After starting 2006 with a bang, investors pulled back, shaken out of their complacency by mixed earnings reports from several key companies and a scandal surrounding the Japanese company, Livedoor. And oil prices climbed because of the Iranian nuclear energy crisis and political problems in Nigeria. Global stock markets have been climbing for three years despite soaring oil and other commodity prices and climbing interest rates in many industrial countries. A positive has been improved corporate profits.
After sinking on Monday, a modicum of calm returned to stocks the next day as equities recouped some of their losses - or as in Europe, declined less. Oil prices eased and there were favorable earnings reports. Even Friday's much weaker-than-expected U.S. gross domestic product report did not deter investors from gobbling up stocks as upward momentum accelerated. Good earnings from Microsoft and Procter & Gamble along with a strong U.S. housing sales report took precedence over the GDP data. Despite heavy losses on Monday, all indexes followed here were up on the week.
Global Stock Market Recap
Europe and the UK
The CAC, DAX and FTSE regained their equilibrium after a shaky start and were up on the week, in part on merger and acquisition news combined with continuing positive corporate earnings news. Crude oil prices edged downward as well relieving concerns about their impact on spending. In a week of otherwise thin economic data, the better-than-expected preliminary GDP in the UK helped investors there. And in Germany, the DAX benefited from the improved Ifo sentiment reading, which was the best in almost 5 years. Also on investors' radar is the European Central Bank meeting on February 2nd after some Governing Council members suggested interest rates need to rise to limit inflation. The ECB's key interest rate stands at 2.25 percent.
Asia/Pacific
Investors tidied things up as they prepared to take off for the lunar New Year that begins on January 29th (Sunday). Many Asian markets including South Korea, Hong Kong and Singapore will be closed during the week.
Asian investors began the week on a shaky note after oil prices jumped and U.S. shares fell by the most since 2003 as Citigroup and General Electric posted earnings that missed analysts' estimates. Both the Nikkei and Kospi lost as much as 2.1 percent on Monday. But on Tuesday, investors reversed direction and all indexes followed here were up on the week.
Tokyo stocks completed the u-turn as shares leapt on Friday, boosted by robust earnings and favorable economic data. The Nikkei was up 3.6 percent on Friday - its largest increase in more than three years - and ended the week at a five-year high of 16,460.7. The Topix was up 2.9 percent Friday and 4.1 percent so far this year. The Nikkei made up all of the losses that occurred in the wake of last week's raid on Internet services company Livedoor. Stocks such as Sony boosted the indexes after the company reported strong quarterly earnings and raised its full-year outlook to an operating profit from a loss. Banking stocks were boosted by the latest CPI data that indicated consumer prices were increasing, suggesting that deflation could be winding down. An end to deflation makes the Bank of Japan's exit from its zero interest rate policy more imminent, which in turn would enable banks to widen their lending margins.
China's National Bureau of Statistics released several important economic measures on Wednesday. While the accuracy of the data is questioned by many analysts, the release said that GDP was up 9.9 percent in the fourth quarter when compared with a year ago. The data are available for only three years and show that GDP grew less than 9 percent only in one quarter - the second quarter of 2003. The statistics sent China soaring past France, Britain and Italy to become the world's fourth-largest economy, after the United States, Japan and Germany. Some economists adjust China's figures for the low value of its currency and low domestic prices to suggest that if valued at Western prices, China's output has surpassed Germany's as well. China had the world's fastest-growing major economy and was the second-biggest contributor to global growth in 2004 after the U.S., according to the International Monetary Fund.
A nationwide census completed last year found millions of previously unaccounted for services companies. This is helping to ease concerns about China's ability to sustain growth. The census added $284 billion - equivalent to the output of Austria - to China's 2004 GDP and suggested services are more important to the economy than previously thought.
