Global Markets

Investors focused on interest rates as the way to salvage shrinking economies and several central banks complied and cut rates. Financial markets continued to be volatile even as Libor or the London interbank offered rate— the rate that banks charge each other for three-month loans in dollars continued to improve.

Investors waited for the Federal Reserve to dutifully meet expectations and cut the fed funds target rate by a third to 1 percent. In Asia, the central banks in Korea, China, Taiwan and Japan cut rates. In addition to lower interest rates, the Fed announced that it would lend $30 billion each to central banks in Brazil, Mexico, South Korea and Singapore to lend on to local banks. The dollar loans, structured as currency swaps, are intended to help meet intense demand for dollars in these major emerging markets and aims to offset the sharp tightening in credit conditions. The International Monetary Fund (IMF) simultaneously announced plans to make large loans available to a wider group of well-run emerging economies that meet basic fiscal tests with very few strings attached.

Global equities enjoyed some much-needed respite as bargain-hunting set in following the heavy selling of recent sessions and despite grim economic data that offered a reminder of the perils ahead. Equities suffered a dreadful October only somewhat ameliorated by last week’s positive gains for most indexes. The declines have sent pundits and analysts to the record books trying to find precedents for recent behavior.

On the week, all indexes followed here were up with the exception of the Shanghai Composite, Set and PSEi. The gains for the week ranged from 0.5 percent for the KLSE Composite to 19.9 percent for the Bolsa. The news for the month of October is dismal. All indexes were down in double digits. The index that performed the best — that is with the smallest loss — was the FTSE which was down only 10.7 percent. The worst performer was the Jakarta Composite which sank 31.4 percent in the month.

Global Stock Market Recap

Europe and the UK

After reaching their nadirs on Monday, European and UK equities recovered and recouped all of the previous week’s losses and then some. The weekly gains were impressive — the FTSE, CAC and DAX gained 12.7 percent, 9.2 percent and 16.1 percent respectively. Equities were up primarily on the hope that both the Bank of England and European Central Bank will follow the Fed and cut rates by 50 basis points each on Thursday. While losses in October were in the double digits, they did not approach the magnitude of losses of most Asian/Pacific and North American indexes. The FTSE lost 10.7 percent while the CAC and DAX were down 13.5 percent and 14.5 percent respectively.

Investor attitude toward economic data definitely wore rose colored glasses. For example, when the advance third quarter gross domestic product data for the U.S. showed a decline less than expected, equities were up. The fact that the data were negative did not seem to matter. Similarly, record and new record low sentiment data for consumers and businesses were shunted aside as interest rates continued to be slashed by central banks and credit conditions eased.

Financial stocks in the UK got a lift after the Chancellor of the Exchequer, Alistair Darling signaled the Bank of England was free to cut interest rates without fear of breaching its inflation targets. The chancellor said the Bank had discretion over the time taken to meet its inflation targets and “can support, in line with its statutory requirement, the government’s wider economic objectives.”

The European bond markets are about to get a little crowded with governments and banks expected to swamp the markets with new debt next year. The competition among issuers to attract investors will never be greater — and that does not include U.S. Treasury demands which are expected to soar when they announce the new cycle of funding needs Wednesday.

Asia/Pacific

The region’s central banks were active last week and provided a boost to equities as did bargain hunting by some investors. And while most of the region’s equity indexes gained last week, only the All Ordinaries managed to recoup the previous week’s losses and then some. However, the Shanghai Composite (down 6.0 percent) and SET (down 3.8 percent) were lower again while the PSEi edged down 0.1 percent on the week.

All indexes plunged in October, despite last week’s gains. Losses extended from 14 percent for the All Ordinaries to a 31.4 percent drop for the Jakarta Composite and a 30.2 decline for the SET. The Shanghai Composite continued to plunge, losing 24.6 percent to put it down 67.1 percent in 2008. Commodity related stocks were dumped on worries over global demand.

On Friday, the Japanese equity market dropped after the Bank of Japan announced its first rate cut in seven years while the yen strengthened against the U.S. dollar. Investors had been looking for a 25 basis point cut rather than the 20 basis point cut they received. On Thursday, Prime Minister Taro Aso promised to pump ¥5 trillion ($51 billion) into the economy to help households and small businesses, and indicated he would delay elections until the global financial crisis subsides. The Finance Ministry previously had cut its economic assessment in all of the nation's 11 regions for the first time in a decade amid the prospect of a global recession. This second stimulus package since August is equivalent to about 1.2 percent of annual gross domestic product. But Aso's spending choices are constrained because the nation's public debt, at about 180 percent of gross domestic product, is the highest among industrialized nations.

