Global Markets

Equities swooned world wide as the Greek aid package and the People’s Bank of China’s third margin requirement increase this year sent investors fleeing for safe havens. And the global market sell off continued to escalate throughout the week. This time worries centered on the increasing fears that the debt crisis would spread to other European countries. All equity indexes followed here with the exception of the SET were down last week. The CAC plunged 11.1 percent while the Nasdaq sank 7.9 percent, the Jakarta Composite dropped 7.8 percent and the FTSE swooned by 7.7 percent.

Markets were rocked as the danger to the global economy of unsustainable budget deficits has hit investors hard. Riots in Athens have illustrated how the severe austerity measures designed to tackle such deficits have implications not just for economic growth but on the fabric of society as well. The dollar and highly-rated government bonds have been pushed sharply higher on safe haven flows while commodities corrected to year lows.

And on Thursday, worries about European sovereign debt turned into a route. A four percent drop in Chinese stocks started the downbeat mood. But later in the afternoon U.S. stocks plunged while the VIX index of market volatility spiked nearly 40 percent to 40.71, to the highest level in a year. Traders were disappointed that ECB President Jean Claude Trichet did not announce further measures to support the region’s debt markets. Adding to stress in markets were signs that European banks were becoming less willing to lend to each other as fears about counterparty risk relating to Greek debt exposure takes hold.

Global Stock Market Recap

Europe and the UK

Equities crumbled as the weight of the ongoing Greek crisis and worries that it may spread elsewhere drove investors to sell. From Hong Kong to New York, there was mounting concern that the €110 billion rescue package for Greece would not prevent the crisis from spreading to other highly indebted eurozone nations. The FTSE was under additional home grown pressures stemming from Thursday’s national election and its inconclusive result which has led to a hung Parliament for the first time since the 1974. On the week, the FTSE dropped 7.7 percent, the DAX sank 6.9 percent and the CAC plunged 11.1 percent.

On Sunday May 2, eurozone finance ministers agreed to a €110 billion aid program aimed at averting a sovereign debt default by Greece and stopping the crisis from spreading to other heavily indebted periphery economies. However, rather than a feeling of relief, investors were concerned that the Greek debt crisis would spread. Investor sentiment suffered another blow after Moody's placed Portugal's credit ratings on review for possible downgrade. The review of Portugal's ratings, which had been on negative outlook since October 2009, is expected to be concluded within three months. Moody's said the action reflects the recent deterioration of Portugal's public finances as well as the economy's long term growth challenges. Equities were down despite strong PMI readings.

There was a ray of sunshine on Friday however. Spain’s economy crept out of recession in the first quarter of 2010 after nearly two years of decline, according to a preliminary estimate released by the Bank of Spain. The Bank estimated that GDP inched up 0.1 percent in the first quarter. The positive result was attributed to the global recovery, better export performance, continued fiscal stimulus and higher levels of confidence. Compared with the same quarter of the previous year, however, GDP was still down 1.3 per cent.

European Central Bank follows its own path

As widely expected, the European Central Bank left its key policy refinancing interest rate at 1 percent where it has been since May 2009. The ECB left the deposit rate — the floor for euro money market rates — at 0.25 percent and the marginal lending rate or the ceiling at 1.75 percent. The governing council has said repeatedly that interest rates remain appropriate and that they do not see inflationary risks. Inflation currently is 1.5 percent and below the ECB's target of close to but under 2 percent. Today's meeting was held in Lisbon. The governing council meets twice a year away from the ECB's Frankfurt headquarters.

At his post meeting press conference, ECB president Jean Claude Trichet dashed hopes that the Bank would act to calm the eurozone’s escalating fiscal crisis. He said the governing council did not discuss the option of buying government bonds and gave no signals that other measures were under consideration. Rather he said governments should step up efforts to bring down deficit and debt levels. The ECB’s hard line stance almost certainly reflected resistance within the governing council to measures that would blur the boundary between monetary and fiscal policy and would endanger the ECB’s independence. Mr Trichet’s comments suggest the ECB still sees Greece’s situation as exceptional and possible to isolate, without serious effects on Spain or Portugal.

Asia/Pacific

No surprise — all indexes followed here with the exception of the SET were down last week, with several sinking below their end of year levels. Needless to say, the markets followed U.S. stocks and plunged on Friday after a possible glitch in trading resulted in an unprecedented almost 1,000-point plunge in intra-day trading. But most Asian markets already had been down each day last week. Weekly losses were large, with the indexes sinking anywhere from 4.5 percent (Sensex and PSEi) to 7.8 percent (Jakarta Composite). The KLCI managed to drop only 1 percent.