Canada
Bank of Canada rate now 3.5 percent
As expected, the Bank of Canada increased its key lending rate by 25 basis points to 3.5 percent, the highest rate since October 21, 2001. It was the fourth increase in five months and the Bank said that it will take "modest" further action to keep inflation from accelerating. The move narrows the spread between U.S. and Canadian interest rates to 75 basis points - at least until next week when the Federal Reserve is expected to increase its key rate to 4.5 percent. The Canadian dollar slipped after the Bank used the word 'modest' in referring to future actions while bonds were up and stocks were basically indifferent. However, the currency resumed its upward climb later in the week thanks to higher oil prices at week's end.
Canada's six rate increases since June 2004 trail the Fed's 13 consecutive moves during that time. The Bank paused for almost a year after two increases in late 2004 as a surging currency threatened to slow exports that make up 40 percent of Canada's economy. Canada's abundance of natural resources has spurred demand for the currency and left companies straining to fill demand.
In its update to the October Monetary Policy Report, the Bank of Canada increased its GDP forecast for 2006 to 3.1 percent from its previous estimate of 2.9 percent. It expects that inflation will slow from the first quarter's 2.5 percent rate to the central bank's 2 percent target by the first half of next year. Core inflation, which excludes eight volatile items such as gasoline and fruit from the calculation, will accelerate to 2 percent from a 1.7 percent pace in that time. Business investment, household expenditures and strong government spending will lead the expansion. Even though 2006 economic growth will exceed 2.9 percent, the Bank said inflation won't necessarily accelerate. Inflation has been restrained as the economy grows because companies haven't passed on rising energy costs and because of lower import prices.
Currencies
The U.S. dollar benefited from favorable economic data such as a better-than-expected durable orders report earlier in the week, but it was under pressure briefly Friday thanks to disappointing preliminary fourth quarter GDP data. Then investors focused in on the inflation data contained in the report along with rising new homes sales data that were released later in the morning and decided that the Fed would continue to increase interest rates. Earlier in the week, the dollar tumbled, under pressures from rising geopolitical jitters and increasing speculation that the yield gap between the U.S. and eurozone may soon begin to close. Comments from members of the European Central Bank's governing council continue to grow more hawkish. Members are concerned that eurozone rates are too low for price stability and there are inflationary risks because of rising oil prices. The dollar was not particularly affected by the comments of Chinese central bank governor Zhou Xiaochuan who said that growth of the country's currency reserves would slow.
London has reasserted its preeminence over New York as the dominant center for foreign exchange trading according the UK's Foreign Exchange Joint Standing Committee which is sponsored by the Bank of England. Only last summer data showed New York was rapidly closing the gap on London for currency spot trading - a trend attributed to the wave of U.S. hedge funds that flooded into the market as currencies now were considered an asset class in their own right. New data show the volume of spot transactions conducted in London jumped to $257 billion a day in October - 11.7 percent higher than recorded in April 2005. In contrast, U.S. trading volumes rose just 8.7 percent to an average of $211.8 billion a day over the same period, according to the equivalent committee overseen by the Federal Reserve Bank of New York. One theory for London's renewed dominance is that a growing volume of petrodollars generated by high oil prices is being channeled through London's banking system. Petrodollars that are routed through London into the U.S. do not generate foreign exchange transactions, but those being recycled into other currencies will.
Indicator scoreboard
EMU - M3 money supply for the three months ending in December was up 7.6 percent when compared with the same three months a year ago and down from 8 percent in the previous three months. The ECB's growth target for M3 is 4.5 percent.
Germany - January Ifo business sentiment index jumped to 102 from 99.7 in December. It was the index's highest reading since May 2000. Germany's performance reflected the increased confidence in the country's boardrooms and a series of high-profile global acquisitions by German companies in recent months. There also signs that domestic consumer spending might finally be ending years of stagnation. The Ifo surveys about 7,000 firms in manufacturing, construction, wholesale and retail about their assessment of the current and future outlook.
Italy - November seasonally adjusted retail sales were unchanged and up 0.9 percent when compared with last year. Sales for both food and non-food sectors were unchanged on the month. ISTAT's retail sales data are not closely watched because of their volatility and the lack of correlation with consumer spending in the GDP statistics.