The Chinese stock market closed sharply lower, reversing most of Thursday's gains, as concerns about a domestic economic slowdown deepened after more companies posted weak third-quarter earnings. The official Shanghai Securities News reported Friday that the net profit of 1,624 listed companies in the first nine months rose 7.1 percent from a year earlier to 782 billion yuan, slowing from about 16 percent for the first half. On Wednesday, the People's Bank of China cut the benchmark one-year lending and deposit rates by 27 basis points — the third rate cut in six weeks to revive slowing economic growth.

Asian Banks — scheduled and not scheduled

Bank of Japan

The Bank of Japan cut its key interest rate to 0.3 percent from 0.5 percent. The BoJ’s prior rate cut was in March 2001 when it implemented quantitative easing and drove the policy rate down to nearly zero percent. The shocks that have reverberated through the financial markets have had and continue to have a significant impact on Japanese markets. Equity prices have plunged and the yen has appreciated sharply as investors unwound carry trades. And the JGB and related markets were also severely affected because the Japanese affiliate of Lehman Brothers was a major player in these markets. The bank also cut their Lombard lending rate to 0.50 percent from 0.75 percent.

In their statement, the Bank said the decision vote was tied 4 to 4 and was decided finally by governor Maasaki Shirakawa. The decision on the Lombard rate was unanimous. The BoJ also said they would pay interest on excess reserves until the March reserves period, and set the interest rate on excess reserves at 0.1 percent. The BoJ also cut their economic assessment, saying the economy will remain sluggish over the next several quarters, and said they will do everything they can to get the economy back on a growth path. They also said that while downside risks to growth are increasing, the upside risks to inflation are on their way down. The BoJ noted that the world economy is in dire condition, and strains in financial markets have been mounting.

Earlier, the government announced a second package of economy boosting measures which highlights just how quickly troubles in Japan have escalated. The yen is a key culprit. Its dramatic rise against the euro and the U.S. dollar has heightened concerns and forced policy makers to consider taking bold steps. The problems are numerous — a surging currency, a careening stock market, worsening corporate earnings and economic data, and an overextended banking sector.

Bank of Korea

The Bank of Korea slashed its key interest rate by 75 basis points to 4.25 percent at an emergency meeting on Monday. At the same time, the government pledged extra tax cuts and spending to tackle the nation's biggest crisis since it needed an International Monetary Fund bailout 10 years ago during the Asian financial crisis. The rate reduction was the second in less than three weeks. The Bank also said that it will accept a wider range of bonds as collateral in money-market operations, intensifying efforts to boost liquidity in the banking system following the government's guarantee of lenders' debts last week. The BoK came under increasing pressure to take action after the country’s stock market tumbled 20 percent in the prior week and the won closed near a 10-year low on growing fears about a looming recession. Government data last week showed that the Korean economy expanded 3.9  percent in the third quarter from last year, the slowest pace in three years, as the country’s exports were hit hard by the global slowdown.

Peoples Bank of China

The People's Bank of China announced Wednesday that the one-year benchmark lending and deposit rates would be cut by 27 basis points respectively on October 30. This came as a surprise and brings the one year lending rate to 6.66 percent and one year deposit rate to 3.60 percent. This was the third time in two months that the PBoC has reduced rates. The fact that the PBoC cut came ahead of the expected Federal Reserve cut was taken as another sign that China is cooperating with the U.S. and global efforts to contain the financial crisis and its impact on global economy. Indeed, with domestic growth slowdown proved to be sharper than the government expected, as indicated by the 3Q GDP report, policymakers in China have stayed vigilant on the potential fallout of a deeper and broader than expected global recession on Chinese economy and reacted decisively and promptly.

China cut borrowing costs for the first time in six years on September 15, the day Lehman Brothers filed for bankruptcy. It followed up with another reduction on October 8 as the U.S. Federal Reserve and five other central banks made emergency coordinated reductions to counter the financial crisis. Both cuts were accompanied by reductions in the proportion of money that banks must set aside as reserves.

Central Bank of the Republic of China (Taiwan)

The Central Bank of the Republic of China (Taiwan) joined other central banks and cut its policy interest rate (discount rate) by 25 basis points to 3.0 percent. This is the third rate cut by the Taiwan central bank in less than two months. It cut 25 basis points on October 9th and 12.5 basis points on September 25th. The central bank highlighted easing inflation pressure and inflation expectations, and focused on the downside risks to growth, as latest indicators, including IP, consumption and employment data all pointed to swiftly decelerating economic momentum.