Stocks were down Monday after weekend announcements by the People’s Bank of China and the government Australia. The PBoC increased reserve requirements by 50 basis points — it was the third time the Bank increased reserve requirements — while the Australian government announced that it would impose a new 40 percent tax on profits generated by resource companies. The so-called resources super profits tax, which mirrors a levy imposed on offshore petroleum projects, forms part of the government’s overhaul of the tax system to address the challenges of an ageing population and rising healthcare costs. Canberra said that it would also cut the corporate tax rate from 30 percent to 28 percent for non-resources companies, increase mandatory pension payments from 9 percent to 12 percent and create a A$5.6 billion infrastructure fund for the mining industry.

As the week wore on, increasing concerns about the debt concerns in Greece and the contagion effect on other countries in the region drove sentiment down. Large scale protests in Greece against austerity measures, speculation that Portugal might also face downgrades and a sharp decline in commodity prices dragged the markets lower.

On Friday (local time) the Bank of Japan offered ¥2,000 billion in overnight liquidity to “increase markets’ sense of security” because of the turmoil. It was the Bank’s first exceptional offer of overnight funds since the scare over Dubai’s sovereign debt in December 2009 and its biggest since the height of the financial crisis in December 2008. The move shows that fears about European sovereign debt default are rippling across global markets, with the Bank of Japan the first central bank to react by adding liquidity. However the move does not reflect any significant market disruption in Japan or any fears of contagion to Japan, despite its own debt woes.

The People's Bank of China announced that it will raise banks' deposit reserve requirement by 50 basis points effective on May 10. That will bring the reserve requirement for big banks to 17 percent of deposits and 15 percent for smaller ones. Previous increases were made in January and February. The Shanghai Composite has been tumbling on concern that government measures to cool the property market and the economy will hurt profits.

Reserve Bank of Australia increases rates yet again

The Reserve Bank of Australia increased its key cash rate by 25 basis points to 4.5 percent and remains the only major industrial central bank in a rate increasing cycle. In his statement, governor Glenn Stevens said that interest rates are now average for borrowers. He also said that the risk of serious contraction had passed. The intent of the increases had been to bring rates back to average.

The RBA began its latest round of increases in October 2009 when it increased rates from 3.0 percent to 3.25 percent. Since then, it has increased rates at each monthly meeting with the exception of February 2010 (the Bank does not meet in January). The Bank which has an inflation target of two percent to three percent saw first quarter consumer prices rise by 2.9 percent and up from 2.1 percent on the year in the fourth quarter of 2009. And although retail sales have unexpectedly declined in February, house prices for the first quarter were up 4.8 percent on the quarter after jumping 5.1 percent in the previous quarter. They were up 20 percent on the year.

And there is a boom in the key mining and resources sector. Soaring exports of iron ore and coal, primarily to China and India, are causing labor and accommodation shortages in the main mining states. Mineral export prices and volumes have been cited by the RBA as strengthening Australia's terms of trade, boosting investment and incomes. But offsetting these factors are slight jitters over Greece's bailout, the announcement of major tax reforms, and a federal budget due to be delivered on May 11.

On Friday (local time) the RBA released the latest quarterly statement on monetary policy. The Bank revised its growth forecast for the Australian economy for the next two years upward. The economy is expected to grow 3.75 percent in the year to June 2011 and faster than the 3.5 percent February forecast. Growth is expected to remain at that level until mid-2012 before rising to 4.0 percent by December 2012. However, the RBA warned that growth could be crippled by a number of factors including a global fallout from the sovereign debt crisis in Europe. The bank also expects prices to rise faster than previously estimated.

Currencies

All major currencies with the exception of the yen were down against the dollar in volatile trading all week long. In Europe, the euro plunged as investor fears heightened over possible contagion from the Greek financial crisis to other countries with large deficits and high labor costs (Spain and Portugal). The euro dropped to a 14-month low against the dollar and an eight year low against the yen as worries over the finances of Greece and other countries on the periphery of the eurozone escalated. Initial relief over a joint €110 billion rescue package from the International Monetary Fund and the EMU quickly faded.

