Next week, International Perspective will be published on Thursday, July 2nd.

A happy July 4th to all celebrants!

Global Markets

Central banks took center stage last week as the Federal Reserve’s Open Market Committee met and made no policy changes, the leadership of the Bank of England testified before parliament, the Swiss National Bank moved aggressively to weaken the Swiss franc and the ECB pumped funds into the eurozone banking system. Also influencing markets were the June OECD forecasts that revised its initial 2010 outlook upward.  

While all Asia/Pacific indexes followed here were up last week, those in the U.S., UK and Europe declined. Investors were quixotic and ignored better than expected data while at the same time, shrugging aside disappointing data. Stocks in Europe and North America began the week with hefty losses after the World Bank lowered its 2009 forecast and recession worries returned. The indexes tried — and for the most part failed — to make up Monday’s losses during the rest of the week. The World Bank expects the global economy to shrink by 2.9 percent this year compared with a previous estimate of a 1.7 percent contraction. Equities, commodities and emerging market currencies suffered hefty losses as risk averse investors shifted to the perceived safety of the dollar, the yen and government bonds.

There was also some disappointment that the Fed offered little in the way of fresh insight following its latest policy meeting. The Fed repeated that interest rates would remain low for some time and made no change to its quantitative easing policies.

The Organisation for Economic Cooperation and Development (OECD) said in its June global economic outlook that conditions appear to be improving for the first time in two years, thanks to government efforts to stimulate economies. Output for the 30 OECD member countries is now expected to decline 4.1 percent in 2009 — a more modest drop than the 4.3 percent contraction estimated in March. For 2010 the outlook has improved significantly — the OECD forecast an expansion of 0.7 percent instead of the 0.5 percent contraction forecast in March. It said financial conditions were likely to remain constrained for some time and the bottom of the recession would probably not be reached until the second half of this year.

Global Stock Market Recap

Europe and the UK

The CAC and DAX retreated for the third consecutive week while the FTSE was down for its second week. Investors waffled as doubts lingered over the prospects for a sustained rally in the medium term. The FTSE, which is heavily weighted with resource stocks, responded negatively to returning weakness on the commodities markets. Analysts said the pullback in equities highlights just how fragile investor confidence is with respect to the recovery in economic growth and asset prices. U.S. data continued to impact trading. For example, banking stocks retreated after U.S. first time claims for unemployment benefits unexpectedly increased Thursday. On the other hand, investors took heart in the upward revision to the OECD’s semi-annual forecast.

On Wednesday, Bank of England governor Mervyn King told the Treasury Select Committee that he was more uncertain than ever over the likely path of the economic recovery and agreed with the view that withdrawing policy stimulus too early risked restarting the economic downturn. King was asked if he was confident the UK would return to a period of above trend growth. He said the timing of any such recovery was highly uncertain. Among the issues for concern is the ability of banks to restore lending.

The European Central Bank began its liquidity injections into the financial markets about two years ago at the onset of the financial crisis. At that time it injected €95 billion overnight to help ease the tension and shocked market players. On Wednesday, in its first ever offer of one-year funds, the ECB pumped €442.2 billion ($614.8 billion) into the eurozone banking system at an interest rate of just 1 percent. The total allotted was the largest yet provided in a single ECB operation. For the ECB, however, the action was an extension of the policy it has pursued since Lehman Brothers failed last September.

Asia/Pacific

All indexes followed here were up last week. For the most part, they reversed at least a portion of the prior week’s losses. Once again, Asian investors reacted more favorably to U.S. data than those in the U.S. — but by and large, continued to take their cues from U.S. stock index behavior. Commodity price gyrations also played a roll as investors bought and sold resource stocks in synchronization with underlying confidence about the global recovery. Investors here were also buoyed by the results of the FOMC meeting when the post-meeting statement reaffirmed their commitment to quantitative easing and downplayed inflation concerns. The indexes were up as much as 3.8 percent (Hang Seng) and 3.7 percent (Taiex) and as little as 0.1 percent (All Ordinaries).

In Japan, core consumer prices excluding fresh food sank a record 1.1 percent on the year mainly due to lower prices for utilities, transport and communication. Analysts said much of the decline was caused by lower energy prices and a change in a gasoline tax. It was the sharpest decrease since comparable figures were first compiled in 1971. The data stoked concerns that deflation would become entrenched again and hamper a rebound in growth. While the Bank of Japan has so far been relatively relaxed about deflation — which did not derail the long period of economic growth that ended last year — the new data will give ammunition to those who think the BoJ should act more aggressively. Massive spare capacity thanks to shrinking exports and non-existent domestic demand — along with rising unemployment — only add to the downward pressure to wages and prices and on prices.

Currencies

The dollar lost ground last week against the euro, yen, pound sterling and Swiss franc as improving sentiment dented safe haven demands for the currency. The dollar came under pressure after Wednesday’s FOMC meeting when the Fed made it clear any exit from its current monetary policy was some way off. Analysts said that the Fed’s post-meeting statement encouraged investors to abandon the dollar in search of riskier, higher-yielding assets.

On Wednesday, a big liquidity injection from the European Central Bank also lifted sentiment. The ECB added a record €442.2 billion into the eurozone banking system in a first offer of unlimited one-year funds that some analysts nicknamed ‘stimulus by stealth’. The ECB isn't increasing the quantity of money in circulation in the same way as the Fed and Bank of England which are buying assets outright. But its policy of providing unlimited liquidity to European banks is designed to achieve a similar goal. Since the crisis began, the ECB has expanded its balance sheet as aggressively as the Fed or the BoE — and with broadly similar results.

