Global Markets

Aside from the Facebook IPO distraction, there was little cheer in equity markets last week. Global shares plunged as the Greek tragedy wore on. Added to these woes were wobbly economic data including flash growth estimates in Europe and mixed data from the U.S.

Greece will hold new elections on June 17^th after political party leaders failed to reach an agreement to form a coalition government. It follows an inconclusive election on May 6^th that left the country deeply divided and put its fate as a member of the Eurozone in doubt. A compromise for a government to save the country proved elusive after the three biggest parties each failed to form a coalition last week and three additional rounds of talks mediated by the president proved fruitless.

Under Greece's constitution, the party leaders are asked to agree on a caretaker government to lead the country to fresh elections. Since they could not agree even on a caretaker prime minister, the president appointed a senior judge, Panagiotis Pikramenos, as interim prime minister. The sole purpose of the caretaker government is to get the country through the elections and it cannot make any political moves.

European leaders have said they will halt aid if promises given in return for the bailout are not kept. If so, Greece could go bankrupt as early as next month. Analysts say that this will almost certainly herald a Greek return to the drachma, its traditional currency.

While most Greeks oppose the bailout terms, they overwhelmingly back the euro. Nearly 80 percent want a new government to do all that is needed to keep Greece in the euro, a recent poll showed. European leaders say Athens can remain in the euro only if it sticks to the promises to clean up its finances that it made to secure the bailout. Opponents say those harsh terms are making the situation worse by strangling the economy which contracted over 6 percent in the first quarter when compared with a year ago.

Global Stock Market Recap

Europe and the UK

Equities dropped as the sovereign debt crisis continued to swirl around Greece and Spain, and other Eurozone ‘peripherals’ as well. With the prospect of the uncertain Greek political situation lasting at least until the new elections are held on June 17^th, investors sold banks — and for that matter, everything else. Rating downgrades added to the downward pressure. The FTSE sank 5.5 percent, the CAC dropped 3.9 percent, the DAX slid 4.7 percent and the SMI slumped 2.6 percent. Only the DAX remains above its year end 2011 close.

Investors focused on Greece awaiting the inevitable announcement that the country would hold new elections on June 17^th. Adding to the depressing news was that the European Central Bank had reportedly halted monetary policy operations to some Greek lenders to restrict its risk — and perhaps to add pressure of its own on the country to resolve its difficulties.

But it wasn’t only Greece weighing on equities. Weakness in European bank stocks was sparked by a sharp sell-off in shares of Spanish bank Bankia. The Spanish government denied a newspaper report on Thursday that customers had withdrawn more than €1 billion from the partly nationalized lender over the past week. Bankia itself said that deposit activity was normal but the government's denial helped its shares to recoup some of their heavy losses. Concerns about the general state of Spanish banks, many of which have suffered heavy loan losses since the property market crash began in 2008 — and may have to write off more bad loans — have upset financial markets. Some market watchers believe a large injection of public funds to recapitalize the banking system and flush out the real estate losses may force Spain to seek an international bailout. The government took over the bank last week in an attempt to dispel fears that Bankia could not handle huge losses caused by the property crash which began in 2008.

Late Thursday, Moody's downgraded 16 Spanish banks and Santander UK, a UK domiciled subsidiary of Banco Santander. Earlier in the week, Moody's downgraded 26 Italian banks as part of a series of similar moves on sovereign and corporate debt issuers across the Eurozone periphery. Fitch Ratings downgraded Greece's credit rating by two notches further into junk territory and pointed to increased risk that the country may exit the Eurozone.

Flash gross domestic product reports show that the Eurozone scraped by with no change on the quarter and avoided a recession — thanks primarily to Germany’s 0.5 percent growth after contracting 0.2 percent in the previous quarter. The French economy stagnated after modest growth in the fourth quarter. However, Italy recorded a contraction of 0.8 percent after shrinking 0.7 percent at the end of 2011. Spain slid 0.3 percent on the quarter, the same as in the previous quarter which was the first decline since the final three months of 2009. Greek GDP plunged an unadjusted 6.2 percent from a year ago. GDP has now contracted for four consecutive years to 17.1 percent below the first quarter of 2008.

