Global Markets

It was a busy week as the world focused on the Obama administration’s bailout plans — both the fiscal stimulus and the Treasury’s plan to right the banking system. And although doubting Thomas’s appeared to be in the majority, the stimulus plan passed and is expected to receive President Barack Obama’s signature in the next several days. Equities worldwide tumbled as pessimism about the efficacy of the U.S. stimulus package ravaged investor sentiment.

A good chunk of last week’s new data involved merchandise trade balances. The data showed that international trade was shrinking — in most cases both imports and exports declined. Canada’s trade balance fell into a deficit for the first time since 1976 while Chinese exports plunged 17.5 percent. And in Europe, first estimates for fourth quarter gross domestic product were released. The data showed the eurozone in recession with most member state economies shrinking for the third consecutive quarter. The declines in Italy and France were underlined by dismal industrial output data.

On the week, equities were down in Europe, the UK and North America. They were mixed in Asia/Pacific region.

Global Stock Market Recap

Europe and the UK

After two positive weeks, equities turned down once again. A potent mixture of pessimism, poor earnings and dreadful data combined to drag the indexes downward. Early in the week, the news was dominated by a combination of the U.S. bailout and the Treasury plan to fix the banking sector. Investors doubted if the fiscal stimulus package would work while the Treasury plan still lacked details avidly sought by market analysts to revive the credit markets and the economy.

Stocks turned down on Tuesday as investors turned skeptical about the U.S. government's latest bank bailout plan. The Treasury unveiled a revamped financial rescue plan to cleanse up to $500 billion in spoiled assets from banks' books and support $1 trillion in new lending through an expanded Federal Reserve program. Investors were disappointed — they had been looking forward to clear and definite steps on how to cleanse the toxic assets.

The Bank of England’s quarterly Inflation Report lived up to the expected negativity and Governor Mervyn King underlined that negativity by saying that the UK economy is in a deep recession and the depth of the slump would depend on the rest of the world.

On the week, the FTSE was down 2.4 percent, the CAC lost 4 percent and the DAX declined by 5 percent.

Bank of England Inflation Report portrays gloom up ahead

The Bank of England released its quarterly Inflation Report on Wednesday and portrayed a dismal outlook for the economy. The Bank said that the decline in GDP would be amplified as companies disposed of stocks as they fall short of working capital and their business prospects weaken. But it expects that companies will then ease their rate of destocking and begin to rebuild inventories, increasing output once again. At the lowest end of its forecast, the Bank said there is a chance that GDP could fall by as much as 6 percent in the second quarter of 2009 compared with the year before.

The Bank also spelled out its views on monetary policy as interest rates approach zero. It said that cuts in the Bank rate so far — from 4.75 percent to 1 percent since late 2008 – had fed through to consumers and businesses with longer term variable rate loans. But it said that the transmission of lower interest rates to lending had been severely disrupted by the financial crisis, with interest rates for new lending to households tending to drop by much less than the decline in the bank rate. The net effect of these factors blunted the impact of the bank rate declines.

In order to supplement normal interest rate policy, the Bank has been granted powers to use its asset purchase facility to buy up high-quality corporate debt to ease credit. However, the Bank outlined its concerns about creating money, saying that there was a risk that banks would choose to hoard the funds rather than expand the supply of credit as happened in Japan in the 1990s.

In his comments after its release, Mervyn King said he was preparing to deploy quantitative easing — creating money to buy assets. He said that interest rates would not have to fall to zero before starting quantitive easing, signaling that the Bank’s monetary policy committee could vote for such a move as soon as its meeting on March 5. It also suggests that such unconventional measures could begin with gilt purchases.

Asia/Pacific

Most Asian stocks rose for the first time in five days Friday, led by banks and electronics companies, on optimism that governments will widen efforts to end the financial crisis and revive global growth. Stocks were up ahead of a two-day Group of Seven meeting in Rome on optimism that a U.S. plan, which is reportedly being contemplated, to aid homeowners by subsidizing mortgage payments would provide a concrete form of financial policy to tackle the global slowdown.

Australian stocks were up Friday after the country’s senate passed an A$28 billion stimulus package. Some analysts pointed to the concerted government efforts to stimulate the economy and said that it injects some confidence in the market — but it will take some time to see positive results. Stocks were up after U.S. stocks rallied Thursday afternoon (in the U.S.) and the Dow recovered a 200 plus point loss after speculation rose that the U.S. would help struggling mortgage borrowers. Six of 13 Asian/Pacific indexes followed here were up on the week including the Shanghai Composite, Sensex, All Ordinaries, KLSE Composite, Taiex and SET.

