Global Markets

U.S. and European equities ended the week on a positive note thanks to a combination of better than anticipated German business sentiment and a better than expected durable orders excluding transportation from the U.S. The picture mid-week had been different as investors continued to respond to Tuesday’s FOMC statement.

Worries about the global economy increased following reports showing growth in Germany’s manufacturing and service sectors slowed more than expected in September, and after the U.S. weekly initial jobless report portrayed a labor market continuing to struggle for traction. And the week’s accumulation of U.S. housing data showed a sector barely bouncing off its lows.

As expected the Federal Reserve Open Market Committee (FOMC) left its policy making fed funds target range at zero to 0.25 percent. Once again, the FOMC stated that it expected the fed funds rate to remain low for an "extended period." Kansas City Fed President Hoenig continued to dissent, voting against the extended period language. However, the FOMC did adopt a clear easing bias, noting that it “is prepared to provide additional accommodation if needed.” Consequently, further large-scale securities purchases to expand its holdings well beyond the current quantitative target of $2.054 trillion are clearly on the table.

Gold, after vaulting upward, paused and hovered just below the $1,300 an ounce level at week’s end. The Friday London PM gold fixing was $1,297 a troy ounce. But gold is not the only metal on a tear. The price of silver soared to a 30-year high as investors continued to pile money into precious metals on the back of diminishing faith in paper currencies. Silver’s rise has been more spectacular even than that of gold — it has surged 20 percent in the past month. On Friday it rose above its high of March 2008 to touch a peak of $21.41 a troy ounce, the highest since 1980 when the Hunt brothers cornered the market, driving prices to more than $49 an ounce. Analysts and traders say $1,300 is an important trading level for gold with a large number of options to buy or sell at that price being traded. Should gold breach that price as is widely expected, the market could surge higher towards $1,350.

On the week, equities in Europe and the United States recorded healthy gains for the week while in Asia Pacific, indexes were mixed. The SET jumped 3.1 percent while the Nasdaq gained 2.8 percent. The Taiex edged up 0.1 percent. Both Japanese indexes were down 1.6 percent in a holiday-shortened trading week.

Global Stock Market Recap

Europe and the UK

After a negative start Friday, the FTSE, DAX and CAC rallied on reassuring German sentiment and on U.S. data for capital equipment orders that eased concerns about a slowdown in business investment. Equities had faltered midweek on worries about global growth and as rising government bond yields for Europe’s most indebted nations sparked concern that the region’s sovereign debt crisis could be intensifying. For the week, the FTSE and CAC were up 1.6 percent while the DAX gained 1.4 percent. For the FTSE it was the longest streak of weekly gains since April.

While there was little new European economic news during the week, two releases caught investors’ eyes. On Thursday, European stocks declined after flash PMI reports showed both manufacturing and services growth slowing more than anticipated for the eurozone as a whole and Germany in particular. Concerns were underlined after the U.S. weekly initial jobless report was weaker than expected — especially since investors remained concerned about the dour message the Fed sent in its Tuesday post meeting statement. However on Friday, stocks rebounded strongly after the Ifo reported that business sentiment topped forecasts in Germany. An added dollop of favorable news came from the U.S. where capital equipment orders beat analysts’ estimates.

Norges Bank, Norway's central bank left its key policy rate at 2 percent for a fourth straight meeting Wednesday and said that the country's inflation rate was likely to be slightly lower than it had expected. In a dovish statement, the Bank reiterated its plan to gradually normalize the key policy rate and said that — aside from inflation — other economic indicators, as well as the Norwegian krone exchange rate, were developing in line with its projections. Norges reiterated its plan to gradually normalize the key policy rate and to keep it in the interval 1.5 percent to 2.5 percent until it updates its forecast path and economic projections on October 27^th.

Asia Pacific

Stocks were mixed in thin trading with many markets closed during the week for holidays. Both the Nikkei and Topix were down 1.6 percent as equities were buffeted by the yen’s gyrations and by tepid U.S. and European data Thursday which dampened the outlook for the global recovery. The weekly declines for the Nikkei and Topix were the first in a month. The All Ordinaries also slumped, declining 0.7 percent on renewed signs of risk aversion.

Japanese stocks were down three trading days (Japan observed holidays on Monday and Thursday) thanks in part to the yen, which influences exporters’ earnings. With growth dependent on exports, the higher value of the yen puts a damper on economic growth. The Topix has fallen 16 percent from its high this year on April 15^th while the Nikkei is down 16.5 percent since April 5^th. A combination of Europe’s debt crisis, China’s steps to curb property prices and concern about the pace of U.S. economic growth has hurt confidence in the global recovery. Some analysts think that equities will go up only if people expect Japan will take additional monetary easing steps.

