Monday, October 3, 2005
Equities continued to rally in the third quarter even as exogenous events such as hurricanes and terrorist attacks attempted to derail the U.S. and UK economies. The Dow managed to have its first positive quarter of 2005 while the Nasdaq had its second. But both indexes are down in 2005 and continue to lag - by a substantial margin - the 11 international indexes followed here. The best performer so far this year is the Kospi, followed by the Bolsa and the Topix. The graph below dramatically illustrates the Dow's laggard performance.
High oil prices and their impact on economic activity and inflation remained the key focus last week as investors focused on oil refinery and production facility damage on the Gulf Coast after Rita pummeled the area. Oil prices initially fell back below $65 a barrel, but then climbed above $66 as damage reports were revealed.
Global Stock Market Recap
Europe and Britain
Despite July's terrorist attacks in London, equities there, after a momentary pause, rallied strongly. While the FTSE 100 was up 1.7 percent in the first quarter, and 4.5 percent in the second, it rallied 7.1 percent in the quarter just ended. Not only did investors overcome the terrorist blow, but they also seemed to look the other way where growth is concerned. Retailing, which was already sagging prior to the attacks, sagged further and manufacturing continued its dismal retreat. For the year to date, the FTSE is up 13.8 percent. There are several reasons for the index's stellar performance. Many companies have been returning cash to shareholders, either in the form of special dividends or via share buybacks. The dramatic increase in crude prices has benefited members of the oil sector, which is a large component of the FTSE. And London is awash with merger and acquisition speculation with this year shaping up to be the best in four for M&A.
German stocks also confounded in September. The DAX was originally rejuvenated by the thought of a change in government. But stocks have continued to climb despite the hung election that so far has not produced a new government.
Mediocre growth in both Germany and France does not seem to deter equity investors! What has helped is the weakening euro against the dollar combined with prospects of continued U.S. growth (and therefore exports to the U.S.). The DAX gained 10 percent in the third quarter while the CAC was up 8.8 percent. They are up 18.5 percent and 20.4 percent respectively for the year.
Asia/Pacific
Japan's indexes continue to rack up new four-year highs as economic performance catches up with market expectations. The Nikkei was up over 9 percent in September while the Topix soared by over 11 percent. Stocks benefited after the Bank of Japan signaled that an end to seven years of deflation was in sight. Banks such as Mitsubishi Tokyo Financial Group led gains as Bank of Japan policy board member Miyako Suda said the central bank is "getting closer" to the point where it can change its policy of flooding the economy with cash. The Bank has vowed to continue its zero interest rate policy until deflation is purged from the economy. Bank stocks are up on expectations that an end to deflation will help them cut their bad loans and extend lending. The Nikkei was up 17.2 percent and the Topix 20 percent in the third quarter.
The poorest performer in the third quarter was Singapore's STI. Even so, the STI was up 4.2 percent on the quarter and has gained 11.6 percent so far in 2005. Both the Hang Seng and All Ordinaries were up 8.6 percent on the quarter. The Australian index has gained 13.3 percent so far this year as growth weakened in the sub-continent. The Hang Seng is the only Asian index tracked here that has below double digit growth, with all of it coming in the third quarter after breaking even in the first two. The index is up 8.4 percent in 2005. The best performer by far is the Kospi, up 36.3 percent for the three quarters of 2005 and up over 21 percent in the third quarter alone!
Currencies
The euro and yen were down this week, thanks to comments by several Federal Reserve officials that indicated no pause in measured interest rate increases despite the hurricanes. The euro was down, pressured by inconclusive German election results and mixed economic data. But better-than-expected economic sentiment survey results Friday buoyed the euro. The yen continued to founder around 113 yen to the dollar as Japanese investors look overseas for higher yields on their investments. Interest rates are not expected to rise until there is evidence deflation has finally been defeated.
The dollar is benefiting from the interest rate spread between European and U.S. Treasury notes. The yield advantage of 10-year U.S. Treasury notes over German government bonds with a similar maturity is about 140 basis points, near the widest since July 1999. Against Japanese government bonds, the spread is 280 percentage points.
Japanese investment abroad is being led by a surge in purchases of foreign bonds. Japan's investors, including the central bank, held $683 billion of Treasuries in July, more than any other country, and they were net buyers of foreign bonds for all but two weeks in the third quarter according to the U.S. Treasury.
Indicator scoreboard
EMU - July nonseasonally adjusted merchandise trade surplus declined to €7.2 billion from €7.6 billion in June. Exports were down 2.1 percent while imports were down 2 percent. When compared with a year ago, exports were up 3.5 percent but imports soared by 10.5 percent. On a seasonally adjusted basis, the July surplus was €1 billion, down from June's €3.9 billion. Exports were up 0.9 percent while imports jumped by 4 percent.
M3 money supply for the three months ending in August was up 7.9 percent when compared with the same three months a year ago. Money supply continues to grow at a rate far above the European Central Bank's target of 4.5 percent.
September flash harmonized index of consumer prices was up 2.5 percent when compared with the same month a year ago. As with all flash reports, no detail is provided.
EU - September economic sentiment improved to 98.6 from 97.8 in August. Industrial sentiment edged upward to minus 7 from minus 8 in the previous month. Consumer sentiment remained unchanged at minus 15. The improvement occurred despite soaring oil prices and the Gulf of Mexico hurricanes which were expected to dampen sentiment.
Germany - September Ifo business sentiment index climbed to 96 from 94.6 in August. The increase was due to an improved view of current economic conditions. The index for current conditions edged up to 96.4 from 93.8 in August. Business expectations for the next six months inched up to 95.5 from 95.4 in the previous month.
