Global Markets

No one could blame investors last week if they suffered from information overload. While we were enjoying our Thanksgiving in the U.S., Dubai imploded — and that remained an issue for Monday but faded as the week wore on. Then there was the usual first week of the month outpouring of new economic data in Europe and the U.S. And if that were not enough, the Reserve Bank of Australia raised rates for a record third month in a row, the ECB announced stimulus withdrawal plans and the Bank of Japan held an unscheduled emergency meeting in its efforts to prop up the Japanese economy and bring deflation to its heels. And of course, Friday was employment report Friday in the U.S. — surely the most monitored economic event in the world!

With the exception of the Nikkei, Topix and the Kospi, all equity indexes followed here were up in November despite rocky trading the last few days of the month thanks to the Dubai situation. The monthly gains were healthy, ranging from a modest 0.3 percent for the Hang Seng and 0.6 percent for the SET to a ruddy 8.1 percent for the Bolsa and 6.7 percent for the Shanghai Composite. On the week, all indexes tracked here were up despite some hesitation along the way. Weekly gains ranged from 10.4 percent for the Nikkei down to 0.4 percent for the S&P/TSX Composite.

A week after Dubai World announced its debt ‘standstill,’ the stock selloff that ensued over the U.S. Thanksgiving holiday seems to have evaporated. After the initial selloff, equities rebounded as investors concluded that Dubai is too small for its woes to pose a systemic threat.

Global Stock Market Recap

Europe and the UK

Equities were choppy but nevertheless ended the week on a positive note. Investor focus was on U.S. economic data as usual. A disappointing nonmanufacturing report from ISM led to worries about the recovery’s resiliency on Thursday. And on Friday, the indexes were down prior to the U.S. employment release and investors were in a defensive mode as traders feared more bad news. However, the news was far better than expected and stocks immediately vaulted higher. Enthusiasm waned though as the market day wound down. Resource stocks were hurt by lower commodity prices and banking stocks drifted lower. The improved employment report reinforced the notion that the U.S. recovery was gaining pace but at the same time raised new fears — namely that the Fed would rethink its low interest rate policy in light of the better than expected data.

After declining in October, the FTSE, CAC and DAX were up in November despite heavy losses on November 26 due to the Dubai debt standstill shock. The CAC was up 2 percent, the FTSE gained 2.9 percent and the DAX jumped by 3.9 percent on the month. For the week, the CAC was the star, jumping 3.4 percent while the DAX was up 2.3 percent and the FTSE gained 1.5 percent.

European Central Bank

As expected the European Central Bank left its policy interest rate at 1 percent where it has been since May. In his press conference immediately after the announcement, president Jean Claude Trichet said that the ECB would scale back its emergency financing operations in 2010. Trichet said that improved financial market conditions indicated that not all of the Bank’s exceptional liquidity measures were needed now. The ECB will link the rate on the December 15 tender of 12 month funds to the average of the Bank’s benchmark interest rate over the year, a departure from its current policy of offering the money at a fixed 1 percent. Trichet stressed the move is not a signal that the ECB has decided to raise its main rate. The ECB has been flooding banks with cheap cash to revive lending among banks. As the economy recovers, policy makers are pulling back liquidity to prevent inflation and asset bubbles. Trichet also said the supply of six month loans will expire at the end of the first quarter. The ECB will continue to provide banks unlimited funds in its main refinancing operations at a fixed rate at least until April 13, 2010.

The ECB raised its economic outlook. It forecasts growth of 0.8 percent next year, up from the 0.2 percent projected in September. Growth will accelerate to 1.2 percent in 2011 according to the new forecasts. The ECB sees inflation averaging 1.3 percent next year and 1.4 percent in 2011. It aims to keep the rate just below 2 percent.

Trichet also noted that it was very important that the U.S. has a strong currency. The euro has gained 18 percent against the dollar since the middle of February, threatening to slow the region’s recovery by hurting exporters.

Asia/Pacific

Wary Asian/Pacific investors will have to wait until Monday to celebrate the improved U.S. labor market report. On Friday, markets here ended mixed with traders preferring to book profits and stay on the sidelines ahead of the employment report. While the markets in Japan, South Korea and China ended in positive territory, those in Hong Kong, Australia, India and Taiwan ended in negative territory on profit taking. All indexes but the KLCI which was virtually unchanged, were up for the week. And for the record both the Nikkei and Topix were down as was the Kospi in November.