Currencies

The yen and the dollar were up against the euro as signs of a global recession led investors to seek safety. The yen was up after the Bank of Japan reduced its key interest rate while the euro dropped after the flash HICP report indicated that inflation had continued to ease, making it easier for the ECB to drop interest rates at their Thursday meeting. A good chunk of the yen’s rise has been the unwinding of carry trades combined with the narrowing spreads between Japan and other nations — for example, the spread between Japanese and U.S. interest rates is now only 70 basis points. On Monday, the yen rose to the strongest level against the euro since May 2002 and traded near a 13-year high against the dollar as global economic turmoil fed into a frenzy of deleveraging.

In October, the yen has risen in value against the euro and the dollar. The pound sterling continued to decline after consumer confidence sank to its lowest since at least 1974. Sterling has dropped about 10 percent against the dollar this month, the biggest decline since investor George Soros drove the currency out of Europe's system of linked exchange rates in 1992. Also down were currencies of developing countries on concern a global economic slump will sap demand for emerging- market assets.

Foreign exchange markets experienced extreme volatility in October as recession-wary investors continued to shy away from risk and parked cash in the relative safety of yen and dollars. Analysts said the financial crisis hit currency markets with a crunch in October. Worst hit were the emerging markets, where massive selling of equities left indices at multi-year lows.

Selected currencies — weekly results

Indicator scoreboard

EMU

M3 money supply for the three months ending in September edged down to 8.9 percent when compared with the same month a year ago. For September, M3 decelerated to 8.6 percent on the year. The latest slowdown in money supply reflected a marked cooling in the main M3 counterpart, private sector lending, where the annual rate of increase dropped from 8.8 percent in August to 8.5 percent.

October flash harmonized index of consumer prices was up 3.2 percent when compared with last year and down from 3.6 percent in September. As with all flash reports, no detail was available. For those countries that have already provided data, decelerating national rates were pervasive.

September unemployment rate remained at 7.5 percent. Unemployment rates fell in Germany (7.1 percent from 7.2 percent), France (7.9 percent from 8.0 percent), Austria (3.2 percent from 3.3 percent), Portugal (7.3 percent from 7.4 percent), Slovenia (4.1 percent from 4.2 percent) and in Malta (5.6 percent from 5.7 percent).  However, joblessness increased significantly in Ireland (6.6 percent from 6.2 percent) and in Spain (11.9 percent from 11.5 percent). 

EU

October economic sentiment sank to 80.4 from 87.5 in September. Consumer morale dropped another 5 points to minus 24 while industrial confidence was off an even larger 6 points to minus 18. Sentiment in services fell into negative territory for the first time this year (down 6 points to minus 6) and retail dropped 5 points to minus 13. Construction declined 4 points to minus 20. Among the larger countries, sentiment dropped nearly 4 points in Spain (66.1), almost 5 points in Germany (88.6) and more than 6 points in both France (86.5) and Italy (82.1).

Germany

October Ifo sentiment index dipped a further 2.7 points to 90.2 as a slump in the key expectations component (down 5.1 points to 81.4) more than offset a surprising bounce in current conditions (up 1.1 points to 99.9). All sectors declined. Manufacturing was down especially sharply (minus 18.9 from minus 11.7) but there was also pronounced weakness in construction (minus 27.6 from minus 25.2), wholesale (minus 27.6 from minus 25.2) and retail (minus 25.0 from minus 24.1).

October jobless rate edged down to 7.5 percent from 7.6 percent in the previous month. The drop in the unemployment rate reflected a 26,000 decline in the jobless total to 3,151,000 and follows increases in payrolls of 36,000 and 20,000 in August and September respectively. Unemployment fell 20,000 in the West and 6,000 in the East.

September retail sales excluding autos sank 2.3 percent but were up 1.2 percent when compared with last year. Over the first nine months of the year, real sales fell 0.5 percent from a year ago as a 3.3 percent nosedive in the purchases of food, drink & tobacco more than offset a 1.4 percent bounce in combined other categories. Total retail sales dropped 3.1 percent and were down 3.8 percent on the year.

France

September producer prices were down 0.4 percent and up 6.1 percent when compared with last year. Inevitably dominating the decline were weaker energy prices which slumped 2.0 percent and without which overall prices would have moved up 0.2 percent. However, excluding energy the PPI was up 3.3 percent. All other sector prices increased except agriculture & food which registered a 0.6 percent drop from August. Even so, the increases in capital goods (0.2 percent), semi-finished goods (0.2 percent), autos (0.2 percent) and consumer goods (0.1 percent) were all relatively modest.

