Global Markets

Once again the equities markets were volatile — up at the beginning of the week as investors awaited the U.S. presidential election results — and then down immediately after as investors refocused on the pervasive economic gloom that dominates economic news everywhere. A series of interest rate cuts across Europe on Thursday — including the Bank of England’s most aggressive easing since 1992 — failed to lift the gloomy mood in global financial markets. Inflation targets were left in the dust for the most part as central banks slewed attention to plummeting growth from over-target inflation rates.

Along with the Bank of England, the European Central Bank, the Swiss National Bank and the Czech National Bank all lowered borrowing costs. And in the Asia/Pacific region, the Reserve Bank of India, Reserve Bank of Australia and the Bank of Korea also slashed interest rates. At the same time, the International Monetary Fund warned that prospects for global growth have deteriorated over the past month and that developed economies are heading for the first full-year contraction since the World War II. Equities were up in Europe and North America Friday in anticipation of further rate cuts. However, with the nominal fed funds target rate already at 1 percent, there is really no room to maneuver. Real interest rates in both the U.S. and UK already are negative while eurozone rates are barely positive.

On the week, most Asia/Pacific indexes gained while stocks in Europe and North America declined.

Global Stock Market Recap

Europe and the UK

After getting off to a positive start for the week, equities tumbled on Wednesday and Thursday despite the rash of interest rate cuts. They steadied Friday morning but sank on U.S. employment report. However, the indexes seesawed yet again and climbed when U.S. stocks rose instead of sinking on dire employment losses and a jump in the unemployment rate. Traders said the poor employment data had already been factored into the markets. Equities advanced Friday but not enough to erase the week’s losses. Equities were given a boost as speculation that the Federal Reserve may lower interest rates offset concern about rising unemployment, while higher oil buoyed energy producers. On the week, the FTSE, DAX and CAC indexes declined by 0.3 percent, 1 percent and 0.5 percent respectively.

Money market rates continue to decline serving as the latest evidence that the paralysis in credit markets is easing. The London interbank offered rate (Libor) that banks charge each other for three-month dollar loans declined to about 2.3 percent, the lowest level in four years. The comparable euro rate fell to the lowest since March 6.

Bank of England stuns with massive 150 basis point cut

The Bank of England stunned financial markets and slashed interest rates by 150 basis points to 3 percent and the lowest level since 1954. The Bank had previously participated in the coordinated rate cut on October 8 when they cut rates by 50 basis points. The latest action brought the total rate cut to two full percentage points in one month. For the first time, the Bank of England’s policy rate is below that of the European Central Bank. With the Bank’s quarterly Inflation Report due Wednesday, analysts think it will give investors full and detailed information about its views on the depth and extent of the UK recession and how far inflation might fall in 2009.

The monetary policy committee explained its decision by saying there was evidence of a “severe contraction” in the economy during coming months, and such a dramatic extinction of inflationary pressure that “at prevailing market interest rates, there is a substantial risk of undershooting the inflation target.” Most analysts took that to mean that there are further rate cuts to come. The shift from focusing on inflation reflects fears about the severity of the recession now under way. GDP’s third quarter decline of 0.5 percent on the quarter was sharper than expected. And business surveys are indicating that the final quarter of 2008 has got off to a dismal start.

Since 1997 when the Bank of England gained the authority to set interest rates, the most it has ever cut them in a single month was 50 basis points as they did on October 8^th. Now some analysts are predicting that the key rate could drop to 2 percent next year. That would be the lowest interest rate since 1951. And anecdotally, if it goes below that level, it would rewrite monetary history — never since the Bank of England was created in 1694 has the base rate been lower than 2 percent.

European Central Bank cuts by a ‘conservative’ 50 basis points

The European Central Bank offered no surprise — as expected it cut its policy interest rate by 50 basis points to 3.25 percent. It noted that the economy is weakening and the inflation outlook is improving. In his press conference, ECB President Jean Claude Trichet said the governing council discussed various options including a larger 75 basis point cut, but they decided (unanimously) that the expected 50 basis point cut was appropriate. His comments left room for probable rate cuts going forward. Trichet noted the ECB never pre-commits and will be looking at incoming data before making any further changes. Trichet also acknowledged that a number of downside risks to the economy have materialized. He said that “momentum in economic activity has weakened significantly” and “intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time.” The ECB’s strategy contrasted with that of the Bank of England, which does not expect a change in the market to come soon and as a result has cut rates even further.