Japan’s Nikkei stock average closed above 10,000 on Friday for the first time since October 30 and jumped 10.4 percent or 941 points on the week, its biggest weekly gain in over a year. Exporters fueled the gain thanks to the decline in the yen. In process, the index snapped a five week losing streak thanks to a wave of short-covering supported by foreign investors. The Nikkei soared 3.8 percent Thursday as a weakening yen lifted exporter issues and moves by Japanese authorities to beat deflation brightened investor sentiment. Some analysts say that sustaining the index over the 10,000 level could be difficult as investors continue to wait for the new government’s economic policy and fresh stimulus package.

Reserve Bank of Australia interest rate now 3.75 percent

As expected the RBA increased its policy interest rate for the third consecutive month by 25 basis points to 3.75 percent as evidence mounts that the economy is strengthening. This is the first time that the RBA has increased rates at three meetings in a row. The Bank will have time to judge the impact of its moves — it next meets in February after taking its summer break in January. The RBA’s post meeting statement infers that after three increases, the Board can now afford to wait for several months before moving again. The RBA is the only central bank in the G-20 that is currently increasing interest rates. The dilemma facing the RBA is in determining the pace of the rate increases. They must balance the risk of keeping borrowing costs too low against an economy that may cool as government stimulus abates.

Bank of Japan holds an emergency meeting

At a hastily called special meeting, the monetary policy board announced that it would offer ¥10,000 billion in cheap, three month loans to commercial banks. The Bank said that the monetary policy easing would “firmly support” the Japan’s recovery. However, the attempt to boost financial sector liquidity disappointed markets and was dismissed by critics as little more than a ‘sideshow’ intended to head off calls from members of the new Democratic party-led government for more decisive action to curb deflation and boost economic growth. Some analysts opined that it reminded them of the days not that long ago when the BoJ would respond to government pressure with some token change to keep the politicians happy.

News of the meeting had sparked speculation the BoJ might return to the kind of quantitative easing it pursued earlier this decade when it committed itself to long-term low interest rates and made financial sector liquidity its policy target. At his post meeting press conference, governor Masaaki Shirakawa said the move to offer the three month loans fixed at its 0.1 percent policy rate could be described as quantitative easing in a ‘broad sense’ in that it was intended to prevent a shortage of liquidity among financial institutions.

This meeting was held under strong pressure from the government and immediately raised worries about central bank independence. Masaaki Shirakawa, the only candidate for BoJ governor last year to be supported by Mr Hatoyama’s Democratic Party of Japan, won immediate praise from the prime minister for his efforts — even though the markets were underwhelmed.

Currencies

The U.S. dollar surged against its major counterparts after the U.S. employment report was much better than expected. Traders were encouraged to boost bets that the Fed would increase interest rates sooner than anticipated. At the same time, the yen was down on the week, its first decline against the dollar in over a month on speculation that the currency will regain its status as the primary funding vehicle for the carry trade. Both the Canadian and Australian currencies were up against their U.S. counterpart — Canada because the country added more than five times as many jobs as expected and Australia on the Reserve Bank of Australia’s interest rate increase that widened the interest rate spread.

Heightened concerns from the Japanese authorities over the strength of the yen pulled the Japanese currency back from a 14-year peak against the dollar. Investors liquidated carry trades after Dubai’s debt problems surfaced. But as fears receded, investors turned once again to carry trades and the yen weakened. No where was the recent trend of currency moves directly impacting other asset classes more visibly illustrated than in Japan last week. A declining yen sent Japanese equities to their best level in five weeks as exporters’ stocks were lifted by prospects of better repatriated profits. Pressure on the yen also intensified as Japanese politicians became increasingly vocal on the issue of currency strength, given its potential to derail their efforts to fight deflation.

Selected currencies — weekly results

Indicator scoreboard

EMU

November flash harmonized index of consumer prices jumped 0.6 percent on the year to its highest level since April. Almost certainly energy prices will have dominated the November bounce since national data from a number of the larger states have all pointed to little change in their respective core rates. As with most flash estimates, no details were available.

Third quarter gross domestic product was up 0.4 percent and dropped 4.1 percent when compared with the same quarter a year ago. The first look at expenditure components confirms the anticipated weakness of household spending, which was down 0.2 percent on the quarter. Gross fixed investment also declined although at least a 0.4 percent drop constituted a marked improvement on the 1.7 percent slide in the second quarter. The only positive contribution from final domestic demand was restricted to government consumption which followed a 0.6 percent second quarter increase with a 0.5 percent gain this time. Meantime, business inventories added a further 0.3 percentage points to growth after a 0.6 percentage point contribution in the previous period. Exports were up 2.9 percent from the second quarter when they fell 1.3 percent. Imports almost kept pace with a 2.6 percent quarterly increase leaving net exports to add 0.2 percentage points to the overall quarterly expansion. All of the larger EMU states with the exception of Spain saw their respective economies grow last quarter. The smaller countries produced a mixed performance.

