Global Markets

Equities were up for the most part last week as investors became more confident that Europe would eventually find a way out of its debt morass. While earnings reports released thus far have not been anywhere near spectacular, traders seemed to accept the results with equanimity. All indexes followed here (except the KLCI which was unchanged) were up on the week. Advances ranged from 0.7 percent (Taiex) to 4.7 percent (Hang Seng).

Stocks advanced after the International Monetary Fund announced Wednesday that it is seeking up to $500 billion in additional lending resources. The IMF said that it would need about $1 trillion in financing in the coming years for loans to countries with short term difficulties. Given that the fund currently has unused lending capacity of about $380 billion, it said it will seek to raise up to $500 billion in new funds to lend, plus $100 billion as a cash buffer. The new funds include the $200 billion already committed by European Union countries in December.

Additional financing might bolster the IMF’s ability to aid Europe, though even with $1 trillion in available funds, it would not have the necessary resources to help big countries like Italy or Spain alone. A participant in the executive board meetings said that non-European members insisted that Europeans take the lead in providing funds for Europe through a firewall. The additional financing would significantly bolster the IMF’s ability to help smaller countries and the “innocent bystanders” that might be hurt by the Eurozone crisis.

The markets cheered the announcement. However, the IMF might face resistance to expanding its lending capacity. The United States — which holds the biggest voting share within the fund and is the only country with an effective veto on major decisions — has insisted that it will not pour any additional resources into the IMF. According to a Treasury spokesperson, the U.S. continues to believe that the IMF can play an important role in Europe, but only as a supplement to Europe’s own efforts.

Global Stock Market Recap

Europe and the UK

Equities were up last week even as trading petered to a close on Friday. Investors were looking for a resolution to the Greek debt debacle. Reports suggested that Greek officials have made progress in talks with creditors to avoid default, but some investors still chose to book profits ahead of the weekend. The continued signs of a U.S. recovery helped investor spirits as did expectations that China would loosen monetary policy. Equities rallied after Spain and France sold bonds at lower yields even after the S&P credit downgrades on January 13^th.

The focus has returned to Greece after the government continued to hold talks with its private creditors on a debt swap deal to lower the country’s borrowing and free up a second round of international aid. An agreement was struck in October to implement a 50 percent cut in the face value of Greek debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing the country’s borrowing to 120 percent of gross domestic product by 2020. An accord with bondholders is key to a second financing package, which faces a €14.5 billion bond payment on March 20^th.

A steadying factor last week was an unexpected record jump in German investor confidence. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, surged to minus 21.6 in January from minus 53.8 in December, the biggest gain since the index started in December 1991.

Asia Pacific

Most of the equity indexes in this region were up for the third consecutive week as worries about Europe calmed. Better than expected data from the U.S. and China also bolstered investor morale. Encouraging earnings from U.S. banks and successful bond auctions in France and Spain also eased concerns over European leaders' ability to tame the region's fiscal woes.

The Nikkei advanced after the euro strengthened against the yen, lifting exporters’ shares. Both the Shanghai Composite and Hang Seng soared ahead of the lunar New Year’s celebrations this week with the former up 3.3 percent and the latter gaining 4.7 percent. The Hang Seng closed above the important 20,000 level for the first time since October last year. China’s fourth quarter growth was slightly higher than expectations and the January flash purchasing managers’ index improved but still showed that manufacturing activity contracted for the third straight month, boosting the case for further easing credit controls.

Fourth quarter GDP grew at its slowest pace since 2009. Investors speculated that the slowdown will increase pressure on Premier Wen Jiabao to ease monetary policy. The People’s Bank of China injected 353 billion yuan into the financial market last week using 14-day reverse repurchase contracts, the most since early 2008.

Overseas investors were net buyers of Japanese stocks for the third straight week from January 10 through January 13, with net purchases reaching ¥153.5 billion according to the Tokyo Stock Exchange. The figure surpassed the previous week's ¥49.3 billion and marked the highest point reached since the fourth week of October, when net purchases by foreign investors hit ¥158.3 billion. Retail investors were net sellers for the fourth straight week, at ¥50.4 billion, down from the previous week's ¥61 billion. Trust banks also became net sellers for the first time in 12 weeks, with net sales reaching ¥200 million.

