Global Markets

Last week was essentially a positive one for equities after investors returned from their long holiday weekends. European and Asian stock markets enjoyed healthy gains on Tuesday although U.S. stocks wobbled a bit as a combination of consumer confidence and poor housing data took the starch out of the rally. Equities rallied when JPMorgan improved its bid for Bear Stearns. And the Federal Reserve's recent moves to boost liquidity and slash interest rates also played a role in boosting investor enthusiasm. But there were signs of quarter-end stress in the money markets as three-month sterling and euro interbank rates hit their highest levels of the year and the dollar rate was also fixed higher. However, central banks' efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis. But equity markets ignored the continued stresses in the financial system, partly in the hope that they were driven by liquidity hoarding at the end of the financial quarter.

As the first quarter limps to a close on Monday, most stock indexes followed here are down significantly on the quarter. Only the Mexican Bolsa and Taiwan Taiex recorded gains — 1.8 percent and 1.4 percent respectively. The losses range from 32 percent for the Shanghai Composite to a 3.8 percent for the SET. Most indexes recorded double digit losses for the quarter.

Global Stock Market Recap

Europe and the UK

The FTSE, CAC and DAX were up last week. For the FTSE and CAC, it was the first positive week since the week ending February 22 and for the DAX, since the week ending February 15. For the first three months of the year (minus one trading day) the FTSE is down 11.8 percent, the CAC is down 16.4 percent and the DAX, 18.7 percent. By the day, gains and losses were split evenly in this holiday shortened week. The renegotiated higher price for Bear Stearns started the week off with large gains by all three indexes. And the positive Ifo economic sentiment report Wednesday gave investors heart that things were not all bad in Europe. The Munich-based Ifo institute said its German business climate index had risen for the third consecutive month, boosted by greater optimism about business conditions but also an improvement in expectations for the next six months.

European equity markets charged ahead Tuesday after a long holiday weekend. Banking stocks led the rally as investors had their first chance to react to Monday’s news that JPMorgan had increased its offer for Bear Stearns. Stocks that had fallen before Easter made the sharpest recoveries. On Thursday, stocks shrugged off a sharp spike in the crude oil prices and were cheered by some strong corporate news. However, the main talking point was crude, which surged above $107 a barrel after saboteurs attacked a key export pipeline in Iraq. But the explosion in one of the two export pipelines in southern Iraq did little to interrupt the country’s flow of crude and the price of crude eased.

Asia/Pacific

All Asian/Pacific equity indexes were up last week with the exception of the Shanghai Composite as investors elsewhere seemed to think that recent declines were overdone. In Japan, the Nikkei and Topix were up 2.7 percent and 2.0 percent respectively on the week. Japanese stocks were up Friday despite discouraging consumer price data that showed prices rising the most in a decade and the first increase unemployment in five months. However with the end of the fiscal year looming on Monday, investors were putting the final touches on their portfolios and stocks were up for the day.

With the first quarter ending on Monday, preliminary quarterly data shows that all Asian/Pacific indexes were down in the quarter with the exception of the Taiwan Taiex, which managed to gain 1.4 percent. The worst performer was the Shanghai Composite — it plummeted 32 percent.

Asian markets were mixed on Monday with many markets closed for Easter Monday. Taiwan stood out in the region, however, with shares surging to four-month highs and the currency soaring after opposition candidate Ma Ying-jeou won the island’s presidential election over the weekend, spurring confidence that economic ties with China will expand.

On Friday, Shanghai rebounded from the previous day’s heavy losses spurred by rumors that the Chinese government would take action to boost the market. On Thursday, the Shanghai Composite Index fell 5.4 percent at 3,411.5, the lowest closing level since June 2007. Friday was another day and the Shanghai reversed direction to close 4.9 percent higher and regain almost all the loss. However, it was not enough to reverse all of the week’s losses and the index was down 5.7 percent on the week for the region's only loser last week. The index has lost 32 percent in 2008. However, Hong Kong stocks soared last week — up 10.3 percent thanks in part to banking and insurance stocks favorable profit reports. Analysts said that Hong Kong banks seem to have worked down their U.S. subprime exposure pretty quickly. Australian stocks were lifted by higher commodities prices

The Kospi was positive for seven consecutive sessions before edging down on Thursday. On the week, the index was up 3.4 percent but is down 10.3 percent so far in 2008. In economic news, a report from the Bank of Korea indicates that consumer confidence dropped in the first quarter of the year. Also, the South Korean finance ministry said Tuesday that it will cut import quota tariffs on oil products to help consumers and enterprises and to lessen inflationary pressures.

