Global Markets

Numerous cross currents gave investors a lot to think about last week — and the issues were global in character.

• The weather dominated headlines as the week began. Snow in the U.S. paralyzed the East Coast, closed the U.S. federal government for four days and postponed several economic data releases to the frustration of traders.
• And in Europe, members of the European Union continued to vacillate over the support they would give Greece to help it survive its fiscal malaise. And news that European leaders had agreed to a ‘deal’ left markets bewildered Thursday thanks to the lack of specifics about the plan.
• Friday’s flash fourth quarter growth data from the eurozone was dismal with only France of the big four showing any growth in the fourth quarter.
• And after Asian markets closed Friday, the People’s Bank of China announced its second increase in bank reserve requirements in a month. This sent European equities (and those in the U.S.) downward on fears about the impact of monetary tightening on global growth.

However, for the week, all indexes followed here had gains ranging from less than 0.1 percent for the Topix to 3.3 percent for the PSEi. Both the Hang Seng and Taiex were up 3.1 percent for the week in pre-holiday trading. 

Global Stock Market Recap

Europe and the UK

Traders in Europe and the UK were focused for most of the week on the evolving Greek drama — what would the EU say (or do) to help contain the country’s fiscal damage. Despite this, stocks were up for the week.

On Friday, after markets closed in Asia, the People’s Bank of China’s announced that it was increasing bank reserves by 50 basis points which dragged equities down. Investors reacted negatively as they did on January 12 when the Bank initially raised its reserve requirement — investors were concerned then that tighter lending in China would slow the global economic recovery.

After the EU’s verbal assurances of support to Greece, stocks, bonds and the euro vacillated as traders tried to decide whether they were relieved that the EU stood ready to support Greece if required. But they were disappointed by a lack of concrete proposals or financial aid. More information is expected on Monday and Tuesday when eurozone and EU finance ministers meet (ECOFIN).

Friday’s GDP announcements showed that eurozone growth is very weak — and in some cases nonexistent. Only France of the four major countries managed to grow, at a respectable 0.6 percent in the fourth quarter. Analysts were shocked that Germany did not grow while in Italy, the economy once again contracted after only one quarter of positive growth. And Spain continues to contract.

Sweden’s Riksbank

The Riksbank left its key interest rate unchanged at a record low of 0.25 percent but moved forward the possibility of an interest rate increase to the summer or early autumn. The Bank had previously indicated a move was unlikely before the autumn. The shift signals optimism that the recovery in the global economy will prove sustainable. This is despite renewed concerns over financial stability as Greece battles to contain its fiscal crisis. Sweden’s shift towards a more hawkish stance comes four months after Norway became the first Western European country to raise rates since the financial crisis. In addition to the brightening outlook for global growth, the Riksbank highlighted higher domestic inflation, stronger than expected employment and improved functioning of financial markets as among the reasons for its shift towards an earlier rate rise.

The ECB does not give any indication about likely interest rate moves more than a month in advance. Financial markets do not expect any increase in the ECB’s policy rate before the end of this year or later. And this morning’s fourth quarter GDP data would certainly support the ‘later’. Similarly, Bank of England interest rates are widely expected to be firmly on hold until late this year.

Asia/Pacific

After sinking the week before, Asian equities rebounded smartly last week on the pledge by the European Union to support Greece and on better than expected economic data (markets here were closed prior to the release of the very disappointing GDP data in Europe). All indexes followed here were up on the week with gains ranging from a gain of less than 0.1 percent for the Topix to 3.3 percent for the PSEi.

With many markets closed this week for the Lunar New Year, investors squared their positions before joining the celebration. After markets had closed, however, the Peoples Bank of China announced that they were lifting bank reserve requirements 50 basis points for the second time in a month effective on February 25. The current level is 16 percent for big banks and 14 percent for smaller ones. The goal is to avert asset bubbles and restrain inflation. The PBoC moved after Chinese markets closed and on the eve of the weeklong Lunar New Year holiday to welcome the Year of the Tiger.

In economic news, gains for Australian employment (Thursday local time) were more than triple that of market expectations. This immediately elevated expectations for another interest rate increase in March and sent the Australian dollar soaring. Employment has gained over 183,000 in the last five months. However, in a separate release earlier in the week, there were signs that the three interest rate increases have begun to bite. The number of home loans extended during December declined by a seasonally adjusted 5.5 percent while the number of loans extended to owner-occupied houses declined 2.3 percent for the month. The Reserve Bank of Australia had increased their policy rate to 3.75 percent by 25 basis point increments in October, November and December.

