Global Markets

Mostly equity indexes were up last week buoyed by a weekend reserve requirement cut by the Peoples Bank of China which was followed — after a marathon negotiating session — by an agreement on a bailout package for Greece. The week was thin on new economic data giving little direction in terms of global growth. Investors focused in on escalating crude oil prices in the wake of increased Iranian tensions.

Crude oil prices as measured by Brent and West Texas Intermediate climbed to their highest in nine months, lifted both by mounting tensions with Iran and optimism over Greece's latest bailout. Promising U.S. economic data are also adding a boost to prices. A weakening dollar, the result of easing European tensions for now, contributed to the increase.

Over the previous weekend, Iran said that it stopped exports to France and the UK and warned European companies that it would halt their supplies unless they sign long term contracts. In recent weeks, news reports have said that Iran is weighing an oil export ban on other countries including Italy, Spain and Greece that are all highly dependent on Iranian crude. The European Union as a whole is set to stop importing Iranian oil on July 1^st in a bid to pressure Tehran over its nuclear program. But analysts say prices could surge in short order if Iran preempts the sanctions with an export ban of its own. Iran exports about 600,000 barrels of oil a day to Europe. European refiners have already cut their imports from Iran ahead of an embargo due to come into force at the start of July, while other major buyers of Iranian oil such as Japan, South Korea and China are also reducing their purchases under pressure from the U.S.

Oil prices soared to a record high in euro terms, surpassing the peak touched in the 2008 price spike and posing a fresh problem for Eurozone economies already struggling under the weight of the region’s debt crisis. The euro denominated price of Brent crude climbed to a peak of €93.63 a barrel on Thursday, surpassing the previous high hit on July 3, 2008. In dollar terms, oil prices also surged, touching a fresh nine month peak though they remain well below their 2008 record of $147 a barrel.

The Greece bailout agreement

After forcing Athens to commit to unpopular cuts and private bondholders to take bigger losses, Eurozone finance ministers agreed to a €130 billion rescue for Greece early Tuesday morning. The agreement, which averts an immediate default, sees private sector holders of €200 billion worth of Greek bonds voluntarily writing down their holdings by 53.5 percent (up from the 50 percent originally negotiated) and seeks to reduce the amount of debt that the country has to refinance by an estimated €150 billion between 2012 and 2020. At the same time, the ECB will forego profits of up to €12 billion on its Greek bonds, funneling them instead back through the national central banks who will then pass them onto Greece. Interest rates on loans to Greece will also be cut.

As part of the €130 billion deal, which aims to reduce Greece's debt/GDP ratio from more than 160 percent currently to 120.5 percent by 2020, Athens has been forced to accept an enhanced and permanent presence of EU monitors to oversee its management. A primary budget surplus will be targeted from 2013 and will be accompanied by liberalization of the labor market as well as other structural reforms.

However, any optimism prompted by the deal, which essentially amounts to a managed Greek default, was tempered by a leaked copy of the IMF/EU's latest report on the country's refinancing prospects. This emphasized the downside risks to the Greek economy caused by its inability to devalue its currency and has left many doubting whether the current strict fiscal medicine can ever produce the desired results.

China cuts reserve requirements at last

The Peoples Bank of China announced a widely anticipated cut in bank reserve requirements on Saturday, February 18^th U.S. time. The 50 basis point drop to 20.5 percent, the first reduction since November, became effective on February 24^th and is seen adding an estimated $63 billion into the financial system. The latest move comes amid concerns that China's export industries are suffering the fallout from the European debt crisis. Inflation, a PBoC concern, declined to 4.5 percent last month, but is still uncomfortably high. Indeed, the Bank has indicated that it remains wary of inflationary pressures at home and to this end future policy easing is likely to be delivered only quite slowly.

Global Stock Market Recap

Europe and the UK

There was no rally after exhausted finance ministers finally agreed to a bailout package for Greece. Rather equities limped along and ended the choppy week mostly in positive territory despite concerns about the region's economy and climbing crude oil prices. Unease about the prospects of Greece avoiding debt woes in the not too distant future continues to weigh on investors.

