Global Markets

Focus last week remained on the ongoing drama in the Eurozone as leaders met to decide upon a package of remedies for the sovereign debt crisis. Earlier in the week markets awaited the outcome and traded on comments regarding the negotiations. After an almost all nighter Wednesday — leaders met until 4:00 AM Brussels’ time — a deal to limit damages was agreed upon. While many details have yet to be decided, it proved to be progress and equity investors rejoiced, sending global indexes and the euro vaulting higher on Thursday. All indexes followed here were up last week and, with one trading day remaining, are up for the month of October.

After a summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens' massive debt load to sustainable levels. The agreement was reached after more than eight hours of negotiations between bankers, heads of state and the IMF. The deal also foresees a recapitalization of hard-hit European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility (EFSF), to give it firepower of €1.0 trillion.

But key aspects of the deal, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks to pin down — the plan to rebuild confidence after two years of crisis could unravel over the details. Three months ago, Eurozone leaders unveiled another agreement that was meant to draw a line under the debt, but they realized within weeks that it was inadequate given the depth of Greece's economic problems and the vulnerability of the banks.

Investors largely cheered Europe’s broad agreement to address its sovereign debt crisis, choosing to celebrate the fact that the Europeans finally agreed on something as opposed to the thornier question of how the plan is to be carried out.

Global Stock Market Recap

Europe and the UK

Even though investors took profits Friday, stock indexes here were up for the week. And with one more trading day left to the month they are up on the month as well. The rebound came after the region’s leaders agreed to expand a bailout fund to halt the sovereign debt crisis. It was noted that some of the fear factor had been removed for now. Stocks were helped by positive data from the U.S. as well. The FTSE was up 3.9 percent while the CAC and DAX were 5.6 percent and 6.3 percent higher respectively for the week.

After an euphoric Thursday, investors returned to earth Friday amid concerns that the comprehensive plan will not end the region's sovereign debt crisis. Italian borrowing costs spiked Friday, suggesting that the bond markets require more convincing from EU officials. Thursday's animal spirits was tempered after EFSF chief Klaus Regling said that he did not expect a "precise outcome" from his talks with Chinese officials and investors over the Asian country's participation in Europe's bailout efforts. Still, with the EFSF breakthrough suggesting that debt-ridden EU members will get more time to put their fiscal houses in order, stocks were down only slightly from Thursday’s 12-week highs.

Asia Pacific

Equities rebounded last week but especially on Thursday and Friday after the agreement in Europe was announced. With one day of trading left in October, all the indexes followed here show healthy monthly gains after declining in both August and September. Gains ranged from 3.0 percent (KLCI) to 11.1 percent (Hang Seng). Among major indexes, the Nikkei advanced 4.3 percent, the Shanghai Composite was 6.7 percent higher and the Sensex gained 6.1 percent. Asian banks climbed sharply higher on Thursday after the European measures were announced, and much of the sector added to those gains on Friday. Strong U.S. GDP data also boosted Friday's morale.

The Chinese market was up for a fifth straight session, with realty stocks pacing gains on expectations that the government will phase out curbs on home purchases. Chinese shares extended gains during the week after Premier Wen Jiabao said the government will fine-tune its economic policies as needed, cementing speculation the central bank may pause interest-rate increases. Traders are hoping for a lowering in the reserve-requirement ratio for small- and medium-size banks before the year-end followed by a cut in interest rates in the second quarter next year.

Reserve Bank of India

India's central bank raised its key lending rate by 25 basis points to 8.5 percent and hinted at an imminent end to its tightening cycle, saying it is unlikely to hike at its December meeting as inflation should be easing by then. In its mid-year monetary policy review the RBI said, "Notwithstanding current rates of inflation persisting till November, the likelihood of a rate action in the December mid-quarter review is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted." The RBI has raised rates 13 times in the past 19 months but has failed to take the sting out of inflation, which rose 9.72 percent on year in September.

The RBI's dovish comments Tuesday come as growth in Asia's third-largest economy is showing clear signs of a slowdown, crimped by the bank's aggressive monetary tightening and the deepening economic troubles in advanced nations. Still, the raise puts India at odds with the rest of Asia where most central banks have stayed on hold during a period of renewed economic turbulence and a few have even begun to ease policy to boost flagging growth.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand kept its policy interest rate at 2.5 percent thanks in part to easing inflationary pressures. Concerns about the impact of the European debt crisis on the economy, which is struggling to recover from its disastrous February earthquake, also influenced the decision. Adding to Governor Alan Bollard’s scope to pause is the rising New Zealand dollar that is easing inflation pressure from imports.

