Global Markets

This past week was filled with rhetoric, first from the Group of Eight on Sunday. This was followed by an outpouring of public statements leading up to Wednesday's EU ‘informal’ summit and it continued virtually non-stop afterwards. As usual, the hype prior to these meetings sent equities north — but then there was that sinking feeling when no obvious action had been prescribed. Rather Greece was urged to follow the previously agreed to bailout plans. All urged Greece to remain a member of the Eurozone and that the new government — which will be elected on June 17^th — should abide by the bailout agreement.

Instead of firm decisions, leaders voiced repeated assurances that they wanted Greece to remain in the Eurozone, but emphasised any new government in Athens had to live up to the terms of its €174 billion bailout. The failure to decide on a clear path forward for Greece, Europe’s banks or Eurozone bonds reflects continued, deep divisions over how to respond to the mounting crisis caused by the possibility of a Greek exit. The leaders put off any decisions on shoring up the region’s banks despite rising concerns that instability in Greece was undermining confidence in the Eurozone’s financial sector. Instead, most of the session focused on a “growth compact” consisting of ways to spur investment in large scale infrastructure projects. But even there, no decisions were made on such proposals as injecting €10 billion in new capital into the European Investment Bank.

Regional leaders also failed to signal any significant new steps to stimulate the sputtering regional economy or resolve the competing agendas of French President François Hollande, who favors stronger action to spur growth and his German counterpart Chancellor Angela Merkel, who has opposed aggressive moves to ease the pressure on Europe’s weakest economies. Mr. Hollande has promised to find a way to generate economic growth not only in France but also for reeling economies like Greece. He has proposed that euro member nations pool their resources to make project bonds available for initiatives intended to promote growth. In the process, he has set himself as an opponent of Ms. Merkel and the austerity policies associated with her stance for fiscal rectitude.

Flash May manufacturing indexes released for the Eurozone, Germany, France, China and for the first time, the U.S. indicate the growth disparity between them. All save the U.S. recorded readings of below the breakeven point between expansion and contraction. Furthermore, the readings indicated a faster fall from April. The U.S. reading was above the 50 level indicating expansion — but it was at a slower pace than the month before. While last week’s first quarter GDP report suggested that the Eurozone had just managed to skirt a technical recession, a deep drop in the May PMIs leave little doubt that the region is in fact in a very real recession.

Global Stock Market Recap

Europe and the UK

Equities were up despite the lack of action on the part of EU leaders to take definitive action to help Greece — or for that matter, Spain. However, the message was a clear one — the EU leaders want Greece to remain in the Eurozone. But renewed speculation that Greece could exit the Eurozone battered stocks midweek. Economic data were poor with May flash manufacturing purchasing managers’ indexes contracting at an accelerating pace even in Germany. And the German Ifo survey confirmed the decline in sentiment. UK GDP for the first quarter was revised to a contraction of 0.3 percent from the initial estimate of 0.2 percent. UK retail sales plunged in April which does not bode well for the second quarter.

On Friday, Italian Prime Minister Mario Monti said he believes Greece will remain in the Eurozone — although it is not a certainty. Speaking on an Italian talk show, he also said that it is in Germany's interests to ensure that no member leaves the euro. He also said that the idea of jointly guaranteed Eurozone government bonds was attracting support among European leaders. Italy can help push Germany to support the idea of collective debt and to embrace the “common good” of Europe, he said.

Spain was also in the spotlight on the news that trading in shares of Bankia had been halted ahead of the release of the details of its rescue plan. The plan, in which Bankia is asking for a $24 billion bailout, was released after European markets closed for the week on Friday. Spain said it is prepared to inject the requested funds in what would be the largest bank bailout in the country's history. Also Friday, Standard & Poor's cut its ratings on the creditworthiness of Bankia and four other banks. It also revised its assessment of Spain's economic risk, saying it believes the country is entering a double-dip recession that will lead to a large increase in troubled assets.

The European markets ended Friday's session and the week in positive territory. Concerns over a possible Greek exit from the Eurozone have persisted and Greece will likely remain in focus at least until the country's second round of elections is held on June 17^th. Despite the evident economic and political woes, the FTSE, CAC, DAX and SMI were up 1.6 percent, 1.3 percent, 1.1 percent and 1.2 percent respectively for the week.

Asia Pacific

Equities mostly declined last week as investors awaited the outcome of the EU summit, only to be disappointed again. While equities advanced the beginning of the week, they dropped sharply mid-week and meandered mostly lower for the remaining part of the week. On the week, four of the 12 indexes followed here advanced while eight declined. Gains ranged from 0.4 percent (Sensex) to 2.3 percent (Kospi). Losses ranged from a decline of 0.2 percent (STI) to 2.0 percent (Jakarta Composite).

The Nikkei was down 0.4 percent, extending its slide for the eighth consecutive week and marking its longest stretch of losses since May 1992, when the index fell for nine straight weeks. A drag on the market has been the strength of the yen against the U.S. dollar and the euro. This in turn has stoked concerns about the earnings of major exporters. In Australia, stocks ended the week at their lowest levels in six months with financials losing heavily on European concerns.

