Global Markets

Investors were kept busy last week monitoring the avalanche of new earnings reports, following the ongoing saga in Greece and vigiling the FOMC announcement along with its newly transparent policy making tools. There were also key economic data releases that warranted attention along with the IMF’s lowered global growth projections. For the week, equities were mixed.

According to the IMF, the Eurozone debt crisis is escalating and dragging down the world economy. As a result, it sharply cut its outlook for global growth and called for policies to restore confidence. The IMF lowered its 2012 forecast for global growth to 3.3 percent from 4 percent just three months ago, saying the outlook had deteriorated in most regions. It projected world growth would strengthen to 3.9 percent in 2013. The organization said economic activity was decelerating but not collapsing. However, it warned that global growth would come in about 2.0 percentage points below its already soft forecast if European leaders did not resolve the crisis and allowed it to drag on.

For the first time since the debt turmoil erupted two years ago, the IMF said the Eurozone would likely slip into a mild recession in 2012, with output contracting by about 0.5 percent. However, it maintained its 1.8 percent growth forecast for the United States in 2012, but cut its projection for Japan to 1.7 percent from 2.3 percent. The IMF said the United States and other advanced economies would likely not escape unharmed if Europe's crisis escalates further. The fund projects a sharp slowdown in the pace of growth in emerging and developing countries and urged them to focus policies to stimulate their economies.

As expected, the Federal Reserve left its federal funds target interest rate range at zero to 0.25 percent. In a change from last time, the FOMC said their benchmark interest rate will stay low until at least late 2014 — it had previously been mid-2013. The committee also anticipated that unemployment will remain high and inflation “subdued.” The FOMC said that the economy is expanding "moderately" despite slowing in global growth and that the unemployment rate would decline, but only gradually. Inflation is expected to run at levels at or below the FOMC's mandate which is 2.0 percent. Finally, the Maturity Extension Program (Operation Twist) will continue.

Global Stock Market Recap

Europe and the UK

Equities ended the week on a dour note. Investors continued to await the conclusion of the seemingly unending Greek negotiations to reach a deal on bondholder writedowns which are needed to avoid a messy default. Investors were also awaiting — then reacting to U.S. fourth quarter growth data. Friday’s losses were in contrast to Thursday’s advances after the Federal Reserve signaled that it will keep interest rates low through 2014 and cut into gains from earlier in the week. The FTSE managed to cling to an increase of 0.1 percent for the week while the CAC slipped 0.1 percent on Friday’s losses. The DAX however, was up 1.7 percent while the SMI slumped 1.5 percent.

Investors were disappointed that the U.S. GDP data did not meet consensus forecasts given the mostly positive data that preceded the release. GDP was up an annualized rate of 2.8 percent for the fourth quarter (or 0.8 percent on the quarter), missing forecasts in the 3.0 percent to 3.2 percent range. These disappointing growth data along with a contraction in UK GDP (down 0.2 percent on the quarter) indicate that there are speed bumps ahead. However, the plus side is that the U.S. is still growing while Europe appears to be sliding towards recession.

After markets here closed for the week on Friday, Fitch announced five sovereign downgrades. They include Spain, Italy, Slovenia, Cyprus and Belgium. It affirmed its rating for Ireland. Fitch cut Spain's rating from AA- to A, Belgium's from AA+ to AA, Italy's from A+ to A-, Cyprus's from BBB to BBB- and Slovenia's from AA- to A. Fitch said that "the Eurozone crisis will only be resolved as and when there is broad economic recovery." Fitch added that it sees further substantial reforms as necessary to resolve the crisis.

Asia Pacific

Most equities advanced in thin trading in a week rife with holidays. The Shanghai Composite and Taiex were closed for the week. On the week, the Jakarta Composite was virtually unchanged, the KLCI edged down 0.1 percent while the PSEi slid 1.4 percent. Gains ranged from 3.0 percent (Sensex) to 0.9 percent (Nikkei). Shares advanced after the Federal Reserve extended its pledge to keep interest rates low and Chairman Bernanke said the Fed would consider more asset purchases to boost economic growth. Analysts interpreted the Fed’s moves as favorable for equities.