September seasonally adjusted unemployment was up by 36,000. The increase reflects a statistical change. Unemployment was up 43,000 in west Germany and down 4,000 in the east. The overall unemployment rate inched up to 11.7 percent from 11.6 percent in August. Unemployment rate in the west was 9.9 percent, up from 9.7 percent in the previous month while in the east, the unemployment rate edged downward to 18.4 percent from 18.5 percent. Seasonally adjusted August payroll jobs were up 36,000 after gaining 32,000 in July and 30,000 in June.
France - July producer price index jumped 0.6 percent and was 3 percent higher when compared with last year. July core PPI, which excludes food and energy was unchanged and up 1.5 percent on the year. August PPI was up a more moderate 0.3 percent and 2.8 percent on the year. August core PPI was also flat on the month but was up 1.2 percent on the year. Energy was up 2.8 percent in July and 1.6 percent in August.
Final second quarter gross domestic product inched up 0.1 percent and was up 1.3 percent when compared with the same quarter a year ago. Household spending was down 0.2 percent thanks to a combination of a slowdown in income gains and a rebound in savings. Business fixed investment sank by 1 percent but household investment was up 1.1 percent.
August unemployment rate remained at 9.9 percent for the second month. The number of jobless was down by 6,000 according to the International Labour Organization definition which excludes jobseekers who did any work during the month. The total number of jobless now stands at a 23 month low of 2.7 million.
Italy - August producer prices were up 0.5 percent and 3.7 percent when compared with the same month a year ago. Prices for energy, capital and consumer goods were up on the month while intermediate prices declined. Excluding energy, the PPI was up 0.1 percent and 1.1 percent on the year.
Britain - Final second quarter gross domestic product was up 0.5 percent. GDP growth was revised downward to 1.5 percent when compared with the same quarter a year ago from 1.8 percent previously reported. This was the slowest rate of growth for ten years. Weaker annual growth stemmed mainly from downward revisions for public administration and defense, transport and storage and motor trades estimates.
Asia
Japan - September Tokyo consumer price index was unchanged on the month and down 0.6 percent when compared with last year. Core Tokyo CPI, which excludes fresh food, edged down 0.1 percent and dropped 0.4 percent on the year. August nationwide CPI was up 0.1 percent but down 0.3 percent on the year. Core CPI was up 0.2 percent but down 0.1 percent on the year.
August unemployment rate inched down to 4.3 percent from July's rate of 4.4 percent. The total number of jobless declined by 300,000 from a year earlier to 2.84 million. The economy lost 70,000 jobs in August, while the workforce shrank by 120,000 people.
August industrial production was up 1.2 percent and 0.4 percent when compared with last year. Industries that mainly contributed to the increase are electronic parts and devices, general machinery and electrical machinery.
Australia - August retail sales were up 0.6 percent and 3.5 percent when compared with last year. Clothing and soft goods jumped by 1.6 percent while food was up 1.1 percent. Household goods were up 0.7 percent and department store sales were up 0.5 percent. Sales for recreational goods, hospitability and services were down.
Americas
Canada - August industrial product price index (IPPI) was up 0.3 percent but down 0.4 percent when compared with last year. Higher prices for petroleum products, meat, fish and dairy products, primary metal products and chemical products were the major contributors to this monthly increase. Petroleum and coal products prices increased 6.5 percent as gasoline and fuel oil prices rose 7.8 percent. If petroleum and coal product prices had been excluded, the IPPI would have decreased 0.3 percent rather than increasing 0.3 percent.
August raw materials price index (RMPI) was up 4.4 percent and 14.5 percent when compared with last year. Prices were up for mineral fuels, non-ferrous metals as well as ferrous materials. Mineral fuels were up 7.9 percent on the month as crude oil prices increased 9.3 percent due to continuing concerns about supply. Prices for non-ferrous metals rose 4.6 percent, mainly due to higher prices for zinc, copper and lead concentrates. Ferrous materials increased 3.5 percent as iron and steel scrap prices were up 7.6 percent.
Between July and August, the value of the Canadian dollar rose 1.5 percent against the U.S. dollar. As a result, if the impact of the exchange rate had been excluded, the IPPI would have risen 0.7 percent instead of its actual increase of 0.3 percent. On a 12-month basis, the value of the Canadian dollar rose 8.9 percent against the U.S. dollar. If the impact of the exchange rate had been excluded, producer prices would have risen 2.0 percent on the year rather than their actual 0.4 percent decrease.
July monthly gross domestic product was up 0.2 percent and 2.8 percent when compared with last year. Growth was concentrated in mining, oil and gas extraction and exploration, retail trade, and transportation industries. The oil and gas industry was spurred by a further increase in already high oil prices. However, manufacturing, wholesale trade and utilities were all down. Industrial production (the output of mines, utilities and factories) increased 0.3 percent. Declines in manufacturing and utilities were more than offset by a surge in the mining, oil and gas extraction sector where high crude oil prices coupled with the end of a labor dispute helped push growth.
Bottom line
As usual, the first week of the month brings with it a bevy of central bank meetings. The first to meet will be the Reserve Bank of Australia, which is expected to leave their policy interest rate at 5.5 percent. The European Central Bank is not expected to move from its 2 percent key interest rate despite a September flash harmonized consumer price index reading of 2.5 percent. With their inflation target of 2 percent, however, the number is bound to provoke discussion if nothing else. Last, the Bank of England meets amid softening economic numbers. However, no change in interest rate from its current 4.5 percent is expected there either. However, the BoE could surprise.
Looking Ahead: October 3 through October 7, 2005
Equities have positive third quarter