Global Markets

After a weekend of frenetic activity in Washington DC at the IMF/World Bank meetings and in Europe and Asia, numerous plans were released with the aim of dynamiting the logjam in the credit markets. The plans were greeted on world equities exchanges jubilantly with many recovering about half of the previous week’s losses in one day. But the jubilation did not last long. Questions concerning the effectiveness of the various plans combined with concerns about the real economy proliferated and equity investors had second thoughts. A sellout ensued and investors unloaded stocks almost indiscriminately. Investors especially unloaded companies in the consumer goods, energy and mineral sectors. Commodities prices plummeted on expectations that demand for commodities will continue to ratchet down as the world sinks into recession.

Data on the real global economy were dismal at best — but markets paid only intermittent attention. On Wednesday stocks tumbled and commodity prices weakened as investors switched their focus from banking bail-outs to deteriorating economic fundamentals and the looming prospect of a global recession. Specters of sinking growth and rising unemployment contributed to the gloom and fear that permeated investors. And U.S. data were uniformly awful with retail sales and housing starts sinking. And with each day, a new bail-out proposal somewhere surfaced adding onto the trillions already promised. In the UK, inflation remained high while unemployment crept upward and average earnings eased. The ZEW expectations survey in Germany plummeted reinforcing the negative views of business and consumers. And consumer sentiment data elsewhere also plumbed new lows.

After all the gyrations during the week, all North American equity indexes were up as were the European DAX and CAC and the UK FTSE. In Asia, however, most indexes followed here were down. The Australian All Ordinaries, the two Japanese indexes and the Thailand SET were positive though the Philippines PSEi was virtually unchanged.

Global Stock Market Recap

Europe and the UK

After declining for four weeks, the FTSE, DAX and CAC finally ended the week on a positive note thanks to better than anticipated earnings and lower money market rates — a sign that the credit crunch is beginning to ease. During the week, investors were barraged by a combination of multi-trillion dollar bank bailout plans and overwhelming signs that the economy is teetering on the brink of recession. As in Asia, stock indexes gyrated from positive to negative and back again from day to day and within a day’s trading. But on Friday, despite wide swings in U.S. markets and despite plummeting housing starts and sinking consumer sentiment, European and UK indexes managed to go in their own direction and end the day with healthy gains.

European and British shares rallied on Monday and Tuesday following British, European and U.S. government actions to stem the financial crisis, but they rallied only to sink on Wednesday and Thursday as recession fears overwhelmed the continued onslaught of new financial rescue packages. On Thursday, the FTSE hit its lowest level in more than five years as miners and oil stocks took another pounding on fears that demand would be hurt by a prolonged economic downturn. Also on Thursday, the Swiss government announced emergency funding for two of the country's leading banks, UBS and Credit Suisse, thus joining the worldwide league of governments that are taking unprecedented steps to support their banking systems as the global financial market crisis spreads. But shares rebounded Friday in part on bargain hunting especially among oil producers and banks, among the most severely sold off sectors during the previous two sessions.

Asia/Pacific

Wild swings in equities continue to be the theme as investors vacillated between relief that measures were being taken to alleviate the credit crunch and fears of a global recession. The Nikkei soared over 14 percent on Tuesday only to sink over 11 percent on Thursday. Despite this volatility, Japanese indexes followed here managed to end the week on a positive note. And the Hang Seng, which vaulted by 10.3 percent on Monday, suffered three days of declines ranging from 4.4 percent to 5 percent. The Hang Seng Index has declined for seven straight weeks for its longest losing streak in six years. The Sensex also gyrated during the week with gains ranging to 7.4 percent on Monday and losses to 5.9 percent and 5.8 percent respectively on Wednesday and Friday sending it below the 10,000 level at week’s end.

The stock markets across the Asia/Pacific region closed mixed on Friday amid growing concerns about a global recession. Most of the nations here rely upon exports to drive their economies. A lack of growth in their primary markets in the U.S. and Europe will impact their domestic economies directly. The Japanese market recovered from its historic decline in the previous session and the Chinese market ended a three-day losing streak. And stock markets elsewhere saw early gains eroded. Crude oil prices rebounded amid growing expectations of an OPEC production cut when the cartel meets on October 24.

Thursday’s record decline in Japan was predicated on fears that the financial crisis will land a devastating blow on the Japanese real economy. The market was battered by selling after a steep slide in U.S. stock prices overnight. The plunge gained momentum on news that the Swiss government will pump huge amounts of money into financial titan UBS AG. In the past, the market would have reacted positively to such steps to avert a crisis — but now it is viewed as a negative and illustrates just how bad things are.

Asian central banks took renewed emergency action Tuesday amid fears of destabilizing emerging market economies. India’s central bank and government moved to ease liquidity pressures as investors, alarmed by falling markets, pulled money out of mutual funds.

