Global Markets

There were a number of events last week that sent investors retreating to safe havens.

• China provoked growth jitters as they began to apply brakes to the burgeoning economy. The slew of economic data released last week confirmed that the economy could be in danger of overheating and Tuesday’s statement indicated the onset of the government’s process of unwinding its current easy monetary and fiscal policies.
• Economic data elsewhere at best were mixed with retail sales in both Canada and the UK below expectations and disappointing investors.
• Earning reports were mixed.
• Thursday’s announcement by U.S. President Barack Obama said that he intended to propose new bank regulations that called for a limit on risk taking by deposit-taking banks. The president said he wanted to end the mentality of too big to fail in the financial markets.
• Some analysts said that equities were overdue for a correction.

All equity indexes followed here were down last week with the exception of the Malaysian KLCI, which managed to edge upward by 0.1 percent. Declines ranged from 4.3 percent for the Hang Seng and SET to 1 percent for the Kospi.

Global Stock Market Recap

Europe and the UK

After a positive start to the week, stocks stumbled on Wednesday on the news from China. Officials there indicated that they would begin to unwind some of the stimulus introduced last year and began to tighten credit. Stocks slumped Thursday, as mounting concerns that further monetary policy tightening in China would weaken demand sank the mining sector. And trepidations ahead of the U.S. announcement of plans to curb trading activities of too big to fail banks outweighed surprisingly strong earnings from banking giant Goldman Sachs Group.

Although Thursday’s announcement by U.S. President Obama about proposed new bank regulations occurred after markets were closed here, equities went into reverse after U.S. stocks tumbled in response to speculation on the announcement. And with a paucity of new economic data on Friday, investors continued to grumble about the prospective U.S. move and retreated for a third day. And in Germany, not even a major upward revision to recently announced manufacturing orders could make a dent in investors’ desire to sell. November orders were revised from the originally estimated increase of 0.2 percent, which clearly had disappointed to a jump of 2.8 percent.

On the week, the FTSE, DAX and CAC were down 2.8 percent, 3.1 percent and 3.4 percent respectively.

Asia/Pacific

Only stocks in Malaysia managed to eke out a gain last week as equity indexes followed here swooned. The week began with stocks declining thanks to lower commodity prices amid concerns about profits at U.S banks and weaker than expected U.S. consumer sentiment data (released on January 12 when Asian markets were closed for the week). And political uncertainty in Japan along with caution ahead of earnings results also contributed to the weakness. In mid-week, investors reacted negatively to moves by China to slow bank lending. At week’s end, traders fretted over the impact of the new banking restrictions proposed by U.S. President Barack Obama. Worries about the fragile economic recovery remain on the backburner.

Australian equities and especially commodity stocks were down a hefty 3.2 percent as commodity prices slipped on concerns about Chinese policy actions to cool economic growth. As if China was not enough, equities here fell sharply on concern that the government may raise taxes on mining projects. According to a Sydney newspaper, Australia’s tax system may recommend taxing mining projects in the same way as energy projects. The so-called resource rent tax would not be levied until exploration and development costs were paid and would only take effect when the project made a profit.

The Hang Seng was hard hit by both Chinese and U.S policy moves and ended the week down by 4.3 percent. Investors retreated from higher-yielding assets after China’s fourth quarter 10.7 percent growth ignited concerns borrowing costs would be raised. Bank and property stocks were particularly hard hit.

China

China began to tap the brakes to slow bank lending in a series of moves designed to fend off inflation and prevent bubbles in the stock and property markets. Equities in China and Hong Kong dropped on the news. A huge government stimulus package worth 4 trillion renminbi, combined with easy credit, helped China ward off a sharp economic slowdown last year. Recently, in another action to dampen bank lending, the People’s Bank of China ordered state owned banks to set aside a bigger share of their deposits as a reserve against failed loans. The PBoC also edged up its rate on an often watched interbank loan earlier this month after keeping it steady for five months and at the same time raised the rate on its one-year bills.

Fourth quarter gross domestic product was up 10.7 percent when compared with last year. up from 9.1 percent growth in the third quarter. Growth for 2009 as a whole was 8.7 percent, down from 2008's 9.6 percent.

A slew of other data were released Thursday (local time) as well. December's industrial production dipped to 18.5 percent growth on the year from November's 19.2 percent, but remained at a high level in historical perspective. December consumer prices surprised on the upside with a 1.9 percent increase on the year, up from 0.6 percent in November. The increase was blamed on higher food prices as a result of severe winter weather in northern China. Producer prices were up 1.7 percent on the year after sinking 2.1 percent in November. And fixed asset investment was up 24.1 percent, virtually unchanged from November’s 24.3 percent increase as real estate investment growth moderated on policy measures aimed at constraining rapid rises in house prices. Nominal retail sales were up 17.5 percent, but real retail sales were up 15.6 percent as there was some evidence of a broad based recovery in consumption.

