Global Markets

Most equities were up last week as worries about the European sovereign debt situation and U.S. debt ceiling negotiations weighed on investors. But a spate of favorable earnings reports offset debt woes. Even tepid economic data failed to override the better than expected earnings news. As optimism overrode pessimism on whether Thursday’s summit would resolve the ongoing Greek troubles, shares took off higher. And late Thursday’s news that indeed Greece will get a new aid package worth €109 billion sent equities soaring. But the rally was quick to fade given weaker than expected earnings from Caterpillar along with comments about Chinese demand and the continuing saga of the U.S. debt ceiling.

In the agreement which offers further help to Greece, European Union leaders said that they will expand the role of the European Financial Stability Facility (EFSF) to allow it to lend to governments which can then recapitalize banks, and to intervene in the secondary market to avoid contagion. The new rescue plan for Greece could push the country into default on some of its debt for a short period but would give Europe’s bailout fund sweeping new powers to shore up struggling economies.

European officials said that financial institutions that own Greek bonds would contribute €50 billion euros through 2014 through a combination of debt extensions and the purchase of discounted Greek bonds on the secondary market. The plan also dealt with the economic problems of previously bailed out Ireland and Portugal.

The summit meeting was called after days of market turbulence in which borrowing costs spiked for Italy and Spain, raising fears that the debt crisis would spread to those much larger countries, potentially setting off another global financial crisis. Germany, Finland and the Netherlands have insisted that private bondholders share the pain of a second bailout, putting them at odds with the ECB and some other governments. After markets closed in Europe, the ECB agreed to a deal under which existing Greek debt would be exchanged for new 30-year bonds with a low interest rate.

Global Stock Market Recap

Europe and the UK

After sinking Monday, European and UK equities rallied on expectations that eurozone ministers would reach an agreement on Greece at their Thursday meeting. Monday’s decline was attributed to disappointment over the stress test results announced on the previous Friday after markets closed. There were fears that the debt crisis would spread to Italy and Spain. Positive earnings reports also helped boost equities. Equities were up four of five days. But even though investors remained wary as the week ended the FTSE was up 1.6 percent, the CAX 1.5 percent while the CAC soared 3.1 percent.

Asia Pacific

Most equities advanced last week with gains ranging from a high of 3.8 percent (SET) to 0.4 percent (PSEi). The exceptions were the Shanghai Composite (down 1.8 percent) and the KLCI (down 0.8 percent). Shares rallied on plans to avert sovereign debt contagion in the eurozone along with progress on resolving the U.S. debt ceiling crisis. Earnings had offset worries earlier in the week about the resolution of these issues. The Shanghai Composite was down amid worries about an economic slowdown and high inflation. The All Ordinaries was up 2.9 percent while the Hang Seng added 2.6 percent.

Shares declined in mainland China after a preliminary reading showed July HSBC's China purchasing managers' index fell to a 28 month low of 48.9 from 50.1 in June. A reading below 50 indicates a contraction in manufacturing activity. According to the survey, input price inflation advanced during the month after falling to an 11 month low in June while output prices continued to increase, albeit at a slower pace. However, analysts noted that consumer spending and investment in infrastructure projects should still support gross domestic product growth of about 9 percent for the rest of this year.

Currencies

The euro was up on the week but declined Friday as investors had second thoughts about whether the plan announced Thursday to contain Greece’s debt crisis will be enough to quell regional turmoil. The currency pared its weekly gain after Fitch said Greece faces “restricted default” after it was agreed that the latest bailout plan would involve contributions from bondholders. However, the euro rallied later in the day.

The U.S. dollar was up Friday against the yen on speculation that a deal to raise the debt ceiling is near. The dollar climbed after touching ¥78.22 to the dollar, the lowest level since the day before the Group of Seven intervened to weaken the yen following the March 11^th earthquake and tsunami.

Selected currencies — weekly results

Indicator scoreboard

Germany

July ZEW survey was mixed with analysts’ assessment of current economic conditions improving to a reading of 90.6 from 87.6 but expectations declining to a reading of minus 15.1 from minus 9.0 in June. This puts expectations some 41.3 points below its long run average. The slide in the latter index was the fifth in succession and was attributed to concerns about the eurozone debt crisis in particular and uncertainty about the fiscal situation in the U.S.

June producer prices edged up 0.1 percent and were up 5.6 percent on the year. The annual pace was its slowest since December 2010. Basics were up 0.3 percent on the month as were consumer goods prices. Capital goods charges edged up 0.1 percent. Energy had a negative impact on the overall monthly change with prices edging down 0.1 percent. Excluding this sector, the PPI climbed 0.2 percent from May — although this was still soft enough to shave annual core growth from 3.8 percent to 3.7 percent.

