Global Markets

The markets’ doom and gloom outlook has been sturdily backed up by recent economic data. The graph to the left illustrates the point. The swing to significant contractions by the major industrial economies is readily apparent. The cause of the collapse however differs from country to country. For example, although Germany did not have the housing bubble or the debt problems that existed elsewhere, the economy went into free fall. The German economy relies on exports which have dried up worldwide. And while Japan’s problems are many, their over-reliance on exports has sunk the economy into a record-breaking decline. Industrial production in these countries has also plummeted — foreign demand has dried up and domestic demand has not picked up the slack and is contracting as well.

According to Organization for Economic Cooperation and Development (OECD) the world's developed economies suffered their largest contraction in output in almost half a century in the fourth quarter. They said the combined gross domestic product of its 30 members declined by 1.5 percent from the third quarter and by 1.1 percent from a year earlier. It was the largest quarter-to-quarter contraction since the OECD began keeping records in 1960, a testament to the scale of the collapse following the worsening of the financial crisis in the third quarter.

Central bankers’ dour comments about the economic environment did not help build confidence either as worries about the global financial sector set off a new wave of risk aversion. The specter of nationalization sent waves of chills throughout equities as investors ran for the hills and sold the sector’s stocks.

Concerns about the global economy and the health of the banking system kept investor risk aversion elevated as a stream of grim news heightened the gloomy mood in financial markets. Analysts also noted that the weekend meeting of G-7 finance ministers failed to break new ground on tackling the financial crisis. Meanwhile, skepticism about the impact of President Obama’s stimulus plans continued to keep investor risk appetite at bay.

On the week, all indexes tracked here plummeted anywhere from 2.0 percent (PSEi) to 10.6 percent (Kospi).

Global Stock Market Recap

Europe and the UK

The FTSE and DAX dropped four days of five while the CAC declined all week as continued signs of economic weakness at home and abroad eroded what little investor confidence that might have existed. U.S. concerns coupled with fresh worries about the outlook for central and eastern Europe compounded investor fears of a deepening global recession. And new efforts by governments to revive their economies were met with skepticism.

The eurozone recession, already the most severe in postwar history, has deepened further, according to unexpectedly bleak purchasing managers’ indexes. The survey provides a grim backdrop to this weekend’s meeting of European leaders in Berlin, part of efforts to coordinate the global response to the crisis and encourage expectations that the European Central Bank will make further significant cuts in its policy interest rate.

The FTSE teetered around the 4000 mark until Friday when it plunged 3.2 percent after an avalanche of bad news overwhelmed investors. The last time the FTSE closed below 4000 was on November 21, 2008. Friday’s plunge occurred after Anglo American Plc suspended its dividend as earnings slumped, sparking a sell off in mining companies. British Airways dropped after Qantas had its credit rating cut by Moody’s.

Europe’s shares sank to their lowest in about five years after fears that two major U.S. banks would have to be nationalized. And Swiss banks fell sharply as fears mounted the U.S. probe into UBS’s cross-border banking operations and mounting policy antipathy to tax avoidance could deal a fatal blow to Switzerland’s status as a hub of private wealth management.

The FTSE dropped 7.2 percent on the week while the CAC was down 8.2 percent and the DAX sank 9.0 percent.

Bank of England minutes dour

The Bank of England’s monetary policy committee voted eight to one to lower rates by 50 basis points to 1 percent. However, they unanimously agreed that governor Mervyn King should write to the Chancellor of the Exchequer Alistair Darling to seek authority for purchases of gilts (government bonds) and other securities in an effort to broaden the money supply via quantitative easing. The minutes said that “In the present environment, where particular credit markets were not functioning normally, it was appropriate to consider increasing the supply of central bank money by more unconventional types of asset purchases.” They also reveal that fears about the impact of low interest rates on banks’ ability to make money from lending limited the cut. Members noted that banks and building societies maintained a spread between their deposit and lending rates to cover the costs of providing banking services and to make a return on capital. Once those deposit rates were at zero, any further declines in lending rates would squeeze the spread. This might have the effect of discouraging, rather than encouraging, further lending with potentially adverse consequences for the rest of the economy.

