Global Markets

Equities were up across the board last week. As in past weeks, investors continued to focus on the political machinations in the Eurozone as the 17 member states struggled to reach some sort of an agreement on resolving sovereign debt banking issues. Now, some attention has shifted to third quarter earnings. All indexes followed here were up for the week. Gains ranged from 1.0 percent for the All Ordinaries and Topix to 7.6 percent for the Nasdaq. The Dow and Nasdaq are the only two indexes followed here that have regained positive territory for the year.

Equity investors seemed to absorb and react to economic data when not distracted by the events in Europe. This past week was no exception. Equities were down after China’s merchandise trade surplus was less than expected but then jumped after U.S. retail sales advanced more than anticipated and relieved some of the concerns about slow pace of economic growth. This news was offset by an increasing number of new credit downgrades of both countries and individual banks. On Thursday, Fitch downgraded UBS and alluded to possible rating cuts for other lenders as Europe continues to grapple with its debt crisis. The banking sector was generally under pressure from S&P’s downgrade of Spanish sovereign debt and a Goldman Sachs industry report giving high estimates for possible European bank recapitalizations.

The eurozone debt crisis dominated a G-20 summit of finance ministers and central bank chiefs in Paris over the weekend. G-20 ministers are expected to discuss plans to buffer Europe's banking sector in the event of a series of sovereign debt defaults. Underlining the challenges was a cut in Spain's long term credit rating due to the country's high unemployment, tightening credit and high private sector debt. French and German officials are trying to add detail to their crisis resolution plan in time for a European Union summit on October 23^rd.

Global Stock Market Recap

Europe and the UK

Equities advanced last week as investors hoped that the October 14^th and 15^th meeting of the G-20 finance ministers would help resolve many of the thorny issues besetting Eurozone countries. Investors were not totally insensitive to events elsewhere. On Thursday, European stocks fell from a two month high after China reported a lower merchandise trade surplus and slowing exports. And while ratings cuts that included S&P’s downgrade of Spain’s long term credit slowed investors, equities gained anyhow on optimism that the sovereign debt issue is on its way to being resolved. On the week, gains ranged from 1.9 percent (SMI) to 5.1 percent (DAX). The FTSE and CAC were up 3.1 percent and 4.0 percent respectively.

Jean-Claude Trichet, outgoing President of the European Central Bank, said that Eurozone leaders must resolve the crisis in Europe and take concrete steps to restore confidence. In an interview with the Financial Times, Trichet said policymakers in the Eurozone have to strengthen banks' balance sheets and restore credibility. He reiterated that the ECB will not act as a "lender of last resort" to governments.

Earlier in the week, European stocks struggled for direction, unable to build on strong recent gains amid concerns that Slovakia would block a planned expansion of bailout funds. A second vote was needed to get the measure passed by the Slovakian parliament after the first vote failed to get a majority because of political maneuvering. All 17 member states have now approved expansion of the European Financial Stability Facility (ESFS).

Although investors do not expect a comprehensive strategy to come out of Friday's meeting, they hope it will provide an opportunity for officials to agree on the outlines of a plan in time for a European Union summit on October 23.

Asia Pacific

Equities advanced last week — investors were mostly optimistic that Eurozone governments have finally recognized the gravity of the sovereign crisis and were moving to do something to help beleaguered banks. Risk appetite was helped after European Commission President Jose Manuel Barroso set out proposals to solve the eurozone's sovereign-debt crisis, including an outline of measures to shore up the region's banks.

Stocks stuttered Friday on Standard & Poor's downgrade of Spain and a move by Fitch to put several U.S. and European lenders on review for possible downgrades. On Friday, investors here were awaiting news from the G-20 meeting to be held on the weekend. But they also took note of China’s continued high inflation readings and a warning from Singapore's central bank that "headwinds from slower global growth will mean slower growth in Singapore in the next few years." With many U.S. companies slated to announce their quarterly results in the coming weeks, disappointing results from Alcoa and JP Morgan weighed on sentiment.

After a week’s vacation, the Shanghai Composite rallied after Central Huijin Investment, a unit of the China Investment Corporation, increased its stake in the "Big Four" Chinese lenders. On the week, gains ranged from 1.0 percent (All Ordinaries and Topix) to an impressive 7.0 percent (Jakarta Composite). The Sensex and SET advanced over 5.0 percent while the Hang Seng and Kospi were up over 4.0 percent.

