Global Markets

All equity indexes with the exception of the Shanghai Composite declined last week as investor trepidations about growth resurfaced. Asian economic data were virtually non-existent while U.S. data continued to show stabilization but not growth. UK data depicted a struggling economy while U.S. data were mixed. Commodity prices continue to gyrate as traders contemplated growth probabilities and their impact on demand. The trajectory of the Chinese economy and its voracious appetite for commodities has become increasingly intertwined with whether higher commodities prices are justified by supply and demand factors.

A key reason for last week’s poor equity performance was uncertainty about financial sector regulation. Proposals for sweeping reforms in the U.S. were swiftly followed up with calls from the Bank of England’s governor for much tighter regulation while the Swiss National Bank called for powers to break up banks thought to be “too big to fail”. The nervousness was heightened when Standard & Poors lowered its credit ratings on a number of U.S. banks and the Obama administration unveiled plans to overhaul financial regulation.

On the week, all indexes followed here were down with the exception of the Shanghai Composite. Losses ranged from 1.7 percent (Nasdaq) to 6.3 percent (SET). Both the FTSE and Dow dropped below their yearend level.

Global Stock Market Recap

Europe and the UK

The CAC and DAX were down for the second week thanks to wariness on the part of investors about growth and valuations. The FTSE was down for the first week in five and slipped once again below its end of 2008 level. Like the Dow, it had difficulty achieving that level and maintaining it. Friday’s gains occurred on renewed hopes for an economic recovery at home and abroad. The FTSE was helped by a better showing for resource stocks in line with more optimistic readings for U.S. and Asian indexes.

But closer to home, data were mixed at best. While UK monthly industrial output was up for the first time since February 2008, retail sales were down and unemployment up. And in Italy, unemployment was up while exports continued to decline. But in Germany, ZEW survey showed morale was improving as expectations climbed.

According to Lorenzo Bini Smaghi, an ECB executive board member, Europe risks falling behind the U.S. in policing the financial system and the current crisis could prove “a wasted opportunity” to ensure its future stability. He made his remarks after European Union leaders approved plans for a new regulatory framework that will include a “European systemic risk council” and a European system of financial supervisors. He voiced specific concern that the systemic risk council, intended to look at general threats to the financial system, would have insufficient power over national authorities. But he also feared more generally that the EU was losing its will to undertake wholesale reform.  

Asia/Pacific

With a dearth of economic data about the region, investors looked elsewhere for signs of better times ahead. Worries about recovery in the U.S. and EU — their prime export markets — put a damper on investor spirits. The week began on a down note for equities and they were down for most of the week. However, the markets across the region snapped the losing trend and ended in positive territory Friday, following better than expected economic data in the U.S, raising hopes that the worst for the economy might be nearing end. All but the Shanghai Composite were down for the week. Losses were heavy — ranging from a low of a 2.8 percent decline for the KLSE Composite to a hefty 6.3 percent drop for the SET.

The Nikkei’s time above the 10,000 level which was reached just last Friday (June 12) disappeared Tuesday as the index dropped 2.9 percent. However, the index recovered at week’s end and at least eased some of the pain. The index followed the U.S. indexes upward on better than expected economic data. It should be noted that promising data earlier in the week was ignored by investors. During the week, both the Japanese government and the Bank of Japan raised their outlook for the economy for the second month in a row. On the downside, the Japan Department Store Association said that sales at nationwide department stores declined for the fifteenth straight month during May by 12.3 percent on the year.

The Shanghai Composite enjoyed its best week since early May and ended trade the week at an 11-month high and reassuring investors that the market was strong enough to cope with Beijing’s decision to allow companies to list after a gap of nine months. Investors in Shanghai were focused on domestic issues. Mainland China’s economy is benefiting from Beijing’s stimulus package.

Another impetus to the index came from the World Bank. It said that the economy would grow by 7.2 percent in 2009 compared with its earlier forecast of 6.5 percent. The index gained 5 percent over the week and it is up 58.2 percent since the start of the year and 69 percent since hitting its recent low on November 4, 2008.

Bank of Japan

As universally expected, the Bank of Japan left its policy interest rate at 0.1 percent as it continues to assess the impact of the global economic downturn. With interest rates already at virtually zero and consumer prices falling again, there is little the BoJ can do except return to explicit quantitative easing. Since lowering the key rate to 0.1 percent in December, the Bank has been buying commercial paper and corporate bonds from lenders to channel cash to companies. Both programs expire on September 30. First quarter GDP was revised upward to a marginally less dreadful 3.8 percent drop on the quarter (compared to 4.0 percent reported originally). Machinery orders data also showed the outlook for capital spending remains very poor. However, industrial production and exports have improved two months running and bankruptcies fell in May for the first time in a year.

In its post-meeting statement, the BoJ upgraded its assessment of the economy. They said that economic conditions had stop worsening and exports and output have begun to turn upward — but uncertainty about the recovery remained high. They also said that the economy would be greatly influenced by final demand.

