Global Markets

Equities were mostly higher after the resolution of the Greek bailout situation — at least for now. Markets barely reacted to the final terms. Rather they turned their attention to other factors including economic growth. The factors that influenced equities last week centered on China’s shockingly large merchandise trade deficit and statements by Prime Minister Wen Jiabao that cooled expectations of policy easing.

Concerns in China offset a spate of positive U.S. economic data and the Federal Reserve’s modestly upbeat FOMC statement that was less dour than its predecessors. The FOMC said that the economy was expanding moderately. The Fed also released results of a stress test of major U.S. banks. The majority of the banks tested have enough capital to satisfy regulators. The results of the stress test sparked a rally in the shares of most U.S. banks Wednesday, which contributed to the strong rally in the U.S. stock markets.

The Shanghai Composite (down 1.4 percent), the KLCI (down 0.5 percent), the Sensex (down 0.2 percent) and S&P/TSX (down 0.1 percent) were lower for the week. Advances ranged from 0.5 percent (Taiex) to 4.0 percent (DAX).

Global Stock Market Recap

Europe and the UK

Equities were up across the board last week as negotiations with Greece wound down and the agreements were approved by the appropriate organizations. The International Monetary Fund’s executive board approved a €28 billion loan for Greece Thursday, despite doubts raised by some members about the ability of the country to implement a four year program that includes stringent austerity measures.

Markets also were boosted by the Federal Reserve’s statement that the U.S. economy is expanding moderately. The results of the Fed’s bank stress tests also improved sentiment with bank stocks contributing to weekly gains. The FTSE, CAC, DAX and SMI were up 1.3 percent, 3.1 percent, 4.0 percent and 2.5 percent respectively.

A downside note was a Fitch downgrade of the UK outlook to 'negative' from 'stable.' Fitch cited vulnerability to economic shocks due to high indebtedness and a weak economic outlook. At the same time, Fitch affirmed the country's long-term foreign and local currency Issuer Default Rating as well as country ceiling at AAA. The rating agency said the affirmations reflect the progress made in reducing the government's structural budget deficit and the credibility of the fiscal consolidation effort. Greece’s credit rating was lifted out of the default category by Fitch on optimism that a debt swap will reduce the risk that the country eventually reneges on its obligations.

Swiss National Bank

As expected, the SNB announced that it will continue to target three month CHF LIBOR at the lower end of its current 0.0 percent to 0.25 percent range. At the same time the Bank reaffirmed its unwavering commitment to hold EUR/CHF above the CHF1.20 lower limit that it announced in September 2011.

Since its introduction the CHF1.20 floor has held firm, in part due to CHF17.8 billion worth of intervention undertaken by the SNB in 2011 to ensure exactly that. Nonetheless, as the SNB reiterated, current levels of the exchange rate (around EUR/CHF1.21) remain dangerously uncompetitive and a constant threat to economic recovery. To this end financial markets will continue to speculate about if and when the exchange rate floor might be adjusted higher.

The SNB also updated its economic forecasts. Growth this year is now estimated at around 1.0 percent while expectations for the CPI have been revised down again and is forecast to decline 0.6 percent on average in 2012. This compares with the 0.3 percent decline predicted in December.

Asia Pacific

Investors shifted their focus to economic growth and to China from Greece. In particular, China’s huge merchandise trade deficit shook confidence in global growth. However, thanks in part to favorable U.S. economic data, most indexes in this region recovered and were up for the week. The exceptions were the Shanghai Composite which slumped 1.4 percent, the Sensex which slipped 0.2 percent and the KLCI which was 0.5 percent lower. However, the Nikkei was 2.0 percent higher thanks to the sliding value of the yen, which in turn boosted exporters’ shares as the end of the fiscal year looms on March 31^st.

On Wednesday, shares were boosted by the Federal Reserve’s positive comments about the U.S. economy along with favorable bank stress test results. But Chinese stocks fell sharply after Premier Wen Jiabao poured cold water on expectations Beijing may loosen policy toward the property sector. The renewed concerns about Chinese growth overshadowed further signs of strength in the U.S. economy. The Shanghai Composite sank 2.6 percent Wednesday following Premier Wen Jiabao's comments that his government continues to be committed to cooling the housing market. He warned that the nation must embrace slower growth and bolder political reforms as it grapples with the implications of the shift in its economy from investment-led growth to one of greater consumption. The downbeat comments prompted investors to take some profits after recent gains. His comments dragged equities down elsewhere as well, including Australia and Korea.

