Stocks began the new quarter on an extremely upbeat note as merger activity combined with better-than-expected economic data from Europe boosted investor spirits. The rally in equities kicked off in Japan where shares jumped on buying linked to the start of the new fiscal year. Shares were also boosted by the release of the Tankan survey of business confidence for the three months to March 31st.
A similar scenario was seen in Europe where there were sharp share price gains and bond weakness following the release of the EMU Purchasing Managers Index - which came in at a five-and-a-half year high and above expectations. Economists said the strong PMI added to the case for another rise in the European Central Bank's policy interest rate. But stocks faded, particularly on Friday due to profit taking. The U.S. employment report provided a momentary lift, but stocks sagged again after U.S. markets dropped. On the week, stocks in the Asia/Pacific region were up while only the FTSE gained in Europe. In the Americas, both the Bolsa and the S&P/TSX were up on the week despite heavy Friday losses. The Dow managed to stay barely positive while the Nasdaq was down by a nose.
Global Stock Market Recap
Europe and the UK
The FTSE charged forward propelled by mining companies including BHP Billiton and Rio Tinto Plc, which hit record prices as metals prices soared. Copper, zinc and platinum rose to records last week, while gold and silver reached their best levels in more than 20 years. After falling below 6000 at first quarter's end, the index soared above 6000 to end the week at 6026, up 1 percent. The FTSE lost ground Friday as profit taking combined with a negative reaction to the U.S. jobs report pushed the index lower on the day.
The CAC and DAX did not fare as well as the FTSE. Both indexes recovered from the previous week's losses on optimism that mergers and acquisitions would increase as earnings growth slows. Slowing earnings growth and relatively low borrowing costs are spurring takeovers. But the indexes faded on Friday after the U.S. employment situation report raised the specter of higher interest rates in both the EMU and the U.S.
ECB dampens rate expectations
The European Central Bank kept its policy interest rate at 2.5 percent after March's much advertised 25-basis-point increase. In his post meeting press conference ECB President Jean Claude Trichet punctured market expectations of a May interest increase, hinting instead at a June move. At his press conference he said, "I would say that the present high probability that is given for an increase of rates in our next meeting does not correspond to the current sentiment of the governing council." While he dropped the word 'vigilance' from his remarks - considered a code word used to signal an approaching rate increase - he also pointed out that inflation risks were clearly on the upside and interest rates remained accommodative.
Trichet hinted that the next interest rate move could come in June. He said that market analysis that said the ECB would be unwilling to raise rates at a meeting that takes place outside the bank's home base in Frankfurt was wrong. The June 8th meeting will be held in Madrid. His comments were more cautious about the economic recovery. He said that a wealth of new information on the economy and credit demand would be available for the June meeting. In addition, the ECB and national central banks would provide fresh staff projections on the economy and inflation.
Bank of England keeps status quo
The Bank of England left its policy interest rate unchanged for an eighth month. According to Bank of England Governor Mervyn King, the UK economy looks benign as inflation stays within the target range and growth strengthens. The service sector - which accounts for about 70 percent of the economy - is growing strongly while consumer spending is slowly picking up and the housing market shows signs of a recovery. The Bank of England policy is on a different track than the ECB or the Fed where interest rates have been climbing. The Bank of England does not issue a statement at the end of its meeting unless there is a policy change. Rather, bank watchers will have to wait until April 19th when the minutes of the meeting will be released.
Asia/Pacific
Asian/Pacific stocks soared last week. The Topix climbed to its highest close in more than 14 years while the Hang Seng hit its highest level in more than five years. In Japan, retailers such as Aeon and Shimamura and exporters such as Honda led the advance after they forecast higher profits. The Kospi advanced for a 12th day, matching the second-longest winning stretch on record. And indexes in Australia and New Zealand reached all-time highs.
The sharp increase in stocks has reassured Japanese investors who had worried that January's sharp drop, which was prompted by the raid on Internet services company Livedoor, had brought the country's stop-and-start share price rally to an end. Analysts said the increase was justified by the clear structural improvement in Japan's economy and political regime and by efforts to reform the corporate sector.
Reserve Bank of Australia on hold
The Reserve Bank of Australia left its official interest rate unchanged at 5.5 percent for a 13th month. Evidence is accumulating that the economy is recovering from its slowest growth in four years. Recent economic data have shown consumer spending, borrowing and home building are rebounding while exports are at a record and job growth is strong. Australia's spell of unchanged interest rates contrasts with other economies, where central banks have been increasing borrowing costs to cool inflation. The RBA last raised borrowing costs in March 2005. The central bank doesn't explain its decision when borrowing costs are unchanged.
