Global Markets

Despite a string of ongoing worrisome issues, equities were up globally last week. Investors preferred to focus on global growth rather than the headwinds that could reduce it. The run up occurred as investors prepare to wrap things up for the end of the first quarter on Thursday, March 31^st. In Japan, foreign investors took advantage of bargain prices thanks to the previous week's plunge. Investors are shopping around for companies that would benefit from the extensive Japanese reconstruction.

But there are the ongoing problems including the escalation of violence in Libya and the unrest in other countries such as Yemen and Bahrain. And then there are the continuing sovereign debt issues in Europe with focus on Portugal just now but with Ireland and Greece still lingering and perhaps Spain next in line. The situation in Japan is still unwinding with continued aftershocks, radiation tainted food and a nuclear energy plant still uncontrolled and emitting radiation.

On the week, equity indices followed here rebounded from the prior week's losses.

Global Stock Market Recap

Europe and the UK

Indexes in the UK and Europe were up four of five days last week after four consecutive weeks of declines. Last week's advances occurred despite ongoing sovereign debt problems, the continuing woes in the Middle East and North Africa along with the unfolding calamities in Japan. The FTSE was up 3.2 percent, the CAC gained 4.3 percent while the DAX advanced 4.2 percent.

European Central Bank governing board members continue to build the case for an interest rate increase when next they meet on April 7^th. This is despite Portugal's political crisis that has raised the prospect for more ECB bond market intervention. The ECB has kept rates at a record low of 1.0 percent for almost two years as the financial and debt crises have unfolded. The primary goal of the ECB is keeping inflation under its 2 percent ceiling. Inflation as measured by the harmonized index of consumer prices is currently above the target at 2.4 percent on the year.

This month's disaster in Japan, Middle East tensions and now the fall of Portugal's government, potentially forcing the country into a European bailout, have created some uncertainty in markets about an ECB rate increase. But Trichet told the Economic and Monetary Affairs Committee of the European Parliament that he had “nothing to add” to the March 3^rd policy statement when the Bank warned that “strong vigilance” was needed on inflation. In the past, the ‘strong vigilance' phrase was used to indicate a rate increase would occur at the next meeting.

European Union leaders were concluding a two day meeting on the region's fiscal crisis in Brussels on Friday as I write. Portugal has continued to rule out a rescue even after the parliament's rejection of budget cuts that led Prime Minister José Sócrates to resign. A bailout may total as much as €70 billion, as credit rating cuts threaten to deepen Portugal's debt woes. Prime Minister José Sócrates is the second eurozone leader to fall victim to the rolling sovereign debt crisis after Ireland's prime minister was voted out of office last month. The fall of the government prompted both Standard & Poor's and Fitch to cut Portugal's credit rating by two notches.

Asia Pacific

Equities rebounded last week after the previous week's selloff which occurred on the heels of the Japanese earthquake, tsunami and nuclear malfunction. Gains ranged from 0.8 percent in Malaysia to 5.2 percent in India. The Nikkei was up 3.6 percent after plunging 10.2 percent in the March 15 through 18 week. Traders continue to assess the impact of the catastrophe on the economy. Companies that could benefit from reconstruction advanced. Despite the improved sentiment however, investors will be wary of taking on heavy positions given the fluid situation at the Fukushima Daiichi nuclear complex. Focus also turned to potential changes to post earthquake earnings guidance.

Foreign investors bought a record amount of Japanese stocks last week after equities plunged in the wake of the March 11^th earthquake and resulting nuclear accident. Foreign investors bought ¥891 billion in Japanese stocks in the week through March 18^th - the most since comparable records began in 2005 according to the Ministry of Finance. Some analysts said foreign buying may continue before the ex-dividend date on March 28, but others are worried that their buying - the main driver of the market rebound last week - may peter out soon.

Australian banks' growth opportunities will be more limited in the coming years, the Reserve Bank of Australia cautioned in a report. Though the Australian banking system continued to outperform those in many other countries, the very rapid growth seen over the years that preceded the crisis is unlikely to be repeated, the central bank said in its half yearly Financial Stability Review.

