Global Markets

The whole world was transfixed as it watched Japan struggle to deal with the aftermath of the earthquake and tsunami and contain a worsening nuclear disaster. Predictably, investors fled from risk and as a result, global equity indexes were down on the week. However, while eyes were focused on Japan, the Middle East and North Africa turmoil continued to escalate. Hours after the United Nations Security Council voted to authorize military action and a no-fly zone, Libya said it would call an “immediate cease-fire and the stoppage of all military operations” against rebels seeking to oust Colonel Muammar el-Qaddafi. However, at this writing, the fighting continues.

The repercussions from the earthquake continue to unfold. Infrastructure damage to electrical generating facilities, ports, roads and railways will take years to fix. Japan is a major supplier of parts — not only to its own manufacturers but those in other countries around the world. ‘Just in time’ inventory controls have in a way exacerbated the problem because companies no longer hold sufficient component parts for an emergency. In the interim, firms need to find a way around this problem. Even with excess productive capacity, the correct facilities are not always available.

Outsourcing to another country is not always available. For example, autos built in the U.S. rely on parts from Japan and not only for Japanese autos assembled in the states. General Motors said Thursday that it would temporarily shut a truck plant in Louisiana because it could not get enough Japanese made parts, the first in what analysts say could be widespread disruptions at auto plants in North America. Aside from autos, technology firms that rely on Japanese manufacturing will also have shortages. Even plants that were not damaged need a reliable source of electricity in order to manufacture chips and other parts. Fears of radiation contamination are already hurting exports as orders for Japan’s goods and especially food stuffs are being canceled.

To help Japan, the Group of Seven agreed to intervene in the foreign exchange market for the first time since 2000 to lower the value of the yen. The currency had soared since the earthquake as speculators bet that firms would sell foreign assets and repatriate funds to finance the reconstruction. Japanese officials sought to dispel that theory, noting that past disasters such as the 1995 Kobe earthquake did not create such an effect. Markets responded immediately by driving down the value of the yen against the U.S. dollar and putting a dent in a week of sharp increases. The rising value of the yen threatened to undermine demand for Japanese exports at the same time that a series of disasters has damaged the domestic economy.

On the week, all equity indexes followed here except the Kospi and KLCI in the Asia Pacific region and the S&P/TSX Composite in Canada were down. Losses ranged from 10.2 percent (Nikkei) to 0.4 percent (All Ordinaries and SET).

Global Stock Market Recap

Europe and the UK

After sinking for six consecutive sessions that began before the Japanese disaster, equities in Europe and UK rebounded Thursday and Friday to trim the week’s losses. But they did not erase them entirely. The FTSE was down 1.9 percent, the CAC dropped 3.0 percent and the DAX sank 4.5 percent. On Friday, investors bought insurers and industrial firms on speculation that many stocks had been oversold in the wake of Japan's earthquake last week. However, the mood was cautious. Japan was not the only negative news that investors had to deal with. The violence in the Middle East and North Africa — especially in Bahrain and Libya continued and oil prices rose.

Moody’s downgraded Portugal’s debt rating by two levels, citing a weaker outlook for economic growth, risks to the government’s deficit-reduction plans and a possible need to recapitalize the country’s banks. The rating was downgraded to A3, four steps from junk status.

The Organisation for Economic Co-operation and Development (OECD) released its survey of the UK economy. The survey takes place about every two years. It forecasts slow growth in 2011 and 2012, followed by a weaker medium-term outlook than expected by either the Office for Budget Responsibility or the Bank of England. OECD said that the economic recovery will be sluggish and significantly slower than previous upswings as growth will be hit by austerity measures and lackluster export performance. The organization still supports the austerity plans, saying the government has no realistic alternative, but adds that it will impact significantly on government consumption and investment as well as reducing household income growth and therefore, household consumption. The report went on to say that monetary policy would remain expansionary even if inflation is significantly above the BoE’s 2 percent inflation target as it is now.

Asia Pacific

Equities were down last week although many losses were reduced by Wednesday’s and then Friday’s gains. Both the Kospi and KLCI advanced on the week — they were up 1.3 percent and 0.6 percent respectively. However, losses elsewhere were heavy. No surprise, the Nikkei and Topix led the way, sinking 10.2 percent and 9.3 percent. Losses elsewhere were less dramatic. The Hang Seng dropped 4.1 percent while the STI declined 3.5 percent. Only the Shanghai Composite remains in positive territory in 2011.

Friday’s rebound — except in India — occurred after Thursday night’s (Friday morning local time in Japan) Group of Seven announcement that they will intervene in foreign exchange markets in a concerted effort to prevent "excess volatility and disorderly movements." It marks the first time in more than a decade that the G-7 has agreed on such a measure.

Indian equities declined for a second day after the Reserve Bank of India increased its key interest rate to 6.75 percent and investors worried that there will be more rate increases to come. Equities were down 1.6 percent on the week.