Currencies
The yen slipped on Monday as Japan's closely watched Tankan survey undershot expectations, with the large manufacturers' diffusion index dipping from 21 to 20, missing forecasts for an increase to 23. Yen strength in recent weeks has largely been attributed to Japanese investors repatriating funds ahead of the fiscal year-end, a regular phenomenon. In previous years much of this cash has been freshly invested come the start of the new financial year.
The euro retreated from recent highs on Thursday and Friday after the European Central Bank dashed expectations of a 25-basis-point increase in May. The euro dropped after ECB president Trichet damped expectations for a May rate increase. However, analysts said that Trichet's comments do not change the prospects for further rate increases in the future given strong money and credit growth and improving economic conditions.
Indicator scoreboard
EMU - March seasonally adjusted manufacturing PMI reading climbed to 56.1 from 54.5 in February. Germany, France, Italy and Spain index readings were up in March. Output prices index was 54.4 up from 53.4 in the previous month while input prices declined to 62.5 from 64.8. According to NTC Research, the compilers of the index, the upswing continues to be export-led. A reading over 50 signifies growth while below signifies contraction.
March services purchasing managers' survey was unchanged at 58.2, a five-and-a-half year high. New orders were up slightly with a reading of 56.8 from February's 56.4. Input prices were down to 58.1 from 58.9 while prices charged edged up to 52.4 from 52.2 in February.
February seasonally adjusted unemployment rate edged down to a four-year low of 8.2 percent from 8.3 percent. Of the ten eurozone states reporting data, the unemployment rate in four rose while the rest showed improvement.
February real, seasonally and workday adjusted retail sales were down 0.2 percent but up 1 percent when compared with last year. The dip was entirely due to lower food, drinks and tobacco sales, which were down 0.7 percent. Non-food sales were up 0.2 percent on the month.
February producer price index was up 0.5 percent and 5.4 percent when compared with last year. Energy prices were up 1 percent and 19.7 percent on the year. Excluding energy, the PPI was up 0.3 percent and 1.7 percent on the year. Capital goods prices were unchanged on the month and up 1 percent on the year.
Germany - February seasonally adjusted merchandise trade surplus widened to €12.5 billion from €12.1 billion in the previous month. Imports were up 4.8 percent while exports increased by 4.6 percent.
Britain - February industrial output was down 0.2 percent and 1.4 percent when compared with last year. The monthly decline was attributed to lower chemical sector output. Manufacturing output also was down 0.2 percent and 1.4 percent on the year. Output declined in eight of 13 manufacturing sectors, with chemicals and man-made fibers sinking 1.8 percent on the month.
Asia
Japan - First quarter Tankan survey for the largest manufacturers edged downward to a reading of 20 from 21 in the previous quarter. Small manufacturers remained unchanged with a reading of 7. Confidence has climbed for three of the past five quarters. It rose to a 13-year high in September 2004. Large manufacturers, or companies with more than 1 billion yen ($8.5 million) in capital, have been optimistic for 11 consecutive quarters, the longest streak since 1991. But rising prices for oil and other commodities are pushing up costs for manufacturers and eroding profitability.
Australia - February merchandise trade deficit narrowed to A$595 million from a revised A$2.5 billion in January. Exports soared by 9.6 percent while imports declined by 2.3 percent. The deficit was the smallest since July 2002. Shipments of non-rural goods, which include minerals, surged 15 percent but farm exports, such as meat, sugar, wheat, and wool, fell 2 percent. Imports of capital goods, which include business machinery and vehicles, dropped 12 percent, and imports of consumer goods declined 3 percent. Imports of intermediate goods, which include fuel, rose 3 percent.
March employment was up by 27,100 to 10,085,300. Full-time employment decreased by 12,400 while part-time employment increased by 39,500. Unemployment was down by 19,200 to 533,900. Full-time job seekers declined by 15,400 to 377,900 while part-time job seekers decreased by 3,800 to 156,000. The unemployment rate was 5 percent, down from 5.2 percent in February. The participation rate remained stable at 64.4 percent.
Americas
Canada - March employment was up by 50,500 workers, led by hospitals and telecom companies. The unemployment rate edged down to 6.3 percent, a 31-year low, from 6.4 percent in the prior month. Employers added 44,000 full time jobs and 6,500 part time jobs. The labor force participation rate climbed to 67.2 from 67 percent in February.
Bottom line
Focus will be on the Bank of Japan meeting on Monday and Tuesday in this holiday shortened week. Now that the BoJ has ended its policy of flooding the banking system with excess liquidity, the vigil will be on for the end of the zero interest rate policy that has been in place almost continuously since 1999. The Bank has more leeway to be hawkish now that political pressure appears to have abated, and it has signaled that it would like to act preemptively before excess inflation materializes.
Upbeat investors greet new quarter