The RBNZ has an inflation target range of between 1.0 percent and 3 percent. Easing pressure — third quarter consumer prices rose by a less than expected 0.4 percent from the second quarter and 3.5 percent on the year. Removing the effects of a sales-tax increase, annual inflation accelerated 2.5 percent last quarter to within the Bank’s inflation target range.

The RBNZ cut borrowing costs in March to buoy the economy after the temblor in the South Island city of Christchurch devastated the city center and killed 181 people. Bollard has said he expects quake reconstruction will cost at least NZ$20 billion and will boost growth and inflation pressure over the medium term. The New Zealand’s economy was boosted by the Rugby World Cup, which ended with the host team’s victory on October 23. About 95,000 foreign fans who attended the seven-week tournament were likely to spend about NZ$700 million according to estimates.

Bank of Japan

As expected, the Bank of Japan kept its key interest range at zero to 0.1 percent. Also as expected, the BoJ took further monetary easing steps to prop up the economy which is threatened by the relentless rise of the yen and slowing global growth. With virtually no room to cut its already low key interest rate, the BoJ expanded its asset purchase program. The monetary policy board voted eight to one to expand its asset buying program from ¥50 trillion to ¥55 trillion. It also boosted the size of its long-term JGB buying to ¥9 trillion from ¥4 trillion. The MPB noted that economic activity has continued to pick up. It also said that it needs more time to confirm price stability in sight.

But pressure for authorities to take action is growing as concerns over the Eurozone debt crisis push up the yen to record highs against the U.S. dollar amid investors' preference for the perceived safety of the currency. The country is wary that a strong yen, which erodes the global competitiveness of Japan's exporters, could weigh on an economy that is already seeing its pace of recovery from the devastating March 11 earthquake decelerate amid the global economic slowdown. Since September 2010, Japan has intervened twice on its own and once jointly with other G7 rich nations to weaken the yen. But the effects of intervention have proved fleeting in the face of steady demand from nervous investors seeking highly liquid and relatively safe assets such as Japanese government bonds.

Currencies

The euro appreciated last week as Europe’s leaders came to an agreement of how to cope with the sovereign debt crisis. But in a sign that all is still not resolved, the currency declined on Friday from almost a seven week high against the dollar and yen as a rise in Italian borrowing costs raised concerns that European Union leaders have not done enough to stem the region’s debt crisis.

On Thursday, the euro rose about 2.0 percent against the dollar, the most in more than a year, after European Union leaders agreed to increase the region’s rescue fund capacity to €1 trillion and persuaded holders of Greek bonds to accept a 50 percent writedown on the country’s debt. According to Fitch, if the 50 percent nominal haircut on the proposed bond exchange was approved, it would be viewed by the agency as a default event under its Distressed Debt Exchange criteria. Attention on Friday turned towards efforts to get international investors to contribute to the bailout scheme, particularly China, whose leaders are currently being courted by EU representatives.

The yen climbed to a succession of record highs against the dollar in spite of registering declines against most other rivals. Analysts said that in an environment of cautiously positive risk sentiment, nervous investors have clung harder to their Japanese assets, preferring to sell their dollar holdings on speculation the Federal Reserve may soon venture back down the path of quantitative easing. With the yen at record levels against the dollar, talk has veered towards the prospect of official intervention to weaken the currency. Although there were further verbal efforts from the finance ministry to talk the currency lower, there was no physical selling of yen to buy dollar yet.

Selected currencies — weekly results

Indicator scoreboard

EMU

September M3 money supply accelerated to 3.1 percent from 2.7 percent on the year. The ECB's preferred 3-month moving average measure also advanced, gaining 0.3 percentage points to 2.6 percent. Private sector bank lending was up 2.5 percent from a year ago and matched its August pace. Within this, loans to households were similarly steady at a 2.9 percent annual rate and for house purchase, also unchanged at 3.9 percent. Borrowing by non-financial corporations grew 1.6 percent compared with 1.5 percent in August and lending to non-monetary financial intermediaries (excluding insurance companies and pension funds) was up 4.6 percent on the year, again in line with its August rate.

