Global Markets

Once again economic data played a very minor role in market trajectory last week as investors grappled with the continuing efforts of the U.S. Treasury and Federal Reserve to unwind frozen credit markets. Equities rose and fell as progress waxed and waned as the week progressed. A climax was reached Thursday night (U.S. Eastern Time) when a White House meeting collapsed in disarray and everyone was forced to go back to the drawing board. Some form of Tara (the troubled assets relief act) or TARP (troubled assets relief program) is expected. But timing and pricing are questions — and delays could worsen credit market conditions.

Tuesday and Wednesday’s marathon testimony from Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke before several congressional committees on behalf of the bailout plan captured investors’ attention. And during the hearings, valid questions were raised about plan details which were found wanting in the original three page Treasury document. And while Congress would like to adjourn and go home to campaign, no one was about to leave town before some credible bill was passed.

In the money markets, liquidity beyond a week deteriorated as investors and banks prepared for rising funding needs which usually accompany the end of a financial quarter (Tuesday). Central banks in Europe continued to inject dollars into the systems arranged via swap lines with the Federal Reserve, but there was little evidence bank funds being transferred into the broader market as hoarding of cash continued. The funding squeeze has been compounded by a big reduction in lending from money market funds into both the interbank and commercial paper sectors. Banks and other institutions are scrambling for cash before closing their books and are only able to borrow funds one day at a time. Traders say the virtual cessation of lending means interbank funding rates no longer accurately reflect the true cost of raising money.

The Dow and Nasdaq rebounded Thursday as members of Congress decided in principle to pass a $700 billion Treasury plan to bail out the banking system. (The disagreements occurred after the markets in the U.S. had closed for the day.) The gains in U.S. equities and credit markets came in spite of economic data that suggested growth was slowing sharply. The growing sense of optimism came after strains in the money markets intensified and key indicators of risk rose to record levels earlier in the day. Analysts warned that banking system woes could spread to the economy. On the week, only four Asian/Pacific indexes gained. All others tracked here were down on the week.  

Global Stock Market Recap

Europe and the UK

The FTSE, DAX and CAC sank for the fourth day in five on Friday after negotiations on the $700 billion financial U.S. bailout plan stalled and Washington Mutual was seized in the biggest U.S. bank failure in history. There was steep selling across Europe after Congress and the White House failed to reach agreement on the level of funding for the proposed bail-out, as well as the design of the vehicle to take toxic assets off bank’s balance sheets. The gloom was compounded after Washington Mutual (WaMu) was seized by U.S. regulators Thursday night and its banking operations sold to JP Morgan. But earlier in the week, trading was mostly governed by news from Washington. The only bit of economic news that seemed to catch attention was the well-regarded Ifo business survey. It showed that German business confidence slid for the fourth straight month to the lowest level in more than three years.

On Monday equities reacted to weekend news from the United States. European markets dropped on doubts surrounding the U.S. government's proposed $700 billion rescue plan for the financial sector. A sharp rise in crude oil prices also weighed on the markets. In addition to weighing new information about the bailout, the market responded to the Federal Reserve’s announcement late Sunday that it had approved applications from investment banks Goldman Sachs and Morgan Stanley to become bank holding companies. With the status change, the companies will now function like commercial bank and accept deposits, providing additional resources.

Money market traders said that interbank lending for terms longer than a day had come to a near standstill as counterparties feared that they may be lending to a bank that could suddenly become insolvent even as the Bank of England, Federal Reserve, Swiss National Bank and the European Central Bank injected longer term cash into money markets as part of a coordinated effort. But investments remained in a holding pattern as traders focused on developments in Washington. On Thursday, optimism prevailed — and stocks were up — amid speculation that a deal would be hammered out on the bailout plan aimed at reviving the country's battered financial system.

Asia/Pacific

Asian stocks dropped Friday after negotiations on the U.S. bailout plan stalled, Washington Mutual Inc. was seized — and its assets sold to JPMorgan — and shipping rates sank the most in 23 years. Stock investors ended the week in a dour mood after Congress and the administration failed to reach agreement Thursday night (U.S. Eastern Time). Investors were worried that U.S. troubles could be spreading to national financial companies. The Baltic Dry Index, a measure of shipping costs to carry dry bulk cargoes such as iron ore and wheat, has plummeted as shippers worry about the health of the world economy along with a stand-off between ore producers and steel mills. The index has now lost nearly 70 percent of its value from the record levels set in May. Such major fluctuations are typical of dry bulk shipping markets, where small numbers of excess idle ships or small shortages of vessels can send market rates sharply down or up.