Other European Banks cut rates as well

The Swiss National Bank, in an unscheduled meeting Thursday, cut its key interest rate by 50 basis points to 2.0 percent citing a more severe deterioration in the global economic outlook that will weigh on local prospects. The Bank of Denmark cut its key rate by 50 basis points to 4 percent citing the ECB cut of that size as well.

Asia/Pacific

The week started on an upbeat note with most major indexes (except the Shanghai Composite) up impressively prior to the U.S. election. However, the tone reversed itself on Thursday after U.S. and European markets hit the skids on Wednesday and Asian/Pacific indexes gave back much of their gains. Markets were mixed on Friday as investors remained cautious ahead of the U.S. employment report. Markets here were closed when the report was released. On the week, only the PSEi and Taiex declined. Trading continues to be extremely volatile.

Stock markets across the Asia-Pacific region closed mixed on Friday, recovering from a weak start following Wall Street's extended decline on Thursday, as investors remained cautious ahead of the U.S. jobs report. The Japanese market ended lower, but sharply off a 7% plunge in opening trade, while South Korea's Kospi finished in positive territory. Crude oil pared early losses and moved closer to $62 a barrel in late Asian trading. In currency trading, the dollar regained some ground against the yen in late Tokyo deals.

After turning in gains of 6.3 percent and 4.5 percent on Tuesday and Wednesday, the Nikkei declined 6.5 percent on Thursday and 3.6 percent on Friday — yet managed to edge up 0.1 percent on the week. But the Nikkei was hit after Toyota Motor announced a sharp cut in its earnings forecast for the current fiscal year thanks to declining sales and the rising value of the yen which cuts into repatriated profits. Other exporters declined as well.

The Kospi rebounded on Friday after plunging earlier after the Bank of Korea cut its key interest rate for the third time in the past month by 25 basis points to 4 percent. The Kospi was up four days of five and gained 1.9 percent on the week despite sinking by 7.6 percent Thursday. South Korea’s core inflation grew at a faster pace than other advanced nations as a sharp decline in its currency value increased overall import prices.

Reserve Bank of India cuts rate again

Over last weekend, the Reserve Bank of India took emergency action at the weekend to pump liquidity into the local banking system amid mounting concerns that the global financial crisis will cut significantly into India's economic growth. On Saturday (November 1), the RBI cut the repo rate 50 basis points to 7.5 percent, lowering the key short-term interest rate for the second time in two weeks. It also reduced the cash reserve ratio — the amount of money banks have to hold with the central bank — 100 basis points to 5.5 percent. India's weekend announcement came as cash dwindled in the banking system, as evidenced by a tripling in overnight call money rates last week. Cash dried up as overseas investors pulled out a record $12.8 billion from the Indian stock markets this year and the central bank sold dollars to slow the pace of the rupee's decline.

Reserve Bank of Australia

The Reserve Bank of Australia cut its policy interest rate by 75 basis points to 5.25 percent, a three and a half year low. It was the third rate reduction in as many months. The RBA has now lowered borrowing costs by 200 basis points since the start of September. The economy appears to be negatively affected by the global financial crisis and slower worldwide growth. House prices are falling and retail sales are anemic. The All Ordinaries has dropped the most since 1987 and their currency, the Australian dollar, has tumbled as carry trades become less attractive to risk averse investors. The RBA, with an inflation target range of 2 percent to 3 percent, had been aggressively fighting inflation. The CPI was up 5 percent in the third quarter. The RBA increased interest rates 12 times between 2002 and March 2008 to 7.25 percent to reign in inflation. The RBA recently amended its inflation forecast saying that inflation would peak in the fourth quarter before declining into its target range in 2010.