On the week, the FTSE was up .05 percent, the CAC advanced 0.8 percent and the DAX was 0.2 percent higher. However, the SMI slid 0.9 percent. Stocks in Italy, Spain and Sweden also declined. Although there are potent threats from high oil prices, Europe's debt problems and from slowing Chinese growth, equities (except in Spain) are positive so far this year.

A recession warning from the European Commission overshadowed some encouraging news of German business sentiment mid-week. In its interim forecast, the EC said the Eurozone is expected to contract 0.3 percent this year, compared to the 0.5 percent expansion estimated in the autumn forecast. The updated forecast came after most Eurozone members recorded a contraction in the fourth quarter of 2011. The commission expects the economy to shrink 1.3 percent in Italy and 1.0 percent in Spain.

Asia Pacific

Most equities were mixed last week. However, many indexes were bolstered by better than expected economic data from the U.S. while in Germany there were indications that growth may be stabilizing. Growing hopes of further policy easing measures from major central banks and the approval of a massive bond swap by the Greek Parliament overshadowed concerns about the Eurozone economy slipping into a recession. Meanwhile, investors appear confident that rising oil prices will be short lived.

On the week, the Nikkei was up 2.8 percent as exporters advanced thanks to the declining yen against both the U.S. dollar and the euro in the aftermath of the Bank of Japan’s policy easing. The Shanghai Composite was 3.5 percent higher after the weekend easing of reserve requirements by the Peoples Bank of China on February 18^th. However, the Hang Seng shed 0.4 percent.

In Australia, the All Ordinaries was 2.7 percent higher on the week. Banks advanced after Reserve Bank of Australia Governor Glenn Stevens said he does not see the signs of the rapid collapse in global demand that was witnessed three years ago. "With growth near trend, inflation consistent with the target, interest rates about average and an outlook suggesting more of the same, the setting of policy was about right for the moment," Stevens said in his opening statement to House of Representatives Standing Committee on Economics.

Currencies

The move by the Bank of Japan to loosen monetary policy when it met on February 14^th sent the yen down against its major counterparts — including the euro and the U.S. dollar. In the process, the Bank effectively achieved the currency’s weakening to a greater extent than the previous stealth interventions by the Ministry of Finance. The BoJ unexpectedly expanded its asset purchase program to ¥30 trillion from ¥20 trillion, with ¥19 trillion set aside for government bonds. By the end of last week, the yen had dropped to a three month low against the euro. Foreign exchange volatility declined to its lowest level since August 2008 and signs of global growth prompted demand for higher yielding currencies.

The euro strengthened after Eurozone financial ministers approved a bailout package for Greece despite the problems that exist going forward. Officials prepared to address the debt crisis when Group of 20 nations meets on Saturday in Mexico. Europe is expected to be the central topic. Demand for the euro was boosted by the prospect that G-20 officials may discuss committing further resources to Europe’s debt crisis.

Selected currencies — weekly results

Indicator scoreboard

EMU

Flash February manufacturing PMI reading was 49.0, up from January’s final reading of 48.8. The PMI was below the key 50 growth threshold once again. Although output posted gains in the core EMU states, both France and Germany saw their pace of expansion slow. Moreover, production fell across the rest of the region and at a slightly faster pace than at the start of the year. New orders declined once again but at least by the smallest amount in seven months, largely thanks to a stronger performance by overseas demand. The service sector followed January's return to modest growth with a disappointing, if only minor, contraction at 49.4 and was 1 point short of January. New business was down but at a slightly slower pace than at the start of the year. The same was true of backlogs and weakness in the orders flow saw headcount decline, albeit only marginally.

Germany

February overall Ifo economic conditions improved slightly to 109.6, up from 108.3 in January. The headline increase reflected modest improvements in both current conditions (1.2 points) and expectations (1.4 points) leaving the former at its highest level since September and the latter with its strongest reading since July. At a sector level, morale in manufacturing edged just 0.9 points higher to 14.3 but was up 4.1 points at 3.6 in retail. Services registered a 2.6 point advance to 24.9 while wholesale gained 4.4 points to 14.9. However, construction recorded the largest increase, up 6.9 points at 3.3.

