Global Markets

Equities plunged last week as investors took fright over the many political and economic uncertainties, shed risk and ran for safety. The U.S. dollar was higher against virtually all counterparts except the yen. The Greek debt situation continues as European officials move at glacial speed to resolve their differences while the crisis accelerates. Now global economic growth is jeopardized and key economic data are indicating that growth is slowing to a snail’s pace. The Federal Reserve’s policy moves, rather than calming markets, sent them into a tailspin.

And the avalanche of talk surrounding the annual International Monetary Fund meetings in Washington combined with a surprise G-20 statement offering moral — but no concrete support — added to the cacophony. Group of 20’s unexpected statement calmed markets, but only momentarily. With governments not in the mood to boost spending — and instead are cutting spending — little help from fiscal policy is on tap. Central banks now are left with the heavy lifting of calming investors with few tools left to do the job.

Global markets tumbled as investor pessimism about the economic outlook on both sides of the Atlantic was deepened by weak data for the eurozone and a grim assessment from the Federal Reserve. The downcast mood is reflected across the board. Bond prices soared, pushing the United States benchmark yield to new lows while commodities such as oil and precious metals retreated. When the price of gold slid $110 in three days to below $1,700, it encouraged further selling. With sustained equity losses, investors could be using gold as it was meant to be used — to raise cash. Crude oil slipped along with industrial metals, such as copper, as the markets realigned their expectations for the global economy.

The Federal Reserve’s warned that a complete economic recovery is still years away, adding that the United States economy has “significant downside risks to the economic outlook, including strains in global financial markets.” The Fed also announced it would buy long Treasuries and sell short ones to help stimulate lending and growth. The Fed pointed to a number of long term problems in the American economy, including high unemployment and a depressed housing market.

Greece announced a new set of austerity measures Wednesday, aimed to convince international creditors to release a tranche of €8 billion in loans needed by mid-October to avoid bankruptcy. According to local media, a parliamentary vote will be held in the next few days. Speaking to reporters on Thursday, Greek Finance Minister Evangelos Venizelos said the government’s priority is to keep its commitments to foreign creditors to avoid a similar experience to that of Argentina, which defaulted on its debt in 2001 to 2002.

IMF outlook cut

Adding to the negative news was the International Monetary Fund. The IMF cut its global growth forecast and predicted ‘severe’ repercussions if Europe fails to contain its debt crisis or U.S. policy makers remain deadlocked over a fiscal plan. The IMF said that the global economy will expand 4 percent this year and next compared with June forecasts of 4.3 percent in 2011 and of 4.5 percent in 2012. The IMF said it based its forecasts for a “modest pickup of activity” in advanced economies and for “robust growth” in emerging counterparts on the premise that European policy makers will implement the measures to reinforce their bailout mechanism agreed on in July. The IMF is also assuming that volatility in financial markets does not worsen and that U.S. authorities agree on a fiscal plan that both supports the economy and outlines fiscal consolidation over the medium term.

Global Stock Market Recap

Europe and the UK

Equities tumbled as a confluence of negative factors sent investors flocking out of risky assets. Markets continue to focus on the escalating sovereign debt crisis with increasing intensity as policy makers failed to reach a solution at last weekend’s Ecofin meeting. Through the week, Greece sought to prove that it's worthy of receiving the October tranche by outlining a fresh package of austerity measures. Cutting high pensions by 20 percent in the public sector and placing 30,000 civil servants in a "labor reserve" on road to redundancy were among the tough measures agreed to at a marathon Cabinet meeting. Talks with the IMF, European Union and European Central Banks or ‘troika’ continue. Banks remain under scrutiny. S&P downgraded a group of Italian lenders on Wednesday while at the same time, French banks, which had been under assault, denied they are suffering capital shortages.

European stocks plummeted Thursday, suffering their worst performance in over two years, and the euro slumped against the dollar as fears regarding growth across the developed world was heightened by poor Chinese and eurozone economic data, by the continued Greek debt crisis and by a downbeat prognosis for the U.S. economy from the Federal Reserve. Concerns about the economic strength of the eurozone escalated after data showed activity across the eurozone manufacturing and service sectors contracted in September, according to the preliminary composite purchasing managers’ index. The FTSE, DAX and CAC slumped 5.6 percent, 6.8 percent and 7.3 percent respectively.

