Global Markets

Equities swooned last week as they listened to an increasingly acrimonious rhetoric in the buildup to the Group of 20 summit Thursday and Friday. In the end, divisions were papered over and leaders said they would work to tackle global economic "tensions and vulnerabilities" that have elevated fears of currency wars and trade protectionism. Participants essentially called a time out to smooth ruffled feathers and agreed to a vague set of guidelines for measuring imbalances between fast growing emerging countries and the slower paced growth in industrialized countries. The G20 has fragmented since a synchronized global recession gave way to a multi-speed recovery. Slow growing advanced economies have kept interest rates at record lows to try to stimulate growth. However, big emerging markets have come roaring back so fast that many are worried about overheating.

Leaders vowed to move toward market determined exchange rates which can be construed as a reference to China's tightly managed yuan that the U.S. has long complained is undervalued. They pledged to shun competitive devaluations. This addressed concern that the Federal Reserve's easy money policy was aimed at weakening the dollar. In a nod to emerging markets struggling to contain huge capital inflows, the G20 approved imposition of "carefully designed" capital control measures. However, the G20 could not reach a consensus on how to identify when global imbalances pose a threat to economic stability. They merely committed themselves to further discussion in the new year.

Global financial markets were not moved by the outcome of the G20 summit — it offered few concrete measures to change economic policy. Investors were instead focused on the fiscal crisis in Ireland. On the week, only the Nikkei, Topix, STI and Jakarta Composite were up. The gains were 1.0 percent, 1.4 percent, 0.4 percent and 0.3 percent respectively. Losses ranged from 4.6 percent (Shanghai Composite) and 4.0 percent (Sensex) to 0.3 percent (DAX).

Global Stock Market Recap

Europe and the UK

After a lackluster week, equities here declined. Investors were cautious ahead of the Group of 20 summit in Seoul, South Korea. Market participants were made even more wary by the fractious rhetoric that preceded the meeting. The FTSE was down 1.3 percent, the CAC dropped 2.2 percent and the DAX slid 0.3 percent. Stocks here were pressured by renewed sovereign debt issues especially in Ireland along with fears that China would try to tamp down growth even more after it increased bank reserve ratios and inflation jumped more than expected. A resurgent dollar and sinking euro put downward pressure on commodity prices.

The key economic data arrived Friday with the release of preliminary third quarter GDP for many eurozone members and for the eurozone as a whole. On the quarter, growth eased in Germany, Italy, France and Spain — and for the eurozone as a whole. Eurozone growth eased to 0.4 percent on the quarter from 1.0 percent in the second quarter.

Equities were hard hit on Wednesday as sovereign debt concerns combined with China’s increase in bank reserve requirement ratios to make investors risk averse once again. Mining and financial shares were the most prominent losers. Commodity prices were lower which in turn put pressure on mining and mineral shares as the U.S .dollar climbed in value against the euro and yen.

Asia Pacific

Equities swooned last week with the notable exceptions of Japan, Singapore and Indonesia. End of the week losses especially in Hong Kong and Shanghai were attributed to mounting speculation that the Peoples Bank of China would increase interest rates to tame inflation. In data released during the week, both the consumer and producer price indexes jumped more than anticipated (4.4 percent and 5.0 percent respectively on the year). Friday’s losses were heavy, with the Shanghai Composite plunging 5.2 percent and the Hang Seng dropping 1.9 percent. In Shanghai, financial services and resource sectors were hit particularly hard and dozens of stocks dropped by their 10 percent daily limit. The index had risen over 33 percent since the beginning of July before dropping 4.6 percent on the week.

There were other worries that dragged the indexes across the region lower as well. Continued reverberations on technology sector equities were felt after Cisco Systems’ weak outlook along with heightened European sovereign debt worries fueled a bout of risk aversion. The euro dropped to a six-week low versus the dollar on continued worries over Europe's public debts.

