Monday, March 29, 2004
Global Markets
Market focus shifted to political events from economic ones, and investors sold stocks and fled to safe haven investments after political tensions in the Middle East escalated. Post mortems on the Madrid bombings and fallout from the Spanish elections combined with tensions in Taiwan stemming from a wafer-thin presidential victory by incumbent Chen Shui-bian, who just days before was shot in an apparent assassination attempt. Fears of a political crisis depressed stocks in Taiwan and triggered huge central bank intervention. But as tensions eased somewhat, investors recovered some of their equilibrium and returned to the market, helped in part by Thursday's recovery in U.S. stocks.
As the first quarter draws to a close, stocks in Japan, Germany, Mexico and the U.S. were up on the week. All others followed here were down. Stocks in Hong Kong, Britain, Germany and the U.S. are below year-end 2003 levels.
Global Stock Market Recap
Europe and Britain
European stocks were mixed as forecasts from companies including Swiss Reinsurance Co. and Telecom Italia SpA failed to counter concerns about terrorism. Concern that businesses and consumers may slow spending lingered in the wake of terrorist bombings in Madrid and the assassination of a leader of the Palestinian Islamic group Hamas on Monday. Both the FTSE and CAC were down on the week.
British stocks dropped for the third week - the longest run of week-on-week reverses since January 2003. British stocks were down on news from Boots, the largest pharmacy chain, and Sainsbury, a super market chain. Other retailers such as Marks & Spencer department stores added to the gloom.
Asia/Pacific
Japanese stocks are now at a 22-month peak thanks to continuing favorable economic news. The nation's merchandise trade surplus was up, but the eye catching news was Japan's first trade surplus with China in a decade. Other data contributed to the upbeat view - domestic retail sales and worker spending both jumped. The data are beginning to show that the domestic economy is beginning to revive. Elsewhere in Asia, stocks were mixed in part due to the post-election tensions in Taiwan.
Japanese capital flows in the week ending March 19th showed that foreign investors continue to be heavy buyers of Japanese stocks according to the Ministry of Finance. The data confirmed anecdotal evidence of ongoing foreign demand for Japanese equities. Foreign investors were, however, modest net sellers of Japanese bonds. Japanese investors continued as small net sellers of foreign stocks, but were heavy net buyers of foreign bonds for the first time in three weeks.
Currencies
The yen was up for the third straight week against the dollar thanks to more positive than anticipated economic data. Reports showed that consumer spending, which makes up more than half the economy, has finally begun to improve. Faster growth has also spurred record purchases of Japanese shares by overseas investors. Japan's economic growth has come somewhat as a surprise to foreign investors, who had been pessimistic about its prospects.
The euro has stayed within a narrow range all week as weak economic data combined with debates over whether the ECB will lower rates next week addled traders. On Friday, the Ifo Institute business climate index fell to a five-month low while the University of Michigan Consumer Sentiment Index was up in the U.S.
In testimony before the House of Commons Treasury Committee, Bank of England Governor Mervyn King said that the pound's rally is beginning to hurt the economy. This raised concerns that the pound is crimping exports and would prevent the economy from easing its dependence on domestic consumers. The pound was down against the dollar for the third week in four. The Bank of England's key interest rate is 4 percent - 300 basis points above that of the Federal Reserve. The Bank is widely expected to increase rates at either their April or May meeting.
Indicator scoreboard
EMU - January merchandise trade surplus with the rest of the world sank to �1.2 billion from December's �6.1 billion. On the month, exports and imports dropped 9.0 percent and 3.8 percent respectively. When compared with January of 2003, exports dropped 3.4 percent while imports sank 6.4 percent.
February M3 money supply was up by 6.3 percent when compared with last year. The three month moving average through February was up by 6.6 percent when compared with the same three months a year ago. The moving average is the ECB's preferred measure of money supply growth. The ECB has set a target growth rate of 4.5 percent.
Germany - January seasonally and workday adjusted manufacturing orders were revised to a decline of 1.3 percent from the previously reported drop of 2 percent. Foreign orders dropped a revised 2.3 percent rather than the originally reported decline of 2.8 percent. Domestic orders fell 0.3 percent rather than the initially reported 1.2 percent drop.
January seasonally adjusted industrial production was revised to an increase of 0.5 percent from the decline of 0.1 percent originally reported thanks to upward revisions in energy and construction output. Manufacturing output was up a revised 0.4 percent from the originally reported 0.7 percent due to weaker capital goods output. Industrial production excluding construction - the number used to calculate eurozone industrial output - was revised upward to 0.9 percent from the originally reported 0.4 percent.