Finance chiefs of the Group of 20 nations vowed "strong and coordinated international response" to tackle the renewed risks facing the global economy and offered to support banks, if required. However, the leaders offered no immediate policy response to the crisis.

BoE minutes

With economic prospects deteriorating, the Bank of England signaled it was on the verge of pumping in more money to support growth, potentially as soon as October. Minutes from the Bank’s September meeting showed most monetary policy committee members believed the stresses of the past month had strengthened the case for an “immediate” return to the policy of quantitative easing.

With interest rates at a record low of 0.5 percent, attention is focusing on whether the Bank of England will revive its program of asset purchases after spending £200 billion in 2009 and 2010 — mainly on buying gilts — to help drive down borrowing costs for businesses and boost confidence. But any decision on more stimulus has to be weighed against high inflation, which was expected to top 5 percent later this year even though it is expected to slide back in 2012. Adam Posen remained the only one to vote for an additional £50 billion in asset purchases. But the minutes showed that most members of the MPC thought it was increasingly likely that more asset purchases would become warranted at some point. The pound fell to an eight-month low against the dollar, while gilts rose after the minutes were published.

Asia Pacific

Equities in this region reacted mostly to events happening elsewhere. Topping the list was the ongoing European sovereign debt crisis which sapped investors’ interest in risky assets. Mid-week, although expectations of the Federal Reserve’s operation twist were realized, investors where struck by the dour Fed view of the U.S. economy and the sharp negative reaction in U.S. markets. Thursday’s weak economic data from China also sent equities lower as the focus on slowing global growth began to erode prospects for emerging nations as well.

On Friday, trading was choppy. Some indexes cut losses after a late Thursday night (Friday morning in this region) after the G-20 statement gave a slight boost to sentiment. The G-20 pledged to take "strong and coordinated" action to stabilize the global financial system. However, there appeared to be nothing in the way of concrete new action and markets were generally underwhelmed.

The Reserve Bank of Australia released the minutes of its September 6 meeting. The Board noted that current monetary policy is well placed to respond to current and evolving economic conditions. Members are assessing medium term growth and the inflation outlook and how it will be affected by global developments. Although the domestic growth outlook appears to be positive, the question of how it will be affected by recent turmoil is an unknown.

Weekly losses in this region were substantial as many of the emerging markets plunged. The Shanghai Composite was down 2.0 percent while the Jakarta Composite sank 10.7 percent. The Philippine PSEi skidded 9.4 percent while the Hang Seng dropped 9.2 percent. The Taiex and SET lost 7.0 percent and 7.3 percent respectively.

Currencies

Flight to safety sent the U.S. dollar up against all of its major counterparts with the exception of the yen. The dollar jumped and currencies of commodity exporters tumbled on concern global growth is stalling after the Federal Reserve said it saw “significant downside risks” to the U.S. economy. The Fed’s statement stoked concern the global economy is headed for a recession and currency volatility surged to a 16-month high. The euro reached a fresh decade low against the yen after the Eurozone’s services and manufacturing contracted.

The pound weakened to an eight month low against the U.S. dollar after Bank of England officials said they may need to buy more bonds to keep borrowing costs capped as the recovery falters. Sterling was down against both the euro and the U.S. dollar after minutes of the BoE’s September meeting revealed that growth in the second half of 2011 may be “materially weaker” than projected in August. Most of the nine member Monetary Policy Committee said an expansion of the £200 billion bond purchase program was “increasingly probable.”

Both the Canadian and Australian dollars dropped below parity with their U.S. counterpart after an index from HSBC Holdings and Markit Economics predicted China’s manufacturing may shrink for a third month in September, the longest contraction since 2009.

