Monday, September 27, 2004
Oil prices again capture investors
After virtually ignoring daily fluctuations in crude oil prices for the past few weeks, investors once again focused on their upward trajectory and impact on economic growth. On Monday, crude prices ended the day above $46 a barrel in New York after troubled Russian oil company Yukos suspended exports to China. Prices had eased from the large increase of the prior week as the threat of hurricanes in the Gulf of Mexico subsided.
Yukos indefinitely suspended all deliveries to the China National Petroleum Company, adding up to about 100,000 barrels a day or less than 10 percent of the company's daily export volume. Yukos said it was reducing its oil exports to China due to problems with payments for export duties and transport fees because its bank accounts are frozen by government authorities.
Crude prices were also given a boost by a decline in U.S. oil inventories as remnants of Ivan the Hurricane curbed oil production. The Louisiana Offshore Oil Port, the biggest U.S. oil import terminal, closed on September 22nd because of high winds and rough seas. The port, which handles about 1 million barrels of oil imports a day, was shut from September 13th to the 18th by the initial impact of Ivan. Oil did decline slightly after the Bush administration said it might tap the Strategic Petroleum Reserve to compensate for shortages. But on Friday prices reversed course and continued to climb toward the $50 mark. The Strategic Petroleum Reserve was tapped in 2002 after Hurricane Lili disrupted shipments in the Gulf.
Global Markets
Equities slumped as 11 of 13 indexes followed here were down on the week. Only those stocks in Canada and Mexico managed to finish the week on the plus side. The main culprit once again was energy prices especially in light of reduced production in the hurricane riddled Gulf of Mexico, shrinking U.S. inventories and continuing problems in Russia with Yukos production. And in Japan, weak economic data led investors to question the strength and veracity of the recovery there. Then there was those profit warnings from a wide spectrum of companies that deflated investor hopes for third quarter profits. With the third quarter ending on Thursday, investors had good reason to be jittery.
Global Stock Market Recap
Europe and Britain
The FTSE, DAX and CAC reversed direction and were down three of five days last week as crude oil price jitters combined with escalating third quarter profits worries. Oil prices were down slightly on Friday but still were an enormous worry for equities, as supply concerns lingered despite news that the U.S. government was set to loan some of its strategic reserve to refineries. Oil company stocks benefited from a growing consensus that energy prices will remain high and will enhance profits.
The FTSE vaulted over 4600 on Tuesday and closed above that level for the first time in since July 2002. However, this didn't last long as the index fell back as profit warnings and crude prices eroded investor optimism. It has been a slow road back for the FTSE. After reaching its peak of 6720 in December 1999 the index fell to a low of 3644 in February 2003. It has been making its recovery in fits and starts since then.
Asia/Pacific
All Asian/Pacific stock indexes followed here were down on the week as once again crude price increases elevated concerns about the health of world economic growth. Worries about Japanese economic growth also entered into the equation as the tertiary and all industry indexes were down in July and the merchandise trade surplus disappointed analysts (See indicator scoreboard below). In Japan, stocks were down for the second week despite being closed for holidays on Monday and Thursday. Exporters such as Toyota slid after the most recent oil price surge. Toyota gets 70 percent of its profits from the North American market. The risk of a slowdown, especially in the key U.S. market, could hurt exporters' profits.
Hong Kong's Hang Seng Index had its biggest weekly drop in three months and hit a two week low after a properties company missed analysts' estimates. Australian mining stocks fell, led by BHP Billiton and Rio Tinto Group, after copper prices declined for a second day in New York on concern that demand is slowing in China and production of the metal may increase next year.
Currencies
The Federal Reserve increased interest rates by 25 basis points to 1.75 percent and essentially left its accompanying statement with the phrase "measured pace" in place - a stance they have had since May. This sent the dollar tumbling in the meeting's aftermath. The foreign exchange markets continue to look for higher U.S. interest rates to attract investment given the formidable trade and budget deficits. The increase brings the Fed's benchmark rate closer to the European Central Bank's 2 percent key rate. The dollar has gained this year after the Fed began raising its key rate from a 40 year low of 1 percent. Higher Fed rates could enhance the yield advantage of Treasuries and other U.S. debt compared with debt sold in Europe. Since Tuesday, the dollar has fluctuated within a relatively narrow band.
The Japanese yen remained under pressure, rattled by soft economic data, falling equities and a bounce in oil prices. Japanese stocks were down for the second week amid speculation that overseas investors might be selling stocks as crude prices climb. Japan imports virtually all of its oil and would be vulnerable to growing worries over the pace of global economic growth. Economic and Fiscal Policy Minister Heizo Takenaka last week said costlier oil is the biggest risk to Japan's economy. Fears were heightened Friday with the revelation that the tertiary index, a service-orientated measure of activity, and the wider all-industries index both unexpectedly dropped (See indicator scoreboard below).
The British pound declined against the dollar after minutes from the Bank of England's Monetary Policy Committee meeting on September 8th and 9th increased speculation the central bank is nearing the end of a series of rate increases. In the minutes, the MPC indicated it might have underestimated the effect of slowing house-price growth on consumer spending. Rising interest rates and yields helped the pound sterling advance against the euro and the dollar in the year. The Bank of England's key interest rate is 4.75 percent while the Fed's is 1.75 percent and the ECB's is 2 percent.