Bank of Japan

As expected, the Bank of Japan kept its key interest rate range at zero to 0.1 percent. The vote was unanimous. At the same time, the BoJ kept its asset buying program at ¥65 trillion. The monetary policy board extended its growth oriented loans to March 2014 and boosted them to ¥3.5 trillion from the previously announced ¥3.0 trillion. It also extended its asset backed lending to March 2014. In addition, the Bank will establish special rules for a new arrangement for loans of ¥1 trillion equivalent in U.S. dollars for loans and investments denominated in foreign currencies which are expected to contribute to growth.

The BoJ said that economic activity in Japan has remained more or less flat but there are some signs of it picking up. It noted that while overseas economies still have not emerged from a deceleration phase, on the whole, some improvement has been observed in the U.S. and it said that the sluggish European economy has stopped deteriorating.

Reserve Bank of India

The Reserve Bank of India left its key repo interest rate unchanged for a third consecutive month at 8.5 percent after inflation accelerated. The repo rate is the rate at which central bank lends to banks. The reverse repo — the rate at which the central bank borrows from banks — was retained at 7.50 percent.

India joined nations from Indonesia to South Korea in holding borrowing costs this month, juggling price pressures with the need to prevent a deeper growth slowdown as investment falls and Europe’s debt crisis hurts exports.

The RBI raised borrowing costs by a record 3.75 percentage points from 2010 to October last year to fight price increases. The Bank unexpectedly cut the amount of deposits lenders need to set aside as reserves on January 24 and March 9 to ease a cash squeeze, lowering the cash reserve ratio a combined 1.25 percentage points to 4.75 percent. The bank said last week that such a decision was necessary to address a persistent structural liquidity deficit due to advance tax outflows.

The RBI has signaled rate cuts to counter the weakest expansion in almost three years. Such a move depends on a sustained easing in inflation and actions to curb the largest budget gap among BRIC economies. Growth slowed for the fourth straight quarter from a year earlier in the three months through December. The RBI said recent growth inflation dynamics have prompted it to indicate that no further tightening is required and that future actions will be towards lowering the rates.

Currencies

The U.S. dollar was down against most of its major counterparts with the exception of the yen and Canadian dollar last week. However, during March, the dollar has rallied. However, the currency’s moves have differed sharply from what was seen in the aftermath of the financial crisis. Over the past three years, dollar rallies usually were synonymous with risk aversion that was characterized by a flight to safety. That does not appear to be true now. The dollar is rising with equities amid more optimistic sentiment. A key reason for the change is the ongoing strength in U.S. economic data.

The yen continued its decline against both the euro and the U.S. dollar. The yen’s most recent decline can be traced back to the Bank of Japan’s February 13^th and 14^th meeting when the Bank surprised bank watchers by adopting a price stability goal of 1.0 percent and increasing its asset purchase program and its long term JGB purchases. The expansion of the BoJ's asset purchase program had the effect that multiple stealth interventions in the currency market did not. The yen declined.

Selected currencies — weekly results

Indicator scoreboard

EMU

February harmonized index of consumer prices was up 0.5 percent on the month and 2.7 percent on the year. Excluding food, drink, tobacco & energy the HICP was up 1.9 percent for the third month running and up 1.5 percent for the second consecutive month without just unprocessed food & petrol. Energy prices were up 1.1 percent on the month.

January industrial production was up 0.2 percent after sinking 1.1 percent in December. On the year, output dropped 1.2 percent. Nondurable consumer goods dropped 0.7 percent. However, energy was up 1.4 percent and capital goods were up 0.7 percent. Production was up just 0.2 percent from December in intermediates and only 0.1 percent higher in durable consumer goods. Among member states, production in Germany was up 1.5 percent on the month while France saw a 0.4 percent advance. However, Spain was down 0.2 percent and Italy was 2.5 percent lower. For those member states providing data, the annual growth rate was positive in only Germany (1.6 percent) and Slovakia (7.0 percent). All other countries registered declines.

Germany

March ZEW survey shows analysts marginally less optimistic about the current economic situation but notably more upbeat on the outlook. The index measuring current developments slipped a little but at 37.6, down just 2.7 points from February, suggests little concern about how GDP is shaping up at quarter end. Meantime, expectations jumped nearly 17 points to 22.3, their fourth increase in a row and their highest level since June 2010. ZEW indicated that worries about the debt crisis have eased somewhat since February although there is still uncertainty about the health of a number of EU economies and the state of the banking sector. The persistent strength of the local labour market is seen providing a boost to German domestic demand as the year progresses.