Chinese stocks dropped the most in 14 months Friday, leading financial markets across Asia into a unified retreat as investors feared tighter money supply and renewed European debt woes. The drop in the Shanghai Composite erased nearly a quarter of a three month market upswing in a day. Some saw Friday's drop as a natural pullback. Stocks, commodities and Asian currencies have rocketed in the past three months almost uninterrupted, spurred on by hopes the Federal Reserve's quantitative easing program will flood markets with cash.

Currencies

The euro slid to levels not seen since the end of September last week on sovereign debt concerns. However, the currency was up marginally Friday on speculation European leaders will support Ireland in its debt woes as well as the currency region’s other most indebted nations. European leaders attending the G20 meetings broke away to hold private discussions of the sovereign debt situation. European finance ministers sought to reassure investors who drove bond yields to record highs in Ireland and Portugal. Investors speculated that the European Union will need to step in with a bailout.

China’s yuan rose to the strongest level since 1993. China signaled its intention on Tuesday to drain excess cash from its financial system by unexpectedly raising the yield on bills at a Peoples Bank of China auction and announcing new rules to curb hot money inflows. One of the measures directed against inflows sparked a day of unprecedented yuan volatility, with the Chinese currency ending up sharply against the dollar. Taken together, the moves flagged China's increasing concern about a surge in liquidity as the Fed launches another round of quantitative easing, prompting some analysts to say monetary tightening may be closer than thought.

Selected currencies — weekly results

Indicator scoreboard

EMU

Third quarter flash gross domestic production was up 0.4 percent on the quarter after growing 1.0 percent in the second quarter. There are no GDP expenditure components available in the flash estimate but it would appear from some of the national statistics that growth was derived from modest gains in most areas. However, in terms of output, industrial production rose a disproportionately strong 0.8 percent on the quarter so activity in the services sector was probably somewhat disappointing. By country the third quarter performance was underpinned by a 0.7 percent quarterly gain in German real GDP, without which the headline data would have looked markedly worse. The French economy grew in line with the region as a whole but Italy managed just a 0.2 percent advance and Spain failed to achieve any growth at all. At the bottom of the pack of those states providing figures, the Greek recession continued with output down another 1.1 percent after a 1.7 percent drop last time. The strongest growth was recorded in Finland (1.3 percent).

September industrial production dropped 0.9 percent on the month and was up 5.2 percent on the year. Among the major components, production sank most severely on the month in the durable goods sub-sector (down 3.0 percent) but all areas posted declines. Thus, nondurable consumer goods were off 0.6, capital goods 1.3 percent and intermediates 1.3 percent. At the same time energy production declined 0.9 percent. Regionally September was a poor period for many members with output falling especially heavily in Portugal (4.7 percent), Malta (5.6 percent), Italy (2.1 percent) and Greece (5.4 percent). Production was also lower in Germany (0.8 percent) and Spain (1.5 percent) and only steady in France.

Germany

September seasonally adjusted merchandise trade surplus widened from an upwardly revised €12.0 billion in August to a much larger than expected €15.6 billion in September, easily the best performance so far this year. The unadjusted surplus was an even stronger €16.8 billion. The end of quarter improvement reflected a 3.0 percent monthly jump in nominal exports compounded by a 1.5 percent slide in imports. The recovery in exports more than offset back to back declines in July and August and suggests that local industry is having few problems coping with the rise of the euro. While exports to non-EU nations were up nearly 38 percent on the year in September, sales to other EMU countries rose only 13.6 percent. German imports from the EMU zone were up 17 percent, little different from the 18.3 percent gain in imports from outside of the EU.

September industrial production was down 0.8 percent and followed a slightly smaller revised 1.5 percent increase in August. On the year production was up 7.9 percent. Output was hit by a 2.0 percent monthly drop in intermediates and a 5.8 percent slump in consumer durable goods. Capital goods were unchanged on the month while consumer nondurables were up 0.4 percent. Energy climbed 1.2 percent and activity in the construction expanded 0.4 percent.

