Global Markets

No one will miss 2011 with its combination of man-made financial crises and natural disasters. The natural disasters were numerous beginning with a devastating earthquake in New Zealand which was followed in short order by Japan’s massive trembler and tsunami. There were floods in Australia and Thailand that disrupted production as well. And in the U.S., weather was the culprit ranging from tornadoes, floods and hurricanes to an unseasonable snowstorm in October.

In the man-made category, the escalating sovereign debt crisis in Europe captured investors’ attention. Frustration with the slow pace of progress by political leaders sent the euro to a 10 year low against the yen and below key support levels against the U.S. dollar. European stock indexes slumped as well. The crisis which began with Greece spread to take in Portugal, Spain and Italy as worries about contagion spread. At year end, the Eurozone debt crisis is far from resolved, turmoil in the Arab world that began in the spring now has shifted from Egypt and Libya to Syria, and Iran has threatened to stop the flow of oil from the Gulf if sanctions are imposed because of its nuclear ambitions.

Globally, equities plunged outside of the U.S. and the UK. One of 2011's biggest surprises has been the conspicuous strength of the U.S. stock market. Though it is heading for a roughly flat finish to a volatile 2011, the Dow and S&P outpaced all of the major global indexes. Most are down over 10 percent. A reason for this better U.S. performance was that outflows from Asia and Western Europe stock funds were roughly double those of flows out of U.S. stock funds in percentage terms, according to data from fund-flow tracker EPFR Global. The shift was part of a broader flight to safety as global investors sought refuge in gold, while snapping up dividend paying stocks and U.S. Treasuries.

Global Stock Market Recap

Global Stock Market — Quarterly Recap

Europe and the UK

Thin trading marked the holiday shortened last week of the year. However, this did not stop the several of the major indexes from cutting losses incurred in December while others increased their advances. On the week, the FTSE, DAX, CAC and SMI were up 1.1 percent, 0.3 percent, 1.9 percent and 0.7 percent respectively.

Results for the month of December were mixed. While the FTSE, CAC and SMI were up 1.2 percent, 0.2 percent and 5.0 percent respectively, the DAX declined 3.1 percent. On the quarter, the national indexes rebounded from the dreadful third quarter. Gains ranged from 8.7 percent and 8.5 percent for the FTSE and OMX Stockholm 30 to 0.2 percent for the IBEX 35. The FTSE (5.6 percent) and SMI (7.8 percent) were the only two indexes in this region to have single digit losses for the year. The CAC and DAX dropped 17.0 percent and 14.7 percent on the year.  

The performance of these indexes reflected investors' desire to avoid debt laden countries in the European periphery, with Italy's FTSE MIB down 25.2 percent for the year. Italy, Europe's largest debtor, faces €100 billion of bond redemptions and coupon payments by the end of April, which is likely to make investors nervous going into 2012. All cyclical sectors dropped heavily in 2011 as investors shunned these stocks as government austerity measures and a lending squeeze in the Eurozone could derail a fragile world economic recovery. In Germany, banks — a big component of the DAX — have been penalized for their holdings of government bonds from weaker Eurozone countries. Traders said the lingering threat of downgrades by ratings agencies over some Eurozone nations including France continue to hang over valuations and the outlook for the global economy.

Asia Pacific

Equities here were mixed in holiday thinned trading last week. Investors were reluctant to commit new funds before the New Year. Worries over the Eurozone overshadowed signs of improvement in the U.S. economy. On Thursday, data from Japan showed a weakening recovery while China’s purchasing managers’ manufacturing index on Friday revealed a reading of 48.7 compared to the earlier 'flash' reading of 49.0. However, the reading was slightly better than the survey's 47.7 reading for November.

Throughout the year though, Europe’s debt crisis kept investors wary and avoiding risk whenever possible. A steadying factor as the year ended was the string of better than expected data on employment, consumer confidence and housing from the U.S. For the month of December, five of 13 indexes including the All Ordinaries (1.8 percent), Kospi (1.2 percent), STI (2.1 percent), Sensex (4.1 percent) and Shanghai Composite (5.7 percent) declined. Monthly gains ranged from a virtually flat reading for the Topix to a 4.0 percent gain for the KLCI.

Losses were formidable for the year 2011 with declines mostly in the double digit range. The Sensex slid 24.6 percent, the Taiex dropped 21.2 percent and the Shanghai Composite was 20.3 percent lower. There were three indexes however, that were up for the year — the KLCI (0.8 percent), the Jakarta Composite (3.2 percent) and the PSEi (up 4.1 percent).

Currencies

Currency markets were choppy last week thanks to thin illiquid markets during the holiday week between Christmas and New Years. Many investors had closed their books on a volatile year prior to the holidays, choosing to put 2011 behind them.

