Global Markets

Global markets were mixed last week. Many indexes responded to currency movements along with the U.S. FOMC minutes. The latter jolted investors as they interpreted discussion of alternatives for eminent action. A knee jerk reaction followed the minutes’ release. Equities dropped in the U.S. followed by those in the Asia Pacific region and Europe. Equities continued downward on Thursday as disappointing Eurozone and U.S. data added further to the downward impetus. While most equities rallied Friday, it was too late to undo the previous two days of losses for many indexes.

The Group of 20 nations declared on Saturday there would be no currency war. Japan's expansive policies, which have driven down the yen, escaped direct criticism in the G-20 statement thrashed out in Moscow. Analysts said the yen, which has dropped about 20 percent as a result of aggressive monetary and fiscal policies to reflate the Japanese economy, may now continue to fall. The final communiqué included a G20 commitment to refrain from competitive devaluations and stated monetary policy would be directed only at price stability and growth. It said disorderly exchange rate movements and excess volatility in financial flows could harm economic and financial stability.

In the ensuing days since the G-20 statement, several central bank governors have spoken out about their current currency rates. On Wednesday, Reserve Bank of New Zealand Governor Graeme Wheeler said he is ready to intervene in foreign exchange markets, adding to comments by officials from South Korea to South America warning their currencies are too strong. The NZ dollar (aka kiwi) declined after the governor said “the kiwi is not a one-way bet.” The country is not a member of the G-20. The kiwi has surged almost 45 percent against the U.S. dollar since the end of 2008, the biggest advance after its Australian counterpart among over 150 currencies tracked by Bloomberg.

After Japan’s leaders pledged steps to boost the economy that caused the yen to tumble, policy makers in South Korea and the Philippines are weighing curbs to capital inflows. Other Asian policy makers have also vowed to curb currency swings in the past month as inflows from developed markets fueled the risk of asset bubbles and of decreased export competitiveness. Speculative trading in the currency market “should be curbed in any means,” Bank of Korea Governor Kim Choong Soo said at a meeting with economists in Seoul. Other Asian central bank governors have also spoken out including the Philippine central bank and Bank Indonesia.

In Europe, the central bank of Norway (Norges) said it is ready to lower interest rates to counter the krone’s strength if it interferes with the bank's inflation target. Norway’s currency rose 6.7 percent in the past six months against the dollar. While the Swiss franc weakened against the euro this year after the region’s debt crisis eased, the Swiss National Bank said the currency remains at risk of strengthening as European leaders struggle to restore confidence. The SNB said it will continue to enforce a cap at 1.20 francs per euro.

Global Stock Market Recap

Europe and the UK

Despite volatile trading, European markets managed to rally Friday sufficiently to be positive for the week. The reason for the advance was the continued strength in German ZEW and Ifo business confidence data. However, the upcoming Italian election, which will be held February 24^th and 25^th, was also a source of concern. The potential return of former Prime Minister Silvio Berlusconi or a hung parliament could jeopardize the government's reform policy agenda. The FTSE inched up 0.1 percent, the SMI gained 0.7 percent while the CAC and DAX were 1.3 percent and 0.9 percent higher respectively.

February flash PMI indexes for the Eurozone pointed to a further decline in business activity, puncturing hopes that the economy, despite buoyant financial market performance, will emerge from recession in the first months of 2013. The flash composite output index that measures performance of both manufacturing and service sectors declined unexpectedly to 47.3 in February from a 10-month high of 48.6 in January. In France, the flash composite output index slumped to 42.3 from 42.7 in January. Germany’s flash composite output index dropped to 52.7 in February from 54.4 in January. A reading above 50 indicates expansion.

The European Commission reversed its prediction for an end to recession this year, blaming a lack of bank lending and record joblessness for delaying the recovery. The Eurozone now is expected to contract 0.3 percent in 2013. This means the Eurozone will remain in its second recession since 2009 for a year longer than originally foreseen. The Commission sees the Eurozone economy growing 1.4 percent in 2014, with a decline of 0.6 percent for 2012.

Joblessness is set to peak at 12.2 percent — or more than 19 million people — in 2013. Both private and public consumption will not make any contribution to improving output. Rather it will be a drag on the economy. The outlook raises the prospect of further interest rate cuts by the ECB to jump start the economy by reducing the cost of lending for companies and families, although with banks reluctant to lend, any impact may be muted. Consumer inflation is forecast to be 1.8 percent for 2013. The Commission's overall view is a touch more pessimistic than that of the International Monetary Fund, which sees a 0.2 percent Eurozone contraction this year.

Asia Pacific

Equities here were split on the week with seven of the 12 indexes followed here advancing on the week. The Nikkei gained for a second week while both mainland China and Hong Kong indexes sank. Asian stocks ended mostly higher on Friday with renewed weakening in the Japanese yen and bargain hunting following the previous session's sell-off offering some support. Investors remained focused on Italy's general election due to be held this weekend, as a return of former prime minister Silvio Berlusconi or a hung parliament could pose downside risks to the government's reform policy agenda. The Nikkei was up 1.9 percent while the Shanghai Composite and Hang Seng lost 4.9 percent and 2.8 percent respectively. China’s indexes were dragged down by financial stocks driven by concerns over liquidity conditions and fiscal tightening policies.