Japanese stocks were pounded as authorities struggled to deal with the earthquake's aftermath in general and the nuclear disaster in particular. Continued hopes that the radiation leak would be controled sent equities into positive territory Wednesday. However, they fell back Thursday on disappointing results. Adding to the turmoil was the soaring yen, which spiked to a record high against the U.S. dollar before falling back Thursday. The yen had strengthened to as high as ¥76.25 per U.S. dollar early in the trading session.

On Friday, the People's Bank of China (PBoC) announced its third reserve increase of the year, underscoring the importance the government places on aggressively sterilizing liquidity and tackling onshore inflationary pressure. The 50 basis point increase in the commercial bank reserve requirement takes effect on March 25 and will see the ratio for large banks rise to a record 20 percent excluding any extra limits for individual lenders. The government last adjusted the reserve requirement on February 24 and had raised the ratio six times over 2010.

Bank of Japan

The Bank of Japan met Monday and took a preemptive step to deal with the earthquake, tsunami and nuclear emergency aftermath. The BoJ doubled its asset buying scheme to ¥10 trillion yen and supplied record funds to banks to shore up confidence in an economy hit by the triple blow of a massive quake, a tsunami and a nuclear emergency. The meeting originally was scheduled for two days. The BoJ decided to boost buying of risk assets — commercial paper, corporate bonds, exchange-traded funds and real estate investment funds — by ¥3.5 trillion against an increase of just ¥1.5 trillion for government bonds and short-term securities.

The BOJ kept its assessment of the economy broadly intact, saying it was sticking to its view that the economy will resume a moderate recovery later this year. BoJ governor Masaaki Shirakawa said the Bank will scrutinize economic data that becomes available at its rate reviews in April as well as market conditions at the time in deciding whether to ease policy further.

Reserve Bank of India

The Reserve Bank of India raised its key interest rates for the eighth time in a year as expected, to contain stubbornly high inflation. The repo, the rate at which the RBI lends, was raised by 25 basis points to 6.75 percent from 6.50 percent and the reverse repo, the rate at which the Bank borrows from banks, to 5.75 percent from 5.50 percent. The cash reserve ratio, the portion of deposits banks need to keep at the RBI, was unchanged at 6 percent. The latest policy action is expected to continue to rein in demand side inflationary pressures while minimizing risks to growth and manage inflationary expectations according to the Bank’s mid-quarter review of monetary policy.

Currencies

The Group of Seven jointly intervened in the foreign exchange market for the first time in more than a decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake. Japan began the effort, with Europe’s central banks following up in their markets, sending the currency down the most against the dollar since 2008. G-7 finance chiefs said in a joint statement after a conference call they will “provide any needed cooperation” with Japan. The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Bank of France, the Bundesbank and Banca d’Italia all said they participated in the yen sales on Friday.

The BoJ repeated its pledge to pursue “powerful monetary easing” as policy makers sought to reduce the threat of the economy sinking into recession. The Nikkei 225 Stock Average gained after the announcements, paring losses to 10.2 percent since the earthquake and ensuing tsunami killed thousands and led to rolling blackouts and radiation leaks at a nuclear plant.

The BoJ has been pouring cash into the financial system to stabilize money markets and on March 14 doubled an asset-purchase fund to 10 trillion yen, pledging to step up purchases of securities including government debt, exchange-traded funds and real-estate investment trusts.

The G-7 said in its statement that “in response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities” it will intervene in the currency market. “We will monitor exchange markets closely and will cooperate as appropriate,” the statement said.

The Swiss franc also hit a record against the U.S. dollar as the currency advanced on investor demand for a refuge amid turmoil in the Middle East and Japan. Bahrain closed its stock exchange as clashes between security forces and anti-government protesters intensified. There are concerns that violence may spread to neighboring Saudi Arabia, the world’s biggest oil producer.

Selected currencies — weekly results

Indicator scoreboard

EMU

January industrial production was up 0.3 percent and was up 6.7 percent on the year. Activity was underpinned by a 2.5 percent monthly increase in both intermediates and durable consumer goods output. However, there were partially offsetting declines in capital goods (0.3 percent) and nondurable consumer goods (0.4 percent) and a more sizeable drop in energy (3.1 percent). Regionally there was the usual diverse performance among the member states with strong monthly increases in Spain (1.4 percent) and France (1.1 percent) contrasting with marked declines in Ireland (1.0 percent), Italy (1.5 percent) and Portugal (4.2 percent)

February harmonized index of consumer prices was up 0.4 percent and 2.4 percent on the year. The core HICP which excludes food, drink, tobacco & petroleum was up 1.0 percent on the year after a 1.1 percent increase last time and both the HICP excluding unprocessed food & petroleum and the HICP excluding seasonal food & petroleum eased 0.1 percentage point to a 1.0 percent annual rate. Regionally inflation accelerated in most states although there were a number of exceptions. The sharpest increase was in Ireland (0.7 percentage points to 0.9 percent) followed by Austria (0.6 percentage points to 3.1 percent). The most marked decline was in Greece (0.7 percentage points to 4.2 percent) followed by Malta (0.6 percentage points to 2.7 percent). At the top of the inflation ladder was Estonia (5.5 percent) while Ireland remained at the bottom.