Currencies

The U.S. dollar was up against the euro and yen last week. Yen traders kept a wary eye on the currency - they were careful not to precipitate another round of currency intervention by the Group of Seven or Japan alone.

The euro once again became vulnerable and could remain so as the sovereign debt crisis woes escalated after the Portuguese government collapse and the downgrading of the country's credit ratings by Fitch and S&P.

Portuguese debt yields hit new highs on Friday. But the pressure for now did not spread toward other markets, signaling the contagion risk was seen low at the moment. European leaders agreed to increase their financial rescue fund to the full €440 billion by June but avoided discussing Portugal, which is under growing pressure to seek a bailout. The euro has been supported by expectations the European Central Bank will raise interest rates as early as April, boosting its yield advantage over the dollar. However, on Friday, the euro faded under the crunch of the credit crisis.

The pound sterling weakened after February retail sales sank more than anticipated. Shoppers had rushed into shops in January to buy before a tax increase went into effect in February. The currency ebbed lower after the Bank of England monetary policy committee minutes did not indicate an interest rate increase coming anytime soon despite inflation that is more than double the Bank's inflation target of 2 percent. Earlier in the week, sterling rose to its highest level against the U.S. dollar since January 2010 after inflation data boosted expectations that the Bank of England will have to raise interest rates soon.

Selected currencies - weekly results

Indicator scoreboard

EMU

February M3 money supply growth accelerated from an unrevised 1.5 percent in January to 2.0 percent on the year. The ECB's preferred 3-month moving average measure was unchanged at 1.7 percent. Private sector lending was up 2.6 percent on the year. Within this, borrowing by non-financial corporations was up 0.6 percent after a 0.5 percent gain last time while loans to households expanded 3.0 percent, down 0.1 percent from the start of the year. Lending for house purchase similarly slipped 0.1 percentage points to a 3.8 percent annual rate. However, the most significant change was once again recorded by non-monetary financial intermediaries (excluding insurance corporations and pension funds) where 12-month growth in borrowing jump from 7.1 percent to 8.5 percent.

Germany

March Ifo sentiment index edged 0.2 points lower from a higher revised February level to a still very robust 111.1. The minor dip reflected a decline in the expectations component to 106.5 from 107.9 in February. By contrast, the current conditions measure was up another full point to 115.8. Among the main sectors, confidence was up 0.5 points to 29.9 in manufacturing but slipped 0.4 points to 12.1 in retailing. Larger declines were seen in services (28.0 from 33.0) and construction (minus 7.2 from minus 3.6) while morale in wholesale slipped 0.9 points to 22.4.

France

Fourth quarter revised gross domestic product was up 0.4 percent on the quarter and up 1.5 percent on the year. Changes to the GDP expenditure components were minor, the most significant being a stronger performance by exports which are now seen rising 1 percent on the quarter, up 0.2 percentage points from the flash estimate. As a result net exports added 0.6 percentage points to the bottom line. Elsewhere, household consumption still grew 0.9 percent, while fixed investment (0.3 percent) and government spending (0.2 percent) were revised 0.1 lower. Inventories subtracted 0.9 percentage points, largely due to strike activity in the refining sector.

Italy

January seasonally adjusted retail sales declined 0.2 percent and edged up 0.1 percent on the year. The January decline followed an unrevised 0.2 percent monthly increase in December and constituted the weakest performance since April last year. Purchases of food were down 0.5 percent while non-food sales were off 0.2 percent.

United Kingdom

February consumer prices jumped 0.7 percent and were up 4.4 percent on the year. The latest acceleration in prices was quite widespread. While petrol prices hit a new record high, even the core CPI surged 0.8 percent on the month to stand 3.4 percent higher on the year, a new high. Even excluding indirect taxes the CPI was up 2.8 percent on the year compared with a 2.4 percent advance in January. Annual inflation rates jumped a hefty 1.5 percentage points to 2.8 percent in clothing & footwear, 1.1 percentage points to 4.6 percent in communications and 0.5 percentage points to 2.7 percent in miscellaneous goods and services. Prices of furniture & household equipment also saw fresh gains, up 0.3 percentage points on an annual basis to 4.1 percent. The only positive news was in the food sector where the 12-month rate edged a tick lower to 6.2 percent and in alcohol & tobacco where it dropped 0.7 percentage points to 6.0 percent.