March Ifo Institute business sentiment index sank to 95.4 from 96.4 in the previous month. Current conditions fell for the first time since September 2003 to 92.1 from 92.6 in February. Expectations were also down - they fell to 98.9 from 100.3 in the prior month. The Madrid terrorist attacks on March 11th did not appear to affect the results.
France - February seasonally and calendar adjusted consumer spending on manufactured goods was unchanged but was up 3.6 percent when compared with last year. Rising auto sales offset modest declines in clothing and household durable spending. These results followed a very strong January.
Italy - January retail sales were up 3.6 when compared with last year mainly due to rising food sales. January seasonally adjusted retail sales were up 0.6 percent on the month. ISTAT places more emphasis on the yearly comparison.
January industrial orders sank 3.7 percent and plummeted 6.1 percent when compared with last year. Domestic orders were down 5.5 percent while foreign orders dropped 7.5 percent on the year. Domestic orders account for around 62 percent of the total. Eight of 10 product sectors were down. ISTAT places more emphasis on the yearly comparison than the monthly numbers.
Britain - Final fourth quarter gross domestic product was up by 0.9 percent and 2.7 percent when compared with the same quarter a year earlier. Household spending was up 0.9 percent and 2.5 percent on the year. Gross fixed capital formation was up 2.4 percent and 3.7 percent on the year.
Asia
Japan - January seasonally adjusted tertiary index jumped 2.6 percent and 3.6 percent when compared with last year. This was the fastest pace in almost four years as the export led recovery is spreading to consumers. Retail sales had their biggest gain in almost seven years in January. The tertiary index reflects activity in six industries - utilities, transport and telecommunications, wholesale and retail, finance and insurance, real estate and services. The broader all-industry index rose 2.6 percent in January. From a year earlier, the all-industry index also rose 2.6 percent. The all-industry index is used as a proxy for gross domestic product because it adds industrial production, construction, agriculture and government spending to the tertiary index.
February seasonally adjusted merchandise trade surplus increased to �1.25 trillion ($11.74 billion) from �1.09 trillion in January. Exports soared 10.3 percent while imports dropped 1 percent. Exports to Asia were up 14.4 percent while imports from the region were up 3.6 percent. The trade surplus with Asia was �790.3 billion. Japan's surplus with the U.S. was up to �604.0 billion. Exports to the U.S. fell 0.7 percent but imports from the U.S. plummeted 8.9 percent. The drop was probably due to the continuing embargo of beef from the U.S. after the discovery of a case of mad cow disease.
March Tokyo consumer price index was up 0.4 percent but unchanged when compared with last year. The Tokyo core CPI was also up 0.4 percent but slipped 0.1 percent on the year. Both the February nationwide CPI and core CPI were unchanged both on the month and on the year. The data show that deflation remains persistent despite one-time factors such as rising prices of beef and rice.
Americas
Canada - January retail sales jumped 1.6 percent and were up 1.2 percent when compared with last year. Excluding motor and recreational vehicle sales, retail sales were up 2.2 percent and 3.8 percent on the year. Motor and recreational vehicle sales were down 0.4 percent and sank 6.2 percent on the year.
Bottom line
This week begins the deluge of economic data that usually inundates market watchers at this time of month. Also on the very near horizon are a plethora of central bank meetings beginning with the European Central Bank on Thursday. And with the eurozone's economic recovery proving too gradual for comfort, the European Central Bank will be under renewed pressure to lower interest rates to help prop up flagging sentiment. The impact of the Madrid bombings has probably dented business and consumer confidence at an already difficult moment for the region's economy, but it was too early to say how the bombings might affect growth.
The ECB has held interest rates at 2 percent since June 2003. At the press conference following its March monetary policy meeting, ECB president Jean Claude Trichet highlighted his concerns about private consumption and made clear that a revival of consumer confidence was vital to sustain the upturn. Others have echoed his worries. Otmar Issing, the ECB's chief economist, acknowledged that recent data had been mixed and hinted the bank might have to rethink its analysis if consumer demand did not pick up as expected. But the monetarists and traditionalists at the central bank will almost certainly put up stiff resistance to further easing, preferring a stability oriented stance given their fears that excessive liquidity might stir inflation.
Also on the agenda this week is OPEC's production quota meeting in Vienna, Austria. It's anybody's guess whether rhetoric will be matched by action. Prices are too high for many producers not to try to maximize revenues. OPEC members have a long history of not complying with quotas.
Spring has sprung - summer time has begun in Europe and Britain with the U.S. to follow next Sunday. In a reversal of seasons, Australia returned to standard time.
Looking Ahead: January 26 through January 30, 2004
Another choppy week