Global Markets

Investor nerves were evident last week as equities zigged and zagged on earnings news and new economic information. While earnings by and large surprised on the positive side, economic data were mixed. The dollar continued to tumble when U.S. equities were up and to rise when equities declined. And as the week wore on, investors showed signs of an onset of earnings fatigue after the deluge of reports.

China released a slew of new economic data including third quarter gross domestic product, consumer and producer prices and industrial production that showed the economy bouncing back — but mainly on the heels of the government’s stimulus packages. And in Europe, the German Ifo index was up once again, but not as much as analysts expected while UK gross domestic product for the third quarter dropped, shocking analysts who were expecting the economy to grow. And weak UK retail sales highlighted a concern among investors that while industrial groups in developed economies have seen a rebound, consumer products companies are still struggling to improve revenues.

On the week, stocks were down in North America and in Europe while the picture was mixed in the Asia/Pacific region. Stocks were up in the UK. Among those equities that were up in Asia/Pacific included Japan, Australia, Hong Kong, Singapore and Shanghai.

Global Stock Market Recap

Europe and the UK

The major impetus deciding the trading direction of equities continued to be earnings — with help from a few important economic indicators. Earning optimism got the week off to a robust start on Monday, but investor enthusiasm ebbed as the week wore on. On the week, the FTSE was up 1 percent while the DAX and CAC ebbed down 0.1 percent and 0.5 percent respectively.

The FTSE was up despite disappointing retail sales and gross domestic product data. However, both the DAX and CAC were down as gains from earlier in the week turned into losses thanks to Friday’s morning declines in the Dow, Nasdaq and S&P 500.

And on Friday, the FTSE soared over 90 points until it was dragged down by the sour mood across the pond. The index appeared to ignore the disappointing GDP results when the data did not live up to expectations showing that the UK remained mired in recession to confound expectations. It was the sixth consecutive quarter of recession, making it the longest on record. It was the pound sterling that felt the pressure from the disappointing data. But with multinationals making up a major chunk of the FTSE 100 component companies, a weaker pound should be favorable to them. An increase in UK exports was used as a justification for the index being unmoved by the data. Most analysts agreed that it would be an understatement to say the GDP data disappointed. Despite the large amounts of money having been pumped into the UK economy, the recovery appears to be a long and drawn out process.

Bank of England minutes

The Bank of England’s monetary policy committee left its key interest rate at 0.5 percent and left unchanged the amount of money it is pumping into the economy until November when it will issue its latest Inflation Report. Although differences of opinion existed among the MPC on the likely strength of the recovery, all nine members decided to wait until the Bank’s next quarterly forecast to take a view on monetary policy. The MPC “agreed that recent developments were not sufficiently compelling to justify revising the target level of asset purchases that had been agreed at the August meeting or to change the level of Bank Rate at this meeting”, the minutes said.

The Bank will complete its £175 billion program of money creation and asset purchases ahead of its next meeting on November 5. At that time, the MPC will have the Bank’s latest growth and inflation forecasts and will have to consider these along with the latest evidence on how effective quantitative easing has been in reviving the economy. The MPC said that quantitative easing was having the sort of impact on raising asset prices that it had expected when it started the program in March, but the minutes showed much less certainty about the effect of money injections on spending in the economy. Last week’s data which showed slumping retail sales along with a surprise contraction in third quarter GDP will certainly provide negative input to the QE equation.

Asia/Pacific

After an exuberant start of the week, investor enthusiasm waned and equities ended the week on a mixed note as they took their cues from U.S. stock trading. With little new regional economic data outside of China, investors were fully focused on the slew of third quarter earnings reports that were released during the week.

Equities in Japan edged up on the week, with the Nikkei up 0.2 percent and the Topix up a meager 0.1 percent. On Friday, most of the stocks which gained in early trade declined in late trading as traders preferred to lock in gains and move to the sidelines ahead of key earnings from Japanese companies beginning this week. Also weighing on equities was the possibility that the Bank of Japan may end its corporate funding programs on December 31 when they are slated to expire. Recent improvements in the financial market conditions have strengthened this speculation.