In Japan it was the same story as elsewhere. The Nikkei and Topix were down on the week as investors grew skeptical whether the U.S. government and Congress could soon reach an accord on the government's financial bailout plan. Declines were led by sea transport, nonferrous metal and iron & steel issues. According to traders, investors were in a ‘wait and see’ mood while stocks continued to fall. Downbeat news about the Japanese economy including downward earning revisions by Japanese firms certainly did not help.

Foreign residents were net buyers of Japan stocks and net sellers of Japan bonds and notes for the week ending September 20 according to the Japanese Ministry of Finance. Foreign residents bought a net ¥15.3 billion worth of Japanese stocks. Foreigners had been net sellers of Japanese stocks the two previous weeks. Foreign residents were sellers of a net ¥86.5 billion in Japanese bonds and notes for the week, having been net buyers for at least the four preceding weeks.

The Shanghai Composite closed virtually unchanged Friday ahead of a week long holiday and on uncertainty surrounding the U.S. financial sector bailout. The Chinese markets will remain shut this week for the National Day holiday. Although the Shanghai Composite was down 4.3 percent in September, the index is up about 21 percent from the September 18 — a 22-month closing low — after the removal of a stamp duty on share purchases, sovereign wealth fund plans to purchase domestic bank shares and encouragement for companies to buy back shares. On Monday, equities surged after securities regulators said it may make it easier for companies to buy back shares and the U.S. government unveiled a $700 billion debt rescue plan.

Below the line

Central Bank of the Republic of China (Taiwan) unexpectedly cut its policy discount rate by 12.5 basis points to 3.5 percent from 3.625 percent. This reversed a four year cycle of rate increases which began in June 2003. The Bank highlighted risks to growth given the worsening global economic picture while suggesting that underlying inflation pressures and general inflation expectations are easing. While the bank had been expected to end a tightening cycle in which it had raised rates for 16 consecutive quarters since September 2004, its decision to lower rates came as a surprise to most economists. The Bank’s decision follows a surprise move last week to lower deposit reserve requirements to increase liquidity in the banking system. The bank justified its rate cut by citing lower inflationary pressure and a significantly weaker global macroeconomic environment. The government currently forecasts Taiwan’s economic growth to slow to 3.4 percent on the year in the second half from 5.3 percent in the first six months of this year.

New Zealand reported its second quarter of declining gross domestic product and became the first country in the Asia/Pacific region to fall into a recession. GDP data showed a decline in private consumption and exports, offset by only a small increase in government spending. At its last meeting, the Reserve Bank of New Zealand surprised and lowered its key interest rate by 50 basis points to 7.5 percent and acknowledged the sharp slowdown in the economy.

Currencies

 Both the euro and yen were up against the U.S. dollar last week as uncertainties surrounding the bailout plan and the collapse of Washington Mutual weighed on the dollar. The foreign exchange market remained fragile as the yen rose sharply on Friday as investor risk aversion climbed after negotiations on the financial rescue package had stalled and news that authorities had shut down Washington Mutual, the largest U.S. savings and loans bank, and sold its assets. The news pushed investors towards the safe haven of the low-yielding yen, which has been widely used by carry trade investors to fund the purchase of riskier, higher-yielding assets.

The U.S. plan to create a fund to buy toxic assets from banks to ease the credit crisis has immediately been interpreted as a negative for the dollar by foreign exchange analysts. The need to raise up to $700 billion to buy up mortgage backed securities dramatically changes the fiscal picture for the country and raises concerns about the government’s finances which are already running substantial deficits.

Selected currencies — weekly results

Indicator scoreboard

EMU

August M3 money supply growth continued to slow. M3 growth slipped to 8.8 percent from 9.1 percent in July. The 3-month moving average measure preferred by the ECB eased to 9.2 percent from 9.6 percent or fully 2.8 percentage points below the 12.0 percent peak rate posted in both November and December 2007. At the same time, the 12-month growth rate of the key private sector lending counterpart decelerated to 8.8 percent from 9.4 percent, almost certainly reflecting a combination of dwindling loan demand and significantly tighter conditions in the credit markets.

