Global Markets

2008 limped to a close and in the process left many records of the wrong kind in its wake. The year’s summary for many of the indexes followed here saw new multiple year lows as investors fled in panic from anything remotely reflecting risk. When looking back, the key event was probably the Lehman Brothers collapse in September — an event that at one point threatened the whole global financial system with collapse. Other markets were not immune — it was a terrible year for virtually every type of security — and there was nowhere to hide. Some analysts noted that the concepts of buy and hold and a diversified investment portfolio had been turned upside down. Now only cash and government securities were deemed safe as trust evaporated. And at year end, U.S. and Japan’s policy interest rates hover just above zero with the likelihood that other countries will soon join them.

Among the main equity markets, the Nikkei sank 42.1 percent, eclipsing the loss in 1990 of 38.7 percent. The FTSE’s 31.3 percent loss ranks as its worst year since the index was created in 1985 and easily eclipses 2002’s loss of 24.5 percent. But to put this loss in some perspective — the FTSE was the second best performer of the indexes followed here and dramatically illustrates the scope of the declines elsewhere.

And commodities set extraordinary highs and lows during 2008 as new price records were established for crude oil, gasoline, gold, platinum, copper, aluminum, tin and lead as the bull market which had lasted six years reached its peak. However, with only a few rare exceptions such as gold, virtually all commodity markets ended the year in a disorderly retreat as the worldwide financial crisis provoked by the credit crunch dragged the global economy into recession.

The second table below sums up the terrible year. For most indexes followed here, the fourth quarter was the most dismal.

Global Stock Market Recap

Global Stock Market Recap — 2008 Quarterly Results

Europe and the UK

Multiple year losses dominated as 2008 ended with the FTSE and DAX enduring their largest declines in over 20 years while in Europe and Asia, some markets ended the year by recording their worst performances since records began. Of the three indexes tracked here, the FTSE outperformed both the DAX and CAC. For the year, the FTSE was down 31.3 percent while the DAX dropped 40.4 percent and the CAC by 42.7 percent. The FTSE was the only index followed here to lose slightly than 10 percent in the fourth quarter.

The three indexes never had a chance during the year. They were under pressure from the credit squeeze that carried over from 2007 and then sank on dreadful financial news that ranged from the stock trading scandal at Société Générale in late January to the near collapse of Bear Stearns in March and the demise of Lehman Brothers in September. Investors sold risky assets such as stocks, corporate bonds and emerging markets in favor of government bonds. The collapse of Lehman Brothers in September sparked a breakdown in trust among financial institutions. The banking system froze and the credit crunch sent the global economy into its most serious recession since the 1970s. At the same time, oil prices soared to as much as $150 a barrel during the summer. The collapse in the equity markets occurred even after a drop of more than $100 a barrel in crude oil prices since July and aggressive central bank rate cuts.

On January 1, Slovakia became the 16^th country to adopt the euro and the euro celebrated its 10^th birthday. At the same time, the Czech Republic assumes the European Union's revolving six-month presidency.

Asia/Pacific

2008 was an abysmal year in Asia Pacific region as elsewhere with annual losses ranging from 39.3 percent for the KLSE Composite to 65.4 for the Shanghai Composite. Most losses ranged from 40.1 to 48.3 percent with both the Sensex and Jakarta Composite losing 53.4 percent and 50.6 percent respectively. For many the losses were of historical size. The Shanghai Composite, which was the world’s best performing stock market in 2007, racked up a loss of 65.4 percent since last year. And in India, the Sensex lost more than half its value since the end of 2007.

The Nikkei recorded a 42.1 percent drop for the year while the Topix declined by slightly less — 41.8 percent but the drops here were less than those recorded by the emerging countries of Asia. Stocks for the most part incurred their heaviest losses in the fourth quarter with only the Taiex and SET losing more in the third. All lost 20 percent or more in the fourth, with the exception of the KLSE which was down ‘only’ 13.9 percent.  

PBoC and RBI cut interest rates again

The People’s Bank of China lowered its interest rates for the fifth time in three months on December 22^nd as the government tries to pump money into the economy to restore the high growth rates it considers crucial for social stability and after trade growth collapsed because of recessions in their major export markets — the U.S., Europe and Japan. The interest rate cuts were widely anticipated after the Federal Reserve and Bank of Japan cut interest rates to almost zero.

