Monday, August 23, 2004
Global Markets
Another week and more record highs for crude oil prices. Equities continued to be spooked by the machinations in oil. Fears that supply is inadequate, especially with the political problems that abound in Russia, Venezuela and the Middle East continues to haunt. Stocks of those companies who rely on oil or usage in their products such as chemicals and autos have been hit because of fears that higher prices will depress earnings and revenues. Higher oil prices are exacerbating already towering problems for airlines. Despite the ever increasing crude prices, all thirteen equities indexes followed here steadied and were up on the week.
Most economic models agree that the recent spike in oil prices to over $49 a barrel should have a relatively modest impact on output. According to a recent joint study by the International Energy Agency (IEA), the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) the conclusion was that a sustained $10 a barrel price increase would reduce global output by 0.5 percent after one year. If prices stay around their current level rather than return to the average of the past four years (about $28), then global growth could be lower by almost one percentage point. That is not insignificant, but so far not enough to trigger a global recession when world GDP has been growing by almost 5 percent over the past year - its fastest pace for two decades. Previous oil price jumps such as those in the 1970s, were caused by sudden supply disruptions. This time is different. The current increase is due mainly to stronger demand. The increase in global oil consumption this year is likely to be the biggest in almost 30 years - largely thanks to China - and supplies are tight because there has been little investment in new oil fields or refineries. Assuming that income continues to grow rapidly in China and other emerging economies, global oil demand should remain strong.
Global Stock Market Recap
Europe and Britain
Equities in Britain and Europe stabilized last week, with all three ending on the positive side for the first time in three weeks. European stocks were up paced by technology shares including Alcatel SA and Infineon Technologies AG amid investor optimism that recent declines were unwarranted in view of earnings expectations. But oil prices continued to dominate. Equity investors appeared to not hit the panic button as hard however, and turned their focus to technology shares. Investors were relieved when the July U.S. consumer price index declined for the first time in eight months as shoppers paid less for gasoline, clothing and transportation. Investor confidence in Germany dropped for the first month in three amid concerns about record oil prices and slowing growth in the U.S. and Japan.
Asia/Pacific
Asian/Pacific equities continue to trade on fluctuations of crude oil prices. Airline stocks are particularly vulnerable here. Asian stocks fell, led by exporters such as Toyota Motor Corp. and Samsung Electronics Co., after oil prices climbed and a report showed an unexpected drop in U.S. consumer confidence. However, despite investor waffling during the week, the six Asia/Pacific indexes followed here were up on the week. The Nikkei, Topix and All Ordinaries were up for the first week in three. The indexes fluctuated between gains and losses as investors weighed the impact of record-high oil prices on the global economy. Airlines and car makers were particularly vulnerable. Investors could not make up their minds about technology stocks.
Currencies
Dollar bears continue to fret about the large U.S. trade and fiscal imbalances. And according to recently released minutes of the June FOMC meeting there even was discussion of the current account and trade deficits there. Analysts think that when the imbalances begin to adjust, the dollar will probably fall in value. If investors are looking for growth however, the potential continues to reside with the U.S. rather than Europe. The dollar managed to edge upward against the euro but headed for a losing week versus the yen as record oil prices reduced expectations the Federal Reserve will raise interest rates next month. The dollar has lost about one percent against the euro and 2 percent against the yen since the Fed last week said that higher energy prices were partly responsible for a slowing economy.
The yen is at its highest value in four weeks after the Nikkei 225 Stock Average gained for a third day, raising speculation demand from overseas investors for the country's shares and yen to buy them will increase. The yen has recovered more than 2 percent against the dollar since Friday, when it fell to a two-week low of 112.10 after a government report showed the economy grew at an annual 1.7 percent rate in the second quarter. It was the first time in three quarters Japan's growth rate was less than that of the U.S.
