prices for mineral oils (9.7 percent) which took off on the back of a 10.7 percent jump in crude oil and, to a lesser extent, a 2.6 percent increase in natural gas. Excluding mineral fuels, the RMPI would have dropped 2.8 percent on the month. Among the other major categories, there were declines in non-ferrous metal prices (5.4 percent), animals & animal products (1.3 percent) and logs & bolts (1.7 percent).
It was business as usual when investors returned after their holiday breaks. Angst about growth prospects were carried forward with the result that stock prices were down as was the U.S. dollar. Reports showed that manufacturing activity slowed just about everywhere, although it took a bigger hit in the U.S. and the UK than in Europe. And the U.S. employment situation report Friday contributed more to investor growth worries.
On January 1, 2008, Malta and Cyprus became members of the European Monetary Union. There are now 15 members of the EMU. The central bank leaders are now members of the ECB governing council and share in making monetary policy on an equal footing with members such as Germany, France, Italy and Spain.
The Bank of England and European Central Bank meet this week to determine monetary policy. Of the two, the Bank of England is under more pressure to cut its current interest rate from 5.5 percent. The European Central Bank is expected to hold at 4 percent.
For the Bank of England, falling business confidence and further evidence of a housing slowdown could make its interest rate decision a close call. While the manufacturing activity report showed the industry slowing more than expected, the service sector activity index actually improved. The survey is seen by policymakers as a guide to service sector sentiment that is the main driver of the economy. The monetary policy committee will also take into account downbeat data from the Bank’s most recent survey of credit conditions, which showed lenders had materially tightened lending to households in the last quarter and expected to do so further.
Central Bank activities |
|
January 10 |
UK |
Bank of England Policy Announcement |
|
EMU |
European Central Bank Meeting |
The following indicators will be released this week... |
Europe |
|
|
January 7 |
EMU |
Unemployment (November) |
|
|
Producer Price Index (November) |
|
EU |
Business and Consumer Confidence Survey (December) |
January 8 |
EMU |
Retail Sales (November) |
January 9 |
EMU |
Gross Domestic Product (Q3.07 final) |
|
Germany |
Merchandise Trade (November) |
|
|
Retail Sales (November) |
|
|
Industrial Production (November) |
January 10 |
France |
Industrial Production (November) |
|
UK |
Merchandise Trade (November) |
January 11 |
UK |
Industrial Production (November) |
Asia/Pacific |
|
|
January 9 |
Australia |
Retail Sales (November) |
January 10 |
Australia |
Merchandise Trade Balance (November) |
Americas |
|
|
January 11 |
Canada |
Employment, Unemployment (December) |
|
|
International Trade (November) |
Anne D Picker is the author of International Economic Indicators and Central Banks.
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