Global Markets

Even as the ‘real’ economy shows signs of recovery, the financial markets have once again run amok on eurozone worries which were compounded by the heightened political tensions in the Koreas. However, as the week wore on, confidence returned and equities soared, regaining much of the previous week’s losses in addition to losses incurred earlier in the week. However, on late Friday, markets (in the U.S. — they were closed elsewhere) were sent into reverse by Fitch’s downgrade of Spain to AA+ from AAA. According to Fitch, “The process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term.”

Investors were not immune to the ebb and flow of heightened concerns about Europe’s debt situation and with little new economic data, there was little focus on the respective domestic economies. Escalating tensions between the two Koreas did not help. The euro waxed and waned along with investors’ attitude towards risk.

May has been a difficult month to put it mildly! Stock markets have plunged, private sector investors have lost confidence in the ability of peripheral European governments to pay back their debt and money retreated to the relative safety of U.S. and German government bonds. At this writing with one trading day left in May (except in the U.S. and UK) all indexes followed here are down on the month — all with substantial losses.

Global Stock Market Recap

Europe and the UK

After hitting a nine month low Tuesday, equities rallied Wednesday and Thursday but faded on Friday. They were pulled down in part thanks to sagging pre-holiday weekend declines in U.S. stock markets. Disappointing U.S. data combined with the escalating war of words (so far) between North and South Korea combined to give investors an excuse to pare holdings before the three day weekend in the U.S. and UK.

The FTSE, CAC and DAX managed to recoup Tuesday’s heavy losses and were up for the week. Both the FTSE and CAC were up 2.5 percent while the DAX gained a more modest 2.0 percent. As we all know, May has been a difficult month to put it mildly. The FTSE plunged 6.6 percent. And with one more trading day left for the CAC and DAX, they are down 7.9 percent and 3.1 percent respectively. All three are down so far in 2010.

After markets in Europe had closed on Friday, Fitch downgraded Spain's long-term foreign and local currency issuer default ratings to AA+ from AAA with a stable outlook.

Asia/Pacific

Equities in this region rebounded smartly after sinking Tuesday on renewed fears of European sovereign debt woes and the escalating animosity between North and South Korea. However, investors steadied on Wednesday and stocks were up for the most part for the remainder of the week. Stocks in Japan however ended the week slightly lower as they were unable to recoup all of Tuesday’s losses while those in Thailand suffered from the continued political unrest there. And stocks in Malaysia were also down on the week. With one trading day remaining in May, all indexes in the region are down by substantial margins. Losses range from 11.7 percent and 11.0 percent for the Nikkei and Topix respectively to 1.1 percent for the PSEi. Only the Jakarta Composite, PSEi and SET remain above end of 2009 levels.

In a week that offered little new economic data, there was little to distract investors from Europe’s problems and Korea except for Friday’s (local time) monthly deluge of data from Japan. And U.S. data were a mixed bag with durable orders up significantly while first quarter GDP was revised downward in its second estimate. Minutes of the Bank of Japan policy board meeting held on April 30 revealed that members agreed the deflationary troubles plaguing that country may come to an end by the next fiscal year.

Currencies

After sinking to four year lows mid-week, the euro managed to steady and gain some ground. However, the currency was still down on the week and the month against the U.S. dollar. The currency was pressured lower Friday after Fitch downgraded Spain late in the trading day. (Markets were already closed in Europe with only those in North America still trading in holiday thinned markets.) Most major currencies were down against the U.S. dollar for the month. For the euro, May would be the sixth monthly loss as investors fretted that European measures to reduce fiscal deficits and contain the sovereign debt crisis would undermine the global economic recovery. A meeting of the Group of 20 finance ministers and central bank leaders is expected to address the impact of Europe’s woes on currencies and financial rules on June 4^th and 5^th in Busan, South Korea. According to Japan’s Finance Minister Naoto Kan the discussion of the impact of the European situation on currencies will be on the main agenda.

The euro rebounded from a near four year low against the dollar Thursday after China reassured investors that Europe remained an important investment market for its vast foreign exchange reserves. The euro slumped earlier in the session after a report said China’s State Administration of Foreign Exchange, which manages the reserves of the People’s Bank of China, was concerned over its exposure to peripheral eurozone bonds in the wake of the region’s sovereign debt crisis. This prompted speculation that China might be reviewing its policy of diversifying its dollar holdings into the euro, which has been a big source of support for the single currency in recent years. The report was quickly denied.

Commodity currencies also rallied as risk lovers returned to the carry trade. The Australian dollar was up about 1.7 percent while the Canadian dollar was up about 0.7 percent.

Selected currencies — weekly results

Indicator scoreboard

France

April purchases of manufactured goods sank by 1.2 percent and were up 1.1 percent on the year. On the year, all major sectors saw increases in sales with the exception of autos which were down 2.9 percent. On the month, weakness was quite broad-based with declines recorded in household goods (0.3 percent) and textiles (1.2 percent). Auto sales plummeted 9.5 percent. Overall durable goods fell 4.4 percent after a 2.0 percent rise last time leaving the other products category to post the only increase (0.8 percent).

Italy

March retail sales were up 0.5 percent and 2.9 percent when compared with last year. This was their best monthly performance in more than two years. However, despite the latest improvement, sales for the first quarter as a whole were still down 0.2 percent on the previous period. The decline here was biased by the drop in food purchases (0.5 percent) but non-food demand was only flat. In March alone, food sales were up 1.1 percent from February while non-food was up just 0.1 percent.

