Global Markets

Most equity indexes were up last week with the exception of the Shanghai Composite and Hang Seng in Asia. However, results for August with one trading day remaining on Monday are more mixed in Asia. China-related stocks were down on the month as the Shanghai Composite plunged by 16.2 percent and taking with it the Hang Seng, down 2.3 percent and the Taiex, down 3.8 percent. Equities in Europe, the UK and North America recorded healthy gains. Investors have become increasingly nervous about possible moves the Chinese government might make to reign in overcapacity in steel and concrete industries. The country’s State Council called on authorities to “resolutely” curb this overcapacity.

Economic data in the U.S., Europe and UK were mixed while data in Japan were dreadful on the eve of the country’s national election. In the U.S., analysts’ forecasts of a downward revision in GDP did not come to pass although a 1 percent annualized decline does not make pretty reading. And in the UK, house prices were up but second quarter business investment slumped 10.4 percent — nearly three times the forecast drop. In Germany, September consumer confidence climbed to a 15-month high, but August the retail PMI slipped.

The big news of the week was the earlier than anticipated announcement by U.S. President Barak Obama that he would nominate Ben Bernanke to a second term as Fed chairman. The news was widely expected, but it nevertheless offered further reassurance to nervous investors. Mr Bernanke’s reappointment removes some of the uncertainty about the future course of monetary policy and the way it was handled indicates the administration is a strong advocate of the Fed’s independence. The combination of Mr Bernanke’s renomination and the positive U.S. data helped leading equity market indexes touch 10-month highs in the U.S. and Europe.

Global Stock Market Recap

Europe and the UK

Stocks were up for the second week in Germany, France and the UK as better than expected economic data boosted morale. Volume was low and typical for this time of year. Higher morale was evident in the German Ifo report earlier in the week along with the EU economic sentiment survey on Friday. But the EU survey highlighted the precariousness of the recovery that began in the second quarter. It shows that optimism was up for the fifth consecutive month to the highest since October 2008 but remained significantly below the average of the past two decades. The survey results are likely to reinforce a widespread view that while the third quarter is likely to be the end of the eurozone’s recession, longer term growth prospects are subdued. Unemployment is rising and European Central Bank data suggest that banks were still not providing the credit needed to oil the wheels of recovery. Volatile commodity prices could act as a further constraint on growth.

The FTSE ended the week and month above the 4900 level, a landmark not seen since early October 2008 when markets were tumbling in the aftermath of the Lehman Brothers collapse. Earlier in the week, stocks were helped by the reappointment of Ben Bernanke as Federal Reserve chairman while on Friday, the index was helped by an upward revision in second quarter gross domestic product data. It should be noted that more economic data in the UK and U.S. now are either showing positive trends or at least being given a positive spin.

Asia/Pacific

Asian/Pacific markets were up last week with the exception of the Shanghai and Hang Seng. Trading was choppy as Asian markets fluctuated on concerns about the impact of China's policy to curb excess production in steel and cement industries. Investors continue to be wary about the pace of global economic recovery.

Despite dreadful economic data, stocks in Japan were up primarily on hopes that Sunday’s general election would provoke the change necessary to get the economy back on track. However, on Friday traders were reluctant to create fresh long positions ahead of the election which is expected to see the long ruling LDP party thrown out of office. Indeed, while the market has already factored in the likely victory by the opposition Democratic Party of Japan, investors are now focusing on post-election developments such as cabinet appointees and parliamentary affairs.

Equities were up for the week despite a stronger yen and the consumer price index report that showed July prices plunging a record 2.2 percent on the year as the country sinks deeper into deflation once again. Household spending also sank while unemployment jumped to a record 5.7 percent. Trading was light.

The Shanghai Composite continued to fall during the week and with one trading day left in August, was down 16.2 percent. Since reaching its high on August 4, the index has plummeted 17.6 percent. However, the index is still up over 57 percent in 2009. Worries about tighter government policies continue to upset investors. Among the worries are concerns that large initial public offerings and large scale financing by listed companies could dilute market capital and drag down stocks prices.

The All Ordinaries showed notable gains and ended the week at a 10-month high. With one trading day left, the index was up 5.8 percent in August and was the best performer in the region. Stocks were buoyed by new private business capital spending data that unexpectedly jumped 3.3 percent in the second quarter of 2009 and contrary to economists' expectation of a 5 percent contraction. The Kospi ranked second in August gain — up 3.3 percent and up 43 percent in 2009 — led by autos and technology stocks amid sustained buying by foreign investors.

