Global Markets

Investors were extremely edgy last week as news from the frail U.S. housing sector continued to unfold — in profits and in housing market data. Risk appetites waxed and waned. Investors were two-handed. On the one hand, they were depressed by the darkening housing picture. But investors were also cheered by mounting expectations that the Federal Reserve will cut interest rates when they meet this week. This produced positive gains on most equity markets but at the same time pounded the dollar down to a record low against the euro in overnight trading on Friday. And crude oil prices soared to new highs above the $90 mark.

In a week marked by few new economic data releases in Europe and the U.S., existing and new home sales as well as consumer sentiment reports in the U.S. were closely scrutinized. And earnings reports told of write-downs on mortgaged backed securities as the financial industry toted up the damages. The result is that many analysts are looking for a 50 basis point cut to the fed funds target rate to 4.25 percent, which would put U.S. rates 25 basis points above that of the eurozone’s rate of 4.0 percent.

Both the Nikkei and Topix were down for the second week and remain below their 2006 year-end levels. The indexes lost 1.8 percent and 1.1 percent respectively after declining 3 percent and 4.1 percent in the previous week. The All Ordinaries was also down for a second week, but lost a mere 0.1 percent after declining 0.5 percent. The remaining indexes followed here gained on the week. The Hang Seng soared by 3.2 percent to end the week above the 30,000 level for the first time ever.

Records are made to be broken. That is the case in sports and appears to be the case for commodity prices — and crude oil prices — in particular. Crude rose above $92 in New York for the first time after the U.S. accused the Iranian military of supporting terrorism and stepped up pressure on foreign companies to cut ties with the Middle East oil producer.

Finance ministers and central bankers from the Group of Seven major industrialized nations refrained from mentioning the euro in their official statement after meeting in Washington and called for faster appreciation of China's currency. Investors were disappointed by the lack of action.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX ended the week on a positive note, reversing some of the previous week’s losses — but not all. The three indexes lost ground on Monday, following the lead set by major Asian indexes on Group of Seven communiqué disappointment. They recovered their poise on Tuesday however, but drooped marginally on Wednesday. But on Thursday, the FTSE and Europe reversed direction and regained losses as hopes for another Fed interest rate cut combined with favorable earnings reports helped put a positive spin on investor confidence. Telecommunications helped boost European indexes after France Telecom sales were up more than forecast.

Stocks were up Friday as well. Energy and mining companies led the way as crude oil surged to a record and copper prices increased. Investors responded positively when the biggest U.S. mortgage lender said it expects to return to profit in the fourth quarter and in 2008 after its first quarterly loss in 25 years in the third quarter.

According to flash surveys, eurozone growth lost momentum again in October for the fourth month but still remained at a level that is consistent with robust growth. Recent data for industrial output show that the eurozone was in good shape when the turmoil hit markets this summer, and third quarter gross domestic product is expected to rebound from a soft second quarter. Exports are expected to benefit from growth elsewhere as the U.S. slows. At its October meeting, the ECB governing council chose to keep its key rate at 4.0 percent rate rather than increasing it as anticipated amid uncertainty about the fallout from the U.S. subprime crisis.

Asia/Pacific

The Hang Seng closed at an all time high as it soared above the 30,000 level Friday in hectic trading. The index lost just under 1,100 points on Monday only to rebound over 1,000 on Tuesday. The index also gained over 500 points each on Thursday and Friday. Traders were boosted by expectations of a Federal Reserve interest rate cut on Wednesday which would — given the Hong Kong dollar’s peg to the U.S. dollar — automatically reduce interest rates in the territory as well. Property stocks were up on the prospect of cheaper borrowing costs. The Hang Seng has skyrocketed 52.3 percent since the beginning of the year. Investors have been anticipating a flow of hundreds of billions of dollars of Chinese savings which will enter the Hong Kong stock market over the next few years as Beijing makes it easier for mainland investors to send money abroad.

Japanese stocks were down last week but ended Friday on an upbeat note with the Nikkei gaining 1.4 percent as bargain hunters purchased depressed brokerage company stocks along with those of export-oriented auto and high-tech companies. Oil and mining issues also surged after a record-breaking increase in crude oil prices in New York overnight electronic trading. Upbeat earnings reports also triggered some buying according to analysts. U.S. earnings data from a major financial firm (which included write downs from losses on debt securities and subprime mortgage linked investments) and housing data pressured stocks mid-week and provided more evidence that the U.S. economy was slowing.