Germany

September Ifo business sentiment dropped to 92.9 from 94.8 in August. The decline reflects drops in both the current conditions and expectations components. The slide in overall business sentiment was mainly due to a sharp 3.4 point decline in current conditions to 99.8. Expectations fared a little better but were still down 0.5 points to 86.5. By sector, confidence was notably weaker in manufacturing (down 4.8 points to minus 11.6) and in wholesale (down 4.8 points to minus 10.3). Retail also fell again (by 2.5 points to minus 24.0) but morale managed to creep a little higher in construction (by 0.8 points to minus 25.2).

France

August consumption of manufactured goods declined 0.3 percent after increasing by 0.4 percent in July. Consumption edged down 0.1 percent when compared with last year. The August report was dominated by another poor period for textiles which saw demand decline 1.9 percent following a 0.1 percent drop in July. Sales in this sector were 4.3 percent below their year ago level. Autos dropped 1.0 percent, almost offsetting the 1.3 percent bounce seen in July. Excluding autos, consumption also fell 0.3 percent on the month. The only gainers were household goods where purchases were up 0.6 percent and other products which edged up 0.2 percent.

Second quarter gross domestic product declined 0.3 percent and was up 1.1 percent when compared with the same quarter a year ago. Household consumption was revised down to show a 0.1 percent decline from the first quarter thus matching the drop posted at the start of the year.  The other main areas of weakness were gross fixed capital formation (down 1.5 percent) and exports (down 1.7 percent).  Public sector spending rose 0.5 percent while inventory accumulation added 0.3 percentage points to the bottom line. With imports falling an unrevised 0.3 percent, net exports made a negative contribution of 0.4 percentage points, a notch stronger than the 0.5 percentage points originally reported. Total domestic demand edged up just 0.1 percent.

Italy

July seasonally adjusted retail sales were up 0.6 percent and up 0.6 percent when compared with last year. Over the year to July, non-food purchases were up 1.1 percent led by pharmaceuticals (1.9 percent), clothing & shoes (2.2 percent) and household goods (1.6 percent). Food sales were up a more robust 3.8 percent on the year.

July seasonally adjusted merchandise trade deficit was €1.0 billion. Global exports were up 2.5 percent while imports were up 1.1 percent on the month. When compared with the previous year, exports were up 7.1 percent while imports gained 6.7 percent. Trade with EU countries was in surplus to the tune of € 1.3 billion as exports edged up 0.5 percent from June and imports gained just 0.2 percent. On an unadjusted basis, the trade balance recorded a surplus of €2.1 billion (see graph). Surpluses were recorded by manufactures (€9.3 billion). Other significant surpluses were recorded in clothing (€1.3 billion) and leather (€0.9 billion). The main deficits occurred in energy (€6.6 billion), chemicals (€0.7B billion) and electrical machinery (€0.4 billion).

Asia/Pacific

Japan

July all industry index rebounded from June’s declined of 0.9 percent and was up 0.8 percent as expected on the month. The tertiary index which is a major component of the all industry index rebounded with a gain of 1.2 percent in July. The all industry index takes a reading of activity in the 11 service industries that comprise the tertiary index, along with activity in the construction, agricultural & fisheries industries, the public sector and industrial output. This index is considered a close approximation of gross domestic product growth as measured by industrial and service sector output.

August unadjusted merchandise trade recorded a deficit of ¥324 billion. This compares with a surplus of ¥743.6 billion a year ago. Exports eked out a 0.3 percent gain on the year while imports were up 17.3 percent. Trade with China was skewed due to the Olympics and the closure of factories there. However, exports with Asia were up 6.7 percent while imports were up a modest 3 percent. Exports to the U.S. sank 21.8 percent while imports were up 6.4 percent. The overall balance with the U.S. sank 48.2 percent. Both exports and imports declined with Germany, France, Italy and the UK. Exports to Western Europe were down 3.6 percent while imports were down 6.2 percent. By product, exports of motor vehicles declined while imports of energy products continued to rise. Exports of both machinery and electrical machinery declined. Exports have been clearly hit by the slowdown in world growth and the stronger yen. On a seasonally adjusted basis, the August trade deficit was ¥113.3 billion after a revised surplus of ¥114.5 billion in July. Exports declined by 0.2 percent while imports were up 2.9 percent.