February retail sales declined 0.8 percent from January. The drop, which followed a smaller revised 1.5 percent bounce at the start of the year, left annual growth in volumes at 1.3 percent, well down from the 5.1 percent rate seen in January. The February slide in overall purchases would have been steeper but for a 0.6 percent monthly increase in fuel without which sales would have dropped 1 percent. Outside of a 0.5 percent advance in non-store retailing, all the main categories registered monthly declines. Worst affected was non-specialized stores (down 3.2 percent) but there were sizeable declines in household goods (down 2.5 percent) and clothing & footwear (down 1.3 percent). Other stores also witnessed a small dip in volumes (down 0.2 percent).

Asia/Pacific

Japan

February unadjusted merchandise trade surplus was ¥654.11 billion, up from the year ago surplus of ¥638.28 billion. Exports were up 9.0 percent while imports gained 9.9 percent on the year. Exports have risen for 15 months in a row while imports were up 14 months in a row. Exports to the U.S. were up 2.0 percent on the year while exports to the EU jumped 12.7 percent on the year. Exports to Asia were up 12.3 percent while those to China soared by 29.1 percent. The export increase was led by autos, steel & iron and metal machines. On a seasonally adjusted basis, the merchandise trade surplus was ¥556 billion. Exports were up 4.4 percent on the month and 9.1 percent on the year while imports edged downward by 0.6 percent but were up 9.7 percent on the year.

February consumer price index was down 0.1 percent on the month and unchanged on the year for the third month. Core CPI excluding only fresh food was down 0.1 percent on the month and slumped 0.3 percent on the year while the core excluding food and energy was down 0.1 percent and 0.6 percent respectively. The decline in the annual core excluding fresh food widened from January due mainly to the slower pace of increases in energy prices. Regular gasoline prices were up 7.0 percent on the year in February, decelerating from 7.9% in January according to the Oil Information Center. The government stimulus measures to provide free high school education that began in April 2010 have been pushing down prices from year-earlier levels for the 12 months up to March this year. As the effect fades out beginning in April, it is forecast to push up the year-on-year change in core CPI by around 0.5 percentage point. The March Tokyo CPI data was collected prior between March 9 and March 11 and therefore does not show any impact from the earthquake. March Tokyo CPI was up 0.2 percent on the month but declined 0.3 percent on the year. The core CPI excluding just fresh food and the core that also excludes energy were both up 0.4 on the month and down 0.3 percent on the year.

Americas

Canada

January retail sales dipped 0.3 percent but gained 3.5 percent on the year. Volumes were down an even steeper 0.6 percent on the month. Much of the damage was caused by weakness among new car dealers where purchases dropped 1.7 percent from December. Excluding this sector sales were flat and without both this category and gasoline stations (minus 1.4 percent), they edged 0.3 percent higher. Seven of the 11 reporting subsectors saw demand decline. Furniture & home furnishings sank 2.3 percent. There were declines in electronics & appliances (0.6 percent), health & personal care (0.5 percent) and clothing & accessories (0.8 percent). The main areas of strength were general merchandise stores where purchases climbed 1.2 percent from December and building & outdoor equipment (1.0 percent) followed by sports & hobbies (0.9 percent) and food & drink (0.7 percent).

Bottom line

Equities rallied despite ongoing grave concerns in Japan, the Middle East and North Africa and the eurozone. Data were mixed with retail sales in Canada and the UK declining more than expected. The German Ifo survey for March showed that growth continues to be robust. In the U.S., housing continues to be a major problem. This next week marks the end of the first quarter of 2011 that was notable for its black swan events including unusual weather, an earthquake with its tsunami and nuclear crisis, upheavals in the Middle East and North Africa and a series of sovereign debt problems in the eurozone.

Looking Ahead: March 28 through April 1, 2011

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