Global Markets

Soaring crude oil prices sent stocks plummeting with all indexes followed down on the week. Losses ranged from 3.3 percent for the DAX and Topix to 0.7 percent for the S&P/TSX and Shanghai Composite. Investors reduced risk as they worried that the spreading conflicts in North Africa and the Middle East would exacerbate inflation and cut global growth. However, as oil prices steadied, risk appetite came to the fore again and equities resumed their climb on Friday.

Earlier in the week, the sharp rise in crude oil prices in the international market — with the crude oil price surpassing the psychological $100 a barrel mark — negatively affected market sentiment on fresh concerns that the rising prices might apply brakes on global economic growth. Brent crude had breached $119 a barrel during a period of frantic trading as industrial needs were hedged and traders exploited an explosion of upside momentum. But a confluence of factors sent oil prices down in late Thursday trading. Reassurances on supply came from Saudi Arabia, the International Energy Agency and the U.S. government. The weakness accelerated after an unconfirmed rumor spread that Libyan leader Muammer Gaddafi, Libyan leader had been shot. At the same time, the CME announced that it was increasing its margin requirements by 20 percent to trade oil.

Global Stock Market Recap

Europe and the UK

Equities finished what was an otherwise dreadful week on a positive note. But even Friday’s healthy gains could not offset the damage incurred earlier in the week. The FTSE was 1.3 percent lower, the CAC declined 2.1 percent while the DAX was down 3.3 percent. The indexes declined four of five days. But despite last week’s losses, with one trading day remaining in February, the three indexes are still positive for the month of February. The markets here as elsewhere dropped as geopolitical concerns continued to generate selling pressures. A rally in commodity prices also stirred inflation fears. Some encouraging earnings reports were ignored by the markets.

Inflation was front and center as fears of petroleum products shortages sent commodity prices soaring. With the next European Central Bank meeting on this week’s agenda, council member Yves Mersch said officials there may toughen their language on inflation, indicating a readiness to raise interest rates in coming months. He said that he would not be surprised if the governing council members concluded that there were upside risks to price stability. Eurozone consumer prices are already above the ECB’s inflation target of a 2 percent limit. The euro was up against the U.S. dollar on his comments.

The ECB, which has kept its benchmark interest rate at a record low of 1 percent for almost two years, is growing more concerned that soaring energy and food prices will drive up wages and entrench faster inflation. At the same time, raising borrowing costs too soon could exacerbate Europe’s sovereign debt crisis by increasing pressure on stressed banking systems in countries such as Greece and Ireland. The ECB will publish its latest economic projections on March 3.

Bank of England minutes

On Wednesday, the Bank of England released the minutes of its monetary policy committee February 9^th and 10^th meeting. The minutes revealed that the split among the nine MPC members had widened. Chief economist Spencer Dale joined Andrew Sentance and Martin Weale in voting for a higher interest rate this month because of the dangers of inflation which is currently double the Bank’s 2 percent target. Moreover, while Weale and Dale both favored just a 25 basis point increase, for the first time Sentence pushed for a 50 basis point move, reflecting his growing concern that the Bank is falling behind the curve. At the other end of the policy spectrum, Adam Posen renewed his call for an additional £50 billion of QE. That left the remaining six MPC members voting for no change in Bank Rate (0.5 percent) or the QE ceiling (£200 billion). The pound strengthened against the dollar and the euro after the release of the BoE’s minutes. The pound rose as much as 0.9 percent against the dollar following the decision.

Governor Mervyn King said last week the bank hasn’t preannounced higher rates, and suggested that investors were too quick to raise bets that borrowing costs would increase soon to contain prices. Inflation quickened to 4 percent in January, double the central bank’s target, fueled by a government sales tax increase, soaring commodity prices and a weaker pound.

Asia Pacific

Equity markets here were down last week as investors focused on ever-rising oil prices. However, markets here ended mostly in positive territory as crude prices eased on assurances by the United States, Saudi Arabia and the International Energy Agency that any loss in Libyan production could be compensated for elsewhere. On the week, losses ranged from 0.7 percent (Shanghai Composite) to 3.2 percent and 2.9 percent (Topix and Nikkei). With little economic news and still favorable earnings reports, investors continued to be focused on oil prices. Weighing on equities in this part of the world was the New Zealand earthquake that rocked Christchurch on Tuesday. Damage is much greater than in the September 2010 trembler.

A statement released by Ministry of Finance revealed that Japan residents sold a net ¥151.1 billion in foreign stocks in the week ended February 19. Japan investors also purchased a net ¥28.1 billion in foreign bonds and notes last week. Foreign investors purchased a net ¥621.3 billion in Japan bonds and notes last week, the data showed, and also sold a net ¥194.9 billion in Japan stocks.

Economic news from Japan over the week was mixed. The merchandise trade balance which fell into deficit for the first time in 22 months. The reading came as a shock to analysts, who had been expecting a surplus. Exports, which are a major source of growth, were much weaker than expected. But the consumer price index declined at a slower rate but mainly on food and energy price increases.