In Australia, stocks were up on the week thanks to a better than anticipated employment report and a stimulus package of A$42 billion (or about US$28 billion) that was wrestled through the parliament on the second try. It allows for cash handouts and public works spending which is aimed at preventing the first recession in 18 years. The package includes A$12.7 billion in payments to low and middle income earners and A$28.8 billion for schools, bicycle paths and environmental projects. The package is equivalent to 1.3 percent of gross domestic product this fiscal year and 2 percent next according to Treasury forecasts. The government’s package will create an A$22.5 billion deficit in the year ending June 30, the first shortfall in seven years and the biggest as a percentage of GDP since 1996. The Reserve Bank of Australia last week cut the benchmark interest rate to 3.25 percent, the lowest since 1964, and the government since September has announced almost A$88 billion of fiscal stimulus.

In Japan, Friday’s gains were insufficient to reverse losses of the holiday shortened trading week. On the week, the Nikkei was the biggest loser, dropping 3.7 percent with the Topix close behind declining 3.3 percent. New data were sparse with the corporate goods price index showing the erosion of falling commodity prices. However, on Monday the dreaded fourth quarter gross domestic product will be released — it promises to show a major contraction in growth — by some estimates of more than 3 percent on the quarter (about 10 percent at an annualized rate). Earlier last week, the Japanese market tumbled to its lowest closing level since November 20 weighed down by worries about a delay in the implementation of the U.S. financial rescue plan and weakness of the U.S. dollar against the yen.

Bank of Korea cuts again

The Bank of Korea cut its key interest rate by another 50 basis points to 2 percent — a new record low. This brings the total cuts to 325 basis points since October. The Bank said that financial institutions are managing funds in a conservative way for fear of damaging financial soundness, so borrowing still presents a difficulty. Seoul has tried to get banks to loan by making a windfall interest payment on lenders’ deposits at the central bank. It has also launched a $15 billion recapitalization fund — but money remains tight. Exports, lifeblood of the economy, slumped 32.8 percent in January compared with the same period a year before while December’s industrial output slumped by 9.6 percent in December and was down almost a fifth over the year.

Currencies

The strength of the yen and dollar continued to wax and wane given investors’ appetite for risk. At week’s end both currencies were pressured as talk of a government plan to subsidize mortgage payments boosted risk appetite. And with the Group of Seven meeting of finance ministers and central bankers meeting on Friday and Saturday in Rome, traders were cautious as they awaited its outcome. The move in part also reflected a desire to square positions prior to the weekend — it is a three day weekend in the U.S. with all markets closed on Monday — just in case the G7 made any specific reference to currency valuations.

Japanese Finance Minister Shoichi Nakagawa said he has no intention of bringing up the currency issue at the meeting. He said that he had been saying that rapid fluctuations in the currency market are not desirable and if asked, would relay his position to the other attendees. He said the sharp drop in foreign demand for Japanese products amid the ongoing economic crisis, not the yen's appreciation, is the biggest factor hurting Japanese exporters. Nakagawa said the yen's recent strength relative to other major currencies has benefited the Japanese economy somewhat with lower energy and food import prices.

The pound sterling reached a high against the U.S. dollar in July trading above $2.01 only to slump by more than 32 percent to a 23 year of $1.35 on January 23. But since then the currency has stabilized in the mid-$1.45 range. This is despite the continued stream of bad economic news from the UK. The pound also sank against the euro. Two months ago, analysts thought the pound would fall to parity with the euro, but since then it has recovered. Talk of sterling parity against the euro has all but disappeared — analysts say this is as much a reflection of euro weakness as sterling strength. The negative sentiment building against the euro, not only reflects increasing worries regarding the eurozone banking sector — which is heavily exposed to problems in eastern and central Europe — but also concerns over the European Central Bank’s lack of action in the face of the worsening economic outlook across the region.

Selected currencies — weekly results

Indicator scoreboard

EMU

December industrial output dropped 2.6 percent and was down 12 percent when compared with last year. Fourth quarter output was down an ominously large 5.1 percent down on the previous period. By sector there were monthly declines across the board with the exception of energy where production increased by 1.1 percent. The steepest decline was posted by intermediates (5.7 percent) but there were also hefty drops in durable consumer goods (2.8 percent), capital goods (2.5 percent) and nondurable consumer products (0.9 percent). Regionally, there were monthly declines in all of the reporting member states.