The stock market recovery should entice overseas investors hold onto their Japanese shares. Higher yen demand would increase the yen's value. However, yen gains may be limited as oil prices climb to records, renewing speculation that higher energy costs may damp optimism about Japanese growth. Japan imports virtually all its oil. Japanese officials have not said anything recently on the yen's value against the U.S. dollar, largely because the pair has been trading within a narrow range. As the yen climbs in value, market players must keep an eye on the Ministry of Finance and the Bank of Japan (the Bank acts at the request of the MoF). They have not hesitated to intervene in the past when they thought the yen's climb would hurt exports and exporter earnings.
Indicator scoreboard
EMU - June workday adjusted industrial output was down 0.4 percent but up 2.7 percent when compared with June of 2003. Only basic goods increased in June, inching up 0.1 percent. On the year, output was down in Germany, Greece and Italy. However, on the month, output fell in Germany, Finland, Greece and Italy.
July seasonally adjusted harmonized index of consumer prices inched up 0.1 percent and was up 2.4 percent when compared with last year. Excluding energy and unprocessed food, the HICP was up 0.1 percent and 2.2 percent on the year. Clothing and food prices dropped but were offset by higher hotel and restaurant prices along with price increases for recreation and culture, energy, health care and housing.
June merchandise trade surplus climbed to �8.7 billion from �7.8 billion in May. On a seasonally adjusted basis, the June surplus was down from �9.1 billion in May to �7.1 billion. Unadjusted exports were up 7.1 percent and 15.4 percent on the year. Imports were up 6.7 percent and 14.8 percent on the year.
Germany - August ZEW economic sentiment outlook dropped to 45.3 from 48.4 in June. The survey is conducted by the Center for European Economic Research (ZEW) of 291 German financial experts between August 2nd and August 16th. The reasons given for the outlook decline included slower global growth which could weaken exports and higher oil prices which are suppressing domestic demand. However, ZEW current economic conditions index improved to minus 65.2.
July producer price index jumped 0.6 percent and was up 1.9 percent when compared with last year. The main reason for the increase was petroleum prices, which were up 3.2 percent and rolled steel prices, which were up 7.8 percent on the month. Excluding petroleum product prices, PPI rose 0.4 percent and 1.5 percent on the year.
France - June seasonally adjusted merchandise trade deficit was �304 million, down slightly from May's deficit of �336 million. Exports were up 1.6 percent while imports climbed by 1.5 percent. Exports were up for semi-finished goods, autos, machine tools and consumer durables. Twenty airbus planes were sold in June. Imports were up for semi-finished goods, autos and capital goods.
Second quarter seasonally adjusted gross domestic product was up 0.8 percent and 3.0 percent when compared with last year. An increase in investment offset a slowdown in private consumption. All components were up on the quarter with the exception of net exports. Business fixed investment jumped 2.2 percent while household investment was up 1.6 percent.
Britain - July retail sales dropped 0.4 percent but were up 6.6 percent when compared with last year. This is the first monthly drop in retail sales since May 2003. Poor weather dampened clothing and footwear sales, contributing to the index's overall decline.
Asia
Japan - June tertiary index, a measure of demand for services, was up 0.8 percent and 2.7 percent when compared with last year. The all industry index was up 0.6 percent and on the year. The tertiary index reflects activity in 11 service industries, including utilities, transport, telecommunications, wholesale and retail, finance and insurance, real estate, restaurants and hotels, medical, educational services, health care and welfare sectors. As of April the government increased the number of sectors covered by the index to 11 from six. The all industry index add activity in the construction, agricultural and 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.
Bottom line
As we head into the last two weeks of summer, there are few economic indicators on the horizon. As a result, investors (i.e. those not on vacation) will have little to distract them from the seesawing events in Iraq and elsewhere in the Middle East and the resulting impact on crude oil prices. The European Central Bank meets on September 2nd. But the first full week of September promises overload on new information as four central bank announcements will be making during that week (Reserve Bank of Australia, Banks of Canada, Japan and England) and new economic data will flow with abandon.
Looking Ahead: August 23 through August 30, 2004
Oil, oil, oil