Global Markets

After a somber mid-June to mid-July period when equities retreated, stocks have taken wing again in the past two weeks. With little new economic data available last week after the previous week’s deluge, investors focused on the slew of earnings reports — and of course — on Fed Chairman Ben Bernanke’s semi-annual testimony to Congress. Investors everywhere listened closely to the chairman’s comments as they looked for clues about when the Fed would begin to unwind their stimulus programs. While the chairman said the Fed had a plan to unwind its many quantitative easing programs to avoid an inflationary spike, the economy — although stabilizing — was still too fragile to begin doing so given the high level of unemployment and tepid consumer spending. He said that the stimulus pumped into the global economy late last year probably helped to avoid a collapse of the financial system.

All stock indexes covered here were up last week, primarily on better than expected earnings. However, stocks wilted Friday after disappointing earnings and a modest decline in U.S. sentiment. Earnings reports at week's end, especially those from Microsoft. American Express and Amazon, put a damper on the party in North America and Europe equities. Earlier in the week, stocks were up thanks to good earnings and along with an increase in U.S. existing home sales.

All indexes followed here were up for the second consecutive week. Gains ranged from 6.3 percent for the Hang Seng to 1.8 percent for the Taiex. All indexes are firmly above their yearend 2008 levels.

Global Stock Market Recap

Europe and the UK

Europe’s heady gains last week were tempered by the pull of gravity from U.S. equity declines in early Friday trading. But the FTSE, DAX and CAC still managed to end with significant gains for the second week. On Thursday, the FTSE hit its highest point in more than six months thanks in part to a much better than expected retail sales report for June. Its winning streak continued into Friday and now the index has been up for 10 consecutive sessions. Friday’s worse than expected second quarter gross domestic product report however, had little impact on stocks. Instead the pound sterling was lower after the report. Some analysts opined that recent data that show an improving economy will be incorporated in the third quarter.

The CAC and DAX however, followed U.S. stocks down on Friday despite favorable German Ifo survey results showing that confidence improved for a ninth month. This puts Germany ahead of other European Monetary Union members on the road to recovery. Friday’s decline ended a stretch of nine consecutive positive closes for the two indexes, the longest since 2006. Thursday’s jump was fueled by better than expected earnings from Roche and ABB while upbeat U.S. existing home sales data raised optimism that the global economy is on a recovery mode.

Bank of England minutes

As widely expected, the minutes of this month's Bank of England’s monetary policy committee meeting confirmed another unanimous 9 to 0 vote in favor of leaving the bank rate at its prevailing 0.5 percent level. The minutes also provided some rationale for the decision not to increase the Stg125 billion quantitative easing allocation — a move that upset a gilt (bond) market clearly anticipating additional Bank purchases.

Economic developments had surprised the committee with both the real economy and inflation proving more robust than expected. However, the balance of risks going forwards was still seen on the downside and recent comments from the BoE suggest little change to the official forecast when the MPC releases its Quarterly Inflation Report in mid-August. The Bank is known to prefer tying significant shifts in policy to its report and to this end, any change in the QE stance was always more likely at the August meeting. The MPC was still very uncertain at the start of this month about the success or otherwise of its QE program and for this reason alone it made sense to maintain the status quo for the time being.

Asia/Pacific

Asian equity markets hit new 10-month highs as positive U.S. earnings results and housing data boosted investor sentiment. All 13 Asia/Pacific indexes followed here were up for the second week. The Hang Sang was up 6.3 percent on the week after climbing 6.2 percent in the previous week. The Nikkei gained 5.8 percent and was closely followed by the Shanghai Composite — it was up 5.7 percent on the week and recorded its best weekly percent gain in over two months thanks to reassurances from the People’s Bank of China that monetary policy would remain loose for the near future.

For the Nikkei, Friday was the eighth-straight day of gains ending a second week in positive territory thanks to a weaker yen and some encouraging earnings reports. This was the longest run since mid-November 2005 and put the index just below the important 10,000 mark. After crossing 10,000 in mid-June, the index retrenched and now is once again trying to breach this barrier. Japanese shares have been lagging those in Taiwan and in South Korea where their main indexes have soared by 51.9 percent and 33.6 percent respectively this year in sharp contrast to the Nikkei’s gain of 12.2 percent.

The minutes of the Reserve Bank of Australia’s July 7 meeting and those of the Bank of Japan’s June 15 to 16 meeting were released during the week. The RBA minutes showed that economic activity was not as weak as expected. At the meeting, the Board decided to leave the cash rate unchanged at 3 percent, noting that the current monetary policy stance supported sustainable growth and low inflation, leaving adequate flexibility to respond to developments as and when needed.