Also on Tuesday, Hong Kong’s financial regulators announced they will provide government backing for all bank deposits through 2010. Government assistance for banks in Europe and the United States had put pressure on Asian regulators to follow suit, even though Asian banks tend to be better capitalized. The Hong Kong Monetary Authority also said that it is prepared to provide capital to the territory’s 23 locally incorporated banks if they needed it, following the example of the United States and Britain. Hong Kong banks are already among the most heavily capitalized in the world. The average capital as a share of assets for banks incorporated in Hong Kong is 14 percent, well above the international minimum of 8 percent. Hong Kong currently insures the first $100,000 Hong Kong dollars in an account, which in U.S. dollar is worth $12,900.

Bank of Japan holds unscheduled meeting

The Bank of Japan left its key interest rate at 0.5 percent at an unscheduled meeting Tuesday. The purpose of the meeting was to examine the recent developments in the global financial markets and discuss monetary policy. They also discussed ways to enhance the effectiveness of money market operations in order to maintain financial market stability. The BoJ said it will offer an unlimited number of dollars at a fixed rate as part of measures aimed at mitigating the damaging impact of the global credit turmoil. The Bank also said it would broaden the range of Japanese government bonds eligible for its repo operations and reduce minimum fee rates applied to its security lending facility from 1 percent to 0.5 percent. The Bank of Japan did not participate in the previous week’s coordinated interest rate cuts, but had supported the move at that time.

Currencies

Currencies also gyrated throughout the week, fluctuating on investors’ appetite for risk. The U.S. dollar, which like the yen has been used of late as a funding currency for carry trade, also came under pressure. Japan and the U.S. have the lowest interest rates of the major countries at 0.5 percent and 1.5 percent respectively. The yen initially rallied as rising risk aversion prompted investors to unwind positions in riskier, higher-yielding assets that had been funded in yen. However, as equities rebounded during the week, the yen and the U.S. dollar gave back some of their gains. On the week, the yen was down against the dollar.

In the immediate aftermath of the weekend Group of Seven and IMF meetings, the euro rose the most in three weeks against both the dollar and yen after European leaders agreed to guarantee bank borrowing and prevent failures that would further batter the credit markets. At week’s end, the euro edged up for the first week in three.

Hong Kong celebrated the 25^th birthday of its currency’s (Hong Kong dollar) peg to its U.S. counterpart Friday. The arrangement, which is designed to reduce exchange rate volatility thereby encouraging trade and investment particularly with dollar-based partners, has survived multiple property and stock market crashes and also a concerted attack by speculators during the Asian financial crisis. The peg links the Hong Kong and U.S. dollars at a rate of HK$7.8 to US$1.

Selected currencies — weekly results

Indicator scoreboard

EMU

August industrial output was up 1.1 percent but was down 0.7 percent when compared with last year. The monthly bounce was dominated by a strong surge in Germany where output jumped some 3.3 percent from July. Italy showed a respectable advance (1.4 percent) but both France (down 0.4 percent) and Spain (down 1.6 percent) posted fresh declines. However, there were also monthly gains in Ireland (6.2 percent), the Netherlands (0.9 percent), Portugal (0.6 percent), Slovenia (1.2 percent) and Finland (0.1 percent). By product group, intermediates and capital goods were both up 1.6 percent but all sectors performed well outside of consumer nondurables which were unchanged.

September harmonized index of consumer prices edged up 0.2 percent and was up 3.6 percent when compared with last year. Excluding energy, food, drink and tobacco the HICP was up 1.9 percent. Omitting just energy and seasonal food, prices were up 2.6 percent on the year. Stripping out energy, the index was up 2.6 percent. The 12-month inflation rates were down in all the larger EMU countries. The most marked improvements were in Spain (4.6 percent from 4.9 percent), Italy (3.9 percent from 4.2 percent), Germany (3.0 percent from 3.3 percent) and France (3.3 percent from 3.5 percent).

August seasonally adjusted merchandise trade deficit was €6.1 billion and followed an upwardly revised €6.7 billion shortfall in July. In unadjusted terms, the deficit was €9.3 billion compared with a surplus of €1.5 billion in August 2007. The August gap reflected a 0.6 percent drop in exports combined with a 1.0 percent decline in imports. Annual growth in imports stood at 7.0 percent but exports were 2.0 percent below their year ago level. The unadjusted cumulative red ink over the first eight months of the year stood at €24.0 billion compared with a surplus of €16.5 billion in the same period of 2007. The deterioration is in part attributable to a reduction in the bilateral surplus with the U.S. but a worsening bilateral trade deficit with Russia has had an even more significant impact. Net trade with China over the period was essentially unchanged.

Germany

October ZEW expectations index sank to minus 63.0 from minus 41.1 in September. At the same time, the current conditions measure crashed to minus 35.9, down from minus 1.0 in September. While the magnitudes of both drops are much steeper than anticipated, this survey will have picked up the brunt of the global financial crisis so the results are not especially surprising. Indeed, the financial bias of the survey inevitably renders it all the more susceptible to the recent market turmoil. ZEW indicated that its results found a less pronounced decline after news of the central bank/government bailouts (expectations minus 50).