Asia Pacific

Equities plunged with many indexes hitting four month lows as fears of contagion spread among investors. The Kospi and All Ordinaries slipped below their year-end levels. On the week, losses ranged from 0.9 percent (Sensex) to 7.0 percent (Kospi). The Hang Seng and PSEi were down 5.1 percent and 5.4 percent respectively.

Wednesday’s favorable U.S. economic data were quickly forgotten when Thursday’s did not meet expectations, raising once again worries about global growth. The All Ordinaries was battered because Australia is seen as a higher risk country because of its commodity price exposure and a high exchange rate. Concerns about European politics and U.S. data have exaggerated effects.

Indian equities tumbled on Wednesday, weighed down by capital outflow worries after the rupee slid to a record low against the dollar as it succumbed to growing risk aversion due to concerns about India's widening current account and fiscal deficits as well as Europe’s situation. The rupee pared early losses after finance minister Pranab Mukherjee said there was no need to panic. He assured markets that the Reserve Bank of India is closely watching currency movements. After falling below the psychological 16,000 level for the first time in four months, the Sensex managed to end the week above that level, losing only 0.9 percent for the week.

Currencies

The U.S. dollar advanced against all of its major counterparts with the exception of the yen. Both the yen and the U.S. currency experienced safe haven demand. The euro dropped to its lowest since January and traded below $1.27 for a short time. The Australian dollar dropped below parity during the week and joined its Canadian counterpart — the loonie slid below parity the week before.

The euro extended its declines to a third straight week. Concerns that Europe’s sovereign debt crisis is worsening drove investors away from the currency. The euro weakened against most of its 16 major counterparts after Fitch Ratings downgraded Greece’s long-term credit rating citing heightened risk that the nation may not be able to sustain membership in the monetary union. The euro slid as rising borrowing costs in Spain spurred speculation the crisis is spreading from Greece.

The yen was higher against all of its most traded peers. The currency climbed to three month high against the dollar Thursday, in its biggest single day jump in over a year, after a weak reading of the Philadelphia Fed manufacturing survey cast new doubt on the health of the U.S. economy despite good housing starts and industrial production data the day before. Negative indicators play into expectations that the Federal Reserve will have to resume buying bonds in order to prop up the economy. This increases the amount of dollars in circulation and weakens the currency.

Selected currencies — weekly results

Indicator scoreboard

EMU

March industrial production declined 0.3 percent and was down 2.2 percent on the year. In the same way that unseasonably cold weather boosted output in February (energy up 8.7 percent on the month), so a return to more normal temperatures had the opposite effect in March (energy down 8.5 percent). However, other sectors fared much better. Intermediates jumped 1.0 percent from February and capital goods were up 1.1 percent. Nondurable consumer goods were 0.8 percent higher but durables slipped 0.2 percent. Regionally it was the familiar mixed picture with a 1.3 percent monthly advance in Germany contrasting especially sharply with hefty declines in Greece (1.0 percent) and Spain (1.8 percent). Italy (up 0.5 percent) saw a much needed increase after a cumulative drop of more than 3 percent in January/February but France was soft (down 0.9 percent).

First quarter flash gross domestic product was unchanged on the quarter and when compared with the same quarter a year ago. In line with the usual procedure for the flash report, Eurostat provided no details of the GDP expenditure components. Regionally for the larger member states, the best performer was Germany where total output was up 0.5 percent on the quarter. French GDP was flat and Italy saw its quarterly pace of decline steepen to 0.8 percent. Spain posted a 0.3 percent decline that put its economy back into technical recession. Among the smaller countries providing data the news was quite mixed. On the downside real GDP fell on the quarter in Cyprus (0.3 percent), the Netherlands (0.2 percent) and Portugal (0.1 percent). More positively there were gains in Belgium (0.3 percent), Austria (0.2 percent), Slovakia (0.8 percent) and Finland (1.3 percent).

April harmonized index of consumer prices was up 0.5 percent on the month and an unrevised 2.6 percent on the year. Excluding food, drink, tobacco & energy annual inflation was steady at 1.6 percent and was similarly unchanged at 1.9 percent omitting just energy & unprocessed foods. Excluding seasonal foods & energy, the rate slipped just a notch to also 1.9 percent.