The downward pressure on the euro escalated on Thursday when ECB President Trichet said that the possibility of buying eurozone government debt to ease the crisis had not been discussed at its governing council meeting. Analysts said the divergence between the price of government debt for countries at the core of the eurozone, such as Germany, and those on the periphery undermined the euro’s reserve status.

The euro plunged to a low of $1.2520 against the dollar — its weakest level since March 2009 Thursday as well as an eight year low of ¥110.62 against the yen, as a sharp sell-off in U.S. stocks sparked by the Greek debt crisis caused panic in the currency markets, triggering massive haven demand for U.S. and Japanese currencies. On Friday the euro recovered some poise, but still finished the week lower. In the process the euro also dropped to a record low against the Swiss franc after the Swiss National Bank, which has been intervening to stop the appreciation of its currency since March 2009, withdrew from the market and let the franc trade higher.

Sterling was pummeled first by the uncertainty in the run up to the national election and then the results. The hung parliament exacerbated concerns that a new UK government (whomever) would lack the strength to get to grips with Britain’s record fiscal deficit. The pound plunged to a one-year low against the dollar but still finished the week higher against the euro. Sterling swung sharply against the dollar as the first exit polls pointed to a hung parliament, with the Conservatives falling just short of a Commons majority.

Selected currencies — weekly results

Indicator scoreboard

EMU

April manufacturing purchasing managers’ index jumped to a nearly four year high of 57.6 from 56.6 in March. Both output and new orders accelerated for the ninth month in a row. Intermediates continue to be the best performing sector followed by capital goods with the consumer sector lagging some way behind. New orders were underpinned by exports with intermediates again posting a 10-year high. Moreover, the new orders/inventory ratio remained elevated last month suggesting that producers may well have to step up production to meet future demand. This scenario was also supported by a near record gain in backlogs. Despite the increasingly bullish view of the real economy, employment fell for the 23rd consecutive month. However, at least the decline was only marginal and the smallest since June 2008. Input prices climbed at their sharpest pace since June 2008 and while output prices rose for the first time in 18 months, margins continued to be squeezed.

March producer prices were up 0.6 percent on the month and 0.9 percent on the year. A 1.7 percent jump in energy prices was mainly responsible for the latest gain. Excluding energy, the PPI was up 0.3 percent on the month and 0.1 percent on the year. Intermediate prices were up a robust 0.6 percent from February. By contrast, durable goods prices edged up just 0.1 percent, capital goods were unchanged and nondurables slipped 0.1 percent.

March retail sales were unchanged on the month and 0.1 percent below their year ago level. Total volumes for the first quarter showed no growth over the previous period for the second consecutive quarter. Food, drink & tobacco dipped 0.2 percent on the month while the non-auto fuel and food area edged down 0.1 percent. The main culprit was Germany where purchases declined 2.4 percent from February, a slide that was compounded by an even steeper 2.8 percent slump in Portugal. However, on the brighter side there were respectable gains in France (0.7 percent) and Spain (0.8 percent) as well as in Austria (0.6 percent), Slovakia (2.0 percent) and Finland (1.0 percent).

Germany

March seasonally adjusted retail sales plunged 2.4 percent and were down 2.7 percent when compared with last year. February’s retail sales were revised to an increase of 1.1 percent from the originally reported declined of 0.4 percent. On an unadjusted basis, sales were up 2.7 percent. Food, drink & tobacco posted a 3.5 percent increase while non-food sales were up a more modest 2.8 percent.

March manufacturing orders jumped 5.0 percent on the month and were up 26.1 percent when compared with last year. The March bounce was well balanced with domestic orders up 5.4 percent on the month and overseas demand up 4.7 percent. Within the former, consumer and durables spiked 6.2 percent and were closely followed by capital goods which rose 6.0 percent. Basics gained a more than respectable 3.6 percent. The overseas total was dominated by strength in the other EMU bloc members which together increased orders by 9.6 percent from their February level. Non-eurozone orders advanced a more modest 1.3 percent. Within total foreign orders, consumer and durable orders were up 7.0 percent ahead of a 6.3 percent rise in capital goods and a 1.5 percent advance in basics.

