Global Markets

A plethora of new economic data and the FOMC rate cut vied with earnings, credit market losses and merger news for investors’ attention. The result was a volatile week of trading that, in many ways, has become a way of life in the financial markets. What begins as a decidedly down day ends with the opposite result — sometimes with no apparent reason. Investors continue to have knee jerk reactions to events ranging from interest rate announcements to company profits and rumors of impending doom.

Many traders are happy that January is behind them given the extremely high levels of volatility experienced during the month. The results for the stock indexes covered here for the month of January are awful. Declines for the month ranged from a rather benign 2.5 percent decline for the Bolsa to a 16.7 percent drop for the Shanghai Composite. Overall, equities in North America fared better than those in Europe and Asia. Only the FTSE and Topix in addition to the North American indexes avoided the double digit losses of Europe and Asia. European stocks recorded their worst monthly decline since September 2002 in January. The S&P 500 was down 6.1 percent — its worst start to the year since 1990 — while the Nasdaq sank 9.9 percent. The Hong Kong market had its biggest monthly decline since October 1997.

For the week ending February 1, all indexes followed here in the Asia/Pacific region declined while the FTSE, CAC and DAX each gained over 2 percent. North American indexes ended the week on a positive note. The gains ranged from 3.2 percent for the S&P/TSX Composite to 7.5 percent for the Bolsa.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX, unlike indexes in Asia were able to reverse declines incurred early in the week and turn them into solid positives on Friday. Major merger announcements cheered investors and at the same time distracted them from the disappointing U.S. employment situation report. Initially Friday’s gains were reduced thanks to the lackluster data, but the indexes held onto most of their gains as U.S indexes shrugged off the report. Prospective mergers in mining combined with a surprise offer for internet search engine Yahoo by Microsoft to energize investors. However, new credit crunch fears also surfaced as the risk of widespread downgrades of monolines — which could lose their triple A credit ratings because of their own exposure to the subprime crisis — fueled new worries about banks’ exposure to the sector.

While January was an abysmal month for stocks everywhere, the FTSE fared better than most with a single digit decline of 8.9 percent while the CAC and DAX sank 13.3 percent and 15.1 percent respectively. For the week, the FTSE, CAC and DAX were up 2.7 percent, 2.1 percent and 2.2 percent respectively.

Asia/Pacific

Stocks across the Asia/Pacific region, except for China and Japan, closed higher on Friday after one of their worst months on record, as concerns eased about the outlook for top bond insurers hit by the U.S. subprime mortgage crisis and credit-related losses. The Japanese market closed lower on subprime-linked losses incurred by major Japanese banks, while the Chinese market sank on worries that the worst snowstorms in decades will reduce economic growth and push up inflation. On Tuesday, many Asia/Pacific stock indexes bounced back strongly as they mimicked overnight gains in the U.S. on fresh optimism that the U.S. Federal Reserve would cut interest rates the following day. In Hong Kong, the prospect of lower U.S. interest rates helped property developers and banks. Hong Kong borrowing costs track the U.S. because of the Hong Kong dollar’s peg to its U.S. counterpart.

Unlike those in North America and Europe, all indexes tracked here were lower for January and for the week ending February 1. January losses ranged from a low of 8.8 percent (Topix) to 16.7 percent (Shanghai Composite). For the week, the All Ordinaries edged down 0.1 percent. But the Shanghai Composite was down 9.3 percent as the severe snowstorms in China paralyzed industry and transportation.

Currencies

The euro, after nibbling at its all time high against the dollar, weakened after the U.S. unexpectedly lost jobs last month for the first time in four years. Rather, the U.S. dollar strengthened after the ISM manufacturing report unexpectedly expanded in January. Earlier in the week, the euro gained after the Federal Reserve lowered their key fed funds target rate to 3 percent — a full percentage point below the ECB’s policy interest rate of 4 percent. The euro has gained about 1.5 percent against the dollar since December 31, 2007. The yen has gained against the dollar as well as carry trades were unwound when equities continued to tumble in risk avoidance trading.

Indicator scoreboard

An avalanche of new data in Europe — most of which was released on Thursday and Friday gave investors a chance to size up economic conditions prior to this week’s central bank meetings.

EMU — December M3 money supply was up 11.5 percent when compared with the same month a year ago, down from the 12.3 percent growth rate reported in November. The deceleration reflected a marked decline in monthly growth which dropped from 1.1 percent to just 0.3 percent, the smallest gain seen since November 2005 (also 0.3 percent). For the three months ending in December, M3 was up 12.1 percent when compared with the same three months a year ago. Among the key counterparts, seasonally adjusted private sector loan growth was unchanged at 11.1 percent on the year and unadjusted loans to households slipped to 6.2 percent from 6.5 percent. Nonetheless, overall private sector credit grew 12.7 percent over the latest 12 months, up from 12.2 percent in November and edged up to 5.3 percent from 5.1 percent in the household sector.

January flash estimate of the harmonized index of consumer prices was up 3.2 percent when compared with January of 2007. This is 1.2 percentage points above the ECB’s inflation target of 2 percent. As with all flash estimates, no details are available. These data include new EMU members Malta and Cyprus for the first time.

December unemployment rate edged down to 7.2 percent, a record low. So far wage pressures have been relatively well contained but tightening labor markets will add to central bank concerns that wage agreements might begin to respond more fully to the upturn in HICP inflation.