Moody's downgrading of Japan's credit rating also dented market sentiment. The rating company lowered the credit outlook to negative from stable on the risk that the government won’t do enough to tackle the nation’s debt burden. Moody’s said that the action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies. The rating stands at Aa2. Standard & Poor’s cut Japan’s credit rating for the first time in nine years last month, citing the lack of a “coherent strategy” to address the nation’s debt burden. Japan’s public debt is set to exceed twice the size of the economy this year and reach 210 percent of gross domestic product in 2012, the highest among countries tracked by the OECD.

Currencies

The surging price of crude and continued turmoil in the Middle East and North Africa sent currency traders to safe havens such as the Swiss franc and the yen. The franc has tracked the price of oil higher. Both currencies were up against the U.S. dollar last week. Higher oil prices have weighed on the U.S. dollar sending the currency lower against the euro and the commodity currencies of Australia and Canada. However, the pound sterling was down on the week on a downbeat retail sales report from the confederation of British Industry and a fourth quarter GDP report that was revised to reveal a contraction of 0.6 percent on the quarter.

Turmoil in the Middle East and North Africa remained the main focus of traders as worries about supplies kept prices climbing and raised concerns about inflationary pressures and encouraging flight from riskier assets. A general flight to perceived havens can also be seen in the currency market. The Swiss franc and yen are higher in a flight to safety regardless of the fact that both countries import 100 percent of their energy supplies.

Selected currencies — weekly results

Indicator scoreboard

EMU

February EU Commission's survey of economic sentiment improved modestly to 107.8 from 106.8 in January. The gain reflected a broad-based pick-up in optimism. Industrial sector confidence rose 0.4 points to 6.5 and climbed 1.2 points to 11.1 in services. Retail, which saw a sharp slide at the start of the year, staged a partial recovery with a 0.4 point increase to minus 0.2 while consumer sentiment improved 1.2 points to minus 10.0. Morale in construction rose 1.7 points to minus 24.3. However, the good news here was tempered by another increase in selling prices in both industry and services. Households also reported a rise in their assessment of past and future inflation trends. Among the larger EMU states confidence rose in Germany (1.3 points to 116.8) and in Spain (2.2 points to 93.9) but edged lower in both France (0.4 points to 108.5) and Italy (0.5 points to 101.6).

January M3 money supply was up 1.5 percent, down from a 1.7 percent rate at the end of last year. However, the ECB's preferred 3-month moving average measure edged up to a 1.7 percent rate. The key private sector lending counterpart actually accelerated quite sharply in January with annual growth climbing 0.5 percentage points to 2.4 percent. Within this, loans to non-financial corporations were up 0.4 percent (up from minus 0.2 percent) and borrowing by households climbed to a 3.1 percent annual rate after a 2.9 percent increase in the year to December. Lending for house purchase advanced 3.9 percent on the year, up from 3.7 percent last time. Loans to non-monetary financial intermediaries (ex-insurance companies and pension funds) grew 7.0 percent after a 5.1 percent gain in December.

Germany

February Ifo business sentiment climbed from 110.3 in January to a new record high of 111.2, reflecting fresh gains in both the current conditions and expectations components. Current condition climbed nearly 2 points to 114.7 while expectations edged up just 0.1 points to 107.9. Higher levels of confidence were recorded in most of the main sectors. The manufacturing sector index gained 1.7 points to 29.4, wholesale was up 5.9 points at 23.3, construction advanced 2.4 points to minus 3.7 and services improved 5 points to 33.0. The only area to see a decline was retail (down 1.5 points to 12.5) but morale here was still relatively firm. Ifo indicated that part of the explanation for the latest rise in sentiment was a more optimistic view by exporters of future overseas demand.

Fourth quarter gross domestic product was up an unrevised 0.4 percent on the quarter and 4.0 percent on the year. The first look at the GDP expenditure components underlined the importance of overseas demand with the foreign trade sector adding 0.7 percentage points to the bottom line. By contrast, private consumption grew a relatively modest 0.2 percent, down from 0.5 percent in the third quarter. At the same time, total investment dropped 1.1 percent following a 1.5 percent gain as a weather-related 3.9 percent slump in construction more than offset a healthy 2.6 percent rise in equipment spending. Government spending advanced 0.6 percent after a 1.5 percent spurt in the previous quarter while business inventories subtracted 0.4 percentage points. Total domestic demand fell a disappointing 0.4 percent.

France

January household spending on manufactured goods dropped 0.5 percent on the month but was up 2.4 percent on the year. Not surprisingly, purchases of autos, which jumped more than 7 percent in December ahead of January's curtailment of the government's scrappage scheme, dropped 6.3 percent on the month. Elsewhere, the picture was more mixed. Household goods consumption rose a strong 2.4 percent from December and the other products area saw purchases gain 1.1 percent but demand for textiles dropped a hefty 1.8 percent.

