Monday, August 30, 2004
Global Markets
With little economic news to distract them, investors continued to focus on crude oil prices and tensions surrounding the Republican National Convention in New York City. Despite a decline in oil to below $45 a barrel, equities at first found little reason to celebrate. Rather they continued in their typical languor as befits the final week before summer's end. Investors got more enthusiastic as the week wore on however. On the week, 12 of 13 of the indexes followed here were higher despite low trading volumes.
Crude futures extended their losses to a fifth consecutive session on Thursday as fears over disruptions to supply eased in spite of fresh sabotage attacks on Iraqi pipelines. However, they did edge up on Friday. Now traders are debating whether the declines will continue or prove only a momentary respite. OPEC meets on September 15th in Vienna and already the rhetoric has escalated. The organization's leaders are emphasizing the need for lower crude prices and said discussion of what could be done to stabilize prices is on the agenda. OPEC plans to include non-OPEC members and oil companies in the dialogue. Despite record oil prices, some of the world's biggest oil-producing countries have reduced their investment in new capacity. OPEC said its members drilled 6.5 percent fewer wells in 2003, suggesting the global supply crunch and high oil prices could last longer than expected. The numbers appear to contradict earlier statements by OPEC members that they were actively building extra capacity.
Global Stock Market Recap
Europe and Britain
European stocks got a boost from a rash of upbeat corporate news towards the end of the week. This combined with lower oil prices helped whet investors' appetite for equities. The FTSE, DAX and CAC were all up on the week. With two days of August trading remaining, the FTSE is up on the month despite still high crude oil prices and political uncertainties about terrorism and the U.S. election result that continue to plague investors. The FTSE rose for the seventh trading day in a row Friday, hitting its best closing level since the start of July. Both airlines and auto sectors were helped by the decline in crude.
However, both the CAC and DAX have lost ground so far in August. Investors focused on U.S. data, especially the disappointing employment situation report and the shocking jump in the merchandise trade deficit, rather than the EMU's so-so GDP growth and protests against proposed German unemployment benefit cuts. This is because - with the exception of France where domestic consumption is flourishing - the other major economies continue to rely on the bounty of foreigners. What little growth that existed in the second quarter was thanks to the continued appetite of China and the United States for its exports.
Asia/Pacific
Relief from easing crude prices boosted Asia/Pacific markets. Both the Nikkei and Topix were up despite investor disappointment with last week's economic data including a surprising leap in the unemployment rate and a decline in wage earner spending (see indicator scoreboard below). The slump in oil prices helped lift stocks in Japan, South Korea, Singapore and Hong Kong for the week. Stocks in Australia were up thanks to several companies that reported record earnings.
The biggest takeover battle in Japanese history became even bigger when the Sumitomo Mitsui Financial Group - Japan's third largest bank - sought to disrupt Mitsubishi Tokyo's expansion plans with a $29 billion hostile bid for UFJ Holdings. Mitsubishi Tokyo is Japan's second largest bank while UFJ Holdings ranks fourth. The offer was an escalation in the battle for UFJ, the smallest and weakest of Japan's top four banks. The bank that wins UFJ will emerge as the world's largest lender as measured by assets. This comes just as the outlook for banks is improving given the recent recovery. The messy and public bidding war for UFJ is unusual in Japan's genial banking world, where mergers usually have been negotiated quietly and often under the guidance of government regulators.
A merger of UFJ and Mitsubishi Tokyo would create a bank with assets of �189 trillion ($1.7 trillion). By that measure, it would be bigger than the current number one Japanese bank, the Mizuho Financial Group, and larger than Citigroup, which has assets of $1.3 trillion. A combined Sumitomo and UFJ, with �180 trillion ($1.64 trillion) in assets, would likewise rank as the world's largest bank.
UFJ has been mired under a high level of nonperforming loans for over three years and has fallen behind on a government-mandated schedule to clean up its loan portfolio. Japan's finance industry has experienced huge changes in the last few years as a string of mergers has combined more than a dozen major financial institutions into four huge banks - Mizuho, Mitsubishi Tokyo, Sumitomo Mitsui and UFJ. The mergers came in the aftermath of the collapse of the real estate, stock market bubble in the early 1990s and followed a decade of feeble economic growth that crippled many big banks.
Currencies
The dollar was higher against the euro after the University of Michigan consumer sentiment index declined less than predicted on Friday. The dollar also was helped by comments from Federal Reserve policy makers that the second-quarter economic slowdown won't last. The euro's failure to decline beyond $1.24 has encouraged traders to abandon bets that the dollar will drop and focus on the prospect that U.S. growth may speed up. Against the euro, the dollar is up about 2.4 percent this week. Depressing the euro were gloomy German GDP data showing moribund domestic demand. Virtually all German growth is the result of exports.
The yen traded within a narrow range against the dollar and the euro as the Nikkei had its biggest weekly gain in two months. International investors were net buyers of Japanese equities in the August 13th week for the ninth week in ten. The yen has been hurt of late by soaring oil prices. It has been estimated oil could cut Japan's GDP growth by about 0.4 percent.