Markets here were weighed down by media reports that some of China's biggest banks are set to miss their 2012 lending targets for the first time in at least seven years. But on Friday, risk sentiment improved somewhat, as investors digested comments from Italian prime minister Carlo Monti who said more EU states are in favor of eurobonds and who said he can help Germany accept the proposal for common sovereign bonds for the greater common good.

Bank of Japan

As expected at the end of its two day policy meeting the Bank of Japan monetary policy board left its key interest rate range at zero to 0.1 percent where it has been since October 2010 and left its financial asset buying program unchanged at ¥70 trillion after raising it from ¥65 trillion in April.

The BoJ does not expect Japanese growth to slow sharply in the near term because the adverse effects of slower exports are being offset by strong domestic demand, in large part due to reconstruction in the areas that were hit by the March 2011 earthquake disaster. In April exports declined to China, the EU and Asia but were up to the U.S. from a year ago. The preliminary estimate of first quarter growth was 1.0 percent on the quarter or at an annualized pace of 4.1 percent. Domestic demand contributed 0.9 percentage point to growth while net exports (exports minus imports) added only 0.1 percentage point.

The BoJ repeated that overseas economies on the whole still have not emerged from a deceleration phase but U.S. economic conditions have continued to improve moderately. At the same time, the BoJ warned about the drag on global growth from the European debt and political crisis as the yen remains relatively strong and share prices, weak.

At his press conference Governor Masaaki Shirakawa stressed that the BoJ was not shifting away from its easy money policy aimed at getting inflation back up to 1 percent. "There is no change at all in our stance of carrying on with powerful monetary easing." Shirakawa's remarks add fuel to expectations by many analysts that the BoJ will take additional easing steps around July when it is set to review its price forecast, or even sooner if uncertainties in the euro area increase downside risks to the Japanese economy. Although Shirakawa did not give any hints on what specific steps the bank may take next, he seemed reluctant to venture an opinion about cutting the interest rate on banks' excessive reserves held at the BoJ.

Currencies

Investors’ angst sent the euro tumbling last week. The currency was down against all of its major counterparts including the U.S. dollar, pound sterling and yen. On Friday the currency slipped below the $1.25 — a level not seen since July 2010 — before climbing above that level again. The euro was 2 percent lower against the dollar on the week, taking its decline this month to 5.4 percent, after a Greek opinion poll showed an anti-bailout party gaining support before June 17^th elections. The euro fell 1.2 percent against the yen over the past five days and is down 5.6 percent in May. The fresh losses occurred as some of Europe’s biggest funds said they had reduced their euro holdings on concerns about the stability of the region.

The euro sank Friday after a report that the governor of Spain's Catalonia region was seeking government help toward the region's troubled finances gave traders fresh reason to sell the euro. Although there were no new developments regarding Greece, the euro remains defensive amid ongoing political uncertainty and concerns that the country may leave the Eurozone. While European leaders continue to express their preference for Greece to remain part of the single currency, official comments suggest that prudent contingency planning is underway in case that proves not to be the case.

The euro also hit multi-month lows against the yen during the week, reaching its weakest level against the Japanese currency since February. The euro is currently at its weakest level against the pound since before the collapse of Lehman Brothers.

Selected currencies — weekly results

Indicator scoreboard

Germany

First quarter gross domestic product was up an unrevised 0.5 percent on the quarter and up 1.2 percent on the year. Growth primarily came from foreign trade with the foreign trade balance adding 0.9 percentage points to the quarterly change in total output after having subtracted 0.4 percentage points in the fourth quarter. However, domestic demand contracted a quarterly 0.3 percent. Destocking subtracted 0.4 percentage points but even without this impact the impression is one of weak spending at home. Household spending did return to positive territory, increasing 0.4 percent following a 0.2 percent decline in the fourth quarter, but gross capital investment was off 1.1 percent, reversing its fourth quarter gain and cutting 0.2 percentage points from growth. Construction investment dropped 1.3 percent and equipment spending, 0.8 percent. Government consumption was up 0.3 percent, just a third of its fourth quarter pace.

May Ifo sentiment index reading was 106.9, down 3 points from the start of the quarter and its lowest level since October last year. The drop here was attributable to retreats in both the current and expectations components. The former was down 4.1 points to 113.5, easily its weakest reading so far this year while the latter was 1.8 points lower at 100.9, its lowest level since January. The deterioration in sentiment was apparent in all areas outside of services and there was a particularly hefty drop in morale in the retail sector. Confidence in manufacturing declined to its worst level since September and in wholesale to its weakest since October. The (unadjusted) service sector index actually improved slightly to see its best reading since February.

United Kingdom

April consumer prices were up 0.6 percent on the month and 3.0 percent on the year. Prices were up in most categories on the month. The core CPI climbed 0.6 percent from March and was 2.1 percent higher than a year ago, 0.4 percentage points less than last time.