March seasonally adjusted trade balance was in surplus by €4.3 billion, up from a larger revised excess of €4.0 billion in February. The unadjusted data showed black ink of €8.6 billion, a three month high. The first quarter surplus was €13.7 billion, up from €12.1 billion at the end of 2011. However, the March improvement in the bottom line masked a contraction in both sides of the balance sheet with nominal exports 0.9 percent lower on the month and imports off 1.1 percent. At 4.0 percent, annual export growth at least remains positive but imports now show no rise on their year ago level and provide further evidence of the weakness of Eurozone domestic demand.

Germany

First quarter flash gross domestic product was up 0.5 percent after contracting 0.2 percent in the fourth quarter of 2011. On the year, GDP was up 1.2 percent. While not providing any details on the GDP expenditure components, the FSO indicated that the quarterly expansion was mainly due to net exports, although household consumption also had a positive impact. By contrast investment declined.

May ZEW survey expectations component slid 12.6 points to 10.8, a decline in large part shaped by concerns about developments in Greece. However, current conditions were seen to have improved from April, rising 3.4 points to 44.1. Analysts in general anticipated further euro weakness and, given the sizeable exposure of German banks to Greece, there were worries about a fresh banking crisis. Still economic growth at home was put at 1.5 percent next year, not far short of government expectations.

France

First quarter gross domestic product was unchanged on the quarter and 0.3 percent above its level in the same quarter of last year. The headline readings were supported by a 0.2 percent quarterly increase in household consumption, an increase that was matched by public sector spending. However, this was largely offset by weakness in gross fixed capital formation which dropped 0.8 percent on the quarter. Business investment declined 1.4 percent while households were off 0.2 percent and public administration 0.1 percent. With stock building adding only 0.1 percentage points to the bottom line, domestic demand boosted headline quarterly growth by just 0.2 percentage points. Net foreign trade had a small negative impact as a 0.3 percent quarterly increase in export volumes was more than outpaced by a 0.7 percent advance by imports to shave GDP by 0.1 percentage points. This followed a 0.7 percentage point boost in the fourth quarter.

Italy

First quarter gross domestic product contracted a quarterly 0.8 percent — the third consecutive decline in total output. The annual workday adjusted rate of decline steepened from 0.4 percent last time to 1.3 percent. As usual few details were provided by Istat but they do indicate that an increase in agricultural output was easily more than offset by declines in both the goods producing and service sectors.

March seasonally adjusted trade balance returned its second surplus in the last four months in March. At €0.72 billion the end of quarter surplus compared with a smaller revised deficit of €0.44 billion in February and made for a first quarter shortfall of just €22 million, down sharply from the previous period's €2.3 billion. Exports were up 1.7 percent on the month but the bottom line was also helped by a 1.9 percent decline in imports. Annual export growth still slowed from 7.3 percent to 4.9 percent, its weakest pace since October 2011, but imports were down 10.9 percent on the year and testify to the sluggishness of domestic demand.

United Kingdom

March merchandise trade deficit held steady at February's slightly smaller revised Stg8.6 billion. The outcome reflected a 5.8 percent monthly rebound in exports to a new record high together with an offsetting 4.2 percent bounce in imports. Export volumes also saw a new peak. The underlying (excluding oil and erratics) shortfall narrowed from Stg7.8 billion last time to Stg7.3 billion. The surge in exports (notably autos) was all but entirely due to strengthening demand from the non-EU bloc which saw nominal sales to this region up 12.1 percent from February. By comparison, exports to the rest of the EU edged up 0.1 percent and underlined the weakness of domestic demand in the region.

April claimant count unemployment dropped by 13,700. March's 3,600 increase was revised to show a 5,400 decline. These were the first back-to-back declines since September/October 2010 and the April drop was the steepest since July that year. However, the jobless rate remained at 4.9 percent. Backing up the claimant count data, the more tardy ILO survey found a 45,000 drop in unemployment in the three months to March, its largest decline since the February through April period last year. The jobless rate on this measure was 8.2 percent, down 0.2 percentage points from the fourth quarter. March headline three month average earnings were up just 0.6 percent from a year ago, fully 0.5 percentage points less than in February. Indeed, single month earnings showed an annual increase of only 0.1 percent. Weaker bonus payments were a factor but even headline regular pay last quarter was just 1.6 percent higher than in the first quarter of 2011.