Third quarter flash gross domestic product advanced 0.7 percent and was up a solid 3.9 percent on the year on a workday adjusted basis or 4.3 percent unadjusted. This was the sixth quarter in succession that real GDP has produced a positive growth rate and the second strongest quarterly rate over the period. As usual the Federal Statistics Office provided no details to support the headline figures but it did indicate that household and government spending as well as fixed investment and net exports all made a broadly similar positive contribution. Such balanced growth bodes well for output in the future.

France

September seasonally adjusted merchandise trade gap narrowed to €4.68 billion, only €0.3 billion less than in August and the second largest deficit recorded so far in 2010. The minor improvement at quarter-end masked a contraction in both sides of the balance sheet. Nominal exports dropped 3.1 percent on the month while imports were off a slightly steeper 3.4 percent.

September industrial production (excluding construction) edged up 0.1 percent on the month and was up 5.1 percent on the year. Manufacturing output contracted 0.1 percent on the month. Refining was up 5.2 percent on the month and production of transportation equipment grew 0.7 percent. However, food & agriculture recorded a 0.1 percent drop, as did the other manufactured goods category while machinery declined 1.1 percent. Energy production expanded 1.1 percent on the month while construction slipped 0.3 percent.

Third quarter flash gross domestic product gained a modest 0.4 percent over the previous period following a 0.7 percent second quarter gain. However the composition of third quarter output painted a slightly more optimistic view of demand. The key household sector saw spending up a quarterly 0.6 percent or double the pace seen in the April to June period. Gross fixed capital formation was up only 0.5 percent after a 0.9 percent gain but within this, household investment climbed 1.0 percent following a meager 0.2 percent increase last time. Public sector spending was up 0.4 percent, up just a tick from the second quarter rate. As a result, final domestic demand contributed 0.5 percentage points to the bottom line, a 0.1 percentage point improvement on last time.

Italy

September industrial production sank 2.1 percent after jumping 1.6 percent in August. On the year, output was up 34.6 percent. The September slide was a reflection of broad based losses among the major groupings. In addition to a 3.7 percent monthly nosedive in capital goods output, there were hefty falls as well in both intermediates (1.8 percent) and consumer goods (1.8 percent).

Third quarter gross domestic product growth slowed to 0.2 percent on the quarter and was up 1.0 percent on the year. The only background provided by ISTAT indicated that the goods producing and service sectors saw output expand but agriculture contracted. The July-September period witnessed the third consecutive quarterly advance in total output but the gain was comfortably short of the 0.4 percent and 0.5 percent increases registered in the first and second quarters of the year respectively.

United Kingdom

September industrial production was up 0.4 percent and 3.8 percent on the year. However, manufacturing output edged up 0.1 percent and now stands 4.8 percent higher on the year. Within manufacturing, seven sub-sectors posted on the month gains (chemicals and metals were both up 0.8 percent) while six saw output decline (engineering off 0.6, textiles 1.1 percent). Overall industrial production was supported by the more erratic sub-sectors. Activity in the utilities area jumped 1.4 percent and there were increases of 1.3 percent and 0.9 percent respectively in mining & quarrying and oil & gas extraction.

September merchandise trade deficit narrowed by just Stg0.3 billion to Stg8.2 billion and followed an upwardly revised deficit of Stg8.5 billion in August. Nominal exports rose 2.2 percent on the month while imports were up 0.8 percent. The underlying trade gap was essentially unchanged at a sizeable Stg7.0 billion. Core real exports dropped 1.0 percent on the month and underlying import volumes were down 1.7 percent. The bilateral shortfall with non-EU countries declined marginally to Stg4.6 billion as exports rose 4.4 percent from August and imports expanded 2.6 percent. At the same time, the deficit with the other EU members narrowed by Stg0.2 billion to Stg3.6 billion as exports climbed 0.2 percent on the month and imports rose just 0.2 percent.