April retail sales tumbled 2.3 percent on the month, their worst performance in more than two years. The decline followed a slightly stronger revised 2.0 increase in March and saw annual sales growth drop 1.1 percent as significantly negative base effects also took their toll. With April officially the wettest on record, sales were expected to be soft but it is unclear how much of the latest decline was simply attributable to the bad weather. At least a part of a 5.2 percent monthly drop in purchases of clothing & footwear as well as a 13.2 percent collapse in spending on fuel were due to heavy rain in all areas and flooding in a number of regions. Total non-fuel sales were off a comparatively mild 1.0 percent from March. Non-store retailing was up 1.4 percent, giving weight to the view that shoppers stayed at home for much of the period. In fact, some areas actually performed well, in particular non-specialized stores saw demand expand 1.9 percent and household goods were up 2.1 percent. However, the other stores category suffered a sizeable 3.1 percent drop.

First quarter gross domestic product was revised to a contraction of 0.3 percent from the previous estimate of 0.2 percent. On the year, GDP was revised from a flat reading to a decline of 0.1 percent. The main reason for the revision was a weaker construction sector where output was revised to a drop of 4.8 percent on the quarter. The breakdown of the GDP expenditure components revealed a 0.1 percent quarterly increase in household spending but a 0.3 percent drop in gross fixed capital formation. The 0.2 percent decline in domestic demand would have been a good deal steeper but for a 1.6 percent surge in government consumption that alone added 0.4 percentage points to the bottom line. However, quarterly growth was also was hit by destocking which at least suggests that inventories should not be a significant constraint on output going forwards. Net foreign trade made a minimal negative contribution with a neutral impact from export volumes just offset by a 0.1 percentage point subtraction from imports.

Asia/Pacific

Japan

April unadjusted merchandise trade deficit was ¥520.3 billion – a deficit of ¥472.6 billion had been forecast. On the year exports were up 7.9 percent, below the consensus of 12.7 percent. It was the second increase in a row on the year. Imports also rose less than forecast. Imports were up 8.0 percent against forecasts of 10.9 percent. Imports have now risen 28 consecutive times when measured from a year ago. Japan’s trade data reflect slowing economic growth especially in Europe and China. Exports to the U.S. soared 42.9 percent on the year, rising for the sixth time in a row. However, exports to the EU were down 1.9 percent for the seventh drop in a row. Exports to China were also down for the seventh consecutive time, dropping 7.1 percent. Exports to Asia were down 2.6 percent on the year. On a seasonally adjusted basis, the merchandise trade deficit was ¥480.2 billion. Imports were down 1.7 percent on the month and 8.0 percent on the year. Exports however, were 0.5 percent higher on the month and up 13.3 percent from a year ago.

April consumer price index was up 0.1 percent and 0.4 percent on the year. The key core CPI excluding only fresh food was up 0.2 percent and 0.2 percent on the year for its third consecutive annual increase. Excluding both fresh food and energy the CPI was up 0.2 percent on the month but declined 0.3 percent on the year. Most of the main categories recorded positive annual gains including food (up 0.7 percent), fuel, light & water (up 4.7 percent) and transportation & communication (up 0.9 percent). Energy prices were up 5.3 percent after a 5.7 percent advance in March. Furniture & household utensil prices dropped 3.4 percent, medical care slipped 0.6 percent and housing was down 0.3 percent on the year.

Americas

Canada

March retail sales were up 0.4 percent and 4.1 percent on the year. Volumes also staged a recovery and matched the monthly increase in headline sales. Seven of 11 sub-sectors registered monthly increases, in part reflecting unusually warm weather, notably in the Ontario area. It was a particularly good month for the auto sector where nominal sales rose a solid 1.2 percent. Excluding auto sales, total sales would have edged just 0.1 percent higher. Building material & garden equipment & supplies dealers registered a 1.8 percent gain and there was a solid 1.3 percent advance in clothing & accessories. General merchandise stores (1.1 percent) were not far behind and sporting goods and hobbies (1.9 percent) were especially robust. However, there were some pockets of weakness, notably gasoline stations (down 1.6 percent) where lower prices were a major issue, health & personal care (down 0.6 percent) and miscellaneous stores (down 0.8 percent). Food and drink sales were flat on the month.

Bottom line

Both the Group of Eight and the ‘informal’ EU summit disappointed — neither offered a plan to resolve the current sovereign debt woes in Europe. Nor did they suggest ways to stimulate the sinking economies. Economic data during the week disappointed. Despite the rather gloomy scenario, most equity indexes were up on the week.

This coming week provides ample opportunities to assess growth prospects in the U.S., Europe and the Asia Pacific region with a plethora of new economic data ranging from consumer and business sentiment to hard data on how key sectors are behaving. The week ends with the U.S. employment report — that is one event that investors worldwide follow.

Looking Ahead: May 28 through June 1, 2012

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