Bank of Korea

The Bank of Korea kept its benchmark seven-day repurchase rate at 3.25 percent. Governor Kim Choong Soo said “downside risks” to the domestic economy exceeded upside risks because Europe’s debt woes may spread and advanced economies show signs of “sluggishness.” According to the governor, monetary policy is seen as accommodative. Weakening overseas demand is taking a toll on South Korea. Exports, equivalent to about half the economy, grew at a slower pace in September. August industrial production slid 1.9 percent after declining 0.3 percent the month before. Consumer-price increases eased to 4.3 percent from a year earlier but are still above the BoK’s inflation target ceiling of 4.0 percent.

Currencies

The U.S. dollar was down against all of its major counterparts with the exception of the yen as risk appetites once again came to the fore. The euro extended its biggest weekly gain against the dollar since January as Group of 20 finance ministers began a two day meeting to discuss plans to tackle Europe’s debt crisis. The euro has taken the brunt of market reaction to the ongoing debt crisis.

The yen declined against the dollar on speculation that Japanese authorities will take steps to curtail their currency’s gains. Friday’s positive U.S. retail sales report also lessened demand for a refuge from a faltering global economy. The euro advanced Friday after U.S. Treasury Secretary Timothy F. Geithner said that “Europe is clearly” moving to a crisis solution.

Selected currencies — weekly results

Indicator scoreboard

EMU

August industrial output excluding construction was up 1.2 percent and 5.2 percent on the year. The headline increase was in no small way due to a 4.3 percent monthly surge in Italian output which alone contributed around 0.7 percentage points to the overall increase. Spain (1.3 percent) also saw its first increase in three months and France followed a 1.8 percent monthly gain at the start of the quarter with a respectable 0.6 percent advance. German industrial production fell 1.0 percent but this wiped out only about a quarter of the previous month's spurt. Apart from energy and durable consumer goods (both flat), all main sectors saw solid monthly growth. Capital goods (2.1 percent) led the way ahead of intermediates (1.7 percent) and nondurable consumer goods (1.1 percent).

September index of harmonized consumer prices were up 0.8 percent on the month and 3.0 percent on the year and the fastest pace since October 2008. The jump in headline inflation was largely mirrored in the core indexes, all of which suggested that the underlying picture has also deteriorated from mid-quarter. Excluding food, drink, tobacco & petroleum the 12-month HICP rate was 1.6 percent, not high but still some 0.4 percentage points above the August pace. Similarly, omitting just seasonal food & petroleum, prices were up 2.0 percent on the year after a 1.6 percent reading last time and without only unprocessed food & petroleum the rate climbed a full 0.5 percentage points to also 2.0 percent. Most categories saw prices accelerate with clothing (2.0 percent on the year after minus 2.8 percent in August) especially firm and alcohol & tobacco (3.7 percent after 3.1 percent) also sharply higher. Among the larger EMU states, annual inflation rose 0.4 percentage points to 2.9 percent in Germany and 1.3 percentage points to 3.6 percent in Italy. Spain registered a 0.3 percentage point gain to 3.0 percent but the French rate held steady at 2.4 percent.

August seasonally adjusted merchandise trade deficit narrow to €1.0 billion from the revised shortfall of €3.7 billion in July reflecting a 4.7 percent monthly gain in exports that more than offset a 2.7 percent increase in imports. Much of the improvement in the bottom line was attributable to Germany which saw a near €1 billion increase in its surplus to €7.1 billion. By contrast, the deficits widened in both Italy (€2.4 billion from €1.8 billion) and Spain (€3.6 billion from €3.0 billion). However, France saw a reduction in its red ink from €0.4 billion to €0.1 billion.

Germany

August seasonally adjusted merchandise trade surplus widened to €13.8 billion from a larger revised €10.6 billion in July. The improvement reflected a 3.5 percent monthly jump in exports to a new record high, their best performance since March and only their second advance since April. Imports were unchanged from the start of the quarter. The unadjusted surplus was €11.8 billion. On an annual basis, total exports were up 14.6 percent or 2 percentage points faster than imports. Sales to the rest of the Eurozone were up 11.5 percent on the year while non-EU purchases climbed a disproportionately strong 17.1 percent. Within the 12.0 percent rise in imports, purchases from the other EMU members were 13.0 percent firmer on the year and from the non-EU bloc, 12.8 percent higher.

France

August industrial production excluding construction posted a 0.5 percent monthly increase after a stronger revised 1.8 percent advance in July. Annual output growth accelerated to 4.4 percent from 3.7 percent last time, its best showing since February. Within the monthly headline gain, manufacturing output was up 0.7 percent on the back of solid performances in electronics & machines (2.7 percent), refining (2.0 percent) and the other manufactured goods category (1.3 percent). There were partially offsetting declines in food (0.9 percent) and transport equipment (2.2 percent) but over the last three months, manufacturing saw output expand 0.5 percent (total industrial production 1.0 percent).