Members noted that the risks to growth were mainly to the downside and these stem largely from the possibility that no matter what authorities do in the UK or abroad, there will only be limited success in improving the availability of credit and restoring business and consumer confidence.

Asia/Pacific

Asian/Pacific stocks dropped last week along with those elsewhere. The worries concerned a deepening global recession and financial sector health. Economic data for the region continued to show the ricochet effect of declining demand from North America and Europe. The Topix closed at its lowest level since January 5, 1984. Stocks of automakers and exporters fell even as the dollar rose against the yen. And other markets including those in Australia closed firmly in the red as investors cut their positions ahead of the weekend amid uncertain global economic environment and financial sector health. And in South Korea, markets tumbled on position unwinding by foreign investors after the won fell to a three-month low against the U.S. dollar on fears that domestic banks will struggle to access overseas capital markets. Even when indexes managed to rise during the week, trepidation about the global outlook and dismal U.S. data tempered gains.

Japan’s dismal fourth quarter gross domestic product data sent shockwaves throughout the market. And post Group of Seven recriminations about the behavior of the then finance minister Shoichi Nakagawa who was forced to resign exacerbated the tenuous political environment and limited government action to help bail out the plummeting economy. The political environment has limited any action on the fiscal side.

The BoJ, while providing new measures to prop up the financial system, kept its economic assessment unchanged saying that the deteriorating condition of the economy is likely to continue for the time being. The BoJ said exports are expected to continue to decrease due to a slowdown in overseas economies and the appreciation of the yen. Domestic private demand is also likely to weaken further as corporate profits and firms' funding conditions deteriorate and the employment and income situation becomes increasingly severe. Public investment is projected to be sluggish. Reflecting these developments in demand and growing adjustment pressures on inventories, production is expected to continue to decrease.

Bank of Japan

As expected, the Bank of Japan’s monetary policy board kept its interest rate at 0.1 percent for the third month — the vote was unanimous — and instead decided to expand measures to promote corporate funding. The Bank has already been offering low-interest loans to financial institutions in exchange for collateral, including corporate bonds and commercial paper (CP), as well as buying CP from them outright. So far the BoJ has launched a ¥3 trillion ($32 billion) commercial paper buying scheme and relaxed terms at which it lends to banks by accepting lower-grade corporate debt as collateral. These temporary operations were set to expire on April 30 and March 31, respectively. The deadline was extended to September 30 acknowledging that fundraising conditions would deteriorate as firms' creditworthiness eroded.

In its statement the BoJ fleshed out a plan for purchasing corporate bonds held by banks. The Bank said it would spend ¥1 trillion to buy bonds are those rated ‘A’ or higher with a maximum of up to ¥50 billion per issuer. They also said that they would boost the corporate lending facility to weekly from twice a month.

The economic outlook continues to be dire. Fourth quarter gross domestic product plunged an annualized 12.7 percent and is expected to tumble a further 10.8 percent in the first quarter of 2009, marking the second consecutive quarter of double-digit contractions. The fourth quarter contraction was the sharpest since the first oil crisis over 35 years ago. Despite plunging industrial production, demand is shrinking even faster and inventories are accumulating. And the strong yen has complicated matters for exporters especially as the fiscal year end looms on March 31. The situation has been complicated by government paralysis which has prevented meaningful action on fiscal stimulus. The Japanese government has been loath to take measures to stimulate domestic consumer demand and reduce Japan’s export-dependency as the big spending deficit countries have fallen into recession.

Taiwan’s central bank responds to dire GDP data

The Central Bank of China (Taiwan) cut its discount rate for the seventh time since September 2008, this time by 25 basis points to 1.25 percent. The Bank has now cut rates by a total of 237.5 basis points. The Bank highlighted the severe worsening of the global economy and the feed through to domestic demand, against the backdrop of rapidly easing inflation pressure. Its latest rate cut was to support domestic demand by lowering the funding costs for local households and corporations. Fourth quarter GDP contracted by 8.4 percent thanks to tumbling exports and business investment. This is Taiwan’s first recession since the technology bubble burst in 2001. Exports, which are equivalent to 70 percent of GDP, are expected to plunge 20.1 percent in 2009 while business investment will sink more than 28 percent.