United Kingdom

September producer output prices were down 0.3 percent and up 8.5 percent when compared with last year. The core index edged down 0.1 percent on the month and was up 5.4 percent, its slowest pace since April (4.1 percent). The monthly decline in the overall index was mainly a function of lower gasoline prices which slumped almost 2 percent. The only other declines were posted by tobacco & alcohol (0.4 percent) and other products (1.9 percent). Price increases were led by metal products (0.7 percent), electrical & optical products (0.6 percent), transport (0.6 percent) and in textiles & clothing (0.5 percent). Producer input prices dropped 1.2 percent but were up 24.5 percent on the year. Again, energy prices were the dominating factor with a 7.6 percent monthly slide in crude oil costs. Price increases were led by fuel (4.7 percent), imported food materials (2.1 percent) and imported chemicals (1.4 percent). Of note, the ONS has announced that it will no longer report seasonally adjusted data for input prices since it no longer judges there to be any seasonal influences of statistical significance.

September consumer price index was up 0.5 percent and a record 5.2 percent when compared with last year. Higher gas and electricity prices were largely to blame with prices in the housing, utilities & fuels sector surging 4.4 percent on the month, compounding an already hefty 2.1 percent gain in August. The sharp increase in energy was supported by a 2.2 percent monthly advance in clothing & footwear. On the year, prices for furniture and household equipment and in health were up 2.9 percent while education was up 10.8 percent and food & beverages gained 11.3 percent. Inflation in the all goods area climbed from 5.1 percent to 5.7 percent and in the all services sector to 4.6 percent from 4.3 percent.

Average earnings for three months ending in August were up 3.4 percent when compared with the same three months a year earlier. Excluding bonuses, earnings were up 3.6 percent. In August alone, earnings were up 3.2 percent. Headline average earnings growth unexpectedly decelerated from 3.5 percent to a 3.4 percent annual pace in August. Private sector earnings eased to 3.4 percent from 3.5 percent that more than offset a bounce in the public sector to 3.5 percent from 3.3 percent. By industry, neither manufacturing (2.8 percent) nor services (3.7 percent) saw any change from the July pace.

September claimant count unemployment increased by 31,800, lifting the unemployment rate to 2.9 percent from 2.8 percent in August. Over the three months to August, the ILO jobless measure showed unemployment rising a further 164,000 compared with the previous period, boosting the unemployment rate to a higher than expected 5.7 percent. The jump in the jobless rate from 5.2 percent in the March through May period was the largest since the early 1990s. The data reflect a 122,000 decline in the level of employment, the steepest decline in more than a decade and a clear indicator of things to come.

Asia/Pacific

Japan

September corporate goods price index declined for the second month. The CGPI was down 0.4 percent after edging down 0.1 percent in August. On the year, the index was up 6.8 percent. The two major contributors to the monthly decline were petroleum & and products and nonferrous metals which were down 5.4 percent and 4.1 percent respectively. Prices for chemicals & related products, information & communications equipment and electronic components & devices were also down on the month. When compared with a year ago, a decline of 4.7 percent for nonferrous metals was more than offset by an 8 percent jump in iron & steel. Agriculture, forestry & fishery products were down 0.8 percent on the month and edged down 0.1 percent on the year.

August tertiary industries index sank 1.4 percent after rising 1.2 percent in July. On the year the tertiary index was down 1.6 percent. The index, a measure of service industries, has been alternating between positive and negative months since the beginning of the year. The largest decreases were in the wholesale & retail industries, down 2.2 percent and electricity & gas industries, down 4.2 percent. The largest increase was in the information and communications sector, up 3.1 percent. The finance and insurance sector is down 9.6 percent on the year while the compound services component fell 12.0 percent on the year.

Americas

Canada

August factory shipments sank 3.7 percent but was up 3.9 percent when compared with last year thanks to a 2 percent slump in the year ago period that ensured positive base effects. The main factor dragging the headline down was a nosedive in petroleum and coal shipments (7.7 percent) but there was also a sizeable contraction among primary metal manufacturers (7.9 percent) and in transportation equipment (4.3 percent). Motor vehicles sales also dropped steeply (4.3 percent) as did aerospace products and parts (2.9 percent). New orders added to a generally grim picture with a 1.1 percent drop but backlogs provided a ray of hope with a 2.5 percent increase, their fourth consecutive monthly gain.

Bottom line

Last week’s economic data left little doubt that most if not all of the world’s major economies are in a recession or are teetering on the edge. U.S. data were abysmal — retail sales fell off a cliff — while those in the UK created more angst about the state of the economy there. The massive injections of funds to stabilize the global credit markets by central banks and governments appear to be easing the deep freeze. Government measures to guarantee loans and invest in banks on top of moves by central banks to flood the money markets with cheap liquidity have been the key factors. The Baltic Dry Index, a measure of shipping costs for commodities, continues to sink as demand for commodities such as steel continues to drop globally.

Next week brings a Bank of Canada policy meeting. The Bank made a 50 basis point cut to 2.5 percent on October 8 in coordination with other central banks around the world, and in light of enhanced downside risks to growth associated with the growing financial market turmoil. Despite the already accommodative rate, the Bank is expected to cut again next week by at least 25 basis points to 2.25 percent. And in Australia, key inflation data will be released. And investors will watch nervously as the financial markets continue to unwind.

Looking Ahead: October 20 through October 24, 2008

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