On Thursday, the Board of the Central Bank of the Republic of China (Taiwan) raised its discount rate by 12.5 basis points to 3.5 percent. It also increased rates on accommodations with collateral and the rate on accommodations without collateral by 12.5 basis points to 3.875 percent and 5.75 percent respectively, effective on March 28, 2008. At the same time, the Board reduced the required reserve ratio foreign currency deposits from 5 percent to 0.125 percent, effective on April 1, 2008. This action is expected to lower banks' funding costs and narrow the interest rate spread between NT (Taiwan) dollar deposits and foreign currency deposits. The NT dollar exchange rate is determined by market forces.

Currencies

Both the yen and euro were up against the U.S. dollar last week as traders bet that the Federal Reserve will make further cuts in the fed funds target rate to avoid a recession. The U.S. dollar was not the only currency to lose ground — the pound sterling dropped to a record low against the euro after reports showed March UK consumer confidence slumped to a 15-year low. The pound dropped against most of the major currencies on the decline in consumer confidence and a separate report showing U.K. housing prices advanced in March at the slowest pace in more than a decade. Analysts anticipate that the Bank of England will once again lower its key interest rate when next they meet on April 10. Analysts also noted that while most other central banks were focusing on inflationary pressures, the Fed is more concerned about the downside risks to the economy, leaving it on a different policy path. And recent U.S. data have shown that the economy is wobbly at best which has led to dollar selloffs.

After sinking on Tuesday and Wednesday, the dollar regained some balance. A series of weak U.S. economic reports and especially for consumer confidence contrasted sharply with the unexpected rise in German business confidence suggesting that the eurozone could weather the subprime storm. This encouraged the European Central Bank to reiterate its hawkish stance on interest rates and concerns over rising inflation.

The falling dollar threatens Japan's export driven growth as it makes Japanese products more expensive in the U.S. and other dollar-linked markets. It also caused Japan's foreign currency reserves to suffer ¥18.5 trillion ($185 billion) of paper losses. Most of the country's $1 trillion of reserves are believed to be held in U.S. government bonds and dollar deposits. However, a strong yen helps Japan's economy by muffling the impact of expensive global oil and other materials on consumers and companies. A strong yen, of course, hurts Japanese exporters.

China's yuan has risen in value against the U.S. dollar for 15 weeks. It is currently standing at 7.0122 versus the dollar. China’s central bank, People’s Bank of China has allowed the currency to appreciate faster to temper inflation which was up 7.1 percent on the year in the February. The currency is trading near the highest since a peg to the U.S. dollar was scrapped in 2005.

Indicator scoreboard

Germany

March Ifo sentiment index climbed to 104.8 from 104.1 in February. This was the third month that the index improved. The gain reflected small increases in both the current conditions component (111.5 from 110.3) and in expectations (98.4 from 98.2). Outside of retail the sectoral diffusion indexes show a similarly broad based pickup. Manufacturing confidence improved to 17.9 from 16.3, its best reading since last November, and in wholesale to 7.8 from 5.8. Construction meantime climbed to minus 21.8 from minus 24.9.

France

Fourth quarter revised gross domestic product was up 0.4 percent (from 0.3 percent in the previous estimate) and 2.1 percent when compared with last year. The change t was essentially due to a larger positive contribution from net exports (0.3 percentage points from 0.2 percentage points) courtesy of a smaller drop in exports (0.2 percent from 0.6 percent) that more than offset a less negative performance by imports (1.2 percent from 1.4 percent). Gross fixed capital formation was also nudged higher (1.1 percent from 1.0 percent) but the key private consumption component was left unchanged (0.4 percent) as was the negative contribution from inventories (0.4 percent).

United Kingdom

Fourth quarter final estimate of gross domestic product was up and unrevised 0.6 percent and up a revised 2.8 percent when compared with the same quarter a year ago. Quarterly growth was led by net fixed investment, which jumped a revised 1.8 percent, followed by net exports and stock building, both of which contributed 0.2 percentage points to the bottom line. However, household expenditure was adjusted slightly lower to show just a 0.1 percent rise while government final consumption was revised sharply weaker to register a decline of 0.5 percent, in turn subtracting 0.1 percentage points from growth. Total domestic expenditure rose 0.4 percent versus the third quarter or 3.7 percent from its level a year ago. Among the major output categories, production industries edged up 0.2 percent on the quarter with manufacturing just flat, but services continued to expand at a solid enough 0.7 percent. Agricultural output grew 2.1 percent and construction was up 1.1 percent.