Currencies

While currencies were volatile last week, the euro ended the week virtually unchanged against the U.S. dollar while the yen declined. Sinking equities sent investors scurrying to the safe haven of the dollar and gold. And while gold traded above $1,000 per troy ounce, the Friday London afternoon fix was $989.

The euro was pressured during the week on concern that the financial turmoil in eastern Europe may slow growth in the eurozone. However, the downward pressure was somewhat ameliorated after German finance minister Peer Steinbrück said that his country would support emergency action to protect the eurozone if one of its member states found itself in such serious difficulties that it could not refinance debt. Concerns over the position of countries on the periphery of the eurozone combined with worries over the region’s exposure to a slump in eastern Europe, have weighed on the euro in recent weeks.

The yen’s inverse relationship with global equities broke down last week with the yen falling even as stock markets lost ground. The yen dropped amid a growing sense that the currency was losing its safe haven appeal. Many feel that the yen is overvalued and will have a negative impact on repatriated earnings as the end of the fiscal year on March 31 nears. The yen has weighed on the economy, producing the worst contraction since the oil shock in 1974.

Selected currencies — weekly results

Indicator scoreboard

EMU

December seasonally adjusted merchandise trade deficit narrowed to €0.3 billion following a smaller revised €4.0 billion shortfall in November. Both exports and imports declined. Exports dropped 0.9 percent on the month and stand down 2.0 percent on the year while imports dropped a larger monthly 3.9 percent and were 5.0 percent weaker than a year ago. On an unadjusted basis, the merchandise trade deficit was €650 million. Both exports and imports declined on the month and year. Exports dropped 5.3 percent on the month while imports were down 2.1 percent.

Germany

February ZEW expectations index jumped sharply to a reading of minus 5.8 from minus 31 in January and its best reading since July 2007. However, by contrast, the current conditions index continued to slump, falling another 9.1 points to a lowly minus 86.2, its weakest level since October 2003. The improvement in the expectations component is promising but the new level still needs to be weighed against a long-term average of 26.4. Seen in this context, the latest bounce is much less impressive.

Italy

December seasonally adjusted merchandise trade deficit was €0.5 billion. At the same time, the unadjusted data showed a slightly smaller shortfall of €0.4 billion. The seasonally adjusted data reflected declines in both exports and imports. Exports declined 1.2 percent on the month and were down 5.5 percent on the year. Imports were even weaker with a monthly drop of almost 4 percent that left levels some 10.3 percent lower on the year. Trade with the other EU countries followed a similar pattern but monthly declines in exports (3.5 percent) and imports (5.2 percent) still left a surplus of €1.0 billion.

United Kingdom

January consumer price index dropped 0.7 percent on the month which, while sizeable, will in no small way have been influenced by seasonal factors. Indeed, annual inflation crept down just 0.1 percentage point to 3.0 percent. The December CPI was also higher than expected and it may well be that not all of the 2.5 percentage point cut in VAT that month has been passed on as retailers desperately tried to protect rapidly eroding profit margins. At a sector level, the sharpest declines in annual inflation were in transportation and housing, utilities & fuels. Both reflected mainly lower energy costs. By contrast, inflation accelerated notably in furniture & household equipment. The other main inflation measures decelerated too. In particular, the retail price index dropped 1.3 percent on the month and that put annual inflation at just 0.1 percent. There is a very good chance that in February the 12-month rate will drop into negative territory for the first time in nearly 49 years. Excluding mortgages, the formerly targeted RPIX was down 0.8 percent from December, reducing its annual pace from 2.8 percent to 2.4 percent.

January retail sales volumes were up 0.7 percent and were up 3.6 percent when compared with last year. The Statistics Office (ONS) warned that the December cut in VAT may have distorted the data that month and if so, presumably there may have been some carry-through into January. The increase was dominated by a 1.6 percent gain in non-food sector purchases. Food sales edged down 0.1 percent on the month. Within the former area, clothing & footwear jumped by 6.1 percent and the other stores category was not far behind with a 6.0 percent gain. By contrast household goods fell 4.8 percent and non-store retailing was off 1.7 percent.