Selected currencies — weekly results

Indicator scoreboard

Germany

August producer prices were down 0.3 percent and were up 5.5 percent on the year. Headline prices were depressed by a 0.6 percent monthly slide in the cost of energy but even without this, prices would have edged 0.1 percent lower, enough to cut the underlying annual rate to 3.3 percent. The dip in the core index was mainly attributable to the basics sub-sector where charges were 0.1 percent softer than in July. Both capital goods and consumer goods saw no change although within the latter, durable goods prices rose 0.2 percent.

September ZEW current conditions index was down almost 10 points at 43.6 and the expectations measure off 5.7 points at minus 43.3. The deterioration in the assessment of the current state of the economy was much less marked than the hefty 37.1 point slump recorded in July but the index still hit its weakest level since July last year. Expectations extended the run of monthly declines that began in March and now stand at their lowest point since December 2008. The latest survey results again reflect concerns about the European debt crisis and worsening state of the global economy and their combined potential impact upon both consumer and investor confidence.

Asia/Pacific

Japan

August unadjusted merchandise trade deficit was Y775.3 billion when compared with a year ago. Exports were up 2.8 percent while imports jumped 19.2 percent. This was the first unadjusted deficit in three months. Exports to the EU were up 6.0 percent from a year ago while those to the U.S. were up a more modest 3.5 percent. Exports to China were up 2.4 percent but edged up only 0.4 percent to Asia as a whole. Exports to Australia jumped 19.8 percent. On a seasonally adjusted basis, the merchandise trade deficit was Y293.4 billion. This was the fifth consecutive monthly decline. Exports were up 0.3 percent on the month and edged up 0.1 percent on the year. Imports were up 2.7 percent and 16.6 percent from a year ago.

Americas

Canada

August consumer prices were up 0.3 percent and 3.1 percent on the year. The monthly jump in the overall CPI was matched by the core indexes. The Bank of Canada’s preferred measure which excludes eight volatile items was up 0.4 percent from July to boost its 12-month rate to 1.9 percent while the CPI excluding food & energy was up 0.3 percent to stand 1.5 percent higher on the year. The acceleration in the 12-month headline rate was largely due to transportation (up 7.0 percent after 6.5 percent) with prices of gasoline, passenger vehicle insurance & air transport all picking up steam. Other positive effects came from food (up 4.4 percent after 4.3 percent) and shelter (up 1.8 percent after 1.3 percent). The seasonally adjusted CPI also was up 0.3 percent from the start of the quarter. Within this, transportation costs advanced a disproportionately steep 0.8 percent while household operation and furnishings gained 0.4 percent. Food, together with health & personal care was up 0.3 percent and shelter, 0.2 percent. Alcohol & tobacco charges held steady and recreation, education & reading costs slipped 0.2 percent.

July retail sales dropped 0.6 percent and were 3.9 percent above their year ago level. Volumes were softer, sliding 0.9 percent from June to provide a weak base to start the current quarter. Cash sales in July were hit by 2.8 percent monthly slump in auto demand, within which new car dealers saw purchases drop 3.5 percent. Excluding this sector, total sales would have shown no change on the month and also 3.9 percent higher on the year. Seven of the 11 sub-sectors experienced falling demand in July. Among these, furniture & home furnishings were down 2.2 percent on the month while electronics & appliances and building materials & garden equipment declined 0.8 percent. Sporting goods & hobbles had a particularly poor period with sales off 2.3 percent while gasoline sales were flat. However, food & beverages advanced 0.5 percent, general merchandise was up 0.8 percent and miscellaneous stores saw a 1.5 percent bounce.

Bottom line

Dour economic data sent investors scrambling to safe havens for cover after the preliminary September readings of the eurozone and Chinese purchasing managers’ surveys showed manufacturing and service activity faltering. Investors are growing increasingly impatient with the slow pace in Europe as the continent attempts to find a solution to Greece’s debt problem. The Federal Reserve’s glum assessment of U.S. economic activity sent equities sinking.

The last week of the month always brings a plethora of new economic data. Japan releases its usual onslaught of monthly data. In Germany, the important Ifo survey is on tap along with a spate of eurozone data including money supply and consumer prices which are key to the European Central Bank’s decision making process. Most likely, however, investors will continue to be focused on the ongoing European drama.

Looking Ahead: September 26 through September 30, 2011

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