The BoJ minutes indicated that the Bank may end its three quantitative easing programs individually rather than collectively. Currently, the BoJ is buying commercial paper and corporate bonds while also providing an unlimited repurchase facility. At its July meeting, it extended its programs from September 30 to December 31. Thereafter, it seems likely to evaluate the need for each program based on specific market conditions.

The Asian Development Bank released an upbeat report on the region’s emerging economies Thursday and predicted that 2010 growth would be double that of 2009. However, the bank warned there were risks to the recovery including over-enthusiastic regulation of the financial sector. The bank’s semi-annual Asia Economic Monitor estimated that aggregate gross domestic product growth of the group — which includes the 10 members of the Association of South East Asian Nations and China, Hong Kong, Taiwan, and South Korea — would rise from 3 percent this year to 6 percent in 2010.

Canada

As expected, the Bank of Canada kept its overnight interest rate at 0.25 percent, the lowest rate since the Bank was founded in 1934. It also maintained a conditional commitment to remain there until mid-2010. Recent economic reports showed that employment contracted less than anticipated while building permits, business spending and housing starts posted larger than expected gains. The Bank once again specifically mentioned the Canadian dollar's substantial appreciation as a potential stumbling block to economic recovery given the importance of exports to the economy. The bank made no direct mention of plans to implement quantitative easing.

The Bank of Canada said in its Monetary Policy Report on Thursday that the country’s recession is ending as commodity prices and consumer confidence improve but that the pace of the recovery will be muted by its strong currency. The Bank expects output to expand at an annualized pace of 1.3 percent in the third quarter replacing its prior estimate of a 1 percent contraction. This will mark the end of a recession that started in the fourth quarter of last year.

Currencies

The dollar declined against most of the major currencies except the yen as risk aversity took a back seat to perceived investment opportunities. Climbing stocks and renewed hopes that the economy is on the mend led traders to seek riskier higher-yielding assets. The safe haven dollar strengthened during the throes of the economic crisis, but has since declined thanks to revived risk appetite and concerns about U.S. government spending. The dollar was down against the euro after German Ifo business climate index showed a better than expected improvement in July, indicating that economy is on the road to recovery.

The dollar continued its path toward parity with the Canadian dollar or loonie. Evidence that the Canadian economy is in much better shape than once feared has crippled the dollar against the loonie of late. The Canadian currency was up even after the Bank of Canada warned that the unprecedented rise of the Canadian dollar could “fully offset” any economic recovery. Gains in equities markets worldwide have caused traders to seek positions in the euro and sterling, while the prospect of higher commodities prices has given a major boost to resource linked currencies like the Canadian dollar.

Selected currencies — weekly results

Indicator scoreboard

Germany

June producer prices were down 0.1 percent from May to stand 4.6 percent below its year ago level. This was the steepest annual drop since December 1968. The latest decline was the seventh in the last eight months and means that producer prices have not registered a monthly increase since September last year. Energy prices were down 0.3 percent on the month. Excluding this sector, prices were unchanged but still 2.8 percent lower on the year. The basic and capital goods sectors both saw stable prices in June while a gentle 0.1 percent rise in consumer goods was limited to nondurables.

July Ifo economic conditions index continued to improve with a reading of 87.3, up from 85.9 in June. The latest gain reflected stronger current conditions as well as an increase in the expectations component. Assessment of the current state of the economy advanced 1.9 points to 84.3, its best reading since February, while expectations rose 0.9 points to 90.4, its highest level in more than a year. Higher morale was recorded in all sectors except retail where the confidence index slipped 0.7 points to minus 17.9. Manufacturing led the way with a near-4 point jump to minus 29.8 while services advanced 2 points to minus 3. Sentiment in wholesale rose 2.6 points to minus 22.6 and in construction edged up 1.2 points to minus 25.4.

France

June consumer spending on manufactured goods rebounded by 1.4 percent and was up 1.2 percent on the year. The advance was led by household durable goods where purchases jumped a robust 3.0 percent from May and textiles which soared 3.6 percent. Although autos & related items were down 0.2 percent (this following a 2.5 percent leap in May), other products were up 0.5 percent on the month.

Italy

May retail sales were unchanged and were down 2.9 percent when compared with last year. Sales were dragged lower by a monthly 0.6 percent drop in food sales. Non-food stores fared better with a 0.2 percent rise in demand. On the year, all the major sales categories were down except photo-optical (up 0.7 percent). Within total non-food (minus 2.9 percent), the steepest decline was in stationery & books (4.9 percent) closely followed by magnetic tapes & musical instruments (4.3 percent). Clothing was down 3.3 percent while furniture & related items fell 3.1 percent and household appliances dropped 2.4 percent.