Canada

As expected, the Bank of Canada left its key interest rate at a record low of 0.25 percent where it has been since April 2009. At the same time, the Bank reiterated its commitment to hold rates at that level until the end of the second quarter as the ever appreciating Canadian currency threatens to hamper the economic recovery. The Bank, with an inflation target range of 1 percent to 3 percent which focuses on the 2 percent mid-point, has seen inflation remain under control. And BoC governor Mark Carney has said the economy will operate with slack through the middle of 2011. Exports have been hurt by gain against its U.S. counterpart in the past year.

On Thursday, the Bank released its quarterly Monetary Policy Report. Governor Carney said that there are few revisions of note to its previous report in the October MPR. The real economy is now estimated to have expanded by an (unrevised) annualized 3.3 percent rate in the quarter just ended and is expected to accelerate to 3.5 percent in the current quarter. Growth is expected to peak at 4.3 percent in the second quarter before slowing steadily towards 2.2 percent by the end of next year. Inflation is expected to remain around the Bank’s 2 percent target mid-point.

Currencies

Although the dollar lost ground on Friday, it was up against most major currencies for the week. The euro was pressured by the unfolding fiscal difficulties of four EMU members — Portugal, Ireland, Greece and Spain. There are worries that Greece will fail to contain its budget deficit within the European Union’s limits and as a result diminish the appeal of the EMU’s assets. The euro did receive some good news Friday however. November manufacturing orders for Germany were revised upward by a substantial margin — the previous initial estimate of a 0.2 percent increase on the month was revised to 2.8 percent!

The dollar softened as investors reassessed their positions in the wake of President Obama’s announcement to introduce legislation to curtail certain bank trading activities. Greece’s announcement that it would soon issue a five-year Eurobond in order to raise cash initially sent the euro lower. But the currency was able to recoup losses later in the day as investors became more negative about the dollar and speculated that Obama’s proposal to rein in trading by financial institutions would reduce investment in U.S. assets.

The yen was up against all of its most-traded counterparts as a drop in global stocks on the White House’s plan to limit risk taking and concern China will slow economic growth discouraged demand for higher-yielding assets. The yen was up for a second straight weekly gain against the euro.

Selected currencies — weekly results

Indicator scoreboard

Germany

January ZEW current conditions index improved to minus 56.6, still a strongly negative reading. Expectations edged downward for the fourth month in a row to 47.2 and the lowest level since June 2009. ZEW sees the recovery being delivered at only a sluggish pace and expressed major reservations about the consumer sector. In particular, auto demand is seen declining on the back of the withdrawal of government support measures which clearly had a major positive impact last year. The German economy would be expected to benefit more than most from a pick-up in global demand but inevitably a weak domestic household sector would be a serious threat.

December producer prices edged down 0.1 percent and were down 5.2 percent on the year — the 10th month in a row that the annual PPI rate has been negative. Most categories were unchanged on the month. Energy prices were down 0.2 percent. Excluding this sector, the PPI inched up 0.1 percent but the annual core rate was down 1.7 percent.

United Kingdom

December consumer prices jumped 0.6 percent on the month and soared to 2.9 percent when compared with last year. The spike in the 12-month rate takes the CPI well above its 2 percent target mid-point and to its highest level in nine months. In part this reflects the impact of the cut in VAT in December 2008 which was largely responsible for a 0.4 percent monthly decline in the headline index that month. The monthly gain was mainly due to higher energy costs which helped to drive up transportation costs by 2.2 percent. This pace was matched in furniture & household equipment too. Food & non-alcoholic drinks prices were also firm, up 1.0 percent from November. However clothing & footwear prices were down 1.3 percent. Core CPI climbed a hefty 0.6 percent from November for an annual rate of 2.8 percent. This was up 0.9 percentage points from last time and a new high for the series that began in 1997.

December claimant count unemployment declined by 15,200. The claimant count unemployment rate remained at 5.0 percent. For the three months to November, the ILO unemployment was also down, dropping by 7,800, its first decline since March through May 2008. The unemployment rate was 7.8 percent and down from 7.9 percent for the prior three months. November average earnings growth edged up to 1.6 percent in November. Excluding bonuses the headline rate slipped from 1.7 percent to 1.6 percent suggesting that underlying pay settlements continue very soft.