For the year, sovereign debt concerns consumed investors as the European debt crisis escalated from periphery to core countries of the currency bloc. Questions were also asked about the fiscal positions of the US and UK. Against the dollar, the euro hit its low point of the year at $1.2858 — a 15-month low — last week following the auction of about €18 billion of Italian debt. The euro was down about 3.2 percent on the year against the U.S. dollar and slid 2.4 percent against the pound sterling. The pound sterling also declined against the U.S. dollar for the year. However, the resilience of the currency surprised many given the extension of the UK’s monetary easing program. Sterling’s main support came from the inflation threat. Consumer price inflation remained above 5 percent for much of the year.

Investors sold the volatile euro, and parked their funds in stable Swiss assets, forcing the euro to a record low of SFr1.0094 in August. A month later, the Swiss National Bank, citing the damage done to its export sector, said it would buy as many euros as necessary to maintain a floor of SFr1.20 against the euro.

The yen hit a record high of ¥75.55 against the dollar in the week after the March earthquake and tsunami as domestic investors repatriated their foreign investments. This prompted the world’s top central banks, including the Federal Reserve and the Bank of Japan, to sell yen and buy dollars to help relieve pressure on the yen. But subsequent solo intervention efforts were less successful. The euro weakened to a decade low against the yen on Thursday.

Selected currencies — weekly results

Indicator scoreboard

EMU

November M3 money supply was up 2.0 percent on the year. The preferred ECB measure of money supply — the 3-month moving average — slipped from 2.8 percent to 2.5 percent. The slowdown in large part reflected a sharp deceleration in bank lending where annual growth dropped a full percentage point to 1.7 percent. Within this, loans to households were 2.1 percent and borrowing for house purchase was steady at 3.0 percent. Lending to non-financial corporations was off just 0.2 percentage points at 1.6 percent. The main downward impact came from a sharp weakening in borrowing by non-financial intermediaries (excluding insurance corporations and pension funds) where lending growth plummeted from 8.5 percent last time to only 0.4 percent.

Asia/Pacific

Japan

November unemployment rate remained at 4.5 percent for a second month. Employment was up by 80,000 from a year ago to 62.60 million. This was the first increase in employment from a year ago in five months. The number of unemployed persons was down by 380,000 to 2.80 million from the previous year. On the year, the labour force participation rate slid 0.2 percent to 59.2 percent while the employment rate edged up 0.1 percent to 56.7 percent.

November national consumer price index was down 0.6 percent on the month and 0.5 percent on the year. Core CPI, excluding only fresh food, was unchanged on the month and down 0.2 percent on the year for the second straight month. Excluding both fresh food and energy, the CPI dropped 0.3 percent and 1.1 percent. Energy costs were up 6.7 percent on the year after increasing 6.1 percent in October. December Tokyo CPI was unchanged on the month and down 0.4 percent from last year. Less fresh food, the index also was unchanged on the month but down 0.3 percent from a year ago.

November household spending dropped for a ninth straight month when compared with a year ago. Spending dropped 3.2 percent as demand for TVs and musical instruments and housing as well as utilities dropped. The decline accelerated from a more modest 0.4 percent drop in October. The decline was led by a drop in spending on TVs and culture & recreation. Lower electricity charges also pushed down overall spending. However, spending on automobiles increased. Overall retail sales of transportation & communication (including automobiles) were down 1.5 percent on the year.

November retail sales were down 2.3 percent when compared with the same month a year ago after increasing 1.9 percent in October. The decline was attributed to lower machinery sales and department store and supermarket sales. Relatively high temperatures dampened demand for winter clothing and sales of household electronics. Automobile sales were up 19.7 percent on the year after jumping 22.8 percent the month before. However, machinery & equipment sales including consumer electronics plunged a record 51.8 percent, surpassing the previous record 30.3 percent drop in October.

November industrial production dropped 2.6 percent and was down 4.0 percent on the year. Output fell at a faster than expected pace as the global slowdown combined with a strong yen threatens the export led recovery. Output was up 2.2 percent on the month in October. Transportation equipment, which is mostly automobiles, declined 9.5 percent from the previous month. Information & telecom equipment plunged 23.7 percent on the month in November. METI's latest survey of firms' forecasts shows that production is expected to increase by 4.8 percent on the month in December.

Bottom line

Tumultuous 2011 whimpered to an end last week with most equities experiencing double digit losses for the year. The notable exceptions were three emerging market indexes in the Asia Pacific region and the Dow and S&P in the U.S. — they were up for the year. The yuan was up against the U.S. dollar while the euro slid. The Swiss franc, U.S. dollar and yen benefited from flights to safety.

The pace picks up after the long New Year’s weekend. Many economic indicators postponed from the end of December’s holidays are on tap this week including Eurozone unemployment, consumer prices and business and consumer sentiment. Purchasing managers' indexes for manufacturing and services for most of the Eurozone and the UK are among the new data that will be released.

A debate is already shaping up over whether the U.S.'s better performance in 2011 is merely a product of the global search for safe havens, or if there are longer term forces at play. Some skeptics argue that the global economy has grown too interdependent for any one market — especially one as big as the U.S. — to fully insulate itself from a crisis elsewhere.

Wishing you a happy, healthy and prosperous New Year!

Looking Ahead: January 2 through January 6, 2012

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