Monday, June 27, 2005
Global Markets
Sweden's Riksbank cut its policy interest rate Tuesday by 50 basis points to 1.5 percent and unleashed heightened speculation that other interest rate declines would follow. This was followed the next day by the release of the Bank of England minutes from their June Monetary Policy Committee meeting. The text there showed that two committee members including the Bank's chief economist voted to cut British rates by 25 basis points to 4.5 percent. Sweden now has the lowest rate in the 25-nation European Union. In all of Europe, only the Swiss central bank's three-month Libor target rate at 0.75 percent is lower. The news provided the catalysts for speculation on the European Central Bank's next move. But the response by ECB officials was hawkish. Late on Wednesday, Axel Weber, a member of the ECB governing council, said that interest rates at the current level do not stand in the way of investment and added that calls for a rate cut were "unhelpful".
Equities continued to climb this week for the most part with the Toronto and Hong Kong indexes over 10,000 and 14,000 respectively. For the S&P/TSX it was its first close above 10,000 since October 2000. While the Hang Seng managed to end the week with a healthy 2.3 percent gain, the S&P/TSX was dragged down below 10,000 on Thursday and again on Friday by U.S. indexes when crude oil soared over $60 a barrel. The index ended the week just shy of 10,000 but up 0.5 percent.
Global Stock Market Recap
Europe and Britain
Despite the EU's woes - no constitution, no budget and anemic growth - equity investors don't seem to care. European shares hit three-year highs on Wednesday, with technology stocks spearheading the advance. Since the French no vote at the end of May, the DAX has risen 2.4 percent while the CAC is up 1.9 percent. Only Friday's drops on oil price woes prevented even greater gains at week's end. The FTSE roared through the 5,100 level during trading on Wednesday for the first time since late May 2002. Investors saw prospects of an early cut in interest rates and that created demand and gains for retail, home builder and financial stocks. But on the week, the FTSE barely managed to hold on the positive side while the CAC and DAX gave back the week's gains and more on Friday.
Bank of England minutes
Minutes from the Bank of England's Monetary Policy Committee meeting in June showed that two of its members, including its Chief Economist Charles Bean, voted to cut rates. The news spurred the biggest gain in two-year government bonds since January 2004. It was the first time since July 2003 that committee members voted for a cut. Charles Bean and Marian Bell dissented from the majority view of keeping the repurchase rate (their policy rate) at 4.75 percent for a 10th month. The votes highlight increased concern on the committee about signs of faltering growth in the economy. The UK expanded at the slowest pace in almost two years in the first quarter and government reports since have suggested consumer spending, which drove 51 quarters of growth, is slowing. The UK has the highest interest rates among Group of Seven nations. The last time Bean dissented from the majority view was in January 2001, when he voted with three others for a reduction in rates of 25 basis points. That decision was backed by the entire committee the following month.
Asia/Pacific
Asian/Pacific indexes were mixed last week. Thursday's gains were replaced on Friday with losses as Asian stocks followed those in the U.S. as they reacted to higher crude oil prices. The Hang Seng put in its best one-day performance in four months Wednesday as the index pushed above the key 14,000 level. Expectations of a strong debut by Bank of Communications improved the mood of investors. The market was also helped by the expiry of a call warrant in HSBC, which prompted a flurry of activity. In Japan and even more in South Korea, stocks were down Friday as investors weighed the import of higher oil prices on economic growth in those two countries, both of which rely almost entirely on imported energy supplies.
According to reports, Japanese companies are going to great lengths to address the concerns of newly active and aggressive shareholders. A test of their success begins this week, when Japan's annual shareholder meetings begin in earnest. Nearly 60 percent of all companies listed on the Tokyo Stock Exchange hold their meetings on June 29th. This aggressiveness is in stark contrast from just a few years ago when annual meetings largely rubber stamped management's proposals. Then, most of the shareholders were banks and the companies' business markets who valued relationships over performance. Today, foreigners own about 24 percent of all Japanese shares, up from the 8.1 percent just 10 years ago, according to the Tokyo Stock Exchange. Hostile takeovers and other practices common in the West have begun to crop up along with "poison pill" tactics meant to fend off raiders. As foreign investors make more demands on Japanese management, domestic shareholders are turning up the heat also.
Currencies
The yen fell against the dollar and euro on speculation that record prices for crude oil will restrain the Japanese economy. The yen is down against most major currencies, including the pound sterling and Swiss franc after oil reached $60 a barrel. Japan imports almost all its oil. Japanese Finance Minister Sadakazu Tanigaki acknowledged Friday that the government must closely watch the impact of higher oil prices on the frail economy. The yen had its biggest drop in more than a week on June 22nd after a government report showed the merchandise trade surplus shrank by 68 percent from the previous year. Record oil prices increased import costs while export growth slowed.
The euro rebounded on Friday after dropping below $1.20 mark, a level unseen since August 2004. The euro is being buffeted by speculation the European Central Bank finally will respond to a moribund economy by reducing its interest rate for the first time since 2003 while the Fed continues its series of measured rate increases (The Fed Funds rate is 3 percent and is expected to go to 3.25 percent after the June 29th FOMC meeting). The speculation heightened after the Riksbank cut its policy rate by 50 basis points to 1.5 percent.