Indicator scoreboard
EMU - June seasonally adjusted industrial orders sank 6.5 percent but were up a healthy 10.9 percent when compared with last year. Orders for transport equipment plummeted 15.9 percent while basic metals & fabricated metal products were down 0.8 percent and electrical & electronic equipment down 0.5 percent. However, orders for machinery and equipment increased 1 percent while orders for chemicals & chemical products were up 0.9 percent. No breakdown between foreign and domestic orders is available.
July M3 money supply was up 0.9 percent and 5.5 percent when compared with last year. The preferred measure, the moving average for the months ending in July, was up 5.2 percent when compared with the same three months a year ago. The European Central Bank has a target of 4.5 percent growth for the moving average. Seasonally adjusted private sector loans jumped 6.2 percent on the year for the fourth consecutive increase.
Germany - August Ifo Institute German business sentiment index was 95.3, down from July's 95.6. The decline was due to a deterioration of business expectations, which dropped from 97.1 in July to 96.0 in August. However, the current conditions index climbed to 94.7 in August from 94.1 in July. Ifo President Hans-Werner Sinn said the latest results indicate that Germany's economic recovery "is still not on solid ground".
Second quarter seasonally adjusted gross domestic product was up 0.5 percent and 1.5 percent when compared with the second quarter last year. The data were unrevised from the flash estimate released on August 12th. But with this release, first estimates of the components were available. Domestic demand, which sank 0.1 percent and 0.7 percent on the year, continues to be a drag on the economy. Equipment investment was unchanged and down 1.2 percent on the year. Construction investment is an ongoing problem, declining for the 17th time in the last 19 quarters.
Britain - Second quarter gross domestic product was up 0.9 percent and 3.7 percent when compared with the same quarter last year. Growth continues to be consumer driven with household spending jumping by 1.1 percent and 3.2 percent on the year. The distribution, hotels & catering sector rose by 1.1 percent; government and other services rose by 1.0 percent; business services and finance rose by 0.9 per cent; and the transport and communications sector rose by 0.8 percent with a recovery in telecommunications.
Asia
Japan - July seasonally adjusted merchandise trade surplus widened to �974 billion ($8.86 billion) from a revised �940 billion in June. Exports fell 0.3 percent while imports dropped 1.2 percent. This was the second month of decline for exports as overseas demand cooled. Exports were up 14.3 percent while imports jumped 8.2 percent when compared with last year. Japan's trade surplus with the United States increased 12.6 percent to �639.5 billion from a year earlier.
August Tokyo consumer price index was up 0.2 percent but down 0.2 percent when compared with last year. Core consumer price index also was up 0.2 percent but down 0.2 percent from the year-earlier month. The string of CPI declines began in October 1999 and suggests the economy remains in mild deflation. The pace of the decline in the Tokyo consumer prices is considered an early indicator of price trends for the rest of Japan. The nationwide CPI dropped 0.3 percent and 0.1 percent on the year. The core CPI was down 0.1 percent and declined 0.2 percent on the year. Although higher prices of basic materials have pushed corporate goods prices higher in the past few months, consumer prices remain weak as companies have yet to transfer higher costs into their final products.
July seasonally adjusted spending by households headed by wage earners dropped 2.5 percent but was up 2.9 percent when compared with the same month a year ago. 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 to consume, a ratio which measures the amount of disposable income that went to household spending, fell to 71.0 percent from 76.6 percent in June. Wages have risen in just three months during the past three years and fewer workers are getting bonuses as companies hire part time workers rather than full time employees. Hot weather boosted sales of drinks and air conditioners and the Olympics have helped sales at some companies, such as electronics makers. The temperature in Tokyo, home to one-tenth of Japan's population, rose to a record 103 degrees on July 20th.
July unemployment rate jumped to 4.9 percent from 4.6 percent in June. This is the first increase in the jobless rate since December. The jobless rate had dropped in part as companies took on more part time workers rather than permanent staff. The number of job advertisements in Japan rose 14 percent, largely because of an increase in ads for part time workers, a category that rose 21 percent, according to the Association of Job Information of Japan.
Americas
Canada - June retail sales edged up 0.2 percent on higher auto dealer and pharmaceutical sales. Excluding sales by dealers of new and used recreational vehicles and auto parts, retail sales declined 0.5 percent, but all other categories declined. Retail sales were up 0.3 percent in constant dollars. On the year, retail sales were up 4.9 percent.
Bottom line
After a dearth of economic data in the past two weeks, investors will be trying to absorb a deluge of new important economic information including the intensely followed purchasing managers' surveys this week. And the ECB will be back from vacation when it meets on Thursday - but no policy change is expected despite continued weak EMU growth especially when compared with the United States, Britain and Japan.
There appears to be a divergence of opinion about the impact of higher energy prices. ECB researchers have concluded sharp increases not only hurt growth in countries such as France, Italy and Germany, but also that negative effects do not unwind equally when prices fall. But on Tuesday ECB president Jean Claude Trichet denied that Europe needed to worry seriously about the recent oil price run up. He also denied that the ECB should abandon its June growth forecasts, which assumed an oil price almost 40 percent below current levels. The International Energy Agency, for example, estimates a 40 percent increase in oil prices reduces EMU growth by 0.5 percentage points. Inflation, however, has been stubbornly above the ECB's target in recent months, and the central bank fears that higher oil prices might lead to "second round effects", by increasing wage demands.
Looking Ahead: August 30 through September 3, 2004
Waiting for the data deluge