March industrial output surged 4.0 percent and the annual weekday adjusted output growth jumped from 5.5 percent to 8.6 percent. Excluding construction, output was up 2.6 percent and was up 9.1 percent on the year. The latest increase in production followed a revised 0.2 percent decline in February and left output for the first quarter as a whole up 0.9 percent from the previous period. On the same comparison, manufacturing output grew an even healthier 1.3 percent, down only slightly from the 1.5 percent rate achieved in the fourth quarter. March's advance in total industrial production was led by construction which soared 26.7 percent on the month. The bounce here will in no small way reflect a recovery from the bad weather which hit the sector earlier on in the year. There were also impressive gains in most of the other sectors. Capital goods output jumped 4.4 percent, intermediates were up 3.5 percent and consumer goods rose 1.7 percent (durables minus 0.8 percent). The only real area of weakness was energy where production dropped 5.8 percent from February.

United Kingdom

April input prices were up 0.6 percent on the month and 13.1 percent on the year. Output prices jumped 1.4 percent and were up 5.7 percent on the year. Within the input price index a 5.6 percent monthly slump in fuel costs offset about half the impact of a 4.3 percent gain in crude oil prices. The only other significant rise was seen in imported metals (3.3 percent) while there were declines in imported food (0.7 percent), imported parts & equipment (0.8 percent) and in other home produced materials (1.0 percent). In output prices, for once it was not petroleum products that dominated the headline although prices were up 4.1 percent on the month. Rather, it was the other products category that had the single biggest impact with prices rising 3.9 percent. Within this category, a 23.4 percent jump in the cost of recovered secondary raw materials did most of the damage. Among the other major sectors, only tobacco & alcohol (2.6 percent) showed an unusually large monthly increase although chemicals (0.9 percent) were on the firm side too. Core output prices were up a solid 1.1 percent from March and now stand 4.4 percent higher on the year.

Asia/Pacific

Australia

March retail sales were up 0.3 percent after sinking 1.2 percent in February. On the year, sales were up 1.2 percent. Five retail groups were up on the month — clothing, footwear & other personal accessory retailing (up 1.4 percent), department stores (1.1 percent), other retailing (0.9 percent), cafes, restaurants & takeaway food services (0.7 percent) and food retailing (0.3 percent). However, sales dropped in household goods retailing (down 1.0 percent). Retail sales for the first quarter were much weaker than the previous quarter. They were up 0.1 percent compared with an increase of 1.0 percent in the December 2009 quarter.

March merchandise trade deficit was A$2.08 billion after recording a revised deficit of A$1.7 billion in February. Exports were up 1.5 percent while imports climbed 3.2 percent. Non-monetary gold exports were up 34 percent while rural goods gained 2 percent and services edged up 1 percent. Non-rural goods edged down 1 percent. Imports of intermediate and other merchandise goods were up 10 percent, non-monetary gold jumped by 27 percent, capital goods gained 2 percent while services edged up less than 1 percent. Consumption goods imports were down 4 percent.

Americas

Canada

April employment jumped by 108,700 while the unemployment rate edged down to 8.1 percent. The April employment gain constituted the largest monthly percentage increase in employment since August 2002. The latest jump in payrolls was biased towards part-time jobs which saw an increase of 64,800 but full-time positions were up a healthy 43,800 too. Moreover, the entire headline increase was accounted for by the private sector as the public sector saw job losses of 1,800. However, there was a distinct lack of balance between the goods producing and service sectors payrolls. Thus while the latter created a net new 106,600 jobs, the former saw employment edge up just 2,100 and within that manufacturing surprisingly declined some 20,600. Construction workers were up by 24,400. The service sector total was supported by a 31,600 increase in trade and a 31,300 gain in business, building & other outdoor support services. There were also respectable increases in information, culture & recreation (19,500), general finance (10,500) and professional scientific & technical services (9,900). The only declines of note occurred in accommodation & food (13,600) and education (6,100), the former probably due to a further unwinding of earlier temporary Winter Olympic positions.

Bottom line

Positive economic data were swept away by the crisis of confidence in the global financial markets. Investors sold equities and fled to safe havens. The euro sank under doubt about the efficacy of the fiscal aid package for Greece amid worries that the contagion would spread to other shaky countries such as Spain and Portugal. The UK held its national election on Thursday. And the results show a hung Parliament which added downward pressure on sterling and equities.

The week begins with the Bank of England monetary policy announcement which was postponed from Thursday because of the national election. No policy change is anticipated. On Wednesday, the Bank’s quarterly Inflation Report will be released and will be subjected to close scrutiny by BoE watchers. And data watchers will focus on the EMU’s first quarter flash GDP releases. Horrible winter weather along with slow growth in key export markets probably subdued economic activity in most member states.

Looking Ahead: May 10 through May 14, 2010

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