Currencies

The euro has been subject to mood swings as traders and analysts fretted first on whether there would be a plan to help Greece. Then later they dithered over the lack of clarity in the European Union’s much anticipated pledge to bail out the country. Greece’s fiscal woes have weighed on the euro, pulling it down to an eight-month low against the dollar during the past week. The euro declined after initially stabilizing after the EU pledged to support Greece but offered few details of any plan. The past few weeks have seen a shift out of the euro and into the dollar, motivated by worries over the ability of peripheral eurozone countries to finance their deficits, and the aversion to risk that it has brought with it.

Elsewhere, the Australian dollar surged higher after employment soared in January. The data heightened expectations in the money market that the Reserve Bank of Australia will increase interest rates at its policy meeting in March after having unexpectedly decided to keep them on hold in February. The country has added more than 183,000 jobs in just the last five months.

The pound sterling relinquished early gains Wednesday after the Bank of England’s quarterly Inflation Report painted a dour picture of the economy. The currency declined after the Bank cut its forecast for economic growth and said inflation would undershoot its 2 percent target significantly if interest rates climbed as fast as markets were predicting. The report led to speculation that interest rates here would be held at the current low 0.5 percent for longer than expected and that the Bank might restart the £200 billion asset purchase program, which it put on hold at its policy meeting on February 4^th. On the week however, the currency was up against the U.S. dollar and up against the euro.

Selected currencies — weekly results

Indicator scoreboard

EMU

December industrial production excluding construction collapsed by 1.7 percent and was down 4.9 percent on the year. Among the major sectors, output dropped 2.4 percent on the month in intermediates and 1.6 percent in capital goods. Declines here were only partially offset by gains in energy (2.1 percent), durable consumer goods (0.7 percent) and nondurable consumer goods (1.0 percent). Regionally the monthly headline slide was driven by Germany where production slumped a remarkable 2.6 percent, but there were hefty drops in Greece (2.0 percent) and Ireland (4.2 percent). French output was flat on the month and in Spain production was up 0.5 percent but Italy saw a renewed decline (0.7 percent).

Fourth quarter gross domestic product edged up 0.1 percent and was down 2.1 percent on the year. Details will have to wait until March 4 but it seems very likely that, on average, domestic demand underperformed once again. Regionally it was clearly a very mixed performance with France expanding at a relatively healthy 0.6 percent quarterly clip but Germany stagnating, Spain contracting 0.1 percent and Italy shrinking 0.2 percent. Eurozone growth received some help from its small member states, but weakness in three of the four big states is clearly worrisome.

Germany

December merchandise trade surplus narrowed to €16.7 billion from €17 billion in November. Exports were up 3.0 percent on the month while imports were up an even stronger 4.5 percent. However, on the year as a whole, both components shrank markedly with exports down 18.4 percent and imports off 17.2 percent. Given the importance of the foreign trade, a strong performance by the export community is vital to the health of the German economy.

Fourth quarter gross domestic product was unchanged on the quarter and down 2.4 percent on the year. For the year, GDP was down 2.2 percent. As usual the Federal Statistics Office provided few details with its flash estimate but it did indicate that an improvement in net exports was offset by fresh declines in consumption and investment. Once again it seems that private sector domestic demand is not pulling its weight in the recovery process.

France

December industrial production (excluding construction) edged down 0.1 percent on the month after gaining a downward revised 0.5 percent in November. Output was down 2.3 percent on the year. Manufacturing output slumped 0.8 percent, wiping out its November advance. The only areas to post any significant positive growth were food, where production rose 3.4 percent on the month and energy where output was up 5.3 percent. Otherwise there were declines across the board. Transport (down 4.7 percent) and electronics & machines (down 1.4 percent) were the weakest sub-sectors but output also was down in refining (0.4 percent) and in the other manufactured goods category (0.8 percent).

Fourth quarter gross domestic product was up 0.6 percent after rising 0.2 percent in the third quarter. On the year, GDP was down 0.3 percent. For the calendar year, GDP dropped by 2.2 percent. Although inventory accumulation added a rather large 0.9 percentage points to the quarterly growth, final domestic demand contributed 0.5 percentage points, up from minus 0.1 percent in the third quarter. Moreover, the key household sector saw spending advance 0.9 percent, a much healthier outcome than the meager 0.1 percent rise recorded previously. However, gross fixed capital formation disappointed with a 1.2 percent quarterly fall. This followed the third quarter's 1.4 percent contraction and reflected a 2.7 percent drop in the household sector, a 0.8 percent slide in businesses and a 0.2 percent dip in public administration. Export volumes rose 0.5 percent on the quarter but with imports jumping 3.3 percent, net exports subtracted 0.7 percentage points from quarterly GDP growth.