October economic sentiment shed 0.2 points to a reading of 94.8. Sentiment has fallen every month, apart from September, since February. Morale was little changed in all the major sectors although there were fresh small declines in both consumer confidence (0.8 points to minus 19.9) and industry (0.7 points to minus 6.6). Sentiment in retail was steady (minus 9.8) and there were modest gains in services (0.2 points to 0.2) and construction (1.3 points to minus 25.3). Regionally, sentiment dipped 0.8 points to 104.1 in Germany and 0.1 points to 90.8 in Spain. However, there were slight increases in both France (1.2 points to 97.2) and Italy (0.3 points to 89.3). Elsewhere, Greece recorded a 3.1 point drop to 67.5, just 0.3 points above the record low established in March 2009, but Portugal gained more than 4 points to 77.7. Germany remains the only EMU member where economic sentiment is still above its long-run average.

France

September household spending on manufactured products resumed its downward path with a 0.2 percent decline and leaving purchases 1.0 percent lower on the year. The drop was largely attributable to a sharp 4.7 percent contraction on the month in textile sales. This followed a 2.5 percent slide in August and put volumes 7.3 percent below their year ago level. The decline here was more than enough to offset a 2.8 percent advance in autos and a 0.2 percent gain in the other products category. Overall consumption was 0.5 percent lower on the month and more than reversed a modest 0.2 percent increase in August. Energy demand was particularly soft, falling 4.0 percent.

Asia/Pacific

Japan

September unadjusted merchandise trade surplus was ¥300.4 billion. Exports were up 2.4 percent on the year while imports jumped 12.1 percent from a year ago. The surplus was down 61.2 percent when compared with September 2010. It was no surprise that import growth surpassed export growth as many of Japan's 54 nuclear reactors remained shut for routine maintenance or due to the March earthquake disaster, promoting more purchases of fossil fuels used at thermal power plants. Indeed, imports of mineral fuels were 32.0 percent higher than a year ago with imports of LNG and LPG up 40.0 percent and 49.8 percent respectively. Continued imports here are expected to be a drag on the trade balance going forward. Exports with Asia edged up 0.2 percent on the year with those to China up 2.4 percent. Similarly, exports to the U.S. were up 0.4 percent. Exports to the EU were up 7.6 percent. September seasonally adjusted merchandise trade deficit was ¥21.8 billion — an improvement from August’s deficit of ¥294.4 billion. On the month, exports were 2.2 percent and on the year, they were up 2.4 percent. Imports were down 2.6 percent and gained 12.2 percent on the year.

September retail sales dropped a greater than expected 1.2 percent when compared with the same month a year ago after sinking 2.6 percent in August. Demand for digital TVs remained sluggish after rush purchases in July when Japan terminated analogue broadcasting services. Retail sales of machinery & equipment including consumer electronics plummeted 21.4 percent after sinking 19.2 percent in the previous month on the year. Automobile sales were down 0.3 percent.

September household spending dropped 1.9 percent on the year after sinking 4.1 percent in August. The decline was led by a continued sharp drop in spending on automobiles and a pullback in spending on TVs. Many households had already bought new digital TVs ahead of July 24, when Japan terminated analogue broadcasting. Transportation & communication spending slid 11.0 percent while fuel, light & water charges dropped 10.0 percent on the year. Spending on clothing & footwear dropped 5.0 percent. On the plus side, housing was up 9.9 percent and spending on furniture & household supplies was up 6.5 percent. Medical spending was up 2.3 percent.

September consumer price index was unchanged on the month and edged up 0.2 percent on the year. This was the third consecutive annual increase mainly due to higher gasoline and utility prices. The core CPI which excludes fresh food was also unchanged on the month and up 0.2 percent on the year. Excluding both food & energy however, the CPI was unchanged on the month and down 0.4 percent on the year. Goods prices were up 0.4 percent on the month but down 0.4 percent on the year while services slid 0.3 percent but were up 0.4 percent on the year. On the year, food prices were down 0.8 percent while furniture & household utensils slid 6.0 percent. Medical care costs were down 0.7 percent. However, transportation & communication prices were up 1.6 percent on the year.

September unemployment rate slipped to 4.1 percent from 4.3 percent in August as the number of employed increased from the previous month. The unemployment rate is the lowest since November 2008 when it was 4.0 percent. Effective with September data, the government released the national average unemployment rate based on figures from all the 47 prefectures, including earthquake hit areas that were previously excluded from the data. The adjusted number of unemployed was down by 30,000 to 2.67 million for the second consecutive monthly drop. The unadjusted number of employed people fell by 330,000 to 62.76 million on the year.