Currencies

The yen climbed to a five week high against the dollar on Thursday as a drop in Asian stocks raised concerns over recent optimism for the global economic recovery. This was compounded by reports that China was looking to curb further investment in those industries already suffering from overcapacity. This hit Asian shares, prompting haven demand for the yen. Analysts said falling U.S. government bond yields increased the attractiveness of assets denominated in the Japanese currency. Expectations that Japan’s ruling Liberal Democratic Party would lose its hold on power to the opposition Democratic Party of Japan (DPJ) in this weekend’s elections boosted the yen.

The pound has been the poorest performing large currency over the past few weeks. During this past week, sterling dropped to an 11 week low against the euro and a one month low against the dollar as investors worried about UK finances. The currency already had been undermined after the Bank of England expanded its quantitative easing program. Analysts said that the country would need tight fiscal policies to lower debt levels. On the week, the pound fell 1.1 percent, 1.3 percent against the euro and 1.9 percent against the yen.

Selected currencies — weekly results

Indicator scoreboard

EMU

July M3 money supply growth slipped 0.6 percentage points to 3.0 percent. The ECB's preferred 3-month moving average measure eased 0.7 percentage points to 3.4 percent or more than a full percentage point below its 4.5 percent reference rate. The latest deceleration reflected renewed weakness in private sector lending which was up 0.6 percent on the year after a 1.5 percent increase in June. Loans to households dried up completely, showing no change from a year ago and following a meager 0.2 percent gain last time. Within this, growth in lending for house purchases dropped to minus 0.2 percent from 0.1 percent. Lending to non-financial corporations similarly slowed markedly with its annual rate declining by 1.3 percentage points to just 1.6 percent. However, the ongoing deceleration in M3 has not been mirrored in the narrower M1 measure which has received a sizeable boost from near-zero interest rates and a clear preference for liquidity. Thus, annual growth in M1 jumped to 12.2 percent at the start of the quarter, up nearly 3 percentage points from its June pace.

EU

August economic sentiment climbed sharply to 80.6 from 76.0 in June. It was the fifth month in a row that sentiment has improved and is at its highest reading since October last year. The latest increase was led by services where morale gained 7 points to minus 11. Industrial confidence was also up a respectable 4 points to minus 26 but both consumer and construction sector sentiment gained just 1 point to minus 22 and minus 32 respectively. Moreover, retail saw morale edge a notch lower to minus 14. The improvement in overall sentiment was widespread and particularly marked in Germany (up nearly 5 points to 85.9). Italy registered a 3.8 point advance to 87.5 and Spain rose almost 3 points to 81.9. Data for France was not available.

Germany

Second quarter gross domestic product was up 0.3 percent and down 5.9 percent unchanged from the flash estimate. Private consumption was up 0.7 percent and up 1.2 percent on the year. Total investment was up 0.8 percent even though equipment spending dropped 0.5 percent. Construction activity jumped 1.4 percent while government consumption was up 0.4 percent. Total domestic demand still fell 1.3 percent. Exports declined 1.2 percent from the first quarter but imports fell even more sharply, down 5.1 percent. As a result, net exports added a sizeable 1.6 percentage points to second quarter growth.

August Ifo business sentiment index climbed to 90.5 from 87.4 in July and the highest since September 2008. Current conditions rose to 86.1 while expectations were up to 95.0. All sectors saw morale improve led by wholesale (up 7.9 points to minus 14.6). Confidence in manufacturing (up 7.7 points to minus 22.0) also jumped sharply and there were respectable gains in services (4.4 points to 1.4) and retail (2.8 points to minus 15.0). Construction lagged a little behind with a more modest rise (1.3 points to minus 25.3).

United Kingdom

Second quarter gross domestic product was revised upward to a contraction of 0.7 percent from the originally reported 0.8 percent. On the year the contraction was also revised upward to a decline of 5.5 percent from 5.6 percent. The goods producing sector declined 0.6 percent rather than the drop of 0.7 percent originally reported. Manufacturing was down 0.2 percent. The service sector was unrevised at a decline of 0.6 percent. Gross fixed capital formation sank 4.5 percent while consumer spending was down 0.7 percent. Government consumption was up 0.8 percent from the first quarter but with business inventories again being unwound aggressively, total domestic expenditure dropped 0.9 percent. Net foreign trade provided the only other area of support with exports down 3.1 percent and falling somewhat less than imports 3.4 percent to provide a combined contribution worth 0.2 percentage points.