The first half of the Japanese fiscal year ends September 30^th. Japanese companies received a total of ¥1.01 trillion in dividends from overseas units during the April through July period, down 18.7 percent on the year, suggesting that they are not eager to repatriate profits earned abroad for reinvestment at home. For example, Hoya, which makes hard-drive substrates, plans to repatriate almost no profits from abroad this fiscal year.

Last April, to urge the corporate sector to bring home its overseas wealth the government made 95 percent of dividends from foreign subsidiaries tax-free. The aim was to boost domestic capital investment and R&D to create jobs. However, the move has proved disappointing so far. Many companies are keeping profits at overseas units with an eye on reinvestment abroad, including mergers and acquisitions. Japanese manufacturers have been moving production overseas. Capital investments for this fiscal year are projected to grow 35.1 percent abroad but rise just 6.8 percent in Japan, according to survey results released last month by the Development Bank of Japan.

The Reserve Bank of Australia released the minutes of its recently concluded policy board meeting. The minutes revealed that members of the board felt that a wait-and-watch stance was warranted for now given the decline in core inflation in the June quarter. But the RBA warned rates will have to go up again to keep inflation within target. “Members considered that it was likely that higher interest rates would be required, at some point, to ensure that inflation remained consistent with the medium-term target,” the minutes said. "’For the immediate decision, there had been no significant change in the overall outlook, with conditions looking a little stronger domestically than they had at the previous meeting, but looking a little weaker internationally.”

Currencies

The U.S. dollar sank against all of its major counterparts. The currency neared its lowest in 10 years against the Swiss franc and hovered near a recent five month low against the euro. The dollar continued its dramatic slump versus the safe haven Swiss franc, dropping to a two year low of 0.9795 in intraday trading. The dollar’s weakness over the past week is attributed to a lingering economic weakness that has fueled speculation that the Federal Reserve is preparing for a second round of quantitative easing. Unlike equities which soared after the durable orders release Friday, currency traders saw nothing in the report that would dampen expectations of new Fed action. The unexpected improvement in German business sentiment was a positive for the euro and offset for now, concerns about Europe’s public debt.

In Asian trading Friday, rumors were flying that the Japanese government had once again intervened to push the value of the yen down — however it was not confirmed. Another rumor — this one denied — was that Bank of Japan Governor Masaaki Shirakawa may resign. The central bank said Shirakawa had no plans to step down. (On the day, the yen is virtually unchanged against the U.S. dollar)

On Thursday, the euro sagged after the PMI report suggested that growth was slowing in the eurozone. At the same time, concerns over the fiscal state of eurozone periphery countries resurfaced after weak Irish growth data prompted a sharp sell-off in the country’s bond market, sending yields sharply higher. The euro soared 3.5 percent while both the Swiss franc and Australian dollar were up 2.5 percent. The yen, despite intervention was up 1.8 percent for the week.

The Chinese yuan appreciated to 6.689 to its strongest level as Chinese Premier Wen Jiabao met with President Barack Obama at the United Nations in New York Thursday. The yuan has appreciated about 2 percent against the dollar since June 19, when the central bank said it would pursue a more flexible exchange rate. U.S. lawmakers have demanded a stronger Chinese currency with Treasury Secretary Timothy Geithner saying last week that pace is ‘too slow.’

Selected currencies — weekly results

Indicator scoreboard

Germany

September Ifo business sentiment inched up to 106.8 from 106.7 in August. Current conditions jumped 1.5 points to 109.7 while expectations lost 1.3 points to 103.9 — the weakest reading since May. Confidence was broadly stable in most sectors although retail performed surprisingly well, up 2.2 points at 11.4. Morale in manufacturing eased just 0.2 points to 20.0 and lost a modest 0.5 points also to 20.0 in services. At the same time, sentiment in wholesale slipped 1.3 points to 13.3 while construction reported a 0.5 point improvement to a still lowly minus 18.1.

France

Second quarter gross domestic product was revised upward to a gain of 0.7 percent on the quarter from the flash estimate of 0.6 percent. On the year, GDP was up 1.7 percent. However, household sector spending was shaded lower to yield a modest 0.3 percent quarterly gain. Government spending was up 0.4 percent and gross fixed capital formation gained 0.8 percent, in line with the flash estimate. Final domestic demand contributed 0.4 percentage points to the quarterly increase in real GDP, down from the 0.5 percentage points previously estimated. Stock building added 0.6 percentage points and without this, the economy would have been close to stagnating last quarter.

