Global Markets

Most stock indexes were down last week. While stocks were mixed in the Asia/Pacific region, those in Europe and North America were down thanks in large part to Friday’s disturbing news that the U.S. Securities and Exchange Commission had charged Goldman Sachs with fraud relating to its dealing of subprime related products. Prior to the news, stocks were up thanks to generally favorable economic news and U.S. first quarter earnings that support a global economic recovery.

Needless to say, the fallout reverberated across the financial sector and other asset classes as traders pared risky bets. The U.S. dollar was up on the flight to safety. Worldwide, shares had already been under pressure after an earnings report from Google failed to impress and a crackdown on property speculation in China aggravated fears of further monetary tightening. And in Europe especially, a more cautious assessment of the bail-out for Greece provided the excuse for investors to avoid risk. Investors still have some doubt over Greece’s ability to turn its fiscal position around while some view current proposals as only prolonging the agony. And the reverberations of the Icelandic volcanic eruption didn’t help either.

Global Stock Market Recap

Europe and the UK

 After a lackluster week, equities were down in Europe and the UK as investors reacted to the first spate of first quarter earnings reports in the U.S. But the weekly push to negative came on Friday not long before equities would have closed. The U.S. Securities and Exchange Commission charged Goldman Sachs of defrauding investors by misleading them about subprime mortgage products as the U.S. housing market collapsed. Goldman denied the charges. Needless to say, investors pushed the sell button and gains for the week through Thursday were washed away.

There were other pressures on equities at week’s end — and particularly airline stocks — as Iceland’s Eyjafjallajökull volcano erupted and continues to spread ash far and wide causing widespread air traffic disruptions in Europe and the UK (and in international flights as well). The last time this volcano erupted was in 1821 and it continued for a year.

The week’s economic data focused mostly on merchandise trade balances and industrial production data in Italy and the EMU. Once again it was clear that Germany carried the overall EMU trade balance into surplus. And the smaller member states carried EMU industrial production into the positive while the big four — Germany, France, Italy and Spain — either declined or remained unchanged for the month. And in the U.S. a plethora of new data gave investors plenty to think about. The verdict on the U.S. data was a bit on the negative side if one only looked at the headline numbers.

Investors remained jittery in accessing risk as news about the continuing Greek saga ebbed and flowed. On the week, the FTSE lost 0.5 percent, the DAX was down 1.1 percent and the CAC dropped 1.6 percent.

Asia/Pacific

Stocks in this region ended the week on a negative note as traders fretted over the impact of Chinese measures to cool its rampaging property market. That, combined with what investors thought were unimpressive Google earnings results, found market players locking in gains prior to other earnings reports. For the week, seven indexes declined including the SET (down 6.8 percent) which was closed for three days due to the political unrest in Thailand. Other than the SET, losses ranged from 0.1 percent for the Topix to 1.9 percent for the Indian Sensex. On the positive side, gains were quite modest — they ranged from 0.2 percent for the Taiex and PSEi to 1.2 percent for the STI and Jakarta Composite. The Shanghai Composite ebbed down 0.5 percent after declining 0.4 percent in the previous week.

The major economic news came from China where first quarter gross domestic product soared by 11.9 percent on the year after climbing 10.7 percent in the fourth quarter of 2009. The first quarter gain was the largest since the second quarter of 2007 when it also rose by 11.9 percent. At the same time, March industrial production was released. It soared a torrid 18.1 percent on the year.

Shortly after the data were released, the government announced measures to cool the real estate market, underscoring concern that asset bubbles could be forming after a record increase in March values. Many analysts are now expecting an interest rate increase from the People’s Bank of China — the current policy rate is 8.31 percent. The Hang Sang Index plunged on fears that China's move to clampdown the overheating property market in the country might impact the market.

Currencies

The euro is taking the brunt of wavering investor confidence on resolving Greece’s fiscal woes. The currency continued to be volatile as the latest efforts to resolve it are evaluated. The euro rallied on Monday after eurozone leaders agreed on a Greek rescue package over the weekend in continuing efforts to resolve the country’s debt crisis. But as the week wore on once again investors were leery of the proposed interim solution. Analysts warned that the latest deal would only provide short-term support for the single currency.