In Japan, exporter shares continue to trade on the value of the yen against both the U.S. dollar and the euro. These companies have been hurt by the yen’s strength against its major counterparts. In contrast to Europe, most Asian markets climbed on Friday to improve their weekly gains, with the resource sector leading in Australia as dovish indications for U.S. interest rates pulled in buyers. As the week ended, the Fed's decision to provide some policy certainty outweighed concerns surrounding Greece's debt talks.

The graph above shows the Nikkei’s ups and downs since the beginning of the current fiscal year which ends on March 31^st. It is noteworthy to see that even after the earthquake and tsunami, the index was at a higher level than now. The index subsequently eroded along with other global indexes on the Eurozone sovereign debt crisis which in turn spurred a flight to safety to the yen. This in turn pressured key exporters’ stocks. The higher yen cuts into repatriated profits. Sales suffer because these companies lose price competitiveness.

Reserve Bank of India

The Reserve Bank of India left its repurchase interest rate unchanged at 8.5 percent but unexpectedly cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signaled future interest rate cuts, joining other BRIC nations. The RBI reduced the cash reserve ratio to 5.5 percent from 6 percent. The move adds around 320 billion rupees ($6.4 billion) into lenders. Brazil, China and Russia have either cut borrowing costs or lenders’ reserve requirements in recent weeks as the debt crisis in Europe saps the global expansion. India’s inflation, which was stoked by rupee weakness, eased to a two year low last month, giving the RBI more room to inject cash into a slowing economy. The reduction in the reserve ratio aims to “address structural pressures on liquidity in a way” consistent with the prevailing monetary stance, the RBI said. The persistence of “tight liquidity conditions” could disrupt the flow of credit and further exacerbate growth risks, it said.

Bank of Japan

The Bank of Japan left its key monetary policy interest rate range unchanged at zero to 0.1 percent and will keep its asset buying fund at ¥20 trillion and its credit lending program at ¥35 trillion. Also as expected, the Bank trimmed its growth forecasts for the current fiscal year, noting the effects of weak overseas economies, flooding in Thailand and the appreciation of the yen. The BoJ now expects real gross domestic product to shrink by 0.4 percent in the year ending in March rather than growing by 0.3 percent as it predicted last October. The bank has also revised down its forecast for the year ending in March 2013, from 2.2 percent growth to 2 percent. Analysts say that the BoJ may have been surprised by the slow pace of reconstruction spending in the earthquake affected region of Tohoku, where efforts to rebuild whole communities have hit bottlenecks.

The Japanese economy recovered quickly after the March 2011 earthquake and tsunami, but it has recently stalled due to the flooding in Thailand which disrupted supply chains and weakened global demand caused by the European sovereign debt crisis. The BoJ said exports and production have leveled off, while capital spending by firms is on a mild upward trend and consumption remains solid.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand left its official cash rate (OCR) unchanged at 2.5 percent where it has been since March 2011. RBNZ Governor Alan Bollard signaled interest rates may stay at a record low for longer than he intended a month ago, citing inflation that is “reassuringly” contained amid Europe’s debt crisis. Fourth quarter inflation data were significantly lower than market and RBNZ expectations, and a stark change from the inflationary pressures that seemed to be escalating in the first half of last year. Both headline and the RBNZ’s core measures now are close to the middle of the 1 percent to 3 percent target range. The Bank now has the freedom to wait and see how two of the biggest uncertainties over growth — Europe’s debt woes and the pace of reconstruction in Canterbury — pan out.

Christchurch and the surrounding Canterbury region in the South Island have been rocked by earthquakes since September 2010, including a February 22, 2011 temblor that killed 181 people. Authorities are demolishing city buildings and repairing homes, while large scale reconstruction is yet to begin. A further series of aftershocks has struck the city since December 23.

Currencies

The U.S. dollar sank against all of its major counterparts last week after the Federal Reserve pledged to keep interest rates at a record low for longer than originally forecast. This spurred investors to seek higher yields. The move was compounded by weaker than expected GDP for the fourth quarter. The euro was boosted on Friday after European Union Economic and Monetary Affairs Commissioner Olli Rehn said Greece was “close” to reaching agreement with its creditors. The euro climbed higher after U.S. consumer sentiment climbed to its highest in almost a year.