The Swiss franc fell sharply Wednesday after the Swiss National Bank intervened in the foreign exchange market to halt the currency’s rise. The Swiss National Bank has been conducting operations in the market since March. Currency market intervention was added to the SNB’s arsenal of monetary policy instruments to stifle what it saw as excessive appreciation. Switzerland is among a number of countries that have been active in the currency markets this year. The central banks of Malaysia and Thailand are among those thought to have intervened in the past few months to weaken their currencies in efforts to prop up export growth.

Selected currencies — weekly results

Indicator scoreboard

Germany

June Ifo business sentiment reading climbed to 85.9 from 84.3 in May for its third monthly gain in a row and its best reading since November last year. Expectations reflected another solid gain — they were up 3.5 points to 89.5, its highest level since July 2008. However, the assessment of current conditions edged down 0.1 points to 82.4 and a new low for the cycle. Outside of services (unchanged at minus 5.0) and construction (minus 26.6 from minus 26.3) economic sentiment improved in all sectors. Manufacturing (minus 33.8 from minus 37.9) saw the steepest rise but there were also gains in retail (minus 17.3 from minus 21.1) and wholesale (minus 25.3 from minus 28.2). Manufacturing and wholesale are now at their best levels since November 2008 while retail provided its strongest reading since June last year.

France

May consumption of manufactured products slipped 0.2 percent and was down 1.6 percent on the year. The decline was led by textiles which slumped 1.4 percent on the month following a 0.2 percent drop in April. Weakness here was compounded by a 0.8 percent drop in household goods and a 0.3 percent dip in other products. However, auto sector purchases were up 2.4 percent. Excluding this area, overall sales would have declined 0.8 percent on the month and 3.5 percent on the year.

First quarter gross domestic product dropped 1.2 percent and was down 3.2 percent when compared with the same quarter a year ago. Swooning investment and exports combined with a drawdown in inventories contributed to the decline. Nearly all key categories posted declines, except for consumer spending, which edged up by 0.2 percent. Business investment dropped by 3.4 percent. Public investment was down 0.8 percent, marking the fifth straight quarterly decline. Exports plunged 6.4 percent and outpaced the 5.3 percent drop in imports.

Italy

April retail sales were down 0.4 percent and were 0.6 percent lower on the year. Food sales edged up 0.1 percent but non-food purchases declined 0.6 percent. Over the last three months, while food stores have seen sales fall by a relatively modest 0.3 percent, other stores have suffered a much more pronounced 1.2 percent drop.

Asia/Pacific

Japan

April tertiary sector index rebounded 2.2 percent on the month and was down 6.2 percent when compared with last year. Eight industry groups were up while four were down while one — electricity, gas, heat supply & water — was unchanged. Information & communications jumped 7.6 percent while wholesale & retail trade was up 4 percent. Finance & insurance was up 2.1 percent while miscellaneous services were up 2.8 percent. Those that declined included scientific research professional & technical services (down 1.7 percent), medical, health care & welfare (down 0.8 percent), learning support (down 0.7 percent) and compound services (down 7.7 percent).

May unadjusted merchandise trade surplus was ¥299.8 billion, down 12.1 percent from a year ago. This was the 19^th month in a row that the balance has declined from the previous year. Exports were down 40.9 percent and imports dropped 42.4 percent on the year. Exports to the U.S. sank 45.4 percent while imports from the U.S. dropped 40.3 percent. Exports to the EU did not fare any better, swooning 45.4 percent while imports sank 28.8 percent. Both exports and imports were also down to Asia, dropping 35.5 percent and 36.3 percent respectively. On a seasonally adjusted basis, May’s trade surplus was ¥222.4 billion. Both exports and imports were up for the second month — 1.9 percent each on the month.

May Japan consumer price index was down 0.2 percent and dropped 1.1 percent when compared with last year as expected. Core, excluding only fresh food was down 0.2 percent and 1.1 percent on the year as well. Excluding energy and fresh food however, the core was unchanged on the month and down 0.5 percent on the year. Fuel, light & water charges dropped 2.8 percent on the month hand 3 percent on the year while furniture & household utensils prices declined 0.5 percent and 1.6 percent on the year. Although transportation and communication prices edged up 0.2 percent on the month, they were 5.6 percent lower than a year ago. Goods prices edged down 0.2 percent and were down 2 percent on the year while services prices edged up 0.1 percent on the month and were unchanged on the year. June Tokyo CPI dropped 0.4 percent and sank 1.5 percent on the year. The core excluding fresh food declined 0.4 percent and 1.3 percent. The core also excluding energy dropped a milder 0.2 percent on the month and 1 percent on the year.

Bottom line

Last week, central bank activities dominated the news. This coming week — a holiday shortened trading week in the U.S. — will provide market participants with a plethora of new economic data to digest. Next week also marks the halfway point in the year 2009. The ECB meets on Thursday and as always, ECB president Jean Claude Trichet’s press conference will garner investor attention. Also on Thursday, investors get to see the U.S. employment situation report a day early. It will be employment Thursday rather than Friday!

Looking Ahead: June 29 through July 3, 2009

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