On Friday, the euro was down against both the U.S. dollar and the yen. The currency swooned and followed stocks south especially after Goldman Sachs was charged by the Securities and Exchange Commission with fraud. The euro was down for the second week against the yen on speculation Greece would be forced to activate a €45 billion rescue package as it struggles to rein in the euro region’s widest budget shortfall.

After its semi-annual meeting on Wednesday, the Monetary Authority of Singapore tightened monetary policy by revaluing its currency and sending the Singapore dollar to a 20-month high. Singapore’s dollar has rallied after its economic growth and inflation forecasts were increased and the central bank unexpectedly revalued its currency. The MAS, which uses its currency as its main monetary policy tool, boosted other Asian currencies and intensified speculation that China would let the renminbi trade higher. Analysts said the revaluation was understandable given that gross domestic product rose at a record annualized rate of 32.1 percent in the first quarter.

Selected currencies — weekly results

Indicator scoreboard

EMU

February industrial output was up 0.9 percent after jumping 1.6 percent in January. On the year, output was up 4.1 percent in February. Intermediates soared 1.5 percent while capital goods, up 0.9 percent, also fared well. However there were declines in production in both durable (0.6 percent) and nondurable (0.2 percent) consumer goods as well as a drop in energy (0.4 percent). The larger EMU states failed to impress. Output fell 0.1 percent on the month in both Germany and Spain and was only flat in France and Italy. Rather, the largest increases were posted in Slovenia (6.4 percent) and Portugal (1.6 percent) although both followed particularly sharp contractions in the previous period. Bad weather may well have had some impact upon the volatile monthly profile.

March harmonized index of consumer prices was up 1.4 percent on the year and its highest level since December 2008. Core HICP excluding food, drink, tobacco and petrol, edged up a minimal 0.1 percentage point from February to 1.0 percent and was also 0.1 percentage point higher at 0.9 percent omitting just petrol and unprocessed food. Excluding seasonal food and petrol, the 12-month growth rate was unchanged at 0.8 percent. Regionally, the HICP accelerated in all EMU countries. Among the larger member states, Germany saw its 12-month rate jump from 0.5 percent to 1.2 percent while France was up 0.3 percentage points to 1.7 percent. In Italy, inflation also rose 0.3 percentage points to 1.4 percent but the rate in Spain climbed a hefty 0.6 percentage points to 1.5 percent. Greece had the highest inflation rate at 3.9 percent while Ireland remained firmly at the bottom of the table at minus 2.4 percent.

February seasonally adjusted merchandise trade surplus climbed to €3.3 billion from €1.9 billion in January. February’s exports were up 2.7 percent on the month while imports were up 1.5 percent. Annual export growth accelerated to 10.0 percent or 4.0 percentage points above that of imports. But without a €7.9 billion contribution from Germany, the overall EMU trade balance would have been in the red again. France managed €1.5 billion of black ink but Italy and Spain both posted their second consecutive monthly shortfalls.

Italy

February industrial output was unchanged on the month but was up 2.7 percent on the year ― its fastest pace since April 2008. The steady monthly performance, which followed a smaller revised 1.9 percent gain in January, concealed a 1.7 percent decline in the consumer sector, itself attributable to equivalent falls in both durables and nondurables. There was also a 0.7 percent drop in the production of intermediates. However, weakness here was offset by a 1.7 percent increase in capital goods output and a 0.3 percent gain in the energy sector.

February merchandise trade deficit was €1.57 billion after recording a revised deficit of €1.26 billion in January. The deficit reflected a 2.5 percent increase in nominal exports that was more than offset by a 3.6 percent advance in imports. Annual growth in exports was 7.3 percent, biased up by a 34.6 percent surge in the energy sector. Excluding this category, exports rose 6.4 percent from February 2009. Overseas purchases of consumer goods were up 5.6 percent, behind intermediates (11.6 percent) but ahead of capital goods (2.0 percent). At the same time, overall 12-month import growth stood at 6.6 percent within which intermediates (19.0 percent) again performed strongly. Energy (14.1 percent) similarly posted another large gain but capital goods imports (15.5 percent) were even more robust and well ahead of consumer goods (3.4 percent).