October retail sales were unchanged on the month and were down 1.9 percent when compared with last year. On the month, purchases were held in check by the food & drinks sector where demand slipped 0.3 percent following a 0.7 percent drop in September. Outside of this area, sales were up 0.3 percent although this only offset a 0.3 percent decline last time. By country, volumes were up on the month in Germany (0.5 percent) but fell in Spain (0.6 percent). Neither France nor Italy provided any data. Among the smaller states, purchases climbed relatively strongly in Portugal (1.7 percent), Slovenia (1.2 percent) and Belgium (0.7 percent) but declined sharply in Slovakia (1.7 percent) and to a lesser degree in Austria (0.4 percent).

October unemployment rate remained at 9.8 percent for the second month. The total number out of work across the region increased by 134,000 to 15.567 million. With the notable exception of Germany (7.5 percent after 7.6 percent) unemployment rates increased in most EMU states. Among the other large members, the rate rose 0.1 percentage point to 10.1 percent in France and by 0.2 percentage points in both Italy (8.0 percent) and Spain (19.3 percent).

October producer price index excluding construction edged up 0.2 percent but remains down 6.7 percent on the year. Excluding energy, the PPI edged 0.1 percent lower on the month and 3.9 percent on the year. Energy prices were up 1.0 percent on the month but 14.3 percent weaker on the year. Prices in most other sectors were unchanged on the month. The two exceptions were intermediates which slipped 0.1 percent and nondurable consumer goods where they declined 0.3 percent.

Germany

September retail sales were up 0.5 percent but down 1.7 percent on the year. The October bounce constituted the first increase in purchases since July and only the second monthly increase since April. The unadjusted figures continue to show broad-based weakness in most product areas with positive annual growth in just clothing & shoes (5.2 percent) where discounting has been especially aggressive, furniture & household items (0.8 percent) and in the other goods category (0.2 percent). Total non-food sales volumes were 1.2 percent lower on the year while food purchases were 2.0 percent weaker.

November joblessness dropped by 7,000 and lowered the unemployment rate to 8.1 percent from a higher revised 8.2 percent in October. However, once again the data were distorted by changes in methodology, excluding which the unemployment total would have increased by around 10,000.

France

October producer price index jumped 0.9 percent but remained 6.6 percent below last year’s level. The jump was largely due to a spike in prices in the energy & utilities sector. Prices here surged 5.3 percent on the month and, taken together with a 3.1 percent gain in coking & refining products, dominated the performance of the overall index. Electrical equipment prices along with those for information technology & machines edged up 0.1 percent from September as did those for transport materials and other industrial products. At the same time, food, drink & tobacco prices dropped 0.9 percent. Total manufactured product prices were up 0.1 percent on the month and dropped 7.0 percent on the year.

Third quarter mainland unemployment rate was unchanged at 9.1 percent. Including overseas territories, the rate edged up to 9.5 percent, its highest level since the first quarter of 2006. The number of people out of work last quarter was 2.583 million in the metropolitan areas, split broadly evenly between men and women. The relative buoyancy of the French labor market reflects in large part a variety of government initiatives aimed at promoting employment.

Italy

October producer price index was unchanged on the month and down 5.3 percent on the year. Both the domestic and export PPI were also unchanged on the month. Domestic prices were little changed in most sectors apart from energy where prices were up 0.4 percent on the month. Consumer prices were steady as were charges in the capital goods area while intermediates edged down 0.1 percent.

Asia/Pacific

Japan

October industrial output eased to an increase of 0.5 percent after rising 2.1 percent in September. Analysts had expected an increase of 2.5 percent. This was the eighth consecutive monthly increase. On the year, output was down 14.0 percent. METI said it expects continued upward movement with output to jump 3.3 percent in November. Output growth has slowed because the impact of fiscal stimulus is waning. However schemes rewarding consumers for buying eco friendly appliances and tax breaks on low emission vehicles are helping to keep the momentum. However, production growth could decelerate as the soaring yen cuts into foreign demand because Japanese goods have become more expensive. Analysts are looking forward to the latest Tankan report on December 14 to see the impact the stronger currency is beginning to have on production. 