At his press conference after the meeting, Bank of Japan Governor Masaaki Shirakawa said that there was no guarantee the economy’s revival will be sustained, signaling that it is too early for the Bank to end its quantitative easing program. He said that “The Bank of Japan remains cautious about the strength of final demand once companies at home and overseas complete their inventory adjustments.” Shirakawa said the economy is improving because of three temporary factors — replacement of stockpiles at home and abroad, global fiscal stimulus measures and improving confidence. It is unclear whether a recovery in demand will take hold, he said.

Shirakawa said the BoJ will judge how to end the operations “by the end of September in a predictable manner to market participants” based on an assessment of the economy, financial markets and funding conditions for businesses.

Currencies

The yen was up against both the dollar and the euro last week. Traders noted that the market was listless. Once again, the dollar declined against most of its major counterparts as speculation the global recession is easing and prompted investors to buy higher-yielding assets. An example is the Japanese retail currency investor, who was a major presence prior to the financial market collapse and colloquially known as "Mrs Watanabe." She is buying the Australian dollar again, indicating that Japanese risk appetite for higher-yielding instruments has returned. According to Mizuho Corporate Bank, the surge is stemming from expectations for an imminent Chinese recovery that would boost demand for Australian natural resources. And investors can also earn higher interest rates on Australian dollar-denominated assets. While the Bank of Japan interest rate is 0.1 percent, the Reserve Bank of Australia’s rate is 3 percent.

The euro gained on Friday as global stocks were generally higher and added to risk appetite. Traders also sorted through a mixed bag of economic data from the eurozone. Investors mulled over data showing the German producer price index posted its biggest drop in 22 years, while Italy's unemployment rate was up again. The euro was down slightly against the U.S. dollar for the week.

The pound suffered a setback against the euro and the U.S. dollar Thursday after UK retail sales suffered an unanticipated decline and raised doubts about the economy. Other data were promising — they included an increase in industrial production along with indications that house prices are finally stabilizing. The data indicated that the stimulus plans were beginning to have a positive impact. But adding downward pressure on the currency were data that showed the highest ever monthly public sector net borrowing. The currency however rebounded Friday.

Selected currencies — weekly results

Indicator scoreboard

EMU

May harmonized index of consumer prices edged up 0.1 percent and was unchanged when compared with last year. Core HICP excluding energy, food, drink and tobacco was up 1.5 percent on the year. The CPI without seasonal food or energy dropped 0.2 percentage points to 1.5 percent. On the year, food was up 0.3 percent, housing edged down to minus 0.1 percent, transport was down 4.8 percent and communications dropped to minus1.0 percent. No major sector saw a pick-up in its respective 12-month rate.

April nonseasonally adjusted merchandise trade surplus was €2.7 billion, up from March’s surplus of €1.8 billion. However, on a seasonally adjusted basis, the trade deficit was €0.3 billion and followed a smaller revised €1.8 billion shortfall in March. This was the third month in a row that the red ink has decreased. Both exports and imports declined. Exports fell 1.3 percent on the month while imports declined a more marked 2.7 percent. Over the year, exports were down 27.0 percent and imports were off 28.0 percent.

Germany

June ZEW expectations jumped to 44.8 from 31.1 in May. Current conditions remain deeply negative at minus 89.7, up from minus 92.8. ZEW suggests that the economy may be close to bottoming out but it only forecasts recovery to begin towards the end of the year. The survey results for the eurozone as a whole mirrored the German data with expectations up sharply (from 28.5 to 42.7) and current conditions just slightly higher (minus 90.7 from minus 93.2).

May producer price index was unchanged on the month and was down 2.6 percent on the year — the steepest annual decline in twenty-two years. Energy prices were up 0.7 percent but were down 5.8 percent on the year. Core PPI was down 0.3 percent steepening its annual rate of decline by 0.5 percentage points to 2.5 percent. Within this group, prices eased 0.6 percent on the month for consumer goods and 0.1 percent for both capital goods and intermediates.

Italy

April seasonally adjusted merchandise trade deficit was €120 million, down from a slightly larger revised €310 million shortfall in March. The latest red ink reflected fresh contractions in both sides of the balance sheet with exports down 2.9 percent from March and imports off 3.6 percent. Annual declines in exports remained sizeable for all the main categories, led by energy where sales dropped some 47.6 percent. Consumer goods fell 19.1 percent with durables down almost 26 percent while capital goods dropped 29.1 percent and intermediates shrank 32.9 percent. Imports were similarly weak across the board with intermediates (33.4 percent) posting the largest decline. Consumer goods fared rather better (6.2 percent) but there were hefty falls in both capital goods (32.2 percent) and energy (32.7 percent). On an unadjusted basis, the trade deficit was €277 million.

First quarter seasonally adjusted jobless rate climbed to 7.3 percent from 6.9 percent in the previous quarter. Unadjusted, the rate jumped 0.9 percentage points from the fourth quarter to 7.9 percent, its highest level since 1995. The number of jobseekers rose 64,000 to 1,826,000 led by a 38,000 increase in the north of the country. The centre saw a 30,000 advance but there was a 4,000 decline in the south.