United Kingdom

June retail sales rebounded by 1.2 percent and were up 2.8 percent when compared with last year. Non-food purchases were up 1.6 percent from their May level while food sales were up a more modest 0.7 percent. Within the non-food sector, volumes were boosted by a sizeable 4.7 percent monthly jump in clothing & footwear. However, household goods declined 0.7 percent but non-specialized stores saw sales rise 0.7 percent. Apart from favorable weather effects, it still looks as if those retailers performing the best continue to do so by virtue of heavy discounting — the retail sales deflator was down 0.2 percent on the year, its weakest reading since January and 0.9 percentage points below its May rate.

Second quarter gross domestic product contracted by 0.8 percent and was down 5.6 percent when compared with a year ago — the largest annual contraction on record. The quarterly output drop was split between services (minus 0.6 percent) and industry (minus 0.7 percent). Within the former, transport, storage & communication was particularly weak (minus 2.1 percent) but business & financial services (minus 0.7 percent) and distribution, hotels & catering (minus 0.5 percent) also suffered significant losses. Manufacturing output was down 0.3 percent on the quarter but electricity, gas & water slumped 3.8 percent and mining & quarrying swooned by 1.0 percent. Activity in the construction sector declined 2.2 percent.

Asia/Pacific

Japan

June unadjusted merchandise trade surplus improved to ¥508 billion, up from May’s revised surplus of ¥298.2 billion. Exports were down 35.7 percent when compared with last year while imports sank 41.9 percent. Trade with its major trading partners remains far below year ago levels. On the year, exports to the U.S. are down 37.7 percent while imports are down 37.9 percent. Exports sank 41.4 percent to the EU while imports dropped 26.2 percent. Exports to Asia were down 30.1 percent while imports are down 31.7 percent. The seasonally adjusted surplus was ¥428.2 billion, up from ¥309.5 billion in May. Exports were up 1.1 percent on the month while imports were down 2.1 percent.

Australia

Second quarter producer price index declined 0.8 percent and was up 2.1 percent when compared with last year. On the quarter, domestic prices were unchanged and up a modest 0.3 percent on the year while import prices plunged 5.9 percent but remained up 14.3 percent on the year. The drop in quarterly prices were mainly due to declining prices for industrial machinery & equipment manufacturing (minus 5.6 percent), building construction (minus 0.5 percent) and electronic equipment manufacturing (minus 10.5 percent). Intermediate prices declined 1.9 percent on the quarter and 0.8 percent on the year.

Second quarter consumer price index was up 0.5 percent and 1.5 percent when compared with the same quarter a year ago. Prices were up for most major sectors on the quarter with the exception of food, which dropped 0.9 percent, finance & insurance which was down 1.7 percent and recreation which edged down 0.1 percent. The most significant price increases were for automotive fuel (up 3.6 percent) and hospital & medical services, also up 3.6 percent. Excluding housing and financial & insurance services, the CPI was up 0.7 percent on the quarter and 1.4 percent on the year. Second quarter inflation presents no problem for the Reserve Bank of Australia should it decide that additional stimulus measures are needed to prod the economy into growth.

Americas

Canada

May retail sales jumped 1.2 percent but were still down 4.9 percent when compared with last year. While boosted by higher prices, volumes were also up 0.7 percent on the month. May nominal auto sales were up 2.4 percent on the month. Excluding the auto sector, sales were still up 0.7 percent. Most sectors enjoyed reasonable demand with gains reported in pharmacies & personal health case stores (1.5 percent) and building & outdoor suppliers (1.0 percent). Other increases were seen in furniture, home furnishings & electronics (0.5 percent), food & drink (0.7 percent) and general merchandise (0.4 percent). Clothing & accessories purchases were unchanged on the month.

Bottom line

The limited economic news available last week indicated that conditions are improving albeit sluggishly. The Banks of Canada, Japan and England, Reserve Bank of Australia and the Federal Reserve in the chairman’s congressional testimony all indicated that monetary policymakers will move very cautiously when unwinding the extraordinary measures taken over the past year.

The pace of new economic data picks up this week as usually happens during the last week of the month. In Japan, data for consumer prices and spending along with industrial production and unemployment highlight the list of new information. In the U.S., the Fed’s beige book will provide the latest anecdotal evidence on the shape of the economy. And on Friday, the Department of Commerce will release their second quarter gross domestic product data as well as the five-year benchmark revisions (changing among other things the base year on the chain weighting). These revisions could conceivably change the growth profile for GDP growth substantially, complicating its interpretation.

Looking Ahead: July 27 through July 31, 2009

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