And in Hong Kong where concerns about a real estate bubble abound, the Hang Seng continued to climb, gaining 3 percent on the week. The index was boosted by positive U.S. earnings which have revived hopes that the U.S. economy is on the mend. However, the Sensex recorded the largest weekly loss — down 3 percent — as investors there ignored strong global markets and better than expected earnings.

The Shanghai Composite was up 4.4 percent thanks to the slew of favorable economic data. However, the path was not straight north — rather investors sold mid-week on concerns inflationary pressures and possible monetary tightening may derail economic recovery despite assurances that the stimulus packages would continue. China's annual GDP was up 8.9 percent in the third quarter from 7.9 percent in the previous quarter. Deflation eased in September, with consumer prices falling only 0.8 percent from a year earlier as against the 1.2 percent drop in August.

Reserve Bank of Australia

The October meeting minutes contain the reasons why the reserve bank board felt it necessary to raise their key monetary policy interest rate to 3.25 percent and become the first major central bank to increase rates. They said that recent information showed that the outlook both domestically and globally continued to improve. The domestic economy had been noticeably stronger than had been expected earlier and growth forecasts were being revised up. However, they also said that the risks to waiting to move had increased. The inflation trough was higher than expected and continued low rates could threaten their inflation target (2 to 3 percent) in the medium term. And the expansionary policy could cause imbalances in the economy. In short the very expansionary policy was no longer necessary or prudent.

Canada

As expected, the Bank left its key interest rate at 0.25 percent where it has been since April. And they reiterated once again that the Bank expected to keep interest rates at that level through the first half of 2010. Inflation remains benign — in September, the Bank's preferred measure of the CPI (excluding 8 volatile items) was up 0.3 percent on the month and 1.5 percent on the year. The Bank has an inflation target range of 1 percent to 3 percent and focuses on the midpoint. The Bank has previously said that maintaining its rock bottom rate depended on the inflation outlook. Now they do not expect inflation to return to 2 percent until sometime in 2011. BoC governor Mark Carney has stated frequently that it is not the time to back off stimulus. Canada's export sector which is dependent on the U.S. has been hit hard by the rising Canadian dollar against its U.S. counterpart.

There is concern that the rising C$ could drag down Canada's nascent recovery. Indeed, the Bank signaled enhanced concern about the Canadian dollar's strength saying that it is slowing and offsetting growth. The currency last traded at parity with U.S. dollar in July 2008. A Canadian dollar trading above parity may be more painful to the economy now than two years ago. At that time, oil prices were closer to $100 a barrel and commodity prices in general were a lot stronger and U.S. demand was a lot healthier.

In its Monetary Policy Report, which was released on Thursday, the Bank of Canada said that the stronger currency will keep inflation below its 2 percent target for almost two years and hinder the recovery from the first recession since 1992. Carney reiterated that the Bank had a number of “tools” at its disposal to conduct monetary policy and retains considerable flexibility. Carney said the strength of the Canadian dollar “is the major downside risk” to the economic recovery and repeated “intervention is always an option.” Consumer prices will advance 1 percent on the year this quarter after falling 0.9 percent in the third quarter as the effects of a drop in energy prices recede. He also said that the Bank’s central focus continues to be inflation and not intervening to influence the Canadian currency.

Currencies

Once again the U.S. dollar was down against most major currencies with the exception of the yen and Canadian dollar. During the week, the dollar fell through $1.50 against the euro for the first time in 14 months as optimism over prospects for global growth stemmed haven demand. The euro’s all time high or dollar’s all time low — just a shade under $1.60 — was reached on April 22, 2008. One of the reasons given by analysts for the dollar’s decline was the prospect of a prolonged period of ultra-low interest rates which was encouraging investors, who are seeking risk once again, to abandon the currency in favor of higher yields elsewhere. This has made the dollar the funding currency of choice for carry trades in which low yielding currencies are sold to finance the purchase of higher yielding assets. And the strong start to the third quarter corporate earnings season, particularly in the banking sector, helped to underpin investor confidence.