August consumer price index was up 0.3 percent and 2.1 percent when compared with last year. On the month, most components were up with the exception of furniture & household utensils (down 0.5 percent), clothes & footwear (down 1.7 percent) and medical care (down 0.1 percent). On the year, only medical care (down 0.5 percent) and reading & recreation (down 0.4 percent) declined. On the year, fuel, light & water charges soared 9.7 percent while food prices jumped by 3 percent. Core CPI which excludes only fresh food was up 0.2 percent and 2.4 percent on the year. Excluding both food and energy, the CPI edged up 0.1 percent on the month and was unchanged on the year. September Tokyo CPI was up 0.3 percent and eased to 1.4 percent on the year. Core CPI was up 0.2 percent and 1.7 percent on the year.

Taiwan

August seasonally adjusted unemployment rate edged up to 3.93 percent compared to 3.91 percent in July. In non-seasonally adjusted terms, both unemployment and employment registered modest gains last month, with the former slightly outpacing the latter, bringing the unemployment rate up for the second consecutive month. Seasonally adjusted, employment only rose a meager 0.02 percent.

Hong Kong

August consumer price index increase eased to 4.6 percent when compared with the same month a year ago from 6.3 percent in July. The drop is mostly due to government’s fiscal relief measures, including the three months’ waiver of public housing rentals and two years’ suspension of Employees Retaining Levy, both of which started last month. Excluding the effects of these temporary tax changes and fiscal subsidies, the underlying CPI inflation stayed unchanged at 6.3 percent on the year. Food prices and rental costs continued to be the main factors behind the elevated headline inflation figure. Food prices were up 10.6 percent on the year after soaring 11.7 percent in July. Housing prices were up 2.2 percent on the year.

Americas

Canada

July retail sales edged up 0.1 percent and were up 0.4 percent when compared with last year. The main sector working to keep sales in check was autos which dropped 0.6 percent on the month. Excluding this sector, sales would have risen 0.4 percent. The only other major areas to see a decline in purchases were clothing & accessories stores (0.4 percent) and food & beverages (0.3 percent). But there were solid gains in furniture, home furnishings & electronics (1.8 percent), building & outdoor home supplies (1.2 percent) and pharmacies & personal care (1.0 percent). General merchandise stores (0.5 percent) and miscellaneous retailers (0.5 percent) also posted moderate monthly advances.

August consumer price index was down 0.2 percent but was up 3.5 percent when compared with last year and the fastest pace since March 2003 (4.2 percent). After seasonal adjustment, the CPI rose a monthly 0.2 percent. Excluding food and energy, the CPI edged up 0.1 percent and 1.2 percent on the year. However, the Bank of Canada core rate which excludes eight volatile items was up 0.3 percent and 1.7 percent on the year. The monthly decline in the headline CPI reflected mainly energy prices which slumped 3.0 percent. In turn this helped to ensure a sizeable drop in transportation (down 2.1 percent). The only other decline was in alcohol and tobacco (0.1 percent). The largest monthly increase was posted by health & personal care (0.7 percent) followed by shelter (0.4 percent), clothing & footwear (0.4 percent), food (0.3 percent) and recreation, education & reading (0.3 percent).

Bottom line

It was another hectic market week where economic data by and large took a back seat to yet another bail-out program for the U.S. financial markets. Investors watched — and listened — to two days of virtually non-stop congressional testimony from U.S. Treasury Secretary Paulson and Fed Chairman Ben Bernanke. But at this writing no agreement has been finalized although all agree to the urgency of the situation.

Next week is packed full of key economic data virtually everywhere along with an ECB monetary policy meeting and announcement on Thursday. Recent rhetoric indicates that the Bank will maintain its 4.25 percent interest rate despite growing indications of moribund growth. And the Bank of Japan’s Tankan survey is expected to fall to a five year low with most analysts saying that Japan is already in recession. Corporate executives filled out their Tankan questionnaires in the same weeks as the bailout of Freddie Mac and Fannie Mae and Lehman’s bankruptcy. Bank of Japan Governor Masaaki Shirakawa said recently that there is no end in sight to the financial crisis that has erased more than $14 trillion from world markets this year. He said that the turmoil may stifle demand for exports even though the effect on the nation's banks is limited.

Looking Ahead: September 29 through October 3, 2008

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