The euro maintained its gains even after Fitch Ratings cut the credit ratings of Italy, Spain, Belgium, Slovenia and Cyprus saying they lack financing flexibility in the face of the regional debt crisis. The yen was up against all its 16 most-traded counterparts including the Australian and New Zealand dollars. The Canadian dollar strengthened to parity with the U.S. currency for the first time since November.

Selected currencies — weekly results

Indicator scoreboard

EMU

December M3 money supply was up 1.6 percent, down 0.4 percentage points from an already sluggish November rate when compared with a year ago. As a result, the 3 month average measure eased from 2.5 percent rate last time to 2.1 percent. Moreover, the deceleration in M3 was accompanied by a drop in M1 growth from 2.1 percent in mid-quarter to 1.6 percent. Bank lending was very sluggish, posting an increase of only 1.0 percent on the year after a 1.7 percent annual gain in November. Borrowing by households slid 0.6 percentage points to a 1.5 percent annual pace within which loans for house purchase slumped from a 3.0 percent rate to 2.1 percent. At the same time, lending to non-financial corporations was 1.1 percent higher than in December 2010 but 0.5 percentage points short of its November rate. Even weaker, loans to non-monetary financial institutions (excluding insurance corporations and pension funds) declined 2.0 percent on the year versus a 0.5 percent 12-month fall last time.

Germany

January Ifo economic sentiment edged up to 108.3, its highest level since August. Expectations, which rose 2.3 points to 100.9, show their strongest reading since July. Current conditions actually deteriorated slightly, down 0.4 points at 116.3. At a sector level, gains in confidence were registered in manufacturing (13.4 after 8.9), construction (minus 3.7 after minus 6.3) and services (22.3 after 19.6). However, morale worsened in both wholesale (10.5 from 11.2) and in retail (minus 0.5 after 5.6).

United Kingdom

First estimate of fourth quarter gross domestic product contracted by 0.2 percent, its first decline since the end of 2010. On the year, GDP was up 0.8 percent. Only limited details are available with the first estimate of whole economy output and the key GDP expenditure components not to be released for another month. However, the ONS did indicate that the headline contraction was wholly attributable to a 1.2 percent quarterly slide in industrial output, within which manufacturing was off 0.9 percent, mining & quarrying 1.1 percent and energy 4.1 percent. Water supply posted a 0.2 percent gain but construction was down 0.5 percent. The service sector fared better with output unchanged from its third quarter level. However, this was only thanks to a 0.4 percent quarterly gain in the government category as distribution, hotels & catering dropped 0.5 percent and transport storage & communication 0.1 percent. Business services and finance held steady. Agriculture saw a 0.1 percent gain.

Asia/Pacific

Japan

December unadjusted merchandise trade deficit was ¥205.1 billion. Exports were down 8.0 percent while imports were up 8.1 percent when compared with the same month a year ago. On the year, exports posted a third drop in a row while imports posted their 24th increase in a row. Exports to Asia were down 11.7 percent while exports to China slid 16.2 percent and to Thailand, 16.6 percent. Imports from Asia were up 6.7 percent on the year. Those from China were up 5.8 percent while those from Thailand skidded 20.1 percent. Exports to the EU dropped 12.7 percent while those to the US were up 3.9 percent. On a seasonally adjusted basis, the merchandise trade deficit was ¥567.6 billion. On the month, exports were up 0.2 percent while imports climbed 0.7 percent. For the year 2011, the merchandise trade deficit was ¥2.493 trillion, the first deficit since 1980. Exports dropped 2.7 percent while imports jumped 12.0 percent.

December consumer prices were unchanged on the month and down 0.2 percent on the year. The core excluding fresh food was also unchanged on the month and slipped 0.1 percent on the year. Excluding energy as well as fresh food the CPI was down 0.1 percent on the month and dropped 1.1 percent on the year. Energy prices were up 6.9 percent on the year, cutting the decline in the overall CPI and core excluding only fresh food. Among the major categories, furniture & household utensils dropped 6.7 percent and culture & recreation sank 3.8 percent. Prices for fuel, light & water charges, reflecting higher costs were up 5.2 percent while transportation & communication was up 1.5 percent on the year. Goods prices slid 0.4 percent on the year while services were unchanged.