Currencies

The U.S. dollar declined against most major currencies and in some cases hit multi-year lows after a spate of depressing news about the U.S. housing sector ignited fears about the mortgage market meltdown. The currency sagged to a new low against the euro and hit a 23 year low against the Australian dollar and a 33 year low against the Canadian dollar. Against the pound sterling, the dollar neared a 26 year low reached in July. And the Hong Kong Monetary Authority intervened for the second time during the week to weaken the Hong Kong dollar and keep it within its trading band against U.S. currency by buying US$100 million with Hong Kong dollars. The dollar's decline has driven some politicians to say exports from the $10 trillion euro-region economy could be hit as the euro increases in value. But at the same time, the cheaper dollar has buoyed U.S. exports.

The currency was weakened by the prospects of a reduction in the fed funds target interest rate on Wednesday and for the rest of the week. A 25 basis point cut would leave the fed funds target rate 50 basis points higher than the ECB’s interest rate of 4 percent and at the same rate as the Bank of Canada — 4.5 percent. A 50 basis point cut would narrow the spread with the ECB and put the fed funds target rate below the Bank of Canada’s interest rate for the first time since March 2005. The spread would widen with the Bank of England (current interest rate is 5.75 percent) and the Reserve Bank of Australia (current interest rate is 6.5 percent).

Canada's dollar, after reaching parity with its U.S. counterpart on September 20 for the first time since 1976, has continued to climb. On Friday, it surged to its highest since 1974 as crude oil prices reached a record. Canada's dollar is the best performer this year against the 16 most-actively traded currencies.

Indicator scoreboard

EMU — M3 money supply for the three months ending September was up 11.4 percent when compared with the same three months a year ago. For the month of September, M3 was up 0.8 percent and 11.3 percent on the year. Private sector lending grew 11.0 percent in the year to September which was down a couple of ticks from its August pace but this only matched the rate posted in July. Possible distortions caused by the intervention of the ECB in EMU money markets in the wake of heightened volatility in equity prices make interpretation of the latest data a little more clouded than usual.

France — September consumption of manufactured goods was up 0.1 percent and 5.8 percent when compared with the same month a year ago. Sales had been strong in the prior three months with gains of 1.6 percent, 0.8 percent and 0.7 percent respectively in June, July and August. Auto sales sank 2.2 percent while purchases of textiles (1.7 percent) followed by household goods (0.8 percent) led gains. Total durable goods were down 0.5 percent because of the decline in auto sales. 

Italy — August retail sales were up 0.2 percent and 0.6 percent when compared with the same month last year. The monthly gain was concentrated in food which was up 0.6 percent while nonfood sales edged down 0.1 percent. As a result, food sales were up 2.7 percent on the year while the nonfood sector was flat.

Asia/Pacific

Japan — September not seasonally adjusted merchandise trade surplus was Y1.6 trillion, up from Y1.0 trillion a year ago. Exports were up 6.5 percent while imports declined 3.2 percent. On a bilateral basis, exports to the U.S. were down 9.2 percent while imports dropped 3.7 percent on the year. Exports to China jumped 16.5 percent but imports edged down 1.9 percent. On a seasonally adjusted basis (pictured below), the surplus was Y1.0 trillion, down from Y1.1 trillion in August. Exports were down 2.7 percent on the month while imports declined 1.6 percent.

October Tokyo consumer price index was up 0.1 percent and 0.1 percent when compared with the same month last year. Core CPI excluding only fresh food was up 0.2 percent but unchanged on the year. September national consumer price index was unchanged on the month and down 0.2 percent on the year. Core CPI was up 0.1 percent and down 0.1 percent on the year. The core which also excludes energy was unchanged on the month and down 0.3 percent on the year. Prices for all components with the exception of transportation & communication, medical care and reading & recreation were either up or unchanged on the month. Goods prices were up 0.5 percent on the month but down 0.5 percent on the year. Services however were down 0.4 percent on the month but up 0.2 percent on the year.

September industrial production declined 1.4 percent but was up 3.4 percent when compared with last year. The decline was less than analysts expected. Monthly changes in industrial production continue to be erratic. The September drop occurred after August’s positive reading of 3.5 percent. Industry components that contributed to the decline were general machinery, transport equipment and information & communication electronics equipment. Commodities that contributed to the decline were semiconductor products machinery, large passenger cars and cellular telephones.