EU — January economic sentiment dropped to 101.7 from a revised 103.4 in December. The latest drop reflected declines in confidence in both the consumer (minus 12 from minus 9) and industrial (1 from 2) sectors with the former worryingly dropping below its long-term average to its weakest level in more than two years. All of the other major sectors also posted declines led by retail (minus 3 from 1), followed by services (12 from 14) and construction (minus 6 from minus 5).

Germany — December retail sales volumes excluding autos and gasoline edged down 0.1 percent after declining 1.8 percent and 1.9 percent in October and November respectively. The data provide further evidence of how the consumer sector never fully recovered from the hike in VAT introduced at the start of 2007. Over the 12 months to December, sales fell a hefty 6.9 percent on the back of substantial declines in all major categories. Purchases of food were down 6.8 percent while non-food fell 6.9 percent. However, total retail sales volumes including autos and gasoline were up 2.2 percent on the month but sank 8.3 percent on the year.

January unemployment rate dropped to 8.1 percent from 8.3 percent in the preceding month. The number of unemployed dropped by 89,000 and reflected a 55,000 decline in the West and 34,000 fall in the East. Employment data follow one month behind the jobless figures but a 30,000 increase in December 2007 payrolls is consistent with significant demand for labor. 

France — December producer price index was up 0.2 percent and 4.5 percent when compared with last year. Excluding energy and agriculture, prices were steady on the month and up a relatively modest 1.7 percent on the year. Energy prices soared 10.4 percent with agriculture and food not far behind at 8.5 percent on the year. Other product areas were significantly more restrained with consumer goods up only 0.8 percent and auto products an even smaller 0.6 percent. Capital goods were up an annual 1.9 percent leaving just intermediates at 2.1 percent to break the 2 percent mark.

Italy — December producer price index edged down 0.1 percent for the first monthly drop since September 2006. When compared with a year ago, the PPI was up 4.6 percent. For 2007 as a whole, the PPI was up 3.4 percent. Outside of consumer goods (up 0.3 percent in both durables and non-durables) there was broad based weakness among the major product groups. Capital goods were flat but intermediates declined 0.4 percent. Energy dipped 0.1 percent. Excluding energy, prices were also down 0.1 percent on the month and up a relatively mild 1.7 percent on the year.

Asia/Pacific

Japan — December unemployment rate was 3.8 percent, unchanged from November. In 2007, the unemployment rate varied from 3.6 percent to 4 percent. The number of employed persons dropped by 40,000 but was up 420,000 when compared with the same month a year ago. The number of unemployed was down by 130,000 on the year for the 25th month of consecutive decline. The participation rate was 60 percent.

December spending for two or more person households was up 2.2 percent when compared with last year while income climbed by 2.7 percent. Workers’ household spending was up 1.8 percent but income declined by 2.7 percent. Spending was mixed. Real durable goods spending for two or more person households was up 18 percent on the year but semidurables and nondurables both declined, 6.9 percent and 1.3 percent respectively. Spending on services was up 4.3 percent. Spending dropped for clothing & footware, medical care and education but spending increased for transportation & communication, housing and culture & recreation. 

December retail sales edged up 0.2 percent when compared with last year after climbing 1.6 percent in November. This was the fifth month in a row of gains. However real sales at large scale retail stores were down 1.5 percent on the year. Like household spending, these data are monitored as part of the watch on the frail domestic economy.

December industrial production was up 1.4 percent and 2.1 percent when compared with the same month a year ago. Industries that recorded increases in December were electronic parts & devices, general machinery and plastic products. Commodities that increased were larger passenger cars, flat panel display manufacturing equipment and lithium ion storage batteries. METI also included a forecast for January and February. They expect production to decline 0.4 percent in January and 2.2 percent in February from the previous month.

Americas

Canada — November monthly gross domestic product edged up 0.1 percent and was up 2.7 percent when compared with the same month a year ago. With the goods producing area contracting by 0.2 percent, monthly growth was concentrated in services which slowed to a 0.2 percent gain from the 0.3 percent posted in October. Within this sector, performances were mixed with a 0.1 percent decline in wholesale contrasting with a solid 0.4 percent increase in retail. Transportation & warehousing gained 0.3 percent, professional, scientific & technical services were up 0.3 percent, administrative & waste management also gained 0.3 percent and arts, entertainment & recreation jumped 1.2 percent. Within the contracting industrial sector, manufacturing was down 0.3 percent courtesy of a 0.9 percent drop in durables while non-durables were up 0.6 percent. Mining and oil & gas extraction dropped 0.4 percent, a decline matched by agriculture forestry and fishing.

Bottom line

Stocks in Asia were down while those elsewhere managed to end the week on a positive note. The financial markets were buffeted by a whole range of events including the Federal Reserve’s second interest rate cut in eight days leaving its fed funds target rate at 3 percent. The U.S. rate is now lower than the interest rates in the EMU (4 percent), the UK (5.5 percent), Canada (4 percent) and Australia (6.75 percent).

The Reserve Bank of Australia, Bank of England and the European Central Bank get their turn next week. The RBA is expected to increase its rate to 7 percent to fight inflationary pressures while the Bank of England is expected to lower its rate to 5.25 percent. The ECB is expected to leave their rate at 4 percent. The Lunar New Year begins on Thursday. It is the year 4706 — the year of the earth rat.

Looking Ahead: February 4 through February 8, 2008

Anne D Picker is the author of International Economic Indicators and Central Banks.