The report attributed the growth to "investors' interest in foreign exchange as an asset class alternative to equity and fixed income, the more active role of asset managers and the growing importance of hedge funds." The dollar's depreciation against other currencies over the past two years has proven to be a strong trend and has drawn new players into currencies.
The survey by the Basel, Switzerland-based BIS was conducted in April by central banks and monetary authorities in 52 nations. It covers trading in currency spot, forwards and swaps markets and will be updated in the first half of 2005. The BIS, which was formed in 1930, provides banking services for 120 financial institutions including central banks.
Group of Seven meet - invite China to dinner
The Group of Seven finance ministers and central bankers met on Friday and discussed a most pressing subject - the seemingly ever rising price of crude oil and its impact on world growth. Currency markets were uneasy at week's end as they looked once again to G-7 for any statement relating to foreign exchange rates. In their post-meeting statement, G-7 said that the global economy's outlook continued to be favorable despite imbalances that exist between regions. The major risk to world growth was high oil prices even though inflation and inflation expectations remain low. They urged conservation while asking for increased output to stem price increases.
The G-7 statement about currencies repeated the April statement which said that excess volatility and disorderly movements were undesirable for economic growth and said that they would continue to monitor exchange rates and cooperate as appropriate. "In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms," the G7 said.
China joined the G-7 finance ministers for dinner in Washington for the first time. The U.S. thinks that East Asian currencies are too cheap and are being held down by governments fearful of market forces. That has made the dollar too expensive, has undermined U.S. exporters and contributed to the vast merchandise trade deficit. China, which has maintained a peg of 8.28 yuan to the dollar since 1995, is seen as the chief culprit. But China has paid little attention to G-7 pronouncements in the past and has kept the dollar peg. In a statement released on Friday, Chinese officials promised to "push ahead firmly and steadily to a market-based flexible exchange rate." But the U.S. would like to see China move faster.
The G-7 includes the United States, Britain, France, Germany, Italy, Canada and Japan.
Global Markets
Equity performance had its ups and downs in the third quarter. But ten of the 13 international indexes followed here were over their 2003 year end levels as the quarter ended. Only the DAX, Dow and Nasdaq are down so far this year. However, when compared with the end of the second quarter, the picture is not quite as positive. The Nikkei and Topix, CAC, DAX, Dow and Nasdaq all lost ground on the second quarter. The cost and availability of crude oil dominated investor focus as hurricanes, terrorism in the Middle East, problems with Yukos and Russian oil supplies, along with political woes in Nigeria unleashed waves of investor uncertainty.
Global Stock Market Recap - quarterly results
Global Markets - weekly wrap up
One day doesn't make a trend, but many investors would like to see Friday's jump in equities as a positive omen for the year's last quarter. All thirteen indexes followed here were up on the week despite intermittent concerns about crude prices. Crude oil flirted around the $50 mark all week, closing above it on Friday. The Mexican Bolsa continues to perform far better than any of the 13 below. The Singapore Straits Times and the Australian All Ordinaries are setting the pace otherwise.
Global Stock Market Recap
Europe and Britain
After three quarters, only the DAX of the three indexes followed here is down on the year. After making up a first quarter loss in the second quarter, and then some, the index turned negative once again in the third. The index was depressed by lagging German growth combined with worries about the staying power of the U.S. expansion and ever-climbing crude oil prices.
The CAC in contrast managed to stay above its year-end 2003 level despite losing some ground during the third quarter. The FTSE, after slipping slightly in the second quarter, regained its balance and climbed over 4600 for one day near quarter end. After a negative July and August, both the DAX and CAC turned in positive results in September while the FTSE was positive in both August and September.
All three indexes began the fourth quarter on a very positive note. The FTSE, which had previously tested the waters over the 4600 level on September 21st, jumped convincingly over that level Friday to close at its highest level since July 1, 2002. Investors decided they had become overly pessimistic in their earnings assessments, especially after U.S. data were better than expected. The CAC jumped an impressive 2.5 percent while the DAX added 2.6 percent.