The weak performance of the euro recently has prompted speculation that the currency is becoming the new funding currency of choice for the carry trade - this involves borrowing in a low yield currency and investing in a higher yielding currency. Until just recently, carry trades had been largely been fuelled by cheap dollars. When U.S. interest rates fell to 1 percent and most analysts forecast the weakness to continue, one borrowed in dollars and to take advantage of higher rates in countries such as Brazil, Turkey, South Africa, Australia, New Zealand and the UK. Now that U.S. rates are at 3 percent and expected to climb higher in the coming months such a trade is no longer as lucrative. Some say that the liquidation of these carry trades helped to propel the dollar's recovery. But others say that carry trades are being reset with the euro and Swiss franc as the funding currencies. With interest rates at just 2 percent in the eurozone and speculation of a cut intensifying and the Swiss National Bank operating a Libor target range of 0.25 percent to 1.25 percent (with a specific target of 0.75 percent), this makes sense.
Indicator scoreboard
EMU - April seasonally adjusted merchandise trade surplus was €3.7 billion, down from March's revised surplus of €4 billion. Exports were up 0.9 percent while imports were up 1.3 percent. On a nonseasonally adjusted basis, merchandise trade surplus was €1.3 billion, down from the €4.3 billion in the previous month. Imports were up 10.8 percent while exports were up 4.4 percent on the year.
April seasonally adjusted new industrial orders were up 1.5 percent and 1.6 percent when compared with last year. Orders were down in Germany and France but were up in Italy. Orders for textiles, metal products and chemicals were up while orders for transport equipment along with electrical and electronic equipment were down on the month.
Germany - April seasonally and workday adjusted manufacturing orders were revised to a decline of 2.6 percent from the originally reported drop of 2.9 percent. Orders were revised to a decline of 0.4 percent from a drop of 0.9 percent on the year. Revised foreign orders were down 4.6 percent rather than the originally reported 5.2 percent drop while domestic orders dropped 0.5 percent compared with the originally reported 0.6 percent decline.
June ZEW economic sentiment improved to 19.5 from 13.9 in May. The index measures sentiment among 315 German financial experts, and was conducted by the Center for European Economic Research or ZEW between June 6th and June 20th. The main reason for the improvement was the euro's recent depreciation along with the hope that economic reforms will be more vigorously pursued after the early elections that Chancellor Gerhard Schroeder intends to call for September. More analysts are expecting the ECB to lower interest rates in the near future.
France - May consumer spending on manufactured goods sank 0.9 percent but was up 2.5 percent when compared with last year. This reversed most of April's revised gain of 1.1 percent on the month. Spending on household durables sank 4 percent after jumping 4.6 percent in the previous month. Auto sales were flat while clothing and textile sales barely increased by 0.2 percent.
Italy - First quarter seasonally adjusted unemployment rate was 7.9 percent, down from the previous quarter's reading of 8 percent. The lower rate was due to increased resident population because of the official registration of immigrant employees combined with a drop in the number of job-seekers (particularly in the poorer southern regions) rather than an increase in people finding jobs.
April seasonally adjusted industrial orders were up 1.5 percent and 0.1 percent when compared with last year. Domestic orders were up 0.5 percent but were down 1 percent on the year. Foreign orders jumped by 3.6 percent and 2.8 percent on the year.
April retail sales sank 0.8 percent and 3.9 percent when compared with last year. Both food and nonfood sales sank 3.6 percent and 4 percent respectively on the year. ISTAT's retail sales data are not closely watched primarily because they show little correlation with consumer spending data in the quarterly GDP data.
Asia
Japan - May merchandise trade surplus shrank to ¥297 billion ($2.7 billion) from a year earlier. Exports were up 1.4 percent while imports gained 18.6 percent. Though Japanese exports increased in value their volumes fell 2.5 percent due to sliding exports to China. Imports jumped mostly because of a surge in global oil prices. Japan's trade surplus with the United States expanded 4.5 percent on the year. The surplus with Asia shrank 40.2 percent. Two-way trade with Asia comprises about half of Japan's overall trade figure.
April tertiary index was up 1.8 percent and 2.1 percent when compared with last year. The tertiary index measures 11 industries, including utilities; transport; telecommunications; wholesale and retail; finance and insurance; real estate; restaurants and hotels and health care and welfare.
April all industry index was up 1.7 percent and 1.7 percent when compared with last year. The index is considered a supply-side proxy for gross domestic product. The all industry index combines the tertiary index with activity in the construction, agricultural and fisheries industries, the public sector and industrial output.
Americas
Canada - April retail sales jumped 1.5 percent and soared 8.2 percent above April of 2004. Excluding automobiles and auto parts, sales climbed 0.8 percent and 7.5 percent on the year. Building and outdoor home-supply stores surged 4.5 percent from March. Receipts at furniture and electronics stores gained 2 percent helped by a 4.5 percent increase at computer and software stores. Car dealers and retailers of furniture and building materials recorded the highest yearly increases, benefiting from housing starts that remain high according to StatsCan. Retailers in six of eight categories gained.
May unadjusted consumer prices were up 0.1 percent and 1.6 percent when compared with last year. Gasoline prices dropped 1.6 percent on the month. Excluding food and energy, the CPI was up 0.2 percent and 1.2 percent on the year. The Bank of Canada core CPI which excludes eight volatile items was up 0.2 percent and 1.6 percent on the year.
Bottom line
The pace accelerates this week as many potentially market-moving indicators are released. Japan has its usual end-of-month deluge which includes unemployment, industrial production, worker household spending and the CPI. Added to this formidable list is the quarterly Tankan survey which is considered by many market watchers as the most important of Japan's indicators. In Europe there are also many indicators that the markets consider critical. High on the list there are the purchasing managers' surveys for most countries.
On the political front, the UK accedes to EU presidency on Friday for the next six months. Given the recent French and Dutch rejections of the EU constitution and the EU budget fiasco, it will be a difficult six months.
Looking Ahead: June 27 through July 1, 2005
Sweden, crude stir things up