Asia/Pacific

Japan

April corporate goods price index was up 0.3 percent on the month and down 0.2 percent on the year. The annual decline was the first in 19 months. Petroleum & coal products were up 3.4 percent and 5.1 percent on the year. Food prices were up 0.3 percent on the month and unchanged on the year. Information & communications equipment slipped 0.2 percent and were down 8.6 percent on the year. Nonferrous metals were down 1.0 percent and 8.8 percent on the year. Electronic components & devices slipped 0.3 percent from a month ago and were down 2.2 percent from the same month a year ago.

March tertiary industry index declined 0.6 percent but was up 4.9 percent on the year. Among the industries that were down in March included information & communications (down 7.3 percent), living-related & personal services & amusement services (down 2.9 percent), wholesale & retail trade (down 0.4 percent), accommodations, eating & drinking services (down 0.4 percent), learning support (down 0.1 percent and compound services (down 1.1 percent). Among the industries that gained during the month were finance & insurance (up 1.8 percent), scientific research, professional & technical services (up 1.8 percent), miscellaneous services except government services etc (up 1.2 percent), medical and health care & welfare (up 0.5 percent). Other industries that advanced were real estate & goods rental & leasing, electricity, gas, heat supply & water and transport & postal activities.

March private sector machinery orders, excluding volatile ones for ships and those from electric power companies, declined 2.8 percent and were up 3.1 percent from the same month a year ago. Orders were up 0.9 percent for the three months January to March. The total value of machinery orders received by 280 manufacturers was 4.1 percent higher on the month. In the January to March period orders were up by 7.1% compared with the previous quarter. For the April to June period, the total amount of machinery orders was forecast to decrease by 9.4 percent while private sector orders, excluding volatile ones, were expected to be by 2.5 percent higher from the previous quarter respectively. In 2011 fiscal year, the total amount of machinery orders increased by 2.7 percent while private sector orders, excluding volatile ones, were 6.2 percent higher.

First quarter gross domestic product was up 1.0 percent on the quarter and 4.1 percent when compared with a year ago. GDP was up 4.1 percent on an annualized basis. Resurgent domestic demand and government spending helped fuel recovery from last year's natural disasters and supply chain disruptions that suppressed growth. Domestic consumption was up 0.9 percent on the quarter. It was boosted by reconstruction from last year's earthquake and tsunami disaster. Domestic consumption is helping the economy at a time of international vulnerability for export dependent countries such as Japan. One major driver of the first quarter expansion was public investment which was up 5.4 percent. This helped to partially offset the 3.9 percent drop in private non-residential investment.

Americas

Canada

March manufacturing sales jumped 1.9 percent and up 5.9 percent on the year. There was also good news on volumes which matched the headline nominal gain for their strongest monthly advance since July 2011. Cash sales were up in 13 of the 21 reporting industries within which petroleum & coal products (4.5 percent) stood out. Chemicals (3.2 percent) also fared well and there were respectable gains too in computer & electronics (5.7 percent) and food & drink (3.9 percent). Transportation equipment posted a 3.3 percent increase including a 2.3 percent gain in motor vehicles. Among those industries seeing declining sales, primary metals were down 1.2 percent and plastics & rubber dropped 1.6 percent. But the report is mostly promising and includes notable 2.0 percent monthly gains for both new orders and backlogs.

April consumer prices were up 0.4 percent and 2.0 percent on the year. Excluding food and energy the CPI also was up 0.4 percent and was up 1.9 percent on the year. The Bank of Canada core, which excludes eight volatile items, was up 0.4 percent and 2.1 percent when compared with a year ago. Seasonally adjusted the overall CPI was up a more modest 0.2 percent (excluding food & energy up 0.3 percent and the BoC index up 0.4 percent). Within this, clothing & footwear prices jumped 1.1 percent and there was an above average gain also in transportation (0.4 percent). Elsewhere, prices were quite subdued and a number of categories including household operations and shelter saw no change from March.

Bottom line

Stocks swooned last week as risk aversion took hold and sent investors scurrying for safe havens. Economic data were mixed globally.

The Bank of Japan meets this week — no policy change is anticipated. Further detail will be available on Eurozone growth statistics as well as flash manufacturing and services PMI indexes for May are on tap. Investors will continue to monitor conditions in Greece, Spain and the other ‘peripheral’ members of the Eurozone.

Looking Ahead: May 21 through May 25, 2012

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