December retail sales were up 2.5 percent when compared with a year ago after sinking 2.2 percent in November. Among the major categories, general merchandise sales declined for the 11^th month in 12. They were down 0.2 percent after dropping 2.5 percent in November from a year ago. Machinery & equipment sales dropped for the fifth consecutive month. They were down 9.9 percent after plunging 51.9 in November. All other major categories posted gains with motor vehicles leading the way with an increase of 14.9 percent. Fuel was up 5.7 percent from a year ago.

Australia

December quarter final stage producer prices were up 0.3 percent and 2.9 percent on the year. The quarterly increase was due to increases in prices received for industrial machinery and equipment manufacturing (up 3.2 percent), other manufacturing (up 3.1 percent) and motor vehicle & parts manufacturing (up 1.4 percent). The increase was partially offset by declines in prices received for other agriculture (down 21.8 percent) and flour mill & cereal food manufacturing (down 6.1 percent). Intermediate producer prices also were up 0.3 percent but were up 4.9 percent on the year. The quarterly increase was mostly attributed to oil & gas extraction, petroleum refining and other agriculture. The increase was partly offset by price declines received for grain, sheep, beef & dairy cattle farming and basic non–ferrous metal manufacturing. Preliminary producer prices were up 0.4 percent and 5.9 percent on the year. Prices increased for oil & gas extraction, petroleum refining and property operators & developers. The increases were offset by drops in prices for basic non–ferrous metal manufacturing.

December quarter consumer prices eased from the previous quarter, giving the Reserve Bank of Australia more latitude to lower interest rates when it meets in February. The RBA’s inflation target range is 2.0 percent to 3.0 percent. The index was unchanged on the quarter and up 3.1 percent on the year. The CPI was up 0.6 percent in the September quarter and 3.5 percent on the year. On a seasonally adjusted basis, the CPI was up 0.2 percent on the quarter and 3.0 percent on the year. The RBA’s preferred measures -- the trimmed mean and weighted mean – were up 0.6 percent and 0.5 percent respectively on the quarter. Both were up 2.6 percent on the year. In the quarter, prices increased for domestic holiday travel & accommodation (7.3 percent), rents (1.0 percent), telecommunication equipment and services (1.1 percent), beer (1.2 percent) and automotive fuel (0.7 percent). Offsetting these price increases were declines in prices for fruit (down 13.4 percent), pharmaceutical products (down 5.6 percent), vegetables (down 5.0 percent), audio, visual and computing equipment (down 3.4 percent), international holiday travel and accommodation (down 1.9 percent) and motor vehicles (down 1.2 percent).

Americas

Canada

November retail sales were up 0.3 percent and 3.1 percent on the year. Prices were soft in mid-quarter and helped to depress the headline data. Volume sales were up 0.5 percent on the month, their fourth increase in a row. In the cash data, seven of the 11 sub-sectors saw higher purchases on the month within which sporting goods & hobbies (2.9 percent) fared especially well. General merchandise (0.6 percent) posted its sixth rise in the last seven months and a surge at auto parts, accessories & tire stores (5.1 percent) lay behind a 0.3 percent advance in the auto sector. Gasoline sales were up 0.8 percent and clothing & accessories 0.9 percent. On the downside, there was a third successive decline in furniture & home furnishings (0.8 percent) as well as declines in food & drink (0.3 percent), electronics & appliances (0.3 percent) and building materials & gardening products (0.1 percent).

Bottom line

Economic data were mixed globally last week. The Reserve Bank of New Zealand kept its monetary policy on hold while the Reserve Bank of India reduced its reserve requirements. The Federal Reserve said that it would keep its current fed funds interest rate range at zero to 0.25 percent until the end of 2014.

Economic data and earnings will vie for investors’ attention in a busy week for both. Market watchers will also be looking for the promised progress from the Greek negotiations.

Looking Ahead: January 30 through February 3, 2012

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