Bank of Korea lowers rate as expected

The Bank of Korea followed in the footsteps of other central banks and lowered its key interest rate by 25 basis points to 4 percent on Friday. This is the lowest interest rate since June 2006. This was the third cut in less than a month as the Bank steps up efforts to stave off a sharp slowdown in an economy pummeled by the global financial crisis. In the Bank’s statement they noted that the domestic economic slowdown persists. They also highlighted instability in stocks and the difficulties companies are having raising funds because of tight credit conditions. South Korea's economic growth slowed 3.9 percent in the third quarter, its lowest level in three years as construction contracted and a global slowdown hit manufacturing and exports.

Currencies

The yen gained on the dollar once again while the euro was virtually unchanged on the week despite day-to-day fluctuations. The U.S. dollar waxed and waned on poor economic data and the trajectory of the stock market. When stocks were up, the dollar declined and the opposite was true as well. And on election day (last Tuesday) the dollar lost ground while stocks enjoyed an election day bounce which fueled investor risk appetite once again. The yen’s strength is sapping exporters’ profits. When the yen rises, it cuts into exporter pricing power in overseas markets and, especially in the U.S., reduces sales.

The struggling pound sterling held its ground on Thursday despite the Bank of England’s surprise 1.5 percentage point cut in interest rates and expectations that the economy will face a downturn next year on par with the early 1990s recession. Of late, the currency has been tumbling as traders continue to deliver a vote of no confidence in the country’s economic prospects. Traditionally, lower interest rates have tended to weaken currencies, as returns on funds held in them are reduced and confidence falls. However, sterling is benefiting slightly from the hope that the bold interest rate move would improve the economic outlook.

Selected currencies — weekly results

Indicator scoreboard

EMU

September producer price index excluding construction was down 0.2 percent thanks to falling energy prices. However, on the year, the PPI was up 7.9 percent. Energy prices dropped 0.9 percent, and without their help, the PPI would have been only flat. Core PPI was up 4.1 percent on the year. Other sectors were all relatively well behaved, notably intermediates and non-durable consumer goods both of which edged down 0.1 percent on the month. Capital goods prices edged up 0.1 percent and durable consumer goods were up 0.2 percent.

September retail sales edged down 0.2 percent and were down 1.6 percent when compared with last year. The decline reflected stagnant food sales and a decline of 0.3 percent for non-food products. Most of the downward pressure came from Germany where they dropped 2.3 percent.

Germany

September manufacturing orders plummeted 8 percent after surging 3.5 percent in August. It was one of the largest monthly declines in more than 16 years. On the year, orders dropped 9 percent. The nosedive was largely driven by a collapse in overseas demand but domestic orders were sharply weaker too. Total foreign orders were down 11.4 percent on the month and were 13.6 percent down on the year. Capital goods were off 14.4 percent and basics down 8.4 percent on the month while consumer goods dropped a relatively modest 0.5 percent. Orders from the Eurozone fell 8.5 percent from August while non-eurozone demand slumped an even larger 13.3 percent. At home, weakness was also most apparent in the capital goods area where orders plummeted 11.0 percent but basics also declined a hefty 5.4 percent while consumer goods were down 1.5 percent.

September industrial production (excluding construction) plummeted 3.6 percent and was down 2.3 percent on the year and, over the third quarter as a whole, 1.2 percent below the previous period. Substantial declines in output were seen in all industries. Hardest hit was consumer durables (down 7.2 percent) but intermediate goods (down 4.6 percent) and capital goods (down 3.5 percent) were not far behind. Non-durables goods production fell a relatively mild 2.0 percent, energy was down 1.5 percent and the construction sector shrank by 1.7 percent.

September seasonally adjusted merchandise trade surplus was €13.7 billion, unchanged from an upwardly revised August level. However, for the third quarter as a whole, the surplus shrank by almost 20 percent. A nominal 0.7 percent gain in exports was offset by a 0.9 percent increase in imports. Over the year, total unadjusted exports have grown just 6.9 percent with shipments to non-EU countries (8.2 percent) leading the way. Imports have expanded a much more solid 14.1 percent, also mainly on the back of 15.9 percent rise in purchases from the non-EU bloc.