Asia/Pacific

Japan

September retail sales were down 0.4 percent when compared with last year. On the year sales had increased since July 2007 until the September decline and confirm the anemic state of consumer demand. Large scale retail stores sank for the sixth month. Adjusted store sales or sales for the same stores were down 3.3 percent on the year.

September industrial production was up 1.2 percent after declining 3.5 percent in August. On the year, industrial production was down 1.9 percent. General machinery, transport equipment and electronic parts & devices increased as did metal oxide semiconductor IC (memory), large trucks and small passenger cars. METI expects production to decline in both October and November by 2.3 percent and 2.2 percent respectively. Shipments were up 0.4 percent in September.

September unemployment rate declined to 4 percent from 4.2 percent in the previous month. Employment dropped by 11,000 on the month and 290,000 on the year. The labor force participation rate declined to 60.3 percent while the employment rate dropped to 57.8 percent.

September national consumer price index was unchanged and up 2.1 percent when compared with last year. Core CPI excluding only fresh food was up 0.2 percent and 2.3 percent on the year, an 11 year high. The annual increase reflected continued sharp gains for gasoline, heating oil and processed food. Excluding both food and energy, the CPI was up 0.2 percent both on the month and on the year. On the month, only prices for transportation & communication and reading & recreation were down. Prices for goods were up 0.3 percent and 3.7 percent on the year while for services, prices declined 0.4 percent on the month but were up 0.4 percent on the year. October Tokyo CPI edged down 0.1 percent on the month and was up a more muted 1.2 percent on the year. Core CPI excluding only fresh food was unchanged on the month and up 1.5 percent on the year.

Americas

Canada

September industrial product price index dropped 1.2 percent but was up 8.0 percent when compared with last year. Predictably the monthly decline in overall prices was led by petroleum & coal products which slumped some 4.5 percent and without which the IPPI would have dropped only 0.8 percent on the month. However, there were also sizeable declines in primary metal products (3.3 percent), miscellaneous non-manufactured products (3.4 percent), chemicals & chemical products (2.5 percent), meat, fish & dairy products (1.7 percent) and fruit & vegetables (1.1 percent). Price gains were limited with paper & pulp the most robust (0.4 percent) followed by electrical & communications products (0.3 percent). Motor vehicle and transport equipment costs were up 0.2 percent. Raw material price index plummeted by 7.2 percent on the month and reduced annual growth in the RMPI to 14.8 percent. The bulk of the weakness was due to mineral fuels where prices collapsed by some 11.0 percent. Excluding this sector, the RMPI would have declined a much reduced 1.6 percent. Other declines were seen in vegetable products (8.3 percent), ferrous materials (3.8 percent) and non-ferrous metals (1.5 percent). Monthly increases were restricted to animals & animal products (1.3 percent), wood (0.6 percent) and non-metallic minerals (0.6 percent).

August monthly gross domestic product was down 0.3 percent but up 0.6 percent when compared with last year. Energy production fell 0.5 percent on the month. Output contractions were experienced by both the goods producing and service sectors. Manufacturing output dropped 1.1 percent and was down 4 percent on the year. Mining and oil and gas extraction sank 0.5 percent and construction dipped 0.3 percent.  On the upside, agriculture, forestry, fishing & hunting expanded 0.3 percent and utilities edged up 0.1 percent. Services were down 0.2 percent but remain positive on the year at 1.9 percent. Within services, the largest hit was taken by wholesale trade (down 3.1 percent) but there were also significant declines in transportation & warehousing (0.6 percent) and arts & entertainment (0.7 percent). Output gains were seen in professional, scientific & technical services (0.3 percent), education (0.3 percent), and especially accommodation & food services (0.8 percent). 

Bottom line

Volatile trading characterized the final week of a tumultuous month for investors in equities, currencies, bonds and commodities as data showed the global economy facing a protracted recession. Economic data were gloomy across the board with sentiment plumbing unknown depths and key indicators showing discernable weakness. And many central banks sliced borrowing rates including the Federal Reserve, Bank of Japan and others. The Fed also set up dollar swap lines with Brazil, South Korea, Singapore and Mexico, a move that extended a dramatic rebound in emerging markets.

Next week is a busy one with three major central banks expected to cut rates by 50 basis points each. The Reserve Bank of Australia is expected to reduce its key rate to 5.5 percent while the Bank of England lowers its policy rate to 4.5 percent and the ECB to 3.25 percent. And the U.S. Presidential election takes place on Tuesday.

Looking Ahead: November 3 through November 7, 2008

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