Italy

December industrial production dropped 0.7 percent and was down 5.6 percent from December 2008. For calendar 2009, industrial production slumped 17.5 percent after a 3.3 percent drop in the previous year. December's decline was due to monthly declines in the output of both capital goods (1.6 percent) and energy (0.2 percent). However, there were gains in both consumer goods (1.7 percent) and intermediates (1.2 percent).

Fourth quarter gross domestic product unexpectedly went into reverse and contracted by 0.2 percent following a respectable 0.6 percent quarterly advance in the previous period. The decline left overall output 2.8 percent lower on the year and a calendar year slide of 4.9 percent. As usual, no details of the flash estimate were provided but it is very probable that domestic demand disappointed once again.

United Kingdom

December merchandise trade deficit widened out to Stg7.3 billion from Stg6.8 billion in November. The worsening was due to a 5.2 percent jump in imports that more than offset an otherwise very respectable 4.5 percent gain in exports. The core trade deficit increased rather more sharply, up Stg0.8 billion to Stg6.9 billion. Regionally, the year-end deterioration reflected a worsening in net exports to the non-EU bloc where the bilateral red ink increased from Stg3.1 billion to Stg3.6 billion. The overall trade deficit with the EU was essentially unchanged at Stg3.7 billion. Despite the December deterioration, the calendar year shortfall narrowed to Stg81.9 billion from Stg93.4 billion in 2008. However, the decline was due to sharp contractions in both exports and imports, down a record 9.5 percent and 10.3 percent respectively.

December industrial production was up 0.5 percent while manufacturing jumped by 0.9 percent. However, previous steep losses ensured that the annual growth rates for both series remained firmly negative. Compared with a year ago, industrial production was down 3.6 percent while manufacturing output was 1.9 percent weaker. Utilities were up 4.2 percent but when combined, the increases more than offset a 5.0 percent contraction in mining & quarrying and a 5.5 percent decline in oil & gas extraction.

Asia/Pacific

Japan

January corporate goods price index dropped 2.1 percent for its 13th straight drop on the year. The index was up 0.3 percent on the month. On the year, petroleum & coal prices shot up by 24.2 percent after edging up just 0.5 percent in December. Nonferrous metals prices were also up a healthy 22.9 percent on the year. However, most other categories dropped with iron & steel prices down 17.3 percent while information & communications equipment dropped by 8.2 percent.

Australia

January employment jumped by a much greater than expected 52,700 jobs. It was the largest rise in employment since December 2006. At the same time, the unemployment rate dropped to 5.3 percent from 5.5 percent. The number of employed is now 10.966 million, seasonally adjusted. The increase was driven in part by part time employment, which was up by 36,900 persons to 3.314 million together with a smaller increase in full time employment, which was up 15,900 persons to 7.652 million. The number of unemployed decreased for the third month, down by 22,300 to 612,000. The participation rate was unchanged at 65.3 percent.

Americas

Canada

December merchandise trade deficit was C$0.25 billion after November’s C$0.20B shortfall. Exports were up 1.7 percent while imports were up 1.8 percent. The increase in exports, their fourth consecutive rise, was wholly attributable to volumes which were up 2.1 percent on the month. Real imports were up 1.1 percent. The bulk of the monthly gain in nominal exports was due to higher purchases from the U.S. (2.9 percent). Shipments to both the EU and Japan were down. With imports up 2.0 percent, the bilateral surplus with the U.S. expanded from C$3.4 billion to C$3.7 billion. By commodity the best performing export industries on the month were autos (8.1 percent) and machinery & equipment (3.4 percent). Energy exports rose 1.5 percent and forestry products increased 1.1 percent. Meanwhile, imports were buoyed by 6.0 percent jump in autos and a 5.4 percent advance in energy products. Industrial goods and materials rose 3.0 percent while other consumer goods were up 3.4 percent. However, there were losses in machinery & equipment (down 2.4 percent) and agriculture & fishing (down 1.1 percent).

Bottom line

The People’s Bank of China’s unexpected move to increase reserve requirements on the eve of the Lunar New Year caught investors by surprise. And although stocks were up on the week, European and North American equities ended the week on a sour note. European GDP data contributed to the gloom. And investors are still unsure about the EU’s plans for Greece.

Investors will be closely monitoring the EU finance ministers meeting on Monday and Tuesday looking for concrete information on its plans to help Greece. However, the economic data focus will be on the UK where a series of key economic reports are due to be released. They include the CPI, unemployment and retail sales. In Japan, fourth quarter GDP will be released on Monday (local time) and the Bank of Japan will meet at the end of the week.

Many financial markets will be closed next week for the celebration of the Lunar New Year, the Year of the Tiger. And in the U.S. Monday is Presidents’ Day holiday while in Canada it is Family Day.

Looking Ahead: February 15 through February 19, 2010

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