Australia — Third quarter producer price index was up 1.1 percent and 2.4 percent when compared with the same quarter a year ago. Domestic prices were up 1.5 percent and 3.7 percent on the year while import prices fell by 1.5 percent on the quarter and were down 5.5 percent on the year. Domestic prices were up primarily due to price increases for building construction and ‘other agriculture’. These gains were partially offset by declines in prices for petroleum refining and electronic equipment manufacturing. The imports component decreased due to price declines for electronic equipment manufacturing, other manufacturing, and petroleum refining, partially offset by price increases in other food manufacturing.

Third quarter consumer price index was up 0.7 percent and 1.9 percent when compared with the same quarter a year ago. This is lower than the second quarter readings of 1.2 percent on the quarter and 2.1 percent on the year. Food prices were up 1.9 percent while household contents & services dropped 2.4 percent. Also declining were health down 0.5 percent, transportation down 0.7 percent and education down 1 percent. Housing costs jumped 1.8 percent. The main contributors to the increase were rents up 1.6 percent, house purchase up 1.0 percent, electricity up 4.3 percent and property rates & charges up 4.5 percent. The drop in transportation costs was almost entirely due to the fall in the price of automotive fuel which was down 3.7 percent.

China — Third quarter gross domestic product was up 11.5 percent when compared with a year earlier. Investment accounted for 42 percent of GDP expansion in the first nine months while domestic consumption accounted for 37 percent and external demand made up 21 percent.

September consumer price index was up 6.2 percent when compared with last year, more than double the Peoples Bank of China’s inflation target of 3 percent. Prices eased slighted after food price gains slowed. For the first nine months of 2007 the CPI was up 4.1 percent when compared with the same months in the previous year. Food prices were up 10.6 percent during that period. On the year, prices were up 6.5 percent in August.

Americas

Canada — August retail sales were up 0.7 percent and were up 4.3 percent when compared with last year. Excluding the autos and parts, sales were up 0.3 percent and 5.1 percent on the year. All eight sectors registered gains on the month. Autos jumped 3.0 percent, offsetting the previous month’s decline. Other sectors performing particularly well were pharmacies & personal care (1.8 percent), furniture, home furnishings & electronics (1.5 percent) and clothing (1.4 percent). With soft prices helping to hold down the nominal increase, the recovery in consumer demand was significantly more marked in volume terms which showed an impressive 1.4 percent increase.

Bottom line

It is that time of year! Clocks change back to standard time in Europe and the UK while in Australia, daylight savings begins. Clocks don’t change in the U.S. and Canada until next Sunday, November 4.

New economic data were sparse data last week in the U.S. and Europe. In Japan, merchandise trade and industrial production data were released as was the important consumer price index. Price changes continue to hover around zero and fuel talk about deflation. But consumer anecdotal evidence does not paint the same picture, rather one of everyday items ranging from food to taxis going up in cost. The divergence between the official numbers and the anecdotal evidence presents a problem for the Bank of Japan as it meets this week. No change in policy is anticipated as the BoJ will leave its key interest rate at 0.5 percent.

It is a heavy week for new economic data. Investors will begin to see the impact of the August turmoil on the real economy in the months that followed. And the FOMC meets. Their decision is truly a market moving event! And it will be followed two days later by the U.S. employment situation report. 

Looking Ahead: October 29 through November 2, 2007

Central Bank activities
October 30,31	United States	FOMC Meeting
October 31	Japan	Bank of Japan Monetary Policy Meeting
Other events
October 28	UK, Europe	Standard Time Begins
	Australia	Daylight Savings Time Begins
The following indicators will be released this week...
Europe
October 30	Germany	Retail Sales (September)
		Unemployment (October)
	France	Unemployment (September)
	Italy	Producer Price Index (September)
October 31	EMU	Unemployment (September)
		Harmonized Index of Consumer Prices (October, flash)
	EU	Consumer and Business Confidence (October)
	France	Producer Price Index (September)
Asia/Pacific
October 29	Japan	Retail Sales (September)
October 30	Japan	Household Spending (September)
		Employment, Unemployment (September)
November 1	Australia	Retail Sales (September)
		Merchandise Trade Balance (September)
Americas
October 30	Canada	Industrial Product Price Index (September)
		Raw Materials Price Index (September)
October 31	Canada	Monthly Gross Domestic Product (August)
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