Asia/Pacific
While all six Asia/Pacific indexes followed here are still in positive territory for the year, their third quarter performance was spottier with the Japanese Nikkei and Topix down in each of the three months. The Nikkei lost 8.7 percent while the Topix lost 7.4 percent in the third quarter. The top performers were the Australian all ordinaries, which hit a record high at quarter's end, and the Singapore Straits Times. They are up 11.2 percent and 12.5 percent respectively on the year. The South Korean Kospi, the second quarter's worst performer, managed to right itself in August and September and is now up 3 percent on the year. Japanese equities have been hit particularly hard by soaring crude oil prices. The island country imports virtually all of its energy. Another in a seemingly long list of woes are concerns about the growth in their two largest export markets - the U.S. and China. China loomed large as investors tried to gauge the government's success in curbing rampant growth without triggering a major economic collapse.
Japanese stocks celebrated the better than expected Tankan survey (see indicator scoreboard below) results on Friday. The survey enforced the view that exports - and exporters - continue to drive the economy. However, the indexes that mirror the domestic economy continue to be considerably weaker, suggesting the domestic economy and consumer demand in particular has a long way to go.
Currencies
The U.S. dollar weakened against both the yen and the euro last week as investors sold dollars prior to the Group of Seven meeting. But the dollar managed to recover somewhat on Friday after the ISM manufacturing index did not fall as much as analysts feared. Currency traders continue to look for more competitive interest rates in the U.S. when compared with those internationally. The Fed funds rate (1.75 percent) is now only 25 basis points below those in the EMU (2 percent).
While equity investors focused on the third quarter results, those in the foreign exchange market focused on the fourth quarter forecast. The yen fell against the dollar Friday and for the week after the Tankan showed confidence among large manufacturers is forecast to decline in the fourth quarter (even though it was up in the third). And this was despite healthy increases in stocks on Friday. The yen remained lower after China said it will press ahead with plans to allow market forces to play a greater role in determining its currency's value, which has been pegged at 8.3 per dollar since 1995. No timetable has been set however.
Indicator scoreboard
EMU - Seasonally adjusted M3 money supply was up 5.4 percent for the three months ending in August when compared with the same months a year ago. The three-month moving average is a key indicator for the European Central Bank. August private sector loan growth slowed to 6 percent from 6.2 percent in July.
September flash harmonized index of consumer prices was up 2.2 percent when compared with last year. It's the fifth month that inflation has stayed above the European Central Bank's 2 percent limit.
September manufacturing purchasing managers' index climbed to 53.1 signaling an improvement in business conditions in the manufacturing sector for the thirteenth successive month. However, the PMI fell for the second month running, dropping from 53.9 in August and 54.7 in July to indicate the weakest rate of improvement in seven months. Output rose in all countries, although disparities in rates of growth widened during the month. France saw the steepest increase in production for the second month running and was followed by Austria. While both France and Austria saw growth accelerate (but still remain below recent peaks), growth slowed in all other countries surveyed. Growth slipped for the second consecutive month in both Germany and Italy.
EU - September economic sentiment index edged down to 100.7 from 100.9 in August. Sentiment was up in Germany, Finland, Ireland, Spain and France but was down in Italy and Greece. Industry confidence was up to minus 3 from minus 4 in August while consumer confidence edged up to minus 13 from minus 14. However, construction, retail and services confidence were down from August.
Germany - September Ifo Institute business sentiment index eased to 95.2 from 95.3 in August. An improvement in wholesale sentiment more or less offset declines in manufacturing, construction and retail. Future expectations declined to 95.7 from 95.9 in August. Current conditions were up slightly to 94.8 from 94.7 in the previous month. Ifo President Hans-Werner Sinn said the survey results point to a continuation of the "moderate" economic recovery. Manufacturing sentiment was down to 4.1 from 4.4 in August while construction sentiment dropped to minus 45.6 from minus 45 and retail sentiment sank to minus 31.3 from minus 30.2.