December retail sales edged up 0.3 percent and are 2.1 percent higher on the year. The meager gain surprised in the wake of both the bad weather which supposedly boosted sales of clothing (down 0.1 percent on the month) and food (up 0.3 percent) and the anticipated early buying to beat the impending VAT hike this month. The best performing sector was non-store retailing where demand climbed 2.8 percent on the month. Sales in the other stores category were up 0.7 percent and purchases of household goods climbed 0.5 percent. However, non-specialized stores slumped a hefty 1.0 percent. Cash sales were up almost 1 percent on the month. At the same time, annual growth in the retail sales deflator jumped from minus 0.6 percent to 1.2 percent, its fastest pace since March and its first positive reading since May 2009.

Asia/Pacific

Japan

November tertiary index was down 0.2 percent after increasing a revised 0.4 percent in October. On the year, the index dropped 3.2 percent for the 16th consecutive decline in a row. Wholesales and retail trade dropped 0.7 percent on the month while accommodations, eating & drinking services sank 2.4 percent. Scientific research, professional & technical services was down 1.3 percent while both medical, health care & welfare and information & communications were down 0.6 percent. Miscellaneous services were up 2.1 percent while electricity, gas, heat supply & water was up 1.5 percent. Living-related & personal services & amusement services were up 1.0 percent while real estate & goods rental & leasing was up 0.5 percent.

Americas

Canada

December consumer price index was down 0.3 percent but up 1.3 percent when compared with last year. Gasoline prices dominated the increase in the annual rate (up 25.6 percent after 14.1 percent last time) with neither core CPI measure matching the headline performance. Excluding food and energy, prices dropped 0.4 percent on the month, shaving 0.2 percentage points off the 12-month rate to 0.6 percent. At the same time, the Bank of Canada’s preferred measure was down 0.3 percent and was up 1.5 percent on the year, unchanged from November. Much of the monthly decline in the overall CPI was due to seasonal factors as the seasonally adjusted index edged just 0.1 percent lower. Within this there were especially large declines in the price of clothing & footwear (down 1.3 percent) and household operations, furnishing & equipment (down 0.8 percent).

November manufacturing sales edged up 0.1 percent and were down 10 percent on the year. Volume sales were even weaker, sinking 0.8 percent on the month. This was the first decline in three months and put real shipments 8.4 percent lower on the year. The minor gain in nominal sales was attributable to nondurables which posted a 1.0 percent monthly advance. Within this, chemical products were up 5.3 percent. Petroleum & coal products climbed a very respectable 2.9 percent but this was due to higher prices, up 4.7 percent. Increases in these areas were almost offset by the transportation sector where sales were down 4.3 percent on the month, mainly due to a 15.4 percent slump in aerospace products & parts following its surge in excess of 48 percent in October. Motor vehicle sales were also down 4.5 percent after back-to-back gains in September and October. New orders were up a solid 3.2 percent on the month but unfilled orders were off a further 1.4 percent.

November retail sales slumped 0.3 percent but were up 1.2 percent on the year. The monthly decline would have been much steeper but for the support afforded by higher prices. Hence, volumes sales were down 1.0 percent for their first monthly drop since April 2009. Purchases dropped in five of the eight main retail sectors. Clothing & accessories (down 3.6 percent) were especially weak dropping the most since September 2002. General merchandise stores declined 2.8 percent and dropped 0.5 percent at miscellaneous retailers. By comparison, the automotive sector was relatively firm with higher gasoline prices limiting the fall in purchases to 0.2 percent. However, this masked a 2.2 percent drop in new car sales. The best performers were furniture, home furnishings & electronics (up 1.1 percent) and building & outdoor home supplies (up 1.1 percent).  Food & drink sales were up 0.9 percent.

Bottom line

Economic data were mixed with retail sales in both Canada and the UK weaker than expected. Housing data from the U.S. disappointed as well. However, an unexpected revision to German manufacturing orders painted a very different picture of the sector’s strength. News from China dampened growth expectations in that country as well as in resource supplying countries such as Australia and Canada as the country began to tap the brake and remove stimulus. Proposed new banking legislation in U.S. sent investors into a tailspin.

Both the Bank of Japan and the Federal Reserve hold policy meetings this week. While no policy interest rate changes are expected with both at virtually zero, BoJ watchers will be looking for measures to combat the deepening deflation that is once again gripping the nation. FOMC watchers will be looking for signals of quantitative easing withdrawal.

Looking Ahead: January 25 through January 29, 2010

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