Italy

August industrial output soared 4.3 percent monthly — the first increase of any size since April. Adjusted for differences in working days, annual production growth jumped from an upwardly revised decline of 1.1 percent in July to a gain of 3.8 percent. The August bounce was a reflection of strong gains across all major sectors. Consumer goods output was up 4.2 percent on the month, just ahead of a 4.0 percent increase in capital goods. Intermediates saw a 2.7 percent advance and energy expanded 3.3 percent. Overall manufacturing achieved a 4.0 percent increase and a 4.5 percent annual gain.

United Kingdom

August industrial production edged up by 0.2 percent while the key manufacturing sector saw output slip 0.3 percent. Total industrial production was down 1.0 percent while manufacturing output was up 1.5 percent on the year. The contraction in manufacturing was the third in as many months and followed a revised 0.4 percent decline in July, essentially reflecting reclassification and reweighting.  Even so, the last three months still saw activity expand 0.4 percent compared with the previous period and points to at least a partial reversal in the third quarter of the negative contribution made by the sector to second quarter GDP growth. August alone saw seven manufacturing industries post monthly declines in output while six registered gains. The most significant declines were in wood & paper (3.2 percent) and basic metals & metal products (1.5 percent). By contrast, food, drink & tobacco enjoyed a 1.0 percent bounce, in no small way due to sharp pick-up in exports of spirits to the Asian market. Among the more erratic categories, mining & quarrying gained 2.1 percent with oil & gas up 2.3 percent. Energy expanded 1.9 percent from July but water & waste management slipped 0.2 percent.

September claimant count was up 17,500 after a downwardly revised 19,100 increase in August. The jobless rate edged up to 5.0 percent from 4.9 percent the month before. The ILO data revealed a hefty 114,000 jump in unemployment over the three months to August and an increase in the jobless rate to 8.1 percent. The steepest increase in unemployment for two years also coincided with sharpest (178,000) decline in employment over the same period. Headline average earnings growth was an annual 2.8 percent in August. Single month earnings slowed from 3.0 percent in July to 2.2 percent and regular pay grew just 1.8 percent.

August merchandise trade gap narrowed to Stg7.8 billion — the deficit was the smallest since April and Stg0.4 billion less than a downwardly revised outcome in July. There was a similar reduction in the underlying trade deficit which fell to Stg7.87 billion from Stg8.0 billion. The improvement reflected a 0.6 percent monthly rise in nominal exports to a record high, driven mainly by stronger overseas purchases of fuel, intermediates goods and food, drink & tobacco. The gain here was compounded by a 0.7 percent slide in imports. However, the reduction in the red ink was essentially due to favorable changes in the terms of trade. The real trade balance deteriorated as export volumes dropped 1.3 percent from July while imports were only off 0.1 percent. Regionally, the shortfall with the EU shrank by Stg0.6 billion to Stg2.9 billion and more than offset a Stg0.2 billion widening in the deficit with the rest of the world to Stg4.9 billion. The latest figures come as part of a major overhaul of the trade statistics to bring them more into line with the quarterly national accounts data. The main effect of this was to boost the level of service sector exports by close to Stg1.5 billion on average each month so far this year.

Asia/Pacific

Japan

August private sector machine orders excluding volatile ones for ships and electric power companies jumped a seasonally adjusted 11.0 percent on the month and were up 2.2 percent on the year. Analysts had expected a monthly increase of 4.6 percent. The total value of machinery orders received by 280 manufacturers operating in Japan was up by 6.5 percent on the month. Manufacturing jumped 13.7 percent but nonmanufacturing slid 6.1 percent. Overseas orders soared 32.3 percent after sinking 9.8 percent in July.

August seasonally adjusted tertiary index slipped 0.2 percent and was down 0.3 percent on the year. Wholesale & retail trade declined 1.1 percent on the month, finance & insurance dropped 1.8 percent, transport & postal activities slid 0.6 percent and electricity, gas, heat supply & water was down 1.1 percent. However, living-related & personal services & amusement services were up 1.6 percent, miscellaneous services was up 0.4 percent, accommodations, eating & drinking services edged up 0.2 percent, learning support was up 0.3 percent while compound services advanced 2.5 percent.

September corporate goods price index was up 2.5 percent on the year after rising 2.6 percent in August. It was the 12th consecutive monthly increase. The CGPI edged 0.1 percent lower on the month. On the year, petroleum & coal prices were 17.2 percent higher after rising 17.3 percent the month before. Processed food prices were up 4.2 percent while lumber & wood products prices increased by 4.0 percent. Information & communications equipment prices dropped 8.2 percent while electronic components & devices slumped 2.2 percent and electrical machinery & equipment slid 1.9 percent on the year.