France - July producer price index was up 0.5 percent and 2.6 percent when compared with last year. August producer price index was also up 0.5 percent but climbed 2.8 percent on the year. Excluding food and energy, the July PPI was up 0.3 percent and 1.4 percent on the year. August core PPI climbed 0.3 percent and 1.7 percent on the year. The increases were due to higher energy prices that were up 1.5 percent in July and 1.9 percent in August. Insee, the French statistics institute, typically releases data for the summer months in September.
August seasonally adjusted unemployment rate edged up to 9.9 percent from 9.8 percent in July. The number of jobless was up by 32,000. A total of 2.71 million are currently unemployed according to the International Labour Organization definition which excludes jobseekers who did any work during the month.
Second quarter gross domestic product was revised down to 0.7 percent from the originally reported 0.8 percent gain when compared with the previous quarter. When compared with the same quarter a year ago, GDP was revised down to a 2.8 percent gain from 3 percent. Both consumption and investment gains were revised lower. Private consumption growth was revised down to 0.6 percent from the originally reported 0.7 percent while fixed investment was revised downward to a gain of 1.6 percent from the originally reported 1.8 percent.
Italy - Second quarter seasonally adjusted unemployment rate was 8.1 percent, down from 8.2 percent in the first quarter. This is the lowest rate of unemployment since October 1992. The data are based on a reconstruction of the historical series according to a recently inaugurated survey method. ISTAT, the Italian statistical agency, said the unemployment drop in the first half of the year was not due to an increase in jobs but mainly to demographics, as those beyond the age of 50 stayed at work longer because of the country's pension reforms. Changes in survey method are intended to harmonize data collecting methods with those followed by other major EU economies.
August producer price index jumped 0.5 percent and 3.5 percent when compared with last year. The increase was due primarily to climbing oil and metal prices. Excluding energy, the PPI was up 0.2 percent and 3.3 percent on the year. Energy prices were up 1.4 percent and 4.1 percent on the year.
Britain - Second quarter gross domestic product was up 0.9 percent and 3.6 percent when compared with the same quarter in 2003. Household spending was up 0.6 percent, down sharply from the previous estimate of 1.1 percent. NS, the national statistics agency, said the downward revision was due to reestimated spending abroad. The downward revision was mainly offset by an upward revision to net exports.
September seasonally adjusted Nationwide house price index was up 0.2 percent and 17.8 percent when compared with last year. But the unadjusted average house price actually fell slightly on the month to Stg153,727 from 153,743 in August.
Asia
Japan - August seasonally adjusted industrial production was up 0.3 percent and 9.9 percent when compared with last year. Electronic parts & devices, electrical machinery and chemicals excluding drugs contributed to the increase. According to the survey, manufacturing production is expected to increase 1.3 percent in September and to decrease 0.5 percent in October. The survey reflects changing business conditions and provides a view of where the economy is heading in near future months.
August seasonally adjusted unemployment rate eased to 4.8 percent from 4.9 percent in July. The labor force grew by 240,000 while the economy added 290,000 jobs.
September Tokyo consumer price index edged up 0.1 percent but was down 0.2 percent when compared with last year. Core Tokyo CPI, which excludes fresh food, was unchanged on the month but down 0.1 percent on the year. August nationwide CPI also edged up 0.1 percent but was down 0.2 percent on the year. The core CPI was also up 0.1 percent and down 0.2 percent on the year. Deflation so far has been resistant to rising oil prices. Rice prices are expected to fall because of an abundant harvest and add to deflationary pressures.