At an unscheduled meeting, the PBoC cut its one year deposit rate by 27 basis points to 5.31 percent, its lending rate by 27 basis points to 2.25 percent and the reserve ratio by 50 basis points to 15.5 percent. The move comes nearly one month after the Bank slashed rates over 100 basis points on all three of its interest rates on November 28. Faced with a much more severe slowdown than they had anticipated, China’s leaders have moved aggressively in recent weeks to shore up crumbling growth, announcing a series of fiscal stimulus initiatives and infrastructure projects. Interest rates in China are always multiples of nine, an intentional policy that allows lenders and borrowers without access to calculators or computers to calculate their interest rate payments using the traditional abacus.

The Reserve Bank of India cut interest rates for the fourth time in less than three months, extending the steepest set of reductions since 2000 as inflation cooled thanks to lower crude prices. The RBI cut the repurchase rate to 5.5 percent from 6.5 percent and the reverse-repurchase rate to 4 percent from 5 percent. The monetary authority also cut the so-called cash reserve ratio, or the proportion of deposits banks must hold in reserve, to 5 percent from 5.5 percent, releasing 200 billion rupees ($4.1 billion) into the banking system. India’s government also announced its second stimulus package in a month to counter the impact of a global recession.

Currencies

Equities were not the only financial instrument to set multi-year record declines — currencies did also. A case in point is the British pound sterling. Sterling declined the most against the dollar since the gold standard was abandoned in 1971 and experienced its worst ever year against the euro since its 1999 introduction. Over the course of the year, the pound sank by 27 percent against the dollar and lost 24 percent against the euro as the currency was dragged lower by worries over rising unemployment, deteriorating public finances and a series of aggressive Bank of England interest rate cuts. But the pound registered its largest drop against the yen, losing over 40 percent on the year.

The yen was the star performer especially in the second half of the year as the financial crisis prompted a dramatic unwinding of the carry trade, in which low-yielding currencies such as the yen are sold to finance the purchase of riskier, higher-yielding assets elsewhere. The yen soared over 23 percent against the dollar despite Japan’s struggling economy. The Finance Ministry via the Bank of Japan has intervened before and is likely to keep the threat of intervention on the table going forward. But the yen’s gains were larger against the higher-yielding Australian and New Zealand dollars — the traditional targets of carry trade investors — rising 37 percent and 39 percent respectively.

After hitting a record low against the euro in July, the dollar benefited amid a flight to safety in global assets markets and widespread deleveraging in the second half of the year. The dollar benefited as U.S. investors repatriated funds amid the turmoil and as speculators liquidated positions in higher-yielding assets, especially in emerging markets, that had previously been funded by selling the dollar.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply growth eased to 8.4 percent from 8.7 percent for the three months ending in November when compared with the same three months a year ago. For November, M3 growth was 7.8 percent when compared with last year and down from 8.7 percent in October. The deceleration was mirrored in the key private sector lending counterpart which saw its 12-month growth rate decline from 7.8 percent to 7.1 percent. In part this deceleration reflects further hefty sales of loans by financial institutions within the monetary sector to those outside.

France

November producer prices dropped 1.9 percent and were up 1.6 percent when compared with a year ago. The slide in prices was once again led by cheaper energy costs which were down 7.1 percent on the month. Excluding energy, prices dropped 0.5 percent and were up 2.4 percent on the year. Autos (0.6 percent) were the only sector to see a monthly increase in prices. Declines were led by intermediates (1.3 percent) and agriculture (0.6 percent). Capital goods prices edged down 0.1 percent, as did prices for consumer goods.

November consumption of manufactured goods was up 0.3 percent and 1 percent when compared with last year. The advance occurred despite a 2.1 percent monthly slide in auto purchases and a 1.0 percent drop in sales at textile stores. Losses here were more than offset by a 3.4 percent bounce in spending on household goods combined with more modest increases of 0.6 percent in purchases of durables and of 0.5 percent in buying of other products. Excluding autos and related parts, spending was up 0.6 percent on the month.

Third quarter gross domestic product was up an unrevised 0.1 percent and 0.6 percent when compared with the same quarter a year ago. What meager growth there was occurred mainly in the public sector which was up 0.6 percent from the previous period. Household consumption edged up only 0.2 percent while gross fixed capital formation edged downward by 0.2 percent. Total domestic demand grew 0.2 percent.

Italy

November producer price index tumbled 1.6 percent and was up 2.3 percent when compared with last year. The monthly decline was led by coke & petroleum products where prices dropped 13.1 percent. Weakness was compounded by a 2.6 percent decline in the cost of metals (2.6 percent) and much smaller declines in electrical machinery (0.8 percent), food & drink (0.5 percent), wood (0.3 percent) and paper & paper products (0.3 percent). Overall manufactured goods prices dropped 2.0 percent on the month while minerals were down 0.9 percent.