Currencies

The euro was up for the first week in seven after successful auctions by several member states lowered borrowing costs and took pressure off of the currency. Also contributing to improved sentiment were several better than expected U.S. economic reports. The euro’s weekly advance came as Spain, France, Greece and the European Financial Stability Facility (EFSF) sold bonds at lower rates than at previous auctions, even after Standard & Poor’s downgraded nine euro area countries on January 13^th and the rescue fund on January 16^th. The graph here shows that the euro’s long term trend has been lower since the beginning of 2008 when it hit its all time high.

However, the euro weakened as Greek officials conducted a third day of debt swap talks with private bondholders. The group had agreed in October to carry out a 50 percent cut in the face value of the nation’s debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing the country’s borrowings to 120 percent of gross domestic product by 2020. The euro was also supported after the IMF proposed raising its lending capacity by as much as $500 billion.

Selected currencies — weekly results

Indicator scoreboard

EMU

December harmonized index of consumer prices were up 0.3 percent and 2.7 percent on the year for slowest pace since August. Excluding food, drink, tobacco & petroleum, the 12-month inflation rate was steady at 1.6 percent while omitting seasonal food & petroleum as well as unprocessed food & petroleum, the rate stayed at November's 2.0 percent. Compared with a year ago, price increases slowed most significantly in energy (9.7 percent from 12.3 percent) but clothing (1.8 percent from 2.2 percent) also posted a useful deceleration. Most of the other main categories were little changed.

Germany

January ZEW survey showed a surprising improvement in analysts' assessment of the German economy. Not only did the current conditions index gain 1.6 points to 28.4, its first increase since July, but expectations surged fully 32.2 points to minus 21.6, its highest reading in seven months. The improvement was attributed by ZEW to stronger than anticipated U.S. data and lower longer dated EMU yields. Sentiment this month was also thought to have been supported by the hefty liquidity injections made by the ECB. Still, ZEW remains generally cautious about the economic outlook in general and, inevitably, see the ongoing European debt crisis as a significant threat going forward. Indeed, the jump in the expectations measure needs to be seen in the context of a long-run average value of 24.5.

United Kingdom

December consumer prices were up 0.4 percent on the month and 4.2 percent on the year. The annual rate is slowest pace since June 2011 and the steepest slide since April 2009. Outside of mainly energy related base effects, the December improvement was largely driven by weakness in the clothing & footwear area. Prices here dropped almost 3 percent on the month, enough to lower annual inflation in the sector from 9.2 percent in mid-quarter to 7.9 percent. There was also a significant decline on the month in the cost of alcohol & tobacco (1.5 percent) although this was essentially offset by a spike in food & non-alcoholic beverage prices (1.4 percent). Prices in the communications category (1.3 percent) were up significantly on the month and housing, utilities & fuels (1.0 percent) saw their usual sizeable seasonal gain. The core CPI, which climbed 0.5 percent from November, dropped from 3.2 percent to 3.0 percent on the year.

December claimant count unemployment was up 1,200 while the unemployment rate remained unchanged at 5.0 percent. However, the ILO figures showed joblessness climbing another 118,000 to 2.64 million during the three months to November and a new 17-year high. The unemployment rate on this basis was 8.4 percent. Headline average earnings growth in November was 1.9 percent on the year, down 0.2 percentage points from October's pace.

December retail sales rebounded 0.6 percent on the month after declining 0.5 percent the month before. Annual sales growth was up 2.6 percent. Excluding fuel, purchases also were up 0.6 percent from mid-quarter and were 1.7 percent higher on the year. December's recovery was led by the non-food (ex-fuel) sector where demand grew 1.0 percent on the month. Within this, clothing & footwear (1.8 percent), non-specialized stores (1.2 percent) and the other stores category (2.5 percent) stood out. Sales of food were up 0.4 percent from November and fuel purchases advanced 0.6 percent. However, it was not all good news as both household goods (down 2.4 percent) and non-store retailing (down 0.9 percent) suffered significant declines.