August spending by households headed by wage earners fell 0.2 percent year-on-year in real terms, perhaps adding to concerns the nation's export-led recovery isn't smoothly filtering through to domestic demand. Wage-earner household spending is an important gauge of personal consumption, which accounts for roughly 55 percent of Japan's gross domestic product. The propensity for wage-earner households to consume, a ratio that measures the amount of disposable income that went to household spending, rose to 75.4 percent from 71.0 percent in July on a seasonally adjusted nominal basis.
Third quarter Tankan survey of corporate sentiment improved from three months ago and was at the most upbeat level since the early 1990s. The diffusion index for large manufacturers climbed to 26 from 22 in the previous quarter. The reading was the highest since May 1991, suggesting the current recovery is the strongest since Japan's asset price bubble of the late 1980s burst. The index for small manufacturers registered a 5, up from 2 in the previous quarter. The Tankan - which means short-term economic outlook - is the most closely watched index of business confidence. It asks about 10,800 companies about the outlook for sales, profits and spending. Large companies are those with more than �1 billion ($9.02 million) in capital.
Australia - August merchandise trade deficit narrowed to A$1.93 billion ($1.28 billion) from A$2.67 billion in July. Imports fell 4.8 percent while exports edged down 0.2 percent. Imports of capital goods, which include machinery, aircraft and business equipment, declined 11 percent. Imports of intermediate goods, which include oil and spare parts, fell 4 percent. Imports of consumer goods dropped 5 percent. Exports of rural goods, such as meat, wheat and wool, fell 9 percent and exports of non-rural goods, such as iron ore, gold and fuels, increased 3 percent.
August seasonally adjusted retail sales were up 0.2 percent and 5.8 percent when compared with last year. Gasoline prices increased almost 5 percent in the month, which left consumers with less to spend at retail outlets. Sales at department stores rose 0.7 percent and sales of food increased 0.6 percent. Sales of recreational goods declined 2.6 percent and sales at bars and restaurants fell 0.8 percent.
Americas
Canada - August industrial product price index (IPPI) edged up 0.1 percent and was up 4.9 percent when compared with last year. Petroleum and coal products prices increased 3.6 percent thanks to higher gasoline and fuel oils prices. Lumber and other wood products increased by 3.4 percent as demand continued to be strong for softwood lumber, particleboard and softwood plywood. When compared with last year, the petroleum and coal products group jumped 21.1 percent. When petroleum and coal product prices are excluded, the IPPI was up 3.8 percent on the year.
August raw materials price index (RMPI) was up 3.3 percent and 20.9 percent when compared with last year. Mineral fuels were mostly responsible for the increase.
The value of the U.S. dollar fell 0.8 percent against the Canadian dollar between July and August. As a result, the total IPPI excluding the effect of the exchange rate would have risen 0.3 percent compared with the 0.1 percent actual increase. On a 12-month basis, the IPPI excluding the effect of the exchange rate was 6.5 percent higher in August compared with the 4.9 percent actual increase.
July monthly gross domestic product edged up 0.1 percent and was up 3.2 percent when compared with last year. Manufacturing output was up 0.3 percent after a 1.6 percent surge in June that was export driven. Production was higher in 11 of 21 groups.
Bottom line
The first week in October brings us three central bank meetings - the Reserve Bank of Australia, Bank of England and European Central Bank. No monetary policy changes are expected. The RBA meets just days before the Australian national election on October 9th. In Britain, the Bank of England is expected to remain on hold while Monetary Policy Committee members evaluate the impact of prior interest rate increases. There are signs that recent rate increases are beginning to bite into consumer spending and that house price gains are beginning to slow. At a post Group of Seven press conference, ECB president Jean Claude Trichet said that nothing has changed in the past month leading to the conclusion that once again the ECB will continue their current policies. Key interest rates for the RBA, Bank of England and ECB are 5.25 percent, 4.75 percent and 2 percent respectively.
Another deluge of data will descend on market participants this week. And that will give investors something to think about as they assess fourth quarter growth prospects and await the onset of earnings season.
Looking Ahead: October 4 through October 8, 2004
A mixed third quarter