Fourth quarter gross domestic product contracted an unrevised 0.2 percent from the previous quarter. Annual workday adjusted growth was similarly unchanged at 2.0 percent. The first details on the GDP expenditure components confirmed the anticipated sluggishness of domestic demand which edged up a quarterly 0.1 percent after a 0.5 percent advance previously. In particular, private consumption followed a 1.2 percent spurt with a 0.2 percent decline while government expenditure edged up 0.1 percent. Gross capital investment posted a quarterly gain of 1.1 percent thanks to a 1.9 percent jump in construction investment. However, equipment spending was only unchanged. Net exports for once had a negative impact on the bottom line, subtracting 0.3 percentage points from the quarterly change in GDP as a 0.8 percent drop in export volumes more than offset a 0.3 percent slide in imports.

United Kingdom

Fourth quarter gross domestic product contracted an unrevised 0.2 percent on the quarter and was up a revised 0.7 percent on the year. The expenditure components were mixed. On the positive side, household spending was up a quarterly 0.5 percent, its first increase of any size since the second quarter of 2010. There was also a sizeable 1.0 percent increase in general government consumption. However, gross fixed capital formation dropped 2.8 percent and subtracted 0.4 percentage points off the quarterly change in the bottom line. Domestic demand declined a steep 0.7 percent from the third quarter. But since inventory unwinding accounted for 0.5 percentage points of this, the economic implications were not as negative as appearances suggest. In foreign trade, buoyant exports boosted growth by 0.7 percentage points. In terms of output, industrial production fell a steeper revised 1.4 percent but within this manufacturing was down a slightly smaller adjusted 0.8 percent. Service sector output was unchanged on the quarter.

Asia/Pacific

Japan

January unadjusted merchandise trade deficit was ¥1.475 trillion — the country’s biggest ever trade deficit and topping the previous record seen during the 2009 financial crisis. Japan’s trade has been hurt by weak global demand and a strong yen while fuel demand has boosted imports. On the year, exports were down 9.3 percent while imports were 9.8 percent higher. Exports to the U.S. were up 0.6 percent on the year while those to the EU sank 15.7 percent. Exports to Asia were down 13.7 percent and to China, 20.1 percent. Exports to flood ravaged Thailand dropped 8.5 percent. On the import side, imports from the U.S. were up 5.7 percent, up 7.6 percent from the EU and 7.5 percent higher from China. Imports from Thailand dropped 13.4 percent. High oil costs and hefty demand for liquefied natural gas to make up for a loss of energy supply due to the nuclear power crisis triggered by last year's earthquake and tsunami have sent imports soaring. The seasonally adjusted deficit was ¥612.806 billion. On the month, exports were down 0.4 percent while imports were 0.4 percent higher. On the year, exports dropped 8.0 percent while imports were 6.6 percent higher.

Americas

Canada

December retail sales slipped 0.2 percent and were up 3.4 percent on the year. The latest contraction was the first since July and masked a slightly better performance by volumes which were unchanged from their November level. Weakness in the headline was dictated by reversals in seven of the 11 reporting subsectors. Motor vehicles & parts (down 1.0 percent) were hit by a 9.4 percent slump in parts although purchases of new autos also struggled (down 0.4 percent). Excluding this category, sales were flat on the month. The other main declines were recorded in sporting goods & hobbies (3.4 percent), electronics & appliances (2.8 percent), gasoline (1.1 percent) and general merchandise (1.1 percent). Smaller declines were seen in clothing & accessories (0.8 percent) and at miscellaneous stores (0.2 percent). However, some areas enjoyed a good month, notably furniture & furnishings where sales climbed a solid 3.2 percent and building materials & garden equipment (2.4 percent).

Bottom line

Last week was shaped by the Peoples Bank of China’s long awaited cut in bank reserve requirements, the final sign off by the Eurozone finance ministers on a Greek bailout package and escalating crude oil prices.

Investors will keep their eyes on crude prices and the potential impact they might have on growth going forward. Key data on confidence, retail sales, unemployment and output are on tap. The week’s data should give a better perspective of global growth.

Looking Ahead: February 27 through March 2, 2012

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