United Kingdom

February merchandise trade gap narrowed surprisingly sharply to Stg6.2 billion from Stg8 billion in January and the smallest since June 2006. The improvement was due to a 9.5 percent monthly leap in nominal exports, the largest such gain since June 2006. The jump followed a probably weather-related 6.6 percent slide at the start of the year and was mainly due to volumes which were up 8.3 percent. Meantime, cash imports edged just 0.1 percent lower while volumes were off 0.5 percent. The reduction in headline red ink was to a significant extent matched in the underlying deficit which excludes oil and erratics. Here a 6.7 percent jump in exports combined with 1.1 percent decline in imports to reduce the shortfall by Stg1.3 billion to Stg6.2 billion. Regionally the bulk of the improvement in the overall goods deficit was due to a stronger net trading performance with non-EU countries. Here the bilateral deficit narrowed by Stg1.3 billion to stg3.3 billion.

Asia/Pacific

Japan

March corporate goods price index was up 0.2 percent on the month but down 1.3 percent as expected on the year. This was the fourth consecutive monthly increase but the 15^th straight drop on the year. Many categories showed monthly price increases, but they were far below those of a year ago. For example, manufacturing industry product prices were up 0.1 percent on the month but down 0.7 percent on the year. Processed foods were up 1 percent on the month and were down 1.7 percent on the year. However, petroleum products were up both on the month and year while prices for information & communication equipment slumped.

Americas

Canada

February merchandise trade posted a C$1.4 billion surplus and reflected a 2.8 percent monthly gain in nominal exports that was only partially offset by a 0.9 percent advance in imports. The real trade position also improved with export volumes up 1.4 percent from January and imports rising a more modest 1.0 percent. The bilateral surplus with the U.S. widened by more than C$0.2 billion as nominal exports climbed 2.0 percent and imports grew 1.2 percent. At the same time, the bilateral deficit with the EU shrank from C$326 million to C$173 million while a minimal bilateral shortfall with Japan was turned into a small surplus. Within the monthly rise in total cash exports, there was a solid increase in the auto sector (5.0 percent) which was all the more impressive in the context of temporary plant closures. The other main performer was industrial goods & materials (7.2 percent) but there were increases too in both agriculture & fishing (2.0 percent) and forestry products (2.1 percent). The only decline was in the other consumer goods (1.4 percent). Imports were supported by particular strength in forestry products (7.3 percent) combined with solid increases in autos (3.5 percent) and machinery & equipment (3.3 percent). However, energy imports were sharply lower (down 14.2 percent).

February manufacturing sales stalled and gained a minimal 0.1 percent but sales were still up 6.0 percent on a year ago. The softness of the headline data in part reflected weakness in prices as volumes were up a somewhat healthier 0.3 percent on the month and 6.4 percent on the year. Volumes have now posted increases for six consecutive months. The relative sluggishness of cash shipments was a function of weakness in the transport sector where sales dropped 1.8 percent on the month. In addition, and in particular, petroleum & coal products saw a chunky 3.9 percent fall. There were also declines in electrical equipment & appliances (4.5 percent) and in miscellaneous manufacturing (3.2 percent). By contrast there were sizeable gains in plastic & rubber products (4.4 percent), chemicals (4.3 percent) and in beverage & tobacco products (5.7 percent). In total, 12 of the 21 reporting industries achieved further gains. New orders were up 1.4 percent on the month and backlogs were up 1.5 percent. With inventories edging up 0.2 percent, the inventory/sales ratio was unchanged at 1.35 months, 0.24 months down on a year ago.

Bottom line

There was a steady stream of U.S. data last week — and on average, the picture was positive. There was also a steady stream of earnings data as the ‘earnings season’ began. Most of the news was good but at times did not meet investors’ overly optimistic expectations. In Europe, the Greek saga continued to unfold. When investors were positive, the euro gained — and when they had second thoughts, the currency sagged.

The Bank of Canada meets Tuesday. The stream of economic data has been by and large positive including employment. The arbiter of Canadian recessions has declared that the recent mild downturn that began in the third quarter of 2008 ended in the third quarter of 2009. However, in the U.S., the NBER recession dating committee deferred on whether/when the U.S. recession officially ended. But whether the Bank of Canada will be moved to change its interest rate from the current 0.25 percent remains to be seen.

Looking Ahead: April 19 through April 23, 2010

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