Italy

December retail sales advanced 0.2 percent and were up just 0.4 percent on the year. For 2010 as a whole, sales also grew a meager 0.2 percent. Food sales rose 0.3 percent from November while non-food demand edged up a minimal 0.1 percent. Quarterly rates were minus 0.2 percent and zero respectively and point to another disappointing contribution from the household sector to real GDP growth.

United Kingdom

Fourth quarter gross domestic product was revised to a 0.6 percent contraction from the 0.5 percent initially reported. On the year, GDP expanded 1.5 percent, down from the original estimate of 1.7 percent. The revision was mainly attributable to a larger drop in service sector output which was revised to a decline of 0.7 percent on the quarter. However, industrial output was revised 0.2 percentage points weaker to a 0.7 percent quarterly rate. Within this, manufacturing now shows growth of 1.1 percent, down from the 1.4 percent reported last time. By contrast the originally estimated 3.3 percent decline in construction sector output was revised to a shallower 2.5 percent decline. The first look at the GDP expenditure components revealed a 0.1 percent dip in household spending, its first quarterly decline since the second quarter of 2009. This was compounded by a 2.5 percent slide in gross fixed capital formation which alone subtracted 0.4 percentage points from the bottom line. Government spending was a firm 0.7 percent and made the largest single contribution (0.2 percent) to overall growth. Total domestic expenditure was down 0.3 percent on the quarter and was up 2.7 percent on the year. Net exports had a negative impact as a 0.6 percentage point contribution from exports was more than offset by a 0.9 percentage point subtraction by imports. The ONS again warned that the fourth quarter data were seriously impacted by the bad weather late in the period and put the overall effect at minus 0.5 percentage points. This still leaves an underlying contraction in real GDP of 0.1 percent.

Asia/Pacific

Japan

January unadjusted merchandise trade deficit was ¥471.4 billion, the first deficit in 22 months. Exports were up 1.4 percent on the year while imports jumped 12.4 percent. Exports have advanced for 14 months in a row while imports have gained for 13 months in a row. Exports to China edged up 1 percent while imports jumped 17.2 percent on the year. Exports to Asia as a whole were up a mere 0.4 percent while imports gained 14.0 percent. Exports to the EU dropped 0.7 percent while imports expanded by 5.0 percent. Exports to the U.S. advanced by 6.0 percent while imports from the U.S. dropped 1.9 percent. On a seasonally adjusted basis, the merchandise trade surplus was ¥191.8 billion. On the month, exports were up 1.0 percent while imports jumped 8.5 percent.

January consumer price index was down 0.2 percent on the month and unchanged on the year for the second month. Core CPI which excludes only fresh food was down 0.4 percent and 0.2 percent on the year. Excluding both food and energy, the core dropped 0.7 percent on the month and 0.6 percent on the year. Energy charges were up 1.0 percent on the month and 4.7 percent on the year. Fresh food prices jumped 2.7 percent on the month and 6.4 percent on the year. On the negative side, clothes & footwear dropped 6.9 percent on the month and was unchanged on the year. Education edged up 0.1 percent and sank 12.9 percent on the year.

Americas

Canada

December retail sales were down 0.2 percent on the month but were up 4.9 percent on the year. The monthly decline was wholly attributable to volumes which dropped 0.4 percent. Bad weather in some areas probably hampered overall sales and autos were especially weak, slumping 2.8 percent on the back of a 2.7 percent drop at new car dealers. Excluding vehicles & parts, purchases were up 0.6 percent from November. The other main areas of weakness were building materials & outdoor supplies where demand contracted 1.4 percent on the month together with food (down 1.6 percent), sports, music & hobbies (down 1.9 percent) and general merchandise stores (0.4 percent). Among the subsectors that saw increased sales were gasoline (up 7.6 percent thanks to price increases), furnishing & home furnishing stores (up 1.9 percent), clothing & accessories (up 1.0 percent) and electronics (up 0.6 percent).

Bottom line

Last week was all about oil prices and potential scarcities. Little notice was given to economic data and positive earnings reports. Both U.S. and UK fourth quarter GDP reports were revised lower. However, U.S. consumer sentiment continued to rise. In Japan, consumer prices declined less, thanks to high food and energy prices. New Zealand reeled after another devastating earthquake in the Christchurch area.

This week features three central bank meetings — the Reserve Bank of Australia, the Bank of Canada and the European Central Bank. The RBA is expected to leave its policy interest rate at 4.75 percent while both the Bank of Canada and the ECB leave their rates at 1.0 percent. As is usually the case, the first week of the new month features many market moving economic indicators and the first week of March is no exception. Key manufacturing and service purchasing managers indexes are on the agenda. And in the U.S. the first Friday of a new month brings the employment situation report.

Looking Ahead: February 28 through March 4, 2011

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