Asia/Pacific

Japan

October corporate good price index was up 0.2 percent after remaining unchanged for the three preceding months. On the year, the CPGI was up 0.9 percent — the first gain since June and the largest since December 2008. For October, most of the index’s categories were up with processed foods soaring by 3.3 percent after a 0.2 percent increase in September. Petroleum & coal products were up 1.5 percent after sinking 2.4 percent the month before. Nonferrous metals were up 1.6 percent. On the year, processed foods jumped 2.7 percent after declining 0.6 percent the previous month. Petroleum products jumped 5.6 percent after climbing 2.8 percent in September. The groups that declined from a year ago included information & communication equipment (down 6.2 percent), electronic components (down 4.4 percent) and pulp, paper & related products (down 1.4 percent).

Australia

October seasonally adjusted employment increased by 29,700 to 11.356 million. However, the unemployment rate jumped 0.2 percentage points to 5.4 percent. Part time employment was up 43,800 to 3.385 million, but the increase was partially offset by a decline in full time employment which dropped by 14,100 people to 7.971 million. The number of people unemployed increased by 32,100 people, to 646,500. The October labour force participation rate jumped 0.3 percentage points to 65.9 percent, a record high.

China

October consumer prices jumped 0.7 percent. On the year, the CPI was up 4.4 percent after rising 3.6 percent in September. For the 10 months through October, the CPI was up 3.0. In 2009, the index dropped 1.1 percent. Overall food prices were up 10.1 percent on the year after climbing 8 percent in September. Non-food prices were up a tame 1.6 percent on the year after rising 1.4 percent in September.

October producer prices increased 5.0 percent on the year after rising 4.3 percent in September. Analysts expected an increase of 4.8 percent. The PPI rose 5.5 percent year to date after sinking 6.4 percent in the previous year. The PPI was up 0.7 percent on the month after increasing 0.6 percent in September.

October industrial output increased eased slightly to 13.1 percent when compared with the same month a year ago after increasing 13.3 percent in September. Analysts had expected an increase of 13.3 percent. For the 10 months through October, output was up 16.1 percent when compared with the previous year. In the same 10 months in 2009 output was up 9.4 percent on the year.

October retail sales soared 18.6 percent on the year after jumping 18.8 percent in September. The gain was somewhat lower than analysts’ expectations for an advance of 19 percent. For the 10 months through October, retail sales were up 18.3 percent on the year. In 2009 for the same 10 months, sales were up 15.3 percent.

Americas

Canada

September international trade gap widened to C$2.49 billion, just short of July’s record. The deterioration was attributable to a 1.2 percent monthly rise in nominal imports compounded by a 1.7 percent drop in exports. The real trade balance also worsened as export volumes dropped 2.2 percent from August while imports were essentially flat. Regionally, the bilateral surplus with the U.S. shrank from C$2.9 billion in August to C$1.6 billion as cash exports slumped 3.6 percent and imports were up 1.6 percent. Exports to the EU fell even more sharply (6.3 percent) but with imports from the same region also significantly lower (6.6 percent) the bilateral balance here was little changed at C$0.4 billion. Overall exports were dragged weaker by a 6.6 percent monthly slide in the auto sector, the fourth consecutive monthly decline. This was compounded by declines in industrial goods & materials (2.3 percent), agriculture & fishing (1.2 percent) and, in particular, in the other consumer goods area (15.9 percent). The only advance of note was in machinery & equipment (3.6 percent). Among the main import categories the strongest performer was industrial goods & materials which gained 5.6 percent on the month. There was also a solid increase by machinery & equipment (3.2 percent). Purchases of overseas autos dropped nearly 5 percent however, and there were smaller declines in both energy products (1.3 percent) and in other consumer goods (1.9 percent).

Bottom line

Events swirled around disparate views at the Group of 20 meeting and the volatile sovereign debt woes in Europe. This time the spotlight is on Ireland and not Greece or Portugal. In the end, the G20 statement glossed over differences while European leaders tried to calm market debt fears. Eurozone third quarter GDP data indicated that growth slowed from the second quarter.

Japan will release its third quarter growth data Monday morning local time (Sunday night on the U.S. east coast). New data are scarce in Europe but in the UK, key consumer price, retail sales and labour market data are on tap.

Looking Ahead: November 15 through November 19, 2010

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