Germany

March ZEW survey suggested that business activity remained at elevated levels. The current conditions index edged up 0.2 points to 85.4 while the expectations measure shed 1.6 points to 14.1. The modest dip in expectations reflected concerns about developments in Japan with responses received after the earthquake had struck averaging only 9.1. There also looks to have been some negative impact from last week's unexpectedly hawkish ECB meeting. Thus, survey replies prior to the policy discussions showed expectations rising to 22.5 while after the meeting, but before the Japanese disaster, they slipped to 12.6. Analysts still see the German economy in good shape and remain generally positive about the outlook, notwithstanding some possible short-term earthquake-related setbacks. However, there will be particular interest in how German export industries are affected by what is likely to be diminished Japanese demand over coming months.

United Kingdom

February claimant count unemployment was down 10,200. This followed a smaller revised 1,500 increase at the start of the year and was the steepest decline seen in the last eight months. Moreover, the headline drop would have been steeper but for a 7,300 increase in claims by females, a rise likely in part due to some changes introduced to benefit eligibility. The jobless rate on this measure held steady at 4.5 percent where it has been since June 2010. The lagging ILO figures painted a very different picture with unemployment in the three months to January rising some 27,000, enough to lift the jobless rate on this definition to an unexpectedly high 8.0 percent. Average earnings growth in January was 2.3 percent while earnings excluding bonuses edged down to a 2.2 percent annual gain after a 2.3 percent rise last time.

Asia/Pacific

Japan

January tertiary industry activity index increased 2.1 percent after dropping 0.9 percent in December. On the year, the index was up 1.0 percent. Among the industries that increased were wholesale & retail trade which was up 3.8 percent and information & communications which added 2.6 percent on the month. Miscellaneous services (except government services etc.) gained 3.3 percent while electricity, gas, heat supply & water jumped 4.9 percent. Other industries that were up on the month included finance & insurance, medical, health care & welfare, transport & postal activities, scientific research, professional & technical services, learning support and compound services. Several industries declined including accommodations, eating & drinking services (down 1.6 percent), living-related & personal services & amusement services (down 1.7 percent) and real estate & goods rental & leasing (down 0.2 percent).

Americas

Canada

January manufacturing sales soared 4.5 percent increase on the month and were up 9.5 percent on the year and their highest level since October 2008. Volumes were up an even larger 5.5 percent on the month and stand 6.8 percent higher on the year. Seventeen of the 21 reporting industries saw nominal sales advance but the headline gain was led by a 26 percent monthly surge in motor vehicle sales. The increase here was largely a reflection of a return to more normal working conditions at a number of assembly plants following the shutdowns and shortened workweek caused by bad weather in December. Excluding motor vehicles and parts, shipments were up 2.2 percent on the month. Among the other major sub-sectors, aerospace registered a 25.2 percent bounce, its largest monthly increase since December 2009. There were also solid gains in machinery (6.7 percent), food (2.2 percent), clothing (8.0 percent), wood products (5.6 percent) and fabricated metals (4.8 percent). There were very healthy monthly advances in both new orders (8.6 percent) and backlogs (1.6 percent). Inventories rose 1.2 percent but this still provided for a 0.04 month drop in the inventory/sales ratio to 1.29 months, some 0.08 months down on its year ago level.

February consumer prices were up 0.3 percent and 2.2 percent on the year. Core CPI excluding food and energy also was up 0.3 percent from January and was up 1.2 percent on the year. At the same time the BoC core index edged up just 0.2 percent on the month to shave its annual rate to 0.9 percent. Seasonally adjusted the headline CPI was unchanged on the month after a 0.3 percent rise at the start of 2011. The ex-food and energy index followed suit and the BoC measure declined 0.1 percent. Within the adjusted data, food prices were up 0.2 percent from January. Transportation was also up 0.2 percent while health & personal care gained 0.3 percent and recreation, education & reading advanced 0.2 percent. However, prices of clothing & footwear edged down 0.1 percent as did alcohol, tobacco & drink. Household operations charges were just steady on the month.

Bottom line

Markets tumbled on a combination of events in Japan and those in the Middle East and North Africa (MENA). While there was little new economic information in Europe and Asia Pacific regions, there were a plethora of mixed signals from U.S. data.

This coming week is also a quiet one data-wise. However, given the events in Japan and MENA, there will be plenty for investors to assess as they move forward.

Looking Ahead: March 21 through March 25, 2011

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