United Kingdom

January merchandise trade deficit widened out from Stg7.2 billion in December to a smaller than expected Stg7.5 billion in January. The modest deterioration reflected a 2.0 percent monthly increase in exports that was more than offset by a 2.6 percent rise in imports. The increase in the headline deficit was mirrored in the underlying (ex-oil and erratics) shortfall which expanded by Stg0.4 billion to Stg7.2 billion. However, this was still more than Stg0.4 billion below the November outcome and will boost hopes that the long awaited rebalancing of the economy may finally be taking place. Indeed, underlying export volumes were up a monthly 2.2 percent compared with a 1.8 percent increase in real imports. The bilateral deficit with non-EU countries was little changed on the month at Stg3.7 billion as exports posted a 4.4 percent jump to reach a new record high. Sales of cars were particularly robust. However, net trade with the rest of the EU worsened by around Stg0.3 billion to a deficit of Stg3.9 billion as exports slipped 0.3 percent on the month and imports rose 1.4 percent.

February claimant count unemployment increased 7,200 while the claimant count unemployment rate held steady at 5.0 percent for the fourth month in a row. ILO joblessness was up a relatively modest 28,000 over the three months to January, the smallest gain since May 2011. The ILO unemployment rate was 8.4 percent. Annual average earnings growth dropped from a slightly softer revised 1.9 percent in the December quarter to just 1.4 percent in the three months to January, its slowest pace since July 2010 and its steepest decline since April last year.

Asia/Pacific

Japan

February corporate goods price index was up 0.2 percent on the month and 0.6 percent on the year as expected. The CGPI has increased for 17 consecutive months when compared with the year before. Manufacturing industry products were up 0.2 percent both on the month and year. Among the major sector price changes on the year were petroleum & coal product prices (up 5.7 percent), pulp, paper & related products (up 3.0 percent) and chemicals & related products (up 1.9 percent). On the down side, nonferrous metals slid 8.5 percent after dropping 9.4 percent the previous month. Information & communications equipment saw prices sink 7.2 percent after a 9.3 percent drop the month before.

January core machinery orders were up a greater than expected 3.4 percent on the month and 5.7 percent on the year. The increase was led by orders for electricity machinery along with those for automobiles and other transport equipment. Offshore orders, which are not part of core, jumped 20.1 percent on the month on large orders for chemical plant machinery. The total value of machinery orders received by 280 manufacturers operating in Japan increased 21.6 percent from the previous month. Machinery orders are widely regarded as a leading indicator of corporate capital investment.

January tertiary index surprised and dropped 1.7 percent on the month – analysts had expected a modest increase of 0.3 percent. On the year, the index slipped 0.1 percent. Most components were down on the month. Finance and insurance dropped 6.8 percent, wholesale & retail trade declined 1.5 percent while information & communications was 1.2 percent lower. Accommodations, eating & drinking services declined 2.0 percent while scientific research, professional & technical services slid 1.8 percent. Medical, health care & welfare, transport & postal activities, living related & personal services & amusement services, real estate & goods rental & leasing and compound services also were lower on the month. Electricity, gas, heat supply & water was 1.3 percent higher while miscellaneous services (except government services etc) edged up 0.2 percent and learning support was 0.7 percent higher.

Americas

Canada

January manufacturing sales were down 0.9 percent after increasing 0.6 percent in December. On the year, sales were up 5.0 percent. The headline slide reflected monthly declines in eleven of the twenty-one reporting industries, led by aerospace products & parts (34.0 percent), which saw its third decline in the last four months. Primary metals were down 3.5 percent, non-metallic minerals lost 5.8 percent and machinery was 4.5 percent lower. However, beverage & tobacco products were up 5.9 percent on the month and new motor vehicle (2.6 percent) and parts (6.2 percent) advanced as well. Petroleum & coal registered a 1.1 percent increase from December and chemicals advanced 1.1 percent. Elsewhere the survey was mixed with a 0.8 percent monthly increase in new orders contrasting with a 0.2 percent drop in backlogs. In addition, inventories were up 1.1 percent, enough to lift the inventory/sales ratio from 1.29 months last time to 1.32 months.

Bottom line

Most equity indexes advanced last week. The Bank of Japan, Swiss National Bank, Reserve Bank of India and the Federal Reserve left their respectively monetary policies unchanged. Economic news for the week was mixed.

This is a relatively light week for new economic data. However, investors will hone in on the flash PMI releases for China, Germany, France and the Eurozone for the latest economic reading.

Looking Ahead: March 19 through March 23, 2012

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