Australia

October retail sales were up 0.3 percent after edging down 0.2 percent in September. On the year, sales are up 5.6 percent. Sales were up for department stores (1.9 percent), cafes, restaurants & takeaway food services (1.1 percent) and household goods retailing (0.1 percent). However, sales declined for clothing, footwear & other personal accessory retailing (down 0.2 percent), food retailing (down 0.1 percent) and other retailing (down 0.1 percent).

Americas

Canada

Third quarter gross domestic product edged up 0.1 percent but dropped 3.2 percent when compared with the same quarter a year ago. Consumer spending was up 0.8 percent on the quarter while gross fixed capital formation was up 2.1 percent and government current expenditures advanced 1.2 percent. Exports posted a quarterly 3.6 percent increase, their first gain since the second quarter of 2007. However, net exports still deteriorated as imports were up a sizeable 8.0 percent, largely thanks to hefty increases in autos (25 percent) and machinery & equipment (9.8 percent). By industry, output from goods producers declined 1.4 percent on the quarter with manufacturing off a slightly smaller 1.0 percent. Services, however, expanded 0.6 percent.

September monthly gross domestic product was up 0.4 percent but down 3.5 percent on the year. Monthly growth was underpinned by both the goods producing and services sectors. The former saw production up 0.9 percent, more than wiping out its 0.7 percent August decline. Within this, manufacturing output rebounded an impressive 1.1 percent while mining and oil & gas extraction was up 1.8 percent. Construction edged up 0.2 percent but there were declines in agriculture, forestry & fishing (0.5 percent) and utilities (0.4 percent). Services output was up a modest 0.3 percent following a 0.2 percent gain in August. Retail trade  was up 1.1 percent led while wholesale trade gained 0.4 percent, transportation & warehousing were up 0.6 percent and arts, entertainment & recreation was up 0.6 percent. Output dropped in accommodation & food services by 0.4 percent.

October industrial product price index was down 0.3 percent and 6.3 percent weaker on the year. Excluding petroleum & coal, the IPPI dropped 0.5 percent on the month and 4.5 percent on the year. Although petroleum & coal product prices were up 1.6 percent on the month, they were swamped by declines elsewhere. The main areas of weakness were motor vehicles & other transport equipment (down 1.5 percent), lumber & other wood products (down 1.0 percent), electrical & communications products (down 0.9 percent), pulp & paper products (down 0.8 percent) and machinery & equipment (down 0.5 percent). The raw materials price index jumped 2.5 percent on the month but was still 7.6 percent below its year ago level. The spike reflected a monthly 5.0 percent jump in the cost of mineral fuels without which the index would have been unchanged on the month. Prices dropped for vegetable products (down 1.2 percent), animals & animal products (down 1.2 percent) and ferrous metals (down 1.5 percent).

November employment jumped by 79,100 jobs and lowered the unemployment rate to 8.5 percent from 8.6 percent. The improvement in jobs was broadly equally split between full-time (38,600) and part-time (40,400) and similarly roughly balanced between the private (56,900) and public (54,300) sectors. The only real area of weakness was self-employment which contracted 32,000. The overall increase in employment was dominated by the service sector which created 73,000 new positions. Within this, the largest single contribution came from education (37,900) but other gains were registered in finance, insurance, real estate & leasing (12,200), public administration (11,300) and professional, scientific & technical services (10,000). However, retail was flat and relatively small declines were seen transportation & warehousing and information, culture & recreation. The goods producing sector created 6,200 new jobs. Manufacturing gained 12,600 jobs and employment in natural resources rose 5,800. By contrast there were declines in agriculture (4,100), construction (7,200) and utilities (1,000). The monthly dip in the unemployment rate was accompanied by a 13,200 decline in the number of people out of work to 1,574,200. The employment rate rose 0.1 percentage points to 54.1 percent while the participation rate jumped 0.4 percentage points to 64.3 percent.

Bottom line

As expected, the Reserve Bank of Australia raised its policy interest rate for the third time to 3.75 percent while the European Central Bank indicated that it would begin to withdraw the extraordinary measures that were put in place during the crisis. The Bank of Japan held an emergency meeting (with some prodding from the government) and added new liquidity to banks. Economic data were generally mixed. The U.S. employment report surprised with a reduction in the unemployment rate to 10 percent and the smallest decline since payrolls began to contract.

The Bank of England meets this week with no change in policy anticipated. Analysts, however, will be looking for signs that the monetary policy board is ready to end asset purchases. In Japan, the second estimate of third quarter GDP will be released — a downward revision is expected. And in Australia, the all important employment report will be released on Thursday (local time).

Looking Ahead: December 7 through December 11, 2009

Anne D Picker is the author of International Economic Indicators and Central Banks.