Italy

July seasonally adjusted merchandise trade balance narrowed to €1.78 billion from a smaller revised €2.11 billion shortfall at the end of last quarter. The unadjusted balance was a surplus of €1.8 billion although this still compares unfavorably with a €3.6 billion surplus a year ago. The improvement in the seasonally adjusted bottom line conceals a contraction on both sides of the balance sheet with nominal exports down 0.6 percent and imports down 1.6 percent. However, on the year exports were up 12.2 percent within which sales to other EU countries rose 8.9 percent and to the non-EU bloc, 16.7 percent. Meantime, imports climbed 21 percent from July 2009 with purchases from the EU up 12.2 percent and from outside of the region, up 32.3 percent higher. On an annual basis exports derived most support from the energy sector which saw exports surge 60.5 percent Excluding energy, exports rose 10.7 percent with intermediates (up 15.7 percent) leading the way ahead of capital goods (up 9.7 percent) and a sluggish consumer sector (up 6.7 percent). Imports were supported mainly by intermediates (up 41.9 percent) although energy (up 25.0 percent) also made a major contribution here too. Consumer goods imports increased 8.7 percent from the same month last year and capital goods were up just 6.6 percent.

Second quarter seasonally adjusted jobless rate edged up 0.1 percentage point to 8.5 percent. The number of people looking for work hit 2.14 million, an increase of 24,000 over the first quarter. The latest rise in the jobless rate reflected a 0.2 percentage point advance to 6.1 percent in the north of the country and a 0.2 percentage point advance to 13.4 percent in the south. Joblessness in the central region was steady at 7.7 percent for the third month in a row.

July retail sales were unchanged on the month and up 1.7 percent on the year. Food purchases were up 0.4 percent while non-food sales were down 0.2 percent. Annual growth in non-food sales now stands at just 1.3 percent (food 2.4 percent). On the year, the best performing sub-sector was photographic equipment (5.0 percent) followed by electrical appliances (4.3 percent) and toys & games (4.0 percent). Shoes & leather goods (3.3 percent) also held up relatively well. By contrast, purchases declined in musical instruments (2.5 percent), computers & telecommunications (0.6 percent) and hardware & household items (0.4 percent).

Americas

Canada

August consumer prices edged down 0.1 percent and were up 1.7 percent on the year. Both core measures were similarly subdued. Excluding food & energy the CPI was unchanged on the month and up 1.3 percent on the year. At the same time, the BoC's preferred measure which excludes eight volatile items edged up 0.1 percent on the month and was unchanged on the year at 1.6 percent. On a seasonally adjusted basis, the CPI was up 0.1 percent. Within this the main upward pressure was a jump in prices in health & personal care (0.7 percent) together with more modest gains in food (0.3 percent) and clothing & footwear (0.2 percent). Prices dropped in transportation (0.3 percent), shelter (0.2 percent) and there were smaller declines in a number of other areas.

July retail sales declined 0.1 percent and were up 3.3 percent on the year. Volumes were down 0.2 percent. A major contributor to the weakness was furniture & home furnishings which saw demand slump 8.4 percent. There were also sizeable declines in electronics (4.9 percent) and in building materials & supplies (2.3 percent) and smaller declines in health & personal care (1.1 percent), and miscellaneous stores (0.9 percent). However, auto & part sales were up 1.0 percent. Excluding this sector, sales contracted 0.4 percent from June. The other main areas helping to lift overall purchases were general merchandise (2.4 percent), clothing & accessories (0.9 percent) and sporting goods and gasoline stations (both up 0.7 percent). Food sales were unchanged on the month.

Bottom line

Investors honed in on the FOMC statement Tuesday and assumed that another dose of quantitative easing was a done deal. German sentiment data on Friday did a lot to calm investor fears of slowing global growth.

This week will more than make up for last week’s dearth of data. In the Asia Pacific region, Japan will unleash its monthly slew of new economic data highlighted this time by the quarterly Bank of Japan Tankan Survey. In Europe, the focus will be on ECB money supply data on Monday and EMU economic and consumer sentiment Wednesday. And Friday’s final purchasing managers’ reports will confirm last week’s preliminary data. Flash harmonized index of consumer prices is on tap Thursday with unemployment data due Friday.

Looking Ahead: September 27 through October 1, 2010

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