Fourth quarter flash gross domestic product sank by 1.5 percent and was down 1.2 percent when compared with last year. The decline was the steepest decline since the GDP data were first complied thirteen years ago. Indeed, a 1.5 percent slump on the quarter was significantly larger than expected. This was the third quarterly drop in real GDP and follows a 0.2 percent decline in both the second and third quarters. As with all flash releases no detail of the expenditure components are provided. Of EMU members that provided data, only Cyprus and Greece recorded growth.

Germany

December merchandise trade surplus was virtually unchanged at €10.7 billion from November’s €10.9 billion. Both exports and imports declined for the third month. Exports dropped 3.7 percent while imports declined 4.1 percent. On the year, exports were down 11.7 percent while imports dropped 6.3 percent.

Fourth quarter flash gross domestic product contracted by 2.1 percent and was down 1.7 percent when compared with the same quarter a year ago. This was the third quarter in a row that GDP declined and the largest on record since reunification in 1990. Details of the national accounts will have to wait until more complete data are available but the Statistics Office did point to declines in exports, investment and household spending.

France

December industrial output (excluding construction) dropped 1.8 percent drop and was down 11.1 percent on the year. The December outturn would have looked even worse but for a 2.0 percent rebound in monthly energy output. Manufacturing industries slumped a hefty 2.8 percent and plummeted 14.0 percent from December 2007. However, capital goods actually performed well with a 2.6 percent monthly advance courtesy of a strong rise in transport equipment and consumer goods edged up 0.2 percent. Food and agriculture also saw a 1.6 percent increase. Weakness was concentrated in semi-finished goods where output dropped 7.6 percent, the auto sector which saw a 7.7 percent nosedive and in construction (down 0.4 percent).

Fourth quarter preliminary gross domestic product contracted 1.2 percent when compared with the third quarter as expected. GDP declined 1.0 percent when compared with the same quarter a year ago. It was the steepest decline in over 30 years. The data were released in advance of schedule after Insee employees distributed the results to protest a television leak on the eve of the official announcement. They attributed the leak to the Finance Ministry, but Finance Minister Christine Lagarde claimed she was not informed ahead of time. Private consumption was up by 0.5 percent on the quarter after barely rising 0.1 percent in the previous two quarters. Business investment plunged 1.5 percent as demand prospects darkened and banks crimped lending. Overall investment was down 1.1 percent on the quarter.

Italy

December industrial output was down 2.5 percent and sank 14.3 percent when compared with last year. Weakness was broad-based. Consumer goods output fell 2.2 percent on the month while capital goods were down a stark 5.1 percent, intermediates 3.3 percent and energy 0.2 percent. Within the manufacturing sector, there were particularly heavy declines in fabric & clothing (5.1 percent), leather (5.3 percent), rubber & plastic materials (5.3 percent), non-metal mineral processing (6.6 percent) and transport vehicles (6.7 percent). The only sector managing an increase of any note was coal & petroleum (0.9 percent).

Fourth quarter flash gross domestic product dropped 1.8 percent on the quarter and was down 2.6 percent from a year ago. The latest quarterly contraction was the third in a row and both declines were the steepest since the data were first compiled in 1980. For calendar 2008 as a whole, the economy shrank by 0.9 percent, the worst performance since 1993. As usual, few details were provided although ISTAT did indicate that output fell in both the goods producing and service sectors and rose in agriculture.

United Kingdom

December merchandise trade deficit narrowed to Stg7.4 billion from a revised Stg8.1 billion deficit in mid-quarter. For the 2008 calendar year the deficit hit a new record high of Stg93.2 billion. The modest monthly improvement reflected in part a gain in nominal exports of 0.3 percent but was largely attributable to a 2.5 percent drop in imports. In volume terms, exports fell 0.4 percent while imports were off an even more marked 2.0 percent. The shrinkage was also limited to net trade with the non-EU bloc where the deficit fell to Stg4.2 billion from Stg5.2 billion in November. At the same time, the bilateral shortfall with EU countries widened by almost Stg0.3 billion to Stg3.2 billion. Excluding oil and erratics, the shortfall shrank to Stg7.0 billion from Stg7.7 billion.

January claimant count of joblessness jumped a hefty 73,800 to 1,233,000 and lifted the unemployment rate by 0.2 percentage points to 3.8 percent. This is the highest rate since February 2000. On the ILO measure, unemployment in the quarter just ended rose 146,000 to stand at 1,971,000 and so within 29,000 of the two million mark, a level not seen since 1997. At the same time, the jobless rate climbed a further 0.2 percentage points to 6.3 percent, its highest level since the first quarter of 1998.

