Global Markets

Everyone seemed to have an opinion but none of them seemed to agree. But by Thursday night, a support package for Greece was agreed on. Key players’ opinions ebbed and flowed so that one needed a score card to keep track. For example, ECB President Jean Claude Trichet was vocal in opposing any IMF participation, but then praised the idea after an accord was reached. However many of his governing council members do not agree with the idea of IMF participation. Similar vacillations were shown from French President Sarkozy who ended up agreeing to the German backed plan.

Briefly, Greece would receive both bilateral loans from its eurozone partners and funds from the International Monetary Fund if it faces severe difficulties. Greece’s public debt is projected to reach more than 120 percent of gross domestic product this year.

The currency markets took the uncertainty of a pact out on the euro sending it to a 10 month low on Thursday. Analysts noted that Greece is not the only country with fiscal woes. Most EMU members are above the guidelines set forth in the Stability and Growth Pact of a deficit no higher than 3 percent of GDP and debt no higher than 60 percent of GDP. And many other countries have been warned by the European Commission including the four largest — Germany, France, Italy and Spain — that their economic growth forecasts for the next three years were too optimistic, putting at risk their ability to cut their budget deficits in accordance with the European Union’s fiscal rules. The Commission asked these four countries along with others including Austria, Belgium, Ireland and the Netherlands to spell out exactly how they intended to meet their medium term deficit reduction targets.

Earlier in the week, worries that the eurozone sovereign debt crisis was spiraling out of control rattled markets, causing the euro to plunge as traders became increasingly frustrated by the eurozone’s vacillation in the face of the Greek debt crisis and after Fitch downgraded Portugal’s sovereign debt.

On the week, all stock indexes followed here were up with the exception of the Hang Seng, STI, Shanghai Composite and Taiex. Only three indexes remain below their 2009 closing level — Hang Seng, Taiex and Shanghai Composite. 

Global Stock Market Recap

Europe and the UK

Stocks were up for the fourth straight week despite the turmoil surrounding the Greek fiscal crisis. Stocks were lower Friday however. Investors’ worried that government debt might derail the fragile economic recovery even after the European Union agreed to a Greek aid plan. The FTSE was up 0.9 percent while the CAC gained 1.6 percent and the DAX jumped 2.3 percent. Stocks were boosted Thursday on the growing hope that EU officials would reach an agreement that would help Greece.

Although there was little new economic data during the week, the German Ifo survey boosted morale and helped invigorate equity investors as did better than expected UK retail sales. And on Thursday, improvement in U.S. jobless claims data also helped put a positive spin on things. And Fed Chairman Ben Bernanke said the U.S. economy still needs low interest rates and that the central bank will be ready to tighten credit at the appropriate time.

Portugal’s parliament approved a government austerity program on Thursday under pressure from international financial markets to apply tough measures to cut the country’s spiraling budget deficit. The vote came just a day after a downgrade of Portugal’s sovereign debt rating raised concerns that the Greek debt crisis could spread to other southern European countries. Finance Minister Fernando Teixeira dos Santos said the vote strengthened the international credibility of the government’s plans to discipline public finances and to stimulate economic growth.

The ECB President Jean Claude Trichet surprised Thursday and said that the ECB would not go ahead with plans to raise the minimum credit rating required for assets provided as collateral by eurozone banks at the end of the year. This will relieve immediate pressure on Greece. His comments in the European parliament, just hours before a Brussels summit of European Union leaders, indicated the ECB saw an urgent need to help calm financial markets’ fears about the eurozone’s stability. The move substantially reduced the risk of Greek assets being excluded if they were downgraded further, which would have a catastrophic impact on the country’s financial system. The ECB’s minimum rating requirement is currently BBB minus. Before Thursday’s announcement, that was scheduled to rise to A minus at the year-end. But Mr Trichet also announced that from next year the ECB would move to a sliding scale system that could result in it distinguishing much more between the assets of different eurozone members.