September industrial production dropped 4.0 percent from August and was down 4.1 percent when compared with the same month a year ago. Industries that mainly contributed to the decline were transport equipment, general machinery and electrical machinery. Commodities that contributed to the drop were large passenger cars, semiconductor products machinery and cellular telephones. According to the Survey of Production Forecast in Manufacturing, production is expected to increase 2.3 percent in October and 1.8 percent in November.

Australia

Third quarter producer price index was up 0.6 percent and 2.7 percent on the year after jumping 0.8 percent and 3.4 percent in the second quarter. The quarterly increase was mainly due to price increases for electricity, gas and water (up 8.2 percent), commercial fishing (up 14.1 percent) and other agriculture (up 3.7 percent). These increases were partially offset by declines in the prices received for building construction (down 0.3 percent) and motor vehicle & parts manufacturing (down 1.3 percent). Intermediate prices edged up 0.1 percent and jumped 4.5 percent on the year. Again, price increases received for electricity, gas and water (up 2.8 percent) contributed to the rise.  Marketing & management services (up 2.8 percent) and legal & accounting services (up 2.6 percent) also contributed to the overall increase. These increases were partly offset by declines in the prices received for grain, sheep, beef & dairy cattle farming (down 5.8 percent). Preliminary prices also edged up 0.1 percent but jumped 5.6 percent on the year. The increase mainly was due to increased prices received for electricity, gas & water (up 3.4 percent), coal mining (up 4.1 percent) and marketing & management services (up 2.8 percent). They were partly offset by a decline in the prices received for oil and gas extraction (down 4.2 percent).

September quarter consumer price index was up 0.6 percent after climbing 0.9 percent in the June quarter. On the year, the CPI was up 3.5 percent after a 3.6 percent gain in the June quarter. The Reserve Bank of Australia's trimmed mean was up 0.3 percent, following 0.7 percent for the June quarter. On a year-ago basis, the trimmed mean posted at 2.3 percent for the September quarter from 2.5 percent in the prior quarter. The most significant price increases for the latest quarter were for electricity (up 7.8 percent), international holiday travel & accommodation (up 5.1 percent), rents (up 1.2 percent), water & sewerage (up 8.6 percent) and property rates & charges (up 5.2 percent). The most significant price declines were for pharmaceutical products, (down 5.0 percent), audio, visual 7 computing equipment (down 3.3 percent), automotive fuel (down 1.4 percent), vegetables (down 2.5 percent), motor vehicles (down 1.0 percent) and fruit (down 1.2 percent).

Americas

Canada

August retail sales rebounded 0.5 percent after sinking 0.5 percent in July. On the year, sales were up 3.9 percent. The improvement in nominal demand was almost matched by volumes which were up a slightly more modest 0.3 percent from July. Within the overall monthly nominal gain, six of the 11 sub-sectors advanced. Gasoline sales (1.9 percent) were firm and more than made back their decline in June/July. Motor vehicle & parts dealers (1.0 percent) also advanced. Excluding the auto & gasoline categories, sales edged up just 0.1 percent. Furniture & home furnishings (1.6 percent) enjoyed a good month, as did sporting books & hobbies (1.5 percent). Health & personal care was up 0.7 percent and food & drink gained 0.3 percent. However, electronics & appliances (1.1 percent), clothing (0.7 percent) and building materials garden equipment (0.3 percent) declined.

Bottom line

Investors anxiously awaited the results of the European summit in the first part of the week, and staged a one day celebration on Thursday before focusing on the enormous amount of detail that has yet to be decided. However, all equity indexes followed here were up on the week. Economic data continue to be mixed. There were positive third quarter growth data from the U.S. which relieved some of the tensions about the economy’s weakness. In Japan, data disappointed. While the unemployment rate declined, so did retail spending and industrial production. The Reserve Bank of India increased its policy rate while the Banks of Japan and Canada and the Reserve Bank of New Zealand did not.

There are two main events this week in the U.S. — the FOMC announcement followed by Chairman Ben Bernanke’s press conference and of course, Friday’s employment situation report. In Europe, Mario Draghi, the new President of the European Central Bank, chairs his first governing council meeting and meets the press afterward. The data watch will revolve around the many manufacturing and services purchasing managers reports. London returns to standard time on Sunday, October 30^th — the U.S. follows on November 6^th.

Looking Ahead: October 31 through November 4, 2011

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