April domestic producer prices were up 1.2 percent and 3.2 percent when compared with last year. Export prices were somewhat more subdued, registering a 0.6 percent advance over their March level to stand 2.6 percent higher on the year. As a result, total producer prices were up 1.0 percent on the month and 3.1 percent on the year. Within the domestic index the main monthly increases were once again recorded in energy (2.3 percent) and intermediates (1.7 percent). Prices of consumer goods were up a mild 0.3 percent, largely thanks to a 0.6 percent increase in durables, while capital goods charges edged up just 0.1 percent.

United Kingdom

First quarter gross domestic product growth was revised upward to 0.3 percent from the original estimate of 0.2 percent. However, when compared with last year, GDP is down 0.2 percent. In terms of output, the modest upward adjustment reflected stronger quarterly production in the goods producing area (up 1.2 percent from 0.7 percent) courtesy of a more robust manufacturing sector. Service sector activity was unchanged at 0.2 percent on the quarter but the decline in construction was revised slightly smaller (down 0.5 percent from 0.7 percent). Among the expenditure components, household spending was flat following a 0.4 percent increase in the fourth quarter. However, gross fixed capital formation registered a respectable 1.5 percent advance and alone contributed 0.6 percentage points to quarterly growth while government final consumption was up 0.5 percent. With inventories declining Stg1.34 billion, total domestic expenditure was up 0.6 percent on the quarter and 0.3 percent on the year. Following a 3.8 percent jump in the fourth quarter of 2009, exports volumes were unchanged at the start of the year. Taken together with a 1.4 percent increase in imports after a 4.7 percent gain previously, net foreign trade subtracted 0.4 percentage points from the bottom line.

Asia/Pacific

Japan

April unadjusted merchandise trade surplus was ¥742.3 billion, up from ¥48.99 billion in April 2009. This was the 13^th consecutive surplus. Exports were up 40.4 percent on the year while imports were up 24.2 percent. Exports are now up for five months in a row while imports are up for four. On a regional basis, unadjusted exports to China were up 41.4 percent on the year while exports to Asia were up 45.3 percent. Both are up six months in a row. Exports to the EU were up 19.8 percent while exports to the U.S. are up 34.5 percent. Imports from China were up 17.9 percent while from Asia that were up 23 percent. Japan imports from the U.S. were up only 9.4 percent while they climbed by 5.2 percent from the EU. Seasonally adjusted merchandise trade surplus slipped to ¥721.9 billion from ¥767.7 billion in March. On the month, exports were up 2.3 percent while imports were up 3.4 percent.

April consumer price index was unchanged on the month but down 1.2 percent on the year as deflation continues unabated. Core CPI which excludes only fresh food was down 0.3 percent and 1.5 percent on the year while the CPI excluding both fresh food and energy dropped 0.4 percent and 1.6 percent on the year. On the year, prices for all categories declined with the exception of transportation & communication where prices were up 1.9 percent on the year. The main culprit for the drop in the CPI was a decline in education where a fee waiver was introduced. Education prices swooned 13.2 percent on the month and 13.0 percent on the year. Prices for goods were up 1.0 percent on the month but down 1.1 percent on the year. Services prices were down 0.9 percent and 1.2 percent on the year. May Tokyo CPI edged down 0.1 percent and was down 1.4 percent on the year while the core less fresh food was unchanged on the month and down 1.6 percent on the year. Excluding both fresh food and energy, the CPI was also unchanged on the month but down 1.4 percent on the year.

April real household spending dropped 0.7 percent when compared with last year after soaring by 4.4 percent in March. Although the data for the subcategories are mixed, the main reason for the decline was a 13.1 percent plunge in clothing & footwear expenditures. Culture & recreation declined by 3.3 percent, transportation & communication spending dropped 1.7 percent and education was down by 0.8 percent. On the plus side, households spent 12.7 percent more for housing, 3.1 percent more on fuel, light & water charges and 3.2 percent more on furniture & household utensils.

April retail sales surged by 4.9 percent on the year, in contrast to the 0.7 percent decline in household spending. This was the fourth consecutive increase in retail sales. However, large retailers’ sales continue to decline. Their sales were down 3.6 percent after sinking 4.9 percent on the year.

April unemployment rate inched up to 5.1 percent from 5.0 percent in March. The number of unemployed was 3.6 million, an increase of 100,000 or 2.9 percent from a year ago. Employment on the year dropped 530,000 to 62.7 million. For the month of April, employment was down 28,000. The labor participation rate was 60.0, down 0.4 percent from a year ago while the employment rate was 56.8 percent and also down 0.4 percent on the year.

Bottom line

Equity indexes in the Asia/Pacific region managed to end the week in positive territory as did those in Europe and the UK. U.S. indexes however were unable to recover after equities sank on Friday in thin volumes on disappointing economic data and the Fitch announcement late in the trading day. U.S. and UK markets closed Monday for the Memorial Day holiday. Economic data were sparse with the main focus on the monthly outpouring of Japanese data and of course, U.S. data — both were decidedly mixed.

This week is a busy one. In the rear view mirror, both Canada and Australia will release their first quarter gross domestic product estimates. Both are expected to show solid growth. The Reserve Bank of Australia, after increasing its policy interest rate six times over the past seven meetings, is expected to pause this time. Thus far, the RBA has increased rates by a total of 150 basis points to 4.5 percent. And the Bank of Canada just might increase its policy rate to 0.5 percent from 0.25 percent on Tuesday.

The G20 finance ministers and central bank governors will meet on Friday and Saturday in Busan, South Korea where they are expected to address financial market instability. They will likely try to present a united front in addressing the problem.

Looking Ahead: May 31 through June 4, 2010

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