Sterling swooned Friday against both the U.S. dollar and euro after GDP data showed that the UK economy was still mired in recession for the sixth quarter. The currency had been rising earlier in the week as investors anticipated that third quarter growth would be positive. The contraction raised the likelihood that the Bank of England would expand its £175 billion quantitative easing program after its monetary policy committee meeting on November 5. The pound sterling’s weakness is helping to boost exports. Manufacturers, according to the CBI, are at their most optimistic in 14 years about the sales of goods abroad thanks to the weakening currency.

The yen continued to decline as investors’ risk appetite increases — it was down against both the dollar and euro last week. And the Canadian dollar was down against its U.S. counterpart after the Bank of Canada said the economic recovery in Canada since July could be “more than fully offset” by the currency’s recent strength which effectively squashed speculation for any early interest rate increase from the BoC.

Selected currencies — weekly results

Indicator scoreboard

Germany

September producer prices dropped 0.5 percent and were down 7.6 percent when compared with last year. A 1.7 percent monthly drop in energy prices was the driving force behind the latest decline, excluding which the headline index would have been unchanged from August and 3.3 percent weaker on the year. Among the other sectors, prices of basics were up 0.3 percent on the months but there were fresh declines in consumer goods (0.2 percent) and capital goods (0.1 percent).

October Ifo climbed to 91.9 from September’s reading of 91.3. Current conditions were little changed, up just 0.2 points at 87.3 while expectations rose 1.1 points to 96.8. At a sector level the performances were very mixed. On the optimistic side, the manufacturing climate index was up more than 3 points to minus 16.7 and sentiment in wholesale climbed 1.2 points to minus 10.9. Morale in construction also crept 0.5 points higher to minus 25.2. However, retail sentiment dropped nearly 5 points to minus 17.3 and confidence in services slipped 1.4 points to 2.4, its first decline since March. Price expectations remain firmly anchored in negative territory and underline the fact that inflation at this time is simply not an issue. However, in line with similar comments from other European businesses, Ifo signaled that a euro level above US$1.50 could damage German industry.

France

September purchases of manufactured goods soared by 2.3 percent after declines in both July and August. Purchases were up 1 percent on the year. Almost half of the surge in demand last month was attributable to the auto sector, up 10.2 percent, which followed monthly declines of 2.9 percent and 1.2 percent in July and August respectively. Excluding autos sales advanced 1.2 percent. Textiles also fared well with a 2.9 percent increase although this failed to offset a 3.6 percent nosedive in August. There were also much smaller increases in household goods (0.2 percent) and in the other products area (0.3 percent).

Italy

August retail sales were down 0.1 percent and are 2.9 percent lower than a year ago. Food sales edged down 0.1 percent while non-food sales were unchanged with both down 2.8 percent on the year. Over the first eight months of 2009, food sales were 1.8 percent lower than in the same period of last year while the non-food sector was off 2.3 percent. Total retail sales were 2.2 percent weaker. In August, the only category to register positive annual growth was pharmaceuticals (0.2 percent). All other areas saw hefty declines with computer & telecommunications (5.0 percent), clothing & footwear (3.6 percent) and hardware & household items (3.3 percent) especially soft.

United Kingdom

September retail sales were unchanged on the month and were up 2.4 percent when compared with last year. On the month, non-food purchases were unchanged as gains in non-specialized (0.5 percent), household goods (0.3 percent) and the other stores sector (0.1 percent) were offset by weaker clothing & footwear demand (minus 0.5 percent). Non-store retailing performed well with a 0.9 percent monthly increase and an 11.7 percent annual gain. Over the quarter, total volumes were up 0.9 percent.