Average earnings for the three months ending in December were up 3.2 percent when compared with the same three months a year earlier. For the month of December, average earnings were also up 3.2 percent on the year. The single month acceleration was wholly attributable to the private sector where the rate jumped to 3.1 percent from 2.4 percent in November. However, the headline rate in this sector only edged up 0.1 percentage points to 3.1 percent. Public sector headline earnings held steady at 4.0 percent but with the single month rate sliding 0.5 percentage points to 3.8 percent, Manufacturing wages continued to slide. The rate here dipped to 2.2 percent from 2.4 percent in November and 3.0 percent as recently as September. Offsetting this decline was an acceleration to 3.6 percent in the services sector. However, this probably reflected higher bonuses. The overall excluding bonus headline rate was unchanged at 3.6.

Asia/Pacific

Japan

January corporate goods price index was down 1 percent and down 0.2 percent when compared with last year. It was the fifth monthly decline in a row. Manufacturing prices dropped 1.5 percent after dropping a revised 1.4 percent in December. On the year, manufacturing industry prices were down 0.7 percent after rising 1.2 percent in December. Agricultural prices plunged 3.8 percent after rising a revised 1.2 percent in December. On the year, agricultural prices were down 0.3 percent.

Australia

January employment surprised and edged up by 1,200 — analysts had expected a drop of 30,000 jobs. The full time employment gain of 33,700 more than offset the part time employment decline of 32,600. However, unemployment jumped by 36,800 to 540,200. Persons looking for full-time work increased by 29,900 to 381,300 while the number of persons looking for part-time work increased by 6,900 to 158,800. This pushed the unemployment rate up to 4.8 percent from 4.5 percent in December. The participation rate edged up to 65.1 percent from 65 percent in the previous month.

China

January producer prices dropped 3.3 percent when compared with last year. This was the steepest drop since March 2002. The National Bureau of Statistics said the drop was attributable to the global economic downturn and a base effect. They said that the PPI is likely to be negative for the entire year due to a base effect from the high inflation rates seen during much of 2008.

January consumer prices were up 1.0 percent when compared with last year after gaining 1.2 percent in December. Food prices were up 4.2 percent on the year while clothing prices were down 2.7 percent. Transportation & communication prices were down 2.5 percent with communication equipment within that category plunging 18.8 percent.

January unadjusted merchandise trade balance was $39.1 billion. Exports sank 17.5 percent while imports plummeted 43.1 percent on the year. The trade balance rose to $39.11 billion in January from $38.98 billion, and was up 102.1 percent compared to last year.

Americas

Canada

December’s merchandise trade balance fell into deficit for the first time since March 1976 — C$458 million compared with a trade surplus of $1.2 billion in November. Exports and imports dropped amid a global economic downturn with exports falling at a faster pace than imports. Exports dropped 9.7 percent to $35.3 billion, as both prices and volumes declined. This marked the largest month-over-month percentage decrease since October 1982. The declines were widespread across most sectors. Overall, exports have been trending downwards since July 2008. Imports also declined, falling 5.7 percent to $35.8 billion. The decrease, reflecting mostly volume reductions, was largely attributable to machinery & equipment, automotive products and industrial goods & materials. Although exports and imports have been declining in recent months, trade in agricultural and fishing products as well as machinery and equipment were generally on the rise throughout 2008. Exports to the United States dropped 10.0 percent to $25.9 billion. The slump in exports, led by crude petroleum, outpaced an 8.4 percent drop in imports. As a result, Canada's trade balance with the United States fell from $4.6 billion in November to $3.8 billion in December, its lowest level since December 1998. Canada's trade deficit with countries other than the United States grew to $4.2 billion in December from $3.4 billion in November, as exports declined 9.0 percent while imports fell 1.0 percent.

Bottom line

Uncertainty and disappointment of the U.S. stimulus packages stirred investor anxiety last week. The only ray of ‘sunshine’ last week was found in U.S. retail sales — they gained on the month. All other data continues to be horrible.

This coming week begins on a distinctly down note — fourth quarter gross domestic product for Japan which is advertised to have contracted by over 3 percent on the quarter will be released on Monday (Sunday night in the U.S.). It will be followed a couple of days later by the Bank of Japan monetary policy board meeting. With rates at 0.1 percent, interest rates have nowhere to go. The BoJ has begun purchasing commercial paper and stocks from the private sector as temporary measures.

Looking Ahead: February 16 through February 20, 2009

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