Australia

September employment increased by 20,400 to 11,451,200 — analysts had expected an increase of 5,000. The increase was driven by a gain in full-time employment which was up by 10,800 people to 8,044,200. Part time employment gained 9,600 to 3,407,100. The unemployment rate edged lower to 5.2 percent from 5.3 percent in August. The number of people unemployed decreased by 3,800 people to 634,200. The number of persons looking for full time work declined by 6,200 to 453,100 while the number of persons looking for part time work increased 2,400 to 181,100. The participation rate remained steady at 65.6 percent.

China

September merchandise trade surplus was $14.51 billion, down from August’s surplus of $17.8 billion. Analysts had expected a balance of $16.2 billion. Exports were up 17.1 percent on the year while imports gained 20.9 percent. For the nine months, January through September, the trade surplus was $107.1 billion compared with $120.6 billion for the same nine months in 2010.

September consumer price index was up 0.5 percent on the month and 6.1 percent on the year. The annual pace slowed slightly from August’s 6.2 percent increase. For the nine months through September the CPI was up 5.7 percent on the year compared with an increase of only 2.9 percent for the same months in 2010. Food prices were up 13.4 percent for a second month when compared with the previous year. Non-food prices gained 2.9 percent after increasing 3.0 percent the month before. Urban CPI was up 5.9 percent for a second month. Rural CPI eased to an increase of 6.6 percent from 6.7 percent on the year in August. Health care costs increased 4.1 percent for a second month on the year.

September producer price index was unchanged on the month and was up 6.5 percent on the year after jumping 7.3 percent in August. For the nine months through September, the PPI was up 7.0 percent on the year compared with 5.6 percent for the same months the year before. Raw materials procurement, fuel & power prices eased to an increase of 10.0 percent after rising 10.6 percent on the year the month before. Production materials climbed 7.1 percent, down from 8.0 percent in August. Consumer goods prices were up 4.6 percent after climbing 4.8 percent in June and July.

Americas

Canada

August merchandise trade deficit widened to C$0.6 billion in August from a slightly smaller revised C$0.5 billion in July. The minimal deterioration was attributable to a 0.7 percent monthly increase in nominal imports that more than offset a 0.5 percent increase in exports. The real trade balance worsened rather more sharply as export volumes dropped 1.1 percent from July and imports eased just 0.1 percent. The bilateral surplus with the U.S. narrowed relatively sharply as exports fell 2.3 percent on the month and imports jumped 2.0 percent. As a result, the black ink shrank from C$3.7 billion to C$2.5 billion. The sluggish overall export performance was largely attributable to autos which slumped 7.5 percent on the month. Energy products (down 2.5 percent) were also soft but most other categories registered gains. In particular there was decent overseas demand for machinery & equipment (7.3 percent), industrial goods & materials (2.0 percent) and for other consumer goods (3.0 percent). Imports were held in check by a 13.6 percent monthly decline in energy with crude petroleum off 25.3 percent. Elsewhere however, there were decent advances in machinery & equipment (2.5 percent), forestry products (2.5 percent) and autos (2.3 percent). Other consumer goods (1.9 percent) also gained ground.

August manufacturing sales were up 1.4 percent and 6.9 percent higher than a year ago. Volumes performed almost as well, posting a 1.1 percent increase from July and a 2.7 percent advance when compared with August 2010. This was their second successive monthly increase. The overall nominal gain was led by transportation equipment which, despite a near-2 percent drop in motor vehicles, saw shipments surge 7.0 percent on the month. The jump here was largely due to aerospace & parts (47.8 percent) but there were hefty rises too in both railroad rolling stock (24.8 percent) and ship & boat building (22.4 percent). Excluding autos, sales were up 1.8 percent from July and 9.7 percent firmer on the year. Elsewhere there were monthly gains in clothing (2.5 percent), chemicals (1.9 percent), electrical equipment (1.6 percent) and food (3.9 percent). Petroleum & coal (2.7 percent) also fared well. On the downside there were sizeable declines in fabricated metals (7.0 percent) and primary metals (2.7 percent).

Bottom line

Economic data improved last week but investors continued to be focused on the situation in Europe. The G-20 meeting of finance ministers and central bankers is focused on helping the Eurozone to make headway in resolving its banking and debt issues.

While this week is light in new economic data in Europe and the Asia Pacific regions, the U.S. will be releasing a plethora of important data including both consumer and producer prices, housing starts and existing home sales and regional manufacturing surveys and industrial production. China will release industrial production and retail sales data while in Germany, both the ZEW and Ifo surveys are on tap. And of course, investors will continue to monitor closely Eurozone progress on its finance sector woes.

Looking Ahead: October 17 through October 21, 2011

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