France

September seasonally adjusted merchandise trade deficit expanded surprisingly steeply to €6.3 billion from €5.4 billion in August. Exports dropped 2.2 percent while imports were up by 0.2 percent. The unadjusted breakdown shows a worsening in the deficits in a number of sectors, notably basics (€1.5 billion from €1.0 billion) and in non-military industry products (€2.8 billion from €1.3 billion). By region, the bilateral trade gaps widened significantly with Germany and Italy. The shortfall with the rest of the Eurozone as a whole also widened but the bilateral deficits were essentially flat with both the U.S. and Japan.

United Kingdom

September industrial production edged down 0.2 percent and was down 2.2 percent when compared with last year. The latest drop was broad-based with drops registered in manufacturing (0.8 percent) and electricity, gas & water (1.5 percent). Manufacturing output dropped 0.8 percent and declined 2.3 percent on the year. There were significant decreases in output of 1.8 percent in the transport equipment industries, 1.7 percent in the chemicals & man-made fibres industries and 1.3 percent in the paper, printing & publishing industries. There were no significant increases.

Asia/Pacific

Australia

September retail sales were up 0.2 percent for the fifth month. On the year, sales were up 2.3 percent. Four of the six industries had an increase with food retailing up 0.6 percent. Also increasing were clothing & soft good retailing (up 0.3 percent), department stores and cafes, restaurants & takeaway food services (both up 0.2 percent). Chains & other large retailers were up 0.3 percent.

September merchandise trade surplus was A$1,460 million, an increase of A$220 million on a revised surplus in August. The surplus was primarily due to the strong increase in non-rural goods exports outweighing the strong increase in intermediate and other merchandise goods imports. Exports were up 7.5 percent. Non rural goods were up 10 percent while other goods increased 3 percent. Rural goods edged down 1 percent but service exports were up 3 percent. The increase in non-rural goods was largely driven by metal ores & minerals, which were up 19 percent, and coal, coke & briquettes which were up 14 percent. Imports were up 7 percent. Intermediate and other merchandise goods imports were up 13 percent, capital goods imports were up 5 percent while other goods were up 16 percent and consumption goods edged up 1 percent.

October employment surprised and increased by 34,300 jobs. However, the entire increase was in part time jobs which increased by 43,500 while full time employment decreased by 9,200. Although unemployment was up by 7,000, the unemployment rate remained at 4.3 percent for the second month. Those looking for full time work increased by 10,200 while the number looking for part time work declined by 3,200. The participation rate edged up to 65.3 percent from 65.2 percent in September.

Americas

Canada

October employment increased by 9,500 while unemployment edged up to 6.2 percent from 6.1 percent in the previous month. Excluding the public sector (up 30,100), payrolls fell more than 20,000. A 47,500 increase in full-time positions was almost offset by a 38,100 decline in part-time jobs. The goods producing sector registered losses of 26,800. Within this sector, the largest declines were seen in manufacturing (8,600), construction (8,800) and natural resources (5,700). However, agriculture (1,000) and utilities (2,900) also posted declines. However, services employment was up 36,300 thanks to a 39,800 increase in public administration. Outside of education (11,800) and trade (10,400) other areas typically registered single digit increases but there was a significant drop in accommodation & food (27,000).

Bottom line

Barack Obama was elected president of the United States Tuesday. However, after beginning the week on a positive note, the so called ‘election day rally’ came crashing to earth as investors were once again overwhelmed by the drumbeat of negative economic data. Even the massive UK interest rate reduction had little positive impact on equity investors — nor did other interest rate cuts in the eurozone, Australia, Denmark and Switzerland. Data were virtually universally bad from purchasing managers surveys to the dire U.S. employment report. Even though employment was up in both Australia and Canada, the data were very weak.

Flash third quarter gross domestic product will be released this week and will doubtlessly confirm that the eurozone including the big three economies — Germany, France and Italy — are in recession as defined by two negative quarters of GDP. But many eyes will be focused on the U.S. as it begins its transition to a new president and his plans for steering the economy on a positive course.

Looking Ahead: November 10 through November 14, 2008

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