United Kingdom

May consumer price index was up 0.6 percent and 2.2 percent when compared with last year. The annual rate is above the Bank of England’s 2 percent inflation target. On the year, prices were up 3.9 percent for alcohol & tobacco while communication was up 1.3 percent and recreation & culture was up 0.8 percent. Prices for clothing & footwear declined 8.1 percent. Core CPI was up 1.6 percent on the year. The retail price index was up 0.6 percent but was down 1.1 percent on the year. The formerly targeted RPI excluding mortgage interest payments (RPIX) similarly climbed a solid 0.6 percent on the month and 1.6 percent on the year.

May claimant count unemployment was up by 39,300 to 1,544,800 and lifted the jobless rate by to 4.8 percent from a weaker revised 4.6 percent in April. The latest gain in unemployment compared with increases of 65,500 in March and 49,600 in April and was the smallest monthly advance in almost a year. However, vacancies tumbled another 38,000. On the ILO measure, joblessness climbed by 232,000 in the three months to April. The increase took the number out of work to 2,261,000 and lifted the jobless rate to 7.2 percent, its highest level since the second quarter of 1997. Employment in the latest three months declined 271,000. This was the steepest fall on record.

Annual average earnings growth for the three months to April accelerated to 0.8 percent. The outcome followed a slightly smaller revised 0.3 percent decline in March. Excluding bonuses the headline rate fell to 2.7 percent from 3.0 percent, its slowest pace since records began in 1981. The overall headline figure reflected a 2 percentage point jump in the single month annual rate to 3.2 percent. The jump was attributable to higher pay rates in both services (3.2 percent from 1.2 percent) and manufacturing (2.2 percent from 0.4 percent). Public sector earnings in April alone were up 3.6 percent on the year compared with 3.4 percent in March.

May retail sales volumes were down 0.6 percent and were 1.6 percent lower on the year. Overall sales were given a modest boost by a 0.3 percent monthly increase in food purchases. Non-food sales dropped a sizeable 1.4 percent. Within the latter the only category that increased was household goods where sales were up 1.6 percent on the month. Non-specialized stores registered a 1.8 percent drop while clothing & footwear sank 1.9 percent. Other stores were off 3.0 percent although non-store retailing edged up 0.2 percent. With the release of this report the Statistics Office indicated that it will now attach more significance to annual growth rates as opposed to the 3-month change it favored previously. However, following modifications made to the methodology for calculating the data just last month, financial markets may well take some time to become convinced about the reliability of the new figures.

Americas

Canada

April factory shipments edged down 0.1 percent and were a sizeable 18.1 percent lower on the year. The entire monthly decline was due to falling prices since volumes posted a 0.4 percent rise. The monthly decline would have been much more marked but for a jump in the transportation equipment industry, without the benefit of which cash sales would have slumped 2.8 percent on the month. Aerospace was particularly robust and motor vehicle parts were up 19.4 percent. By contrast, primary metal manufacturers saw demand drop 4.6 percent, in part due to plant closures. Petroleum & coal sales fell for the ninth month in a row — a 6.7 percent dip also in part due to a major plant shutdown. The other main indicators in the report were also down. New orders plunged 10.1 percent from March and backlogs were down a hefty 5.5 percent.

May unadjusted consumer price index was up 0.7 percent and edged up 0.1 percent on the year. Seasonally adjusted CPI was up 0.2 percent on the month. Core CPI excluding food and energy was up 0.4 percent and 1.3 percent on the year. The Bank of Canada’s preferred core measure which excludes eight volatile items was up 0.4 percent and 2 percent on the year. Energy prices were up 4.4 percent but were down 18.3 percent on the year. Food prices edged up 0.2 percent but jumped 6.4 percent on the year. Prices accelerated quite markedly in household operations & furnishings (3.2 percent from 2.8 percent) and alcohol & tobacco (3.0 percent from 2.4 percent).

April retail sales dropped 0.8 percent and were down 6.2 percent when compared with last year. Nominal sales were depressed by weak prices but volumes performed little better, registering a monthly drop of 0.6 percent to offset their March gain. The nominal April slide was led by the auto sector where demand fell almost 2 percent on the month. Excluding this sector sales were down a slightly less marked 0.5 percent. There were sizeable declines in furniture, home furnishings & electronics (0.8 percent) and food & beverages (1.0 percent). Clothing & accessories were down 0.6 percent while pharmacies & personal care dropped 0.4 percent. However, building & outdoor home supplies were up 0.3 percent and general merchandise was up 0.5 percent.

Bottom line

Economic data were mixed once again last week. Retail sales data in both the UK and Canada disappointed. In the UK, industrial production was up but output data disappointed in the U.S. The Bank of Japan met and maintained the status quo both with its interest rate and its extraordinary measures.

On Wednesday, analysts will hone in on the Federal Reserve’s announcement to garner clues about future policy. In Germany, the closely watched Ifo survey will be released. The ZEW was up last week and investors will anxiously waiting to see if the Ifo reading improves as well. And all market participants will be watching what is sure to be torturous path of financial regulatory reform in the U.S. and elsewhere before the memory of last autumn fades.

Looking Ahead: June 22 through June 26, 2009

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