Asia/Pacific

Japan

November tertiary industry activity index dropped 0.8 percent both on the month and year. The index was hit by sluggish retails sales of consumer electronics. However, most subgroups were down on the month. Declining industries included wholesale & retail trade, living related & personal services & amusement services, finance & insurance, scientific research, professional & technical services, transport & postal activities, medical, health care & welfare, accommodations, eating & drinking services and compound services. The few subgroups that were positive on the month included miscellaneous services, information & communications, real estate & goods rental and leasing and learning support.

China

December industrial production was up 1.1 percent on the month and 12.8 percent on the year. Output was up 12.4 percent from a year ago in November. Only auto production declined, down 6.5 percent on the year. Among the categories that advanced were non-metal minerals which were up 16.7 percent while communication was up 15.4 percent on the year. Machinery was 13.3 percent higher while chemicals gained 14.8 percent. Textiles were up 12.7 percent and transport equipment was 10.3 percent higher.

Fourth quarter gross domestic product growth slowed to 8.9 percent on the year and dragged annual growth to 9.2 percent from 10.4 percent recorded in 2010. The fourth quarter number was slightly better than the 8.6 percent consensus forecast.

December retail sales were up 18.1 percent on the year after rising an as-expected 17.3 percent in November. On the month, sales were up 1.41 percent. Urban retail sales were up 18.2 percent from a year ago after increasing 17.3 percent the month before. Rural sales were up 17.8 percent after 17.2 percent the month before. All sales categories advanced. Auto sales were up 10.2 percent. Gold, silver & jewelry jumped 35.6 percent after increasing 16.2 percent in November.

Australia

December seasonally adjusted unemployment rate was at 5.2 percent for the second month. Employment dropped by 29,300 jobs to 11,421,300 in December. The decline in employment was driven by a drop in part time employment, down 53,700 to 3,370,300 and was offset by an increase in full time employment, up 24,500 to 8,051,000. The decrease in seasonally adjusted part time employment was driven by weaker than usual growth during the December period. The number of people unemployed decreased by 3,800 people to 629,900. The labour force participation rate slid by 0.3 percentage points to 65.2 percent.

Americas

Canada

November manufacturing sales jumped 2.0 percent and were up 10.2 percent on the year. Volumes were up 1.7 percent from October and were 6.9 percent higher compared with a year ago. Increased nominal sales were recorded by fourteen of the 21 reporting industries, led by machinery industry which saw shipments leap 13.4 percent to a new record level. Mining & oil & gas field machinery played a key role here. Motor vehicle sales were also unusually strong, gaining more than 7.0 percent from October as the effects of earlier supply chain disruptions continued to be unwound. Excluding this latter category, sales were up 1.5 percent on the month and 8.9 percent on the year. Strength in these sub-sectors was to some extent offset by weakness in computer & electronics where shipments slumped 11.0 percent on the month. Elsewhere in the survey, the news was positive across the board. In particular, new orders surged some 3.6 percent on the month and backlogs expanded 1.2 percent. Inventories rose 0.4 percent but this was not enough to prevent the inventory/shipments ratio declining 0.02 to 1.31 months.

December consumer price index dropped 0.6 percent on the month and was up 2.3 percent on the year. Excluding food and energy prices, the CPI dropped 0.6 percent from November and was just 1.3 percent higher on the year. Meanwhile the BoC's preferred core index which excludes eight volatile items declined 0.5 percent on the month, enough to reduce its annual rate from 2.1 percent to 1.9 percent. Transportation costs were down 1.1 percent, largely due to a decline in the price of new vehicles. In addition, gasoline prices declined again and the clothing & footwear category (down 0.1 percent) was also weak. The only increase in excess of 0.1 percent was in shelter (0.4 percent).

Bottom line

Markets were bolstered last week by improved U.S. economic data, reduced bond yields in several European auctions and favorable earnings reports. The IMF’s plan to raise more capital also was greeted with approval by investors.

The Federal Reserve, Bank of Japan and the Reserve Bank of New Zealand hold policy meetings this week. All are expected to leave monetary policy unchanged. The Bank of England releases the minutes for its last policy meeting. Bank watchers will be parsing the text looking for clues to the next easing move. Investors will continue to await an agreement between Greece and private creditors.

Looking Ahead: January 23 through January, 27, 2012

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