Britain - Preliminary fourth quarter gross domestic product was up 0.6 percent and 1.7 percent when compared with the same quarter a year ago. Service sector output was up 0.9 percent and 2.9 percent on the year. This helped offset the decline in the industrial sector which was down 0.6 percent and down 2.2 percent on the year.
Asia
Japan - November tertiary services index was up 0.1 percent and 3 percent when compared with November 2004. The tertiary index reflects activity in 11 service industries, among which are utilities; transport; telecommunications; wholesale and retail; finance and insurance; real estate; restaurants and hotels; medical, health care and welfare.
November all industry index was up 0.3 percent and 2.9 percent when compared with last year. The all industry index takes a reading of activity in the industries that comprise the tertiary index combined with activity in the construction, agricultural and fisheries industries, the public sector and industrial output. This index is considered a close approximation for gross domestic product growth as measured by industrial and service sector output.
December seasonally adjusted merchandise trade surplus dropped to ¥611 billion from ¥736 billion in November. Exports were up 0.9 percent while imports increased by 3.4 percent. On the year, the December unadjusted merchandise trade surplus dropped 19.3 percent to ¥914 billion from ¥1.1 trillion. Imports soared by 29.3 percent while exports were up 17.2 percent on the year. The trade deficit with China was up 0.4 percent on the year while the trade surpluses with Asia and the U.S. were up 3.3 percent and 14.6 percent respectively on the year.
January Tokyo consumer price index was unchanged from the previous month and up 0.2 percent when compared with the same month a year ago. Core CPI excluding fresh food sank 0.6 percent on the month but was up 0.1 percent on the year. December CPI for Japan was up 0.2 percent but down 0.1 percent on the year. The core CPI was up 0.1 percent both on the month and on the year. The new core CPI which excludes both fresh food and energy was up 0.3 percent and up 0.1 percent on the year.
Australia - Fourth quarter producer price index was up 0.8 percent and 3 percent when compared with the same quarter a year ago. The domestic component was up 0.9 percent mainly due to increases in building construction, other agriculture, and meat and meat product manufacturing. These increases were partially offset by decreases in petroleum refining and services to transport. The imports component rose 0.1 percent due to price increases for capital goods, including industrial machinery and other transport equipment. Intermediate prices were up 1 percent mainly due to increases in basic non-ferrous metal manufacturing, property operators and developers, meat and meat product manufacturing, and legal and accounting services. These increases were partially offset by decreases in grain, sheep, beef and dairy farming.
Fourth quarter consumer price index was up 0.5 percent and 2.8 percent when compared with the same quarter a year ago. Core CPI - which excludes gasoline, education costs, and fruit and vegetables - was up 0.5 percent and 1.8 percent on the year. Gasoline prices declined 0.9 percent, stereo & computing equipment sank 3.2 percent and drug prices dropped 4.6 percent. However, food prices increased 1.8 percent.
Americas
Canada - November retail sales were up 1.1 percent and 5.5 percent when compared with last year. But excluding autos, retail sales were up only 0.1 percent and a more robust 5.7 percent on the year. New auto sales soared by 4.9 percent. Building and outdoor home supplies gained 2.8 percent while clothing and accessories stores jumped by 2.5 percent.
Bottom line
Next week is a busy one as investors will be inundated with new economic data and central bank action (or non-action). The last meeting of the Federal Reserve Open Market Committee with Alan Greenspan as chairman has finally arrived and Fed watchers undoubtedly will be looking for his final guidance. On the same day - January 31st - the U.S. Senate is expected to vote to affirm Ben Bernanke as new chairman. The ECB Governing Council meets on Thursday. While the FOMC is expected to add another 25 basis points to the 4.25 percent fed funds rate, the ECB is expected to hold its fire at least for another month.
A host of new economic information will also be available including the latest purchasing manager surveys worldwide along with the latest German and Japanese labor force data and Japanese industrial production and worker spending data. Investors will hope the data support their recent optimism.
Exuberance returns to equities