Asia/Pacific

Japan

Fourth quarter preliminary estimate of gross domestic product was even worse than expected. Fourth quarter GDP plummeted 3.3 percent when compared with the previous quarter and sank 4.6 percent when compared with the same quarter a year ago. On an annualized basis, GDP plunged 12.7 percent. This was the third consecutive quarter of decline as the economy pays the price for the lack of economic reforms and increased dependence on exports to generate growth over the past decade. The declines were across the board. Domestic demand declined 0.3 percent on the quarter with private demand dropping 0.6 percent. Private non-residential investment sank 5.3 percent — however private residential managed to gain 5.7 percent. Overall gross capital formation which includes residential, private nonresidential and public investment dropped 2.9 percent. A big toll on the economy was exports — they dropped 13.9 percent and for the whole year of 2008 plunged 45 percent.

December tertiary index declined 1.6 percent and was down 3.6 percent when compared with last year. Industries that declined on the month included wholesale & retail trade, services (down 3.5 percent), finance & insurance (down 2.7 percent), information & communications (down 3.9 percent), medical, health care & welfare (down 1.7 percent) and transport (down 3.5 percent). Industries that increased on the month included services (up 1.9 percent), real estate (up 2.2 percent) and eating & drinking places & accommodations (up 2.1 percent).

December all industry index sank 2.7 percent after dropping 2.4 percent in November. The index plunged 7.0 percent on the year. Analysts had expected a decline of 3.0 percent on the month. The tertiary index which is a major component of the all industry index dropped by 1.6 percent on the month and was down 3.6 percent on the year. 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.

Americas

Canada

December factory shipments sank 8.0 percent on the month and dropped 9.0 percent when compared with last year. Volume sales were down 4.4 percent on the month. Declines were widespread with 20 of 21 reporting industries all suffering. The only gain was seen in printing & related activities where shipments crept up 0.1 percent. Particularly badly hit was the petroleum & coal sector — sales plunged 18.4 percent but the motor vehicle industry fared little better with a decline of 14.2 percent. Meantime, primary metals were off 14.4 percent. Other aspects of the report were similarly negative with both new orders and backlogs declining on the month. New orders dropped 12.9 percent and after a 12.7 percent nosedive in November. By comparison, unfilled orders were relatively robust in posting a decline of just 2.8 percent.

January consumer price index was down 0.3 percent and was up 1.1 percent when compared with last year. Excluding food and energy, the CPI dropped 0.6 percent and was up 1.2 percent while at the same time the Bank of Canada’s preferred core — which excludes eight volatile items — was down 0.4 percent on the month and was up 1.9 percent on the year. At a sector level, the only prominent slowdown was in transportation where prices fell even more steeply on the year (7.5 percent) than in December (6.1 percent). Elsewhere prices tended to creep higher. Annual inflation rates were up in household operations & furnishing (2.3 percent from 1.9 percent) and in health & personal care (2.7 percent from 2.0 percent). Prices also fell less quickly in clothing & footwear (0.4 percent from 2.6 percent). Inflation in the food sector was unchanged (7.3 percent) while energy prices were down 10.9 percent on the year. Energy prices were down 10.9 percent on the year.

Bottom line

Investors tried to adjust to the growing realization that there is no quick fix for the ailing global financial system. And most distressing is the concern that some of the largest U.S. banks may have to be nationalized. Stocks plumbed their lowest levels in many years. President Obama signed a $787 billion stimulus plan while Germany said it would support weaker European countries and the Bank of England said it might adopt quantitative easing to increase credit availability. Economic data were dreadful.

This week will provide new data on the state of the major economies. In Japan, industrial production data will tell whether that sector will continue to plunge after sinking 9.8 percent on the month in December and 8.5 percent in November. And the all important consumer price index will be studied to see if the economy is sinking into deflation. Both Germany and the UK will release revised fourth quarter GDP which will contain details not in the preliminary releases.

Looking Ahead: February 23 through February 27, 2009

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