Indicator scoreboard
EMU - July seasonally adjusted merchandise trade surplus dropped to �5.7 billion from �7 billion in June. Exports slipped by 0.1 percent while imports were up 1.3 percent. On a nonseasonally adjusted basis, the trade surplus was �1.3 billion. Exported edged down 0.3 percent while imported declined by 4.3 percent. When compared with last year, nonseasonally adjusted exports were up 8.5 percent while imports climbed by 6.9 percent.
July seasonally adjusted industrial orders dropped 0.6 percent but were up 5.4 percent when compared with last year. Orders for transport equipment, metal & fabricated metal products and chemical & chemical products were down, only partly offset by increased orders for electrical & electronic equipment and machinery.
Germany - July seasonally and workday adjusted manufacturing orders were revised slightly lower to an increase of 2.8 percent from the originally reported 3 percent gain. Both foreign and domestic orders were revised downward. Foreign orders were up 4.8 percent down from the originally reported 5.2 percent while domestic orders were lowered to 0.9 percent from the originally reported 1.0 percent. Capital goods orders along with basic and consumer goods orders were all lower on the month.
July seasonally and workday adjusted industrial production was revised down slightly to a gain of 1.4 percent from the originally reported 1.6 percent increase. On the year, industrial production was up 2 percent. Industrial production excluding construction was revised down to 1.5 percent from the originally reported gain of 1.7 percent. Manufacturing output was revised downward to an increase of 1.6 percent from the originally reported 1.8 percent.
France - July seasonally and calendar adjusted consumer spending on manufactured goods sank 2.9 percent but was up 2.6 percent when compared with last year. However, in August, consumer spending on manufactured goods was up 0.5 percent and 5.4 percent on the year. The French statistical agency Insee typically releases data for July and August together in September due to summer holidays. Most spending components showed sharp swings over the two-month period. For example, auto spending plummeted by 8.7 percent in July but then recovered by a 2.0 percent gain in August. Household durable purchases sank 3.6 percent but then bounced back by 1.8 percent.
Italy - July unadjusted retail sales were down 0.4 percent and dropped 0.3 percent when compared with last year. Sales were down primarily because of a 0.6 percent decline in non-food sales on the year. However, food sales, which account for about 40 percent of total sales, were up 0.3 percent on the year. ISTAT's retail sales data are not watched very closely because the data show little or no correlation with consumer spending data as published in quarterly GDP statistics.
July merchandise trade balance soared to a surplus of �3.2 billion from a deficit of �1.1 billion in June. Both exports and imports were up with exports increasing 6.3 percent while imports were up 5.1 percent.
Asia
Japan - August seasonally adjusted merchandise trade surplus climbed to �1.0 trillion ($9.5 billion) from a revised �971 billion in July. Exports were up 2.3 percent mainly on demand from China while imports were up 1 percent.
July tertiary industry index sank by 0.8 percent but was up 3.2 percent when compared with last year. The decline reversed the 0.9 percent June increase. The all-industry index was down 0.6 percent after climbing 0.7 percent in June. The tertiary index reflects activity in 11 service industries including utilities, transport, telecommunications, wholesale & retail, finance & insurance, real estate, restaurants & hotels, medical, educational services, health care and welfare sectors. In April the government increased the number of sectors covered by the index to 11 from six. The all industry index adds activity in the construction, agricultural & fisheries industries, the public sector and industrial output to those industries covered by the tertiary index. The all-industry index is considered a close approximation for gross domestic product growth as measured by industrial and service sector output.
Americas
Canada - July retail sales were up 0.5 percent and 3.8 percent when compared with last year. Excluding autos, sales were up 0.3 percent. Furniture, home furnishings & electronics were up 1.7 percent while building & outdoor home supplies sales were up 1.6 percent. However, sales in pharmacies & personal care stores were down 1.5 percent.
Bottom line
After two relatively slow weeks, the flow of new economic information picks up as the third quarter comes to a close and the fourth quarter begins on Friday. Key consumer and purchasing managers surveys head the list of important economic data to be available as international investors attempt to figure out the strength of the world economy.
The International Monetary Fund's annual meeting begins this week in Washington DC. In conjunction, a Group of Seven finance ministers meeting is scheduled for Friday. An historic precedent will be set when China joins in for part of the discussions. Incidentally, Russia, who generally participates at G-7 meetings, will not be attending the China session.
In recognition of its growing economic power, China will meet with the Group of Seven in what could be a prelude to joining the club of wealthy industrialized nations. The price of China's entry into the group, however, could be a revamping of its currency - making the yuan (or renminbi) more flexible and stronger against other currencies, especially the dollar. The United States and Japan have been pushing China to end its policy of pegging the currency to the dollar.
Russia was invited to be part of the Group of Eight countries during the Clinton administration because of its political power, not its economic prowess, and it continues to attend the annual summit meetings for heads of state and top officials.
Looking Ahead: September 27 through October 1, 2004
Slouching into the fourth quarter