Asia/Pacific

Most of the region’s equity indexes ended last week on a positive note. They were boosted by the resolution of the Greek situation. However, not all indexes followed here were able to turn losses into gains for the week. The Hang Seng, Shanghai Composite and Taiex were down for the week and remain below their year end 2009 levels (the STI was down on the week but remained marginally above its year end mark). However during the week, concerns about the debt problems in Greece and outcome of the EU summit more than offset the optimism about global economic recovery with most traders adopting a wait and see attitude. The exceptions were in the Philippines and Indonesia — the PSEi and Jakarta Composite were up 2.7 percent and 2.6 percent on the week. And in Japan, the Nikkei was up 1.6 percent while the Topix gained 1.9 percent. The Nikkei briefly traded over the 11,000 level Friday.

There were few economic releases in the week. Japan’s CPI continued to sink in February while the merchandise trade balance eased on the month. The Bank of Japan released the minutes of the February 17 and 18 meeting. The minutes revealed that several of the board members of the Bank felt that the risks to the Japanese economy are starting to find balance. The minutes further noted that the board believes that the effects of monetary policy are strengthening but the bank must continue to act swiftly and decisively to support the economy. Bank of Japan minutes lag meetings by four to five weeks. A subsequent meeting was held on March 16 and 17.

Currencies

Although the major currencies including the Canadian and Australian dollars, the pound sterling, Swiss franc and yen tumbled against the U.S. dollar last week, the focus was on the euro — it sank to a 10 month low Thursday prior to the EU agreement on fiscal aid that put a safety net under Greece. The currency stabilized Friday even though investors remained wary of the agreement. Analysts opined that the debt problems of Greece (and Portugal) had underlined growing anxiety about the huge levels of borrowing elsewhere. Adding pressure on the euro were comments from Zhu Min, deputy governor of the People’s Bank of China, who said the Greek debt crisis was just the tip of the iceberg as far as sovereign debt worries in Europe are concerned.

Although the euro has been declining since December when Greece’s problems surfaced, the euro’s woes took center stage Wednesday as a ratings agency downgrade for Portugal and further uncertainty about a support package for Greece heightened concerns about sovereign debt, particularly in the eurozone. Relatively buoyant economic figures provided little support for the euro. German business sentiment improved to its best level since June 2008 according to the Ifo institute while the March flash PMI estimate came in stronger than expected.

Selected currencies — weekly results

Indicator scoreboard

EMU

February M3 money supply was down 0.4 percent on the year while the 3-month moving average measure preferred by the ECB declined by 0.2 percent. Private sector lending was once again the main culprit, declining 0.4 percent on the year. However, even this was marginally stronger than the 0.6 percent decline posted in January. Loans to non-financial corporations were down 2.5 percent after a 2.7 percent drop last time while lending to households was up 1.8 percent on the year. Loans for house purchase also accelerated slightly, up 2.1 percent on the year after a 1.8 percent gain in January. Overall consumer credit was down 0.8 percent on the year, an even weaker performance than the 0.5 percent fall last time.

Germany

March Ifo economic sentiment climbed to 98.1 from 95.2 in February and reflected gains in both current conditions and expectations. Current conditions which have lagged the recovery in expectations were up 4.6 points to 94.4, their ninth consecutive monthly gain. Expectations were up another 1 point to 101.9 and so maintained the upward trend seen since their weak point in March last year. The latest increase in the headline index was broadly based. Confidence in manufacturing was up almost 6 points to minus 0.5 and climbed 3 points to 9.8 in services. Morale in construction gained 4 points to minus 14.1 and improved 3.9 points to minus 3.8 in wholesale. However, by far the strongest gain was in retail where sentiment surged 9.6 points to minus 12.4.

France

February consumption of manufactured products slumped 1.2 percent after sinking 2.5 percent in January. On the year, sales were up 1.6 percent. February's drop reflected marked weakness in textiles, where sales dropped 5.4 percent on the month, and in autos, where demand was down 1.5 percent. Household goods were off 0.4 percent and overall durable goods spending declined 0.8 percent. The other products category however, managed a modest 0.2 percent gain.

Italy

Fourth quarter unemployment rate jumped to 8.2 percent from an upwardly revised 7.9 percent in the third quarter. As usual, the highest jobless rate occurred in the South where it climbed 0.1 percentage points to 12.7 percent while the lowest rate was in the North which saw a 0.3 percentage point increase to 5.9 percent. However, the largest gain was in the Central region where the jobless rate rose 0.5 percentage points to 7.7 percent. Total joblessness stood at 24,955,000, up 42,000 on the previous quarter.