United Kingdom

Third quarter gross domestic product contracted by 0.6 percent but was up 0.3 percent when compared with last year. Among the expenditure components, household expenditure declined an unrevised 0.2 percent but fixed investment dropped an even larger 2.8 percent while government spending was up by a smaller adjusted 0.6 percent. Total domestic expenditure dropped a real 0.4 percent on the quarter and was unchanged on the year while the GDP deflator was lowered to show a 2.0 percent annual inflation rate from previously 2.7 percent. By output category, the goods producing sector contracted a steeper revised 1.4 percent (was 1.1 percent) while the decline in services was also nudged larger at 0.5 percent from 0.4 percent.

Asia/Pacific

Japan

November merchandise trade balance was in deficit for the fourth month. The deficit was ¥223.4 billion compared with a surplus of ¥784.4 billion in the same month a year ago. On the year, exports were down 26.7 percent while imports tumbled 14.4 percent. Exports to the U.S. plummeted by 33.8 percent on the year while imports from the U.S. sank by 17.8 percent. Exports to Asia dropped 26.7 percent while imports from Asia were down 12.5 percent. In Asia, exports to China sank 24.5 percent while imports from China were down 12 percent. Moving to Europe, there too, exports to the EU sank 30.8 percent while imports from the area dropped 20.8 percent.

November consumer price index was down 0.9 percent but up 1.0 percent when compared with last year. Core CPI which excludes only fresh food was down 0.8 percent and also up 1.0 percent on the year. However, excluding both food and energy, prices were down 0.2 percent on the month and were unchanged on the year. Prices were down for most major categories with only clothing & footwear prices rising on the month. Food prices were down 0.7 percent but were still positive on the year, rising buy 3.7 percent. The two categories that would be affected by the plunge in energy prices — fuel, light & water charges and transportation & communication — were down 2.1 percent and 3.3 percent on the month. However, while fuel, light & water were up 4.8 percent on the year, transportation & communication prices sank 2.3 percent. Goods prices were down 1.6 percent on the month and up 1.6 percent on the year. Services prices edged down 0.2 percent and were up 0.4 percent on the year. December Tokyo CPI which is considered a precursor of the national index was down 0.2 percent and managed to increase 0.7 percent on the year. Core excluding only fresh food was down 0.2 percent but up 0.8 percent on the year. Excluding both fresh food and energy, the CPI was unchanged on the month and up 0.5 percent on the year.

November unemployment rate was 3.9 percent up from the previous month’s rate of 3.7 percent. Employment was up by 36,000 on the month. The labour participation rate dropped to 60.1 from 60.4 in the previous month. The number of jobless people totaled 2.56 million, up 100,000 from a year earlier. The ratio of job offers to job seekers in the reporting month dipped 0.04 point for the 10^th straight monthly drop to a seasonally adjusted 0.76, the lowest level in four years and nine months. The ratio means there were 76 jobs available for every 100 job seekers. The number of job offers fell 2.3 percent from October while that of job seekers grew 3.3 percent. Meanwhile, the number of new job offers slipped 23.7 percent from a year before.

November household spending dropped 0.5 percent when compared with last year. Spending for fuel, light & water sank by 4.3 percent. However, spending for transportation & communication soared by 11 percent on the year. Worker household spending was up 1.2 percent.

November retail sales were down 0.9 percent on the year. As with household spending, it confirms that consumers are holding onto their yen given the gloomy economic picture. Large scale retail store sales sank by 3.2 percent on the year.

November industrial production plunged a record 8.1 percent on the month and was down 13.3 percent when compared with last year. The monthly drop was the biggest since the government began releasing comparable data in 1953. The November decline in manufacturing output coincided with a record 26.7 percent on-the-year drop in exports. Industries that mainly contributed to the decline were transport equipment, general machinery and electronic parts & devices. Commodities that declined were large passenger cars, large trucks and drive transmission and control parts.

Bottom line

No one is sorry to see 2008 end. The last two weeks saw markets drift as thin volumes made for mainly lackluster trading. Continued intervention by the U.S. Treasury and the Federal Reserve soothed some frayed nerves while investors awaited the new Administration in Washington on January 20^th.

Another large rate cut is expected from the Bank of England on Thursday but central bank watchers will have to wait another week for the European Central Bank to make its January decision known. The Reserve Bank of Australia traditionally does not meet in January — the height of the summer season in the Southern Hemisphere.

Analysts are opining on where the first signs of growth will emerge. Some analysts say that the United States economy, which has been in recession for a year, will be first. The economy is poised to receive a stimulus package from Washington once the new Administration is sworn in of as much as $1 trillion over the next two years and might actually start to lead the world out of the downturn in the second half of the year.

Looking Ahead: January 5 through January 9, 2009

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