July Ifo business sentiment index eased to a reading of 112.9 from 114.5 in June. The decline in the overall measure was due to a 1.9 point slide in current conditions to 121.4, its lowest level since April, and a smaller 0.8 point drop in expectations to 105.0, its fifth consecutive monthly decline. Confidence was slightly lower in most sectors except construction which registered a 1.3 point gain to minus 0.7. Manufacturing was down a comparatively steep 4.3 points at 23.4 (weakest since October 2010) while retail dropped 0.7 points to 10.7, wholesale 3.4 points to 18.1 and services 1.1 points to 25.3. Despite the July decline, Ifo suggested that the Eurozone fiscal crisis has had little impact upon German business sentiment and indicated that it expects a soft landing for the national economy.

United Kingdom

June retail sales were up 0.7 percent on the month and were up 0.4 percent on the year. Excluding fuel, volumes were up a marginally firmer 0.8 percent from their May level. Without the 0.2 percent monthly slide in food purchases, the June headline figures would have looked better as non-food sales were up a healthy 1.1 percent. Within this, there were solid gains in household goods (2.6 percent), non-store retailing (4.8 percent) and non-specialized stores (1.5 percent). Other stores (0.4 percent) also saw a renewed expansion. By contrast, the only other area to see a fall in demand was fuel (1.1 percent).

Asia/Pacific

Japan

June unadjusted merchandise trade recorded a surprise surplus of ¥70.7 billion. This was the first trade surplus since March’s earthquake and tsunami and a sign that many of the supply chain disruptions have been repaired. Exports were down 1.6 percent on the year while imports were up 9.8 percent. Analysts expected exports to drop a steeper 4.3 percent while imports had been expected to rise 11.1 percent. Exports to Asia were down 1.7 percent. However, exports to China were up 1.2 percent on the year. Exports to the U.S. slumped 6.1 percent but were up 8.0 percent on the year to the EU. On a seasonally adjusted basis, the merchandise deficit narrowed to ¥191.2 billion from ¥450.0 billion in May. Exports were up 5.4 percent on the month but slipped 2.2 percent on the year. Imports were up 0.5 percent and 11.3 percent on the year.

Americas

Canada

June consumer prices dropped 0.7 percent on the month. The decline reduced the annual CPI rate by 0.6 percentage points to 3.1 percent, its slowest pace since February. The weakness of the overall CPI was essentially mirrored in the core rates. Excluding food & energy, prices dropped 0.6 percent from May and were up just 1.4 percent on the year after a 2.0 percent annual rise last time. Similarly, the BoC's preferred measure which excludes eight volatile items was also down 0.6 percent on the month which in turn lowered its 12-month rate from 1.8 percent to 1.3 percent. The seasonally adjusted CPI is weak as well, declining 0.4 percent on the month. The seasonally adjusted CPI excluding food & energy index was 0.3 percent lower as was the BoC index. Within in the adjusted data, a 2.4 percent slump in transportation costs had a major impact on the monthly change in the overall index but there were smaller declines too in health & personal care (0.2 percent), recreation, education & reading (0.2 percent) and alcohol & tobacco (0.1 percent). Food and shelter prices both advanced 0.2 percent from mid-quarter but the largest gain was a 0.5 percent jump in the cost of housing operations, furnishings & equipment.

May retail sales edged up 0.1 percent on the month and that boosted annual growth to 4.0 percent from 3.5 percent in April. Volumes were unchanged on the month but seven of the eleven reporting sub-sectors posted increases from their respective April levels. The most significant monthly advance was posted by building material & garden equipment stores where purchases jumped 3.3 percent despite unusually wet weather in some parts of the country. Electronics & appliances were up 2.2 percent while clothing & accessories gained 1.0 percent, sports & other hobbies 1.3 percent and miscellaneous stores 1.4 percent. Gasoline sales were up 1.1 percent and general merchandise 0.8 percent. The relative strength here was all but offset by declines elsewhere, notably in motor vehicles & parts (down 1.0 percent). Excluding this sub-sector, purchases rose 0.5 percent. Other declines were seen in furniture & home furnishing (1.6 percent), food & drink (0.9 percent) and health & personal care (0.1 percent).

Bottom line

With little new economic news on the calendar, investors focused on earnings reports along with the ongoing sagas of Europe’s sovereign debt crisis and the painstaking U.S. debt ceiling negotiations. Despite doubts about the European plan, equities were up on the week for the most part.

This week brings a full slate of new economic information including the first estimates of both British and U.S. second quarter GDP. Australia’s second quarter consumer and producer prices will be released and provide clues to the next Reserve Bank of Australia interest rate move. Japan will post its end of the month data on unemployment, consumer spending and industrial output.

But all eyes will be on Washington and the debt ceiling negotiations with the deadline of August 2nd drawing ever so close.

Looking Ahead: July 25 through July 29, 2011

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