January retail sales were down 0.5 percent and dropped 1.3 percent when compared with a year ago. Food sales sank 1.0 percent on the month while non-food demand was down 0.3 percent. Annual growth rates were negative for all of the major product areas with the largest drop recorded in telecommunications (4.3 percent) closely followed by pharmaceuticals (4.2 percent). Furniture & textiles were down 1.3 percent, electrical goods dropped 2.2 percent and household appliances fell 2.8 percent.

United Kingdom

February consumer price index was up 0.4 percent and up 3.0 percent when compared with last year. Core CPI was also up 0.4 percent on the month and 2.9 percent on the year. On the year, the main downward impact came from recreation & culture which alone subtracted nearly 0.2 percentage points. However, housing & household services and furniture & household goods also made significant negative contributions. Upward pressure stemmed mainly from clothing & footwear where a 2.0 percent bounce in prices from January added almost 0.1 percentage point to the annual rate. Communication and restaurant & hotels were the only other areas to provide a (small) positive push. It should be noted that recent data have been distorted by bad weather in general and by January's 2.5 percentage point hike in VAT in particular. How much of the rise in indirect taxes has been or will be passed on by retailers is unclear.

February retail sales jumped 2.1 percent and were up 3.4 percent when compared with last year after plunging 3 percent on the month in January. Excluding fuel, sales were up 1.6 percent from January but were up 5.4 percent on the year. Sales of food declined 1.2 percent on the month leaving non-food purchases up 3.4 percent. Within non-food, household goods took off, climbing a record 11.2 percent. Clothing & footwear saw demand rise 1.1 percent while the other stores category advanced 2.8 percent. Non-store retailing was also strong, up 3.6 percent. The only decline in the non-food area was in non-specialized stores where demand dropped 0.4 percent.

Asia/Pacific

Japan

February merchandise trade balance recorded its 11th consecutive trade surplus. The unadjusted surplus was Y651 billion, up from Y70.8 billion a year ago. Exports, now up three months in a row, gained 45.3 percent on the year while imports, up two months in a row, gained 29.5 percent on the year. Exports to the U.S. were up 50.4 percent from a year ago while imports edged up 7.2 percent. Exports to the EU were up 19.7 percent while imports gained 7.3 percent. Exports to Asia, now up four months in a row, jumped by 55.7 percent on the year while imports were up 38.9 percent. On a seasonally adjusted basis, the trade surplus was Y470.5 billion, down from Y651.1 billion in January. Analysts have been looking for the impact of the Toyota recall on exports. Exports were down 1.7 percent on the month while imports were up 1.6 percent.

February consumer price index was down 0.1 percent and 1.1 percent when compared with last year. This was the 13^th consecutive month that the overall CPI index has declined on the year. Excluding only fresh food, the CPI was up 0.2 percent but down 1.2 percent on the year. Excluding fresh food and energy, the CPI was down 0.1 percent and 1.1 percent on the year. The index for goods sank 1.9 percent on the year while for services, the indexed declined a relatively modest 0.4 percent. March Tokyo CPI seen as a precursor for the national index was up 0.3 percent but slumped 1.8 percent on the year. Excluding fresh food, the index here was down 1.8 percent on the year while excluding both fresh food and energy the index dropped 1.2 percent. In February, all major price categories continued to decline except transportation & communication and education. However, furniture & household utensil prices plunged 5.3 percent while those for fuel, light & water dropped 5 percent.

Bottom line

The Greek crisis and what the EU would do about it was front and center last week. And after much vacillating, the group finally agreed to a safety net for the country on Thursday night. Most equity indexes were up last week — and the U.S. dollar gained against most currencies as well.

Investors will be faced with the usual deluge of month-end economic data. In Europe and the UK they will have more hours of daylight to evaluate them — daylight saving begins on Sunday. In Japan, the quarterly Tankan will be released along with unemployment and household spending and retail sales. In Europe, the closely watched EC business and confidence survey will provide clues to how businesses and consumers are feeling. The Japanese fiscal year ends March 31^st.

Most markets will be closed on Friday April 2.

Looking Ahead: March 29 through April 2, 2010

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