Asia/Pacific

Japan

February unadjusted merchandise trade surplus was ¥970 billion, 0.9 percent higher than a year ago. This was slightly higher than analysts expected. On the year, exports were up 8.7 percent while imports were up 10.1 percent. On the year, exports to Asia jumped 13.9 percent while imports declined 2.7 percent. In contrast, exports to the U.S. were down 6.0 percent while imports were up 3.6 percent leaving the trade balance down 13.3 percent for the year. Exports to Western Europe were up 8.9 percent but imports edged down by 1.1 percent. Imports of mineral fuels including crude natural gas and coal jumped 53.4 percent on the year, no doubt contributing to the higher overall level of imports. Underlining this are import data from the Middle East. Imports soared 57.8 percent on the year. Seasonally adjusted, the trade balance slipped to ¥598.4 billion from ¥808.7 billion in January. In February, exports declined 2.8 percent while imports edged up 0.2 percent on the month.

February national consumer price index was down 0.2 percent on the month but up 1 percent when compared with the same month a year ago. Core CPI excluding fresh food was down 0.1 percent but also up 1 percent on the year. The core CPI that excludes both food and energy was down 0.3 percent on the month and down 0.1 percent on the year. The difference between the two core rates identifies the source of higher prices, energy. On the month, prices were down or unchanged for all categories except education which edged up 0.1 percent. However, when compared with the same month a year ago, prices were up for all categories with the exception of furniture & household utensils and reading & recreation. March Tokyo CPI which is seen as a precursor to the national index for that month was up 0.6 percent and 0.6 percent on the year. Core CPI excluding food was up 0.5 percent and 0.6 percent on the year while the core excluding food and energy was up 0.6 percent on the month and 0.1 percent on the year. Pressed by record high oil prices and soaring global commodity prices, suppliers are finally beginning to pass through those increases to consumers. In recent months consumers have faced higher prices for wheat based products, chicken and meat, cab charges and gas.

February unemployment rate surprised analysts and climbed to 3.9 percent rather than remaining at 3.8 percent for the fourth month. Employment declined by 100,000 when compared with a year ago after gaining 430,000 jobs on the year in January. The number of employed in February was 62.92 million. The number of unemployed was 2.66 million, down 40,000 from a year ago.

February real household spending was unchanged when compared with last year but up 1.1 percent in nominal terms. Workers household spending was down 0.1 percent in real terms and up 0.1 percent in nominal terms. These weak numbers suggest that domestic demand continues to be weak. The propensity for their households to consume, which measures the amount of disposable income they spent, rose 1.8 points to 74.1 percent according to the data.

February retail sales were up 3.1 percent from a year earlier and increasing for the seventh straight month. These figures are at odds with household spending figures released earlier. It is hard to say which set of data reflect consumer spending more accurately, especially with higher energy costs biting into other spending. Sales at large-scale retailers were up 1.3 percent on the year, after adjustment for the change in the number of stores.

Americas

Canada

January retail sales jumped 1.5 percent thanks to the one percentage point cut in the GST introduced at the start of the month. Sales were up 7.5 percent when compared with last year. Gains were broad-based and especially large in the auto sector (1.8 percent) which benefited from a hefty increase in purchases of new vehicles (2.6 percent), and in clothing & accessories (2.9 percent). Other marked gains were seen in home furnishings & electronics (2.5 percent) where furniture outperformed (3.5 percent) and in building & outdoor home supplies (3.2 percent) which were buoyed by a leap in demand at specialized building materials & garden stores (7.0 percent).

Bottom line

U.S. data remained downbeat last week while confidence data in France and Germany bolstered investor moral there. Stocks were up on the week but sank for the quarter with one day of trading remaining.

The only central bank meeting next week is the Reserve Bank of Australia on April 1 local time. After aggressively increasing their key interest rate to 7.25 percent to fight inflation, the RBA Board is expected to hold their fire this time. Data in the U.S. and Europe will give investors a chance to weigh relative economic performance. March 31 is the end of Japan’s fiscal year.

Looking Ahead: March 31 through April 4, 2008

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