Asia/Pacific

Japan

July unadjusted merchandise trade surplus was ¥380.2 billion, up from ¥81.9 billion in the same month a year ago. On the year, exports were down 36.5 percent but imports dropped by 40.8 percent. Exports were down for the 10th month in a row while imports dropped for the ninth. Exports continue to be down with all major trading partners. They were down 39.5 percent with the U.S., dropped 45.8 percent with the EU and declined 29.9 percent with Asia. Exports to the U.S. are now down for 23 consecutive months and down 12 months with the EU and nine with Asia. On a seasonally adjusted basis, the trade surplus was up for the fourth month and was ¥194.5 billion. Exports were down 1.3 percent when compared with June while imports were up 3.0 percent.

July unemployment rate soared to 5.7 percent from 5.4 percent in June and above analysts’ estimates of 5.5 percent. The unemployment rate in July 2008 was just 4 percent. The number of employed dropped by 1.36 million or 2.1 percent on the year while the number of unemployed jumped by 1.03 million or 40.2 percent on the year. The labor force participation rate declined by 0.3 percentage points to 60 percent while the employment rate sank by 1.3 percent to 56.7 percent.

July national consumer price index was down 0.3 percent on the month and sank 2.2 percent when compared with last year. Core CPI which excludes fresh food but includes energy costs edged down 0.1 percent on the month but sank 2.2 percent on the year. This was its straight annual decline as the costs of gasoline, heating oil and overseas holiday tours continued to plunge from year earlier levels. This was a record decline after sinking 1.7 percent in June. Although retail gasoline prices have been edging up recently, they are still lower than the record highs of a year ago. The core which excludes both food and energy was down 0.3 percent on the month and 0.9 percent on the year.

July household spending by two or more person households dropped 2 percent from the previous year. Spending was down for most categories. The largest decline was for clothing & footwear which dropped 12.7 percent followed by housing which sank by 7.3 percent. Education dropped 6.6 percent while medical care sank 2.9 percent. However, spending on fuel, light & water was up 2.7 percent while transportation & communication gained 1.1 percent.

Americas

Canada

June retail sales were up 1 percent but were down 4.4 percent when compared with last year. Excluding autos, sales were up 1 percent and down 3.6 percent on the year. However, the monthly gain in large part reflected higher gasoline prices as volumes were up a much more modest 0.4 percent. Autos were particularly robust, posting an overall rise of 2.1 percent on the month as a 4.7 percent leap in gasoline purchases dominated a limited 0.4 percent advance in new car sales. Sales were also up in food & beverage stores (1.3 percent), furniture & electronics (0.6 percent) and pharmacies & personal care (0.8 percent). Although clothing & accessories edged up 0.1 percent, building & outdoor supplies and general merchandise stores both were down 0.6 percent.

July industrial product prices were down 0.5 percent and sank 6.9 percent when compared with last year. In contrast to June, exchange rate effects in July were minimal, subtracting just 0.1 percentage point off the monthly decline. The latest monthly drop was wholly attributable to sharply weaker prices for coal & petroleum products (down 0.5 percent) without which the headline index would have been unchanged from June and just 1.1 percent lower on the year. The only other category registering a decline of any real magnitude was fruit, vegetables & other food products where prices dropped 1.2 percent from June. On the upside, the steepest increase among the main areas was in lumber & related products (up 0.9 percent), ahead of primary metals (up 0.4 percent). Most other sectors saw gains of no more than 0.2 percent and several showed no rise at all. Raw material costs sank 3.8 percent, partially unwinding an unrevised 6.2 percent jump in June. Over the last twelve months, prices dropped some 34.4 percent, the steepest such decline since 1977. Mineral fuel prices once again dominated with 6.8 percent decline from June. Without this effect, the RMPI would have fallen just 0.8 percent on the month and dropped 10.6 percent on the year. Apart from vegetable products (down 4.9 percent), other sectors were broadly stable with no monthly decline in excess of 0.2 percent and no rise above 0.2 percent.

Bottom line

The big news this week was Fed Chairman Ben Bernanke’s reappointment. The timing of the announcement took investors by surprise. Economic data were mixed with overall sentiment improving especially in Europe.

Both the Reserve Bank of Australia and the European Central Bank are expected to leave their policy interest rates at 3 percent and 1 percent respectively this week. There also will be new economic data on the health of the manufacturing sector which is expected to be on the upside while new unemployment data will depress. And of course, on Friday the U.S. will release its latest employment report. And in Japan, investors and business will be paying keen attention to Sunday’s (August 30) election results.

Looking Ahead: August 31 through September 4, 2009

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