Preliminary third quarter gross domestic product contracted for the sixth consecutive quarter, dropping 0.4 percent and down 5.2 percent when compared with the same quarter a year ago. The latest quarterly drop in total output was led by the goods-producing sector where a 0.7 percent decline was largely attributable to a 3.5 percent slump in the highly erratic mining & quarrying industries. Electricity, gas & water dropped 0.6 percent. However output in the more important manufacturing sector edged down only 0.2 percent. Agriculture was off a hefty 1.6 percent. The weakness in goods production was mirrored to some degree in services where activity contracted a further 0.2 percent. Distribution, hotels & catering (minus 1.0 percent) led the way here with help from transport, storage & communications (minus 0.3 percent) and business services & finance (minus 0.1 percent). Even the government contribution was zero.

Asia/Pacific

Japan

August tertiary index was up for the third consecutive month. On the month the index was up 0.3 percent but was down 4.2 percent on the year. Scientific research, professional and technical services were up 5.9 percent for the biggest gain on the month. Other groups that were up included finance & insurance (1.9 percent), medical, health care & welfare (0.7 percent), real estate & goods rental & leasing (0.5 percent, transport & postal activities (0.5 percent), learning support (0.9 percent) and compound services (2.8 percent). Three groups were down, including wholesale & retail trade (down 0.9 percent), miscellaneous services (down 2.4 percent) and information & communications (down 1.4 percent). Also down were accommodations, eating & drinking services (down 2 percent) and electricity, gas, heat supply & water (down 0.9 percent) and living related & personal services (down 0.1 percent).

September unadjusted merchandise trade surplus was Y520.6 billion and larger than anticipated by analysts. On the year, exports were down 30.7 percent but imports sank even more – they were down 36.9 percent. Exports to the U.S., which have now declined for 25 consecutive months, dropped 34.1 percent while imports from the U.S. were down 34.3 percent. Exports to the EU are now down for 14 months. They dropped 38.6 percent on the year while imports were down 22.9 percent. Exports to Asia, down 12 months, dropped 22.2 percent while imports were off 29.1 percent on the year. On a seasonally adjusted basis, the trade surplus was Y58.6 billion. Exports edged down by 0.8 percent on the month while imports were up 1.9 percent.

China

Third quarter gross domestic product expanded 8.9 percent when compared with last year. This was the fastest pace since the third quarter of 2008 when GDP was up 9 percent. Over the first nine months, the economy grew 7.7 per cent. Of that, investment accounted for 7.3 percentage points and consumption 4 percentage points. The decline in net exports lopped off 3.6 percentage points. In the release, the National Bureau of Statistics said that “the basis of the economic recovery still needs consolidating while the insufficiency of external demand remains severe.”

Other key economic data were released at the same time. September industrial production was up 13.9 percent on the year after gaining 12.3 percent in August. For the first nine months, output was up 8.7 percent on the year. September consumer price index was down 0.8 percent on the year while producer prices sank by 6.5 percent. On the plus side, retail sales jumped by 15.1 percent on the year.

Americas

Canada

August retail sales rebounded by 0.8 percent after plunging 0.5 percent in July. On the year, sales are down 3.7 percent. Volume sales rose 0.4 percent from July. Excluding autos sales were up 0.5 percent on the month but down 3.8 percent on the year. The monthly headline gain was prompted by a 2.2 percent jump in new car sales and a 3.9 percent leap in gasoline purchases. Overall the auto sector was up 2.4 percent on the month. The only decline in sales occurred at general stores (0.4 percent) although furniture & related items as well as pharmacies & personal care were unchanged. The other major categories saw generally modest gains with building & outdoor home supplies, up 0.5 percent, leading the way. Food & beverage purchases edged up 0.1 percent while sales of clothing & accessories gained 0.2 percent.

Bottom line

Economic data were mixed last week. The major disappointment was UK third quarter gross domestic product data. Investors instead focused on the inundation of earnings reports that were mostly better than expected.

Next week, the Bank of Japan holds a one day meeting at week’s end while the spate of new economic data will hopefully provide further illumination of global growth.

Looking Ahead: October 26 through October 30, 2009

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