Japanese equities fluctuated with the yen. The yen weakened (stocks rose) against the dollar and euro after Finance Minister Taro Aso said whoever assumes the role of the governor of the Bank of Japan must be able to communicate closely with the Ministry of Finance, raising expectations for forceful action from the Bank of Japan once the new BoJ governor is selected. Prime Minister Shinzo Abe is expected to decide the BoJ candidates after his meeting with U.S. President Barack Obama in Washington on Friday.

The All Ordinaries was down 0.4 percent despite Friday’s rebound following upbeat remarks by Reserve Bank of Australia Governor Glenn Stevens on global economic conditions. Appearing before the Federal Parliament's House of Representatives Standing Committee on Economics in Canberra, Stevens said the recovery process around the globe has gained traction and the recent RBA cuts to interest rates were beginning to have an effect on the economy. He said the RBA stands ready to cut the 3.0 percent cash rate further if economic data suggests it is needed.

In China, stocks have been surging since December on signs of improving growth, including higher property prices that lie at the heart of the economy. But investors were spooked after China's cabinet on Wednesday repeated its pledge to use a number of measures, including higher down payments and home purchase limits, to clamp down on real estate speculation and prevent prices from spiraling out of control. Domestic housing prices and sales have rebounded in recent months, stoking fears of resurgent inflation that could derail the economic recovery under way following last year's slowdown. Further dampening the mood was the Chinese PBoC’s record withdrawal of cash this week from the banking system as it tries to stave off a potential spike in inflation from both rising housing prices and persistently high commodity prices.

Currencies

Currencies were front and center last week after the G-20 did not chastise Japan for its aggressive rhetoric in its drive to lower the currency’s value against the U.S. dollar and the euro.

Traders here are watching closely to see who is appointed the new governor of the Bank of Japan. BoJ Governor Masaaki Shirakawa said in early February he plans to step down on March 19^th, three weeks earlier than anticipated. Traders expected Prime Minister Shinzo Abe to appoint the new governor before his visit with President Barack Obama in Washington. But the announcement was postponed until after Friday’s meeting. Needless to say, this will be an important event that will drive the yen.

As Japan's yen continues downward, China's yuan heads in the opposite direction. Since the beginning of October, the Japanese currency has lost over 17 percent against the U.S. dollar. China's currency, meanwhile, is gaining ground, with the Peoples Bank of China guiding it up about 1 percent against the dollar over the same period. The yuan depreciated for much of 2012, and this marks a significant change in direction. The shift reflects a number of factors. Aggressive monetary easing in the U.S., Europe and Japan is pushing commodity prices higher. Pushing up the yuan helps stave off imported inflationary pressure. China's trade with the rest of the world shows signs of tipping further out of balance. After contracting for the previous three years, China's trade surplus ballooned to $231 billion in 2012 from $154 billion in 2011. Higher inflows through the trade account add to pressure for the yuan to rise, as well as weakening China's argument that the currency is near fair value. The pressure on China's exporters from Japan's falling yen is limited. Japan's focus is on high-end manufacturing. China — despite advances in recent years — is still competing at the low end. With China a big importer of components from Japan, a weaker yen is actually a positive in some respects.

Sterling declined sharply after the minutes of the latest Bank of England monetary policy committee meeting were published as investors concluded more stimulus may not be far off. The MPC vote showed six members for maintaining current rate policy at 0.5 percent and a ceiling of £375 billion for asset purchases and showed three members — including BoE Governor Mervyn King — advocating a higher asset purchase ceiling of £400 billion. As the Eurozone’s debt crisis has subsided, sterling's appeal as a haven alternative to the euro has dimmed, sending the currency down. Investors have instead focused on the quandary facing the BoE and its political leaders — how to stimulate weak growth without further fueling stubbornly high inflation. Mr. King will be succeeded by Mark Carney, the current governor of the Bank of Canada on July first. Mr. Carney has signaled he may pursue an even more expansionary policy as governor than Mr. King.

Selected currencies — weekly results

Indicator scoreboard

EMU

February flash composite PMI reading was 47.3 — 1.3 points below its January level. The flash manufacturing PMI slipped just a notch to 47.8 and, outside of Germany, reflected accelerated rates of decline on average across the rest of the region. New orders at least declined at their slowest rate in 20 months but this was largely thanks to a rise in Germany and much the same applied to backlogs. Employment was down for the 13th consecutive month and at much the same pace as at the start of the year. Input costs saw their first drop in six months while factory gate prices retreated for the eighth month out of the last nine. A 47.3 flash service sector PMI signaled the worst performance since November and incorporated the 18th successive drop in new business and the sharpest decline in backlogs in 43 months. Payrolls were trimmed quite aggressively and business expectations fell back from January's 8-month high. Input cost inflation hit a 7-month low while service provider charges eased again but at the slowest pace in nine months. Within the core, the divergence between the French and German economies was again both very apparent and an increasing cause for concern. A composite output index of just 42.3 in France was well short of the 52.7 registered in Germany.

Germany

February ZEW survey was more mixed than expected with the current conditions index posting a decline while the expectations measure registered another strong gain. Current conditions slipped nearly 2 points to 5.2, their first decline since November. Expectations on the other hand were up for the third month running and while February's 16.7 point advance was the smallest of the three, at 48.2 the index is at its highest level since May 2010.

January producer prices were up 0.8 percent — the sharpest increase since April 2011. The PPI was up 1.7 percent from a year ago and its fastest rate since September 2012. Much of the damage was done by the energy sector where charges were up 2.1 percent on the month. Excluding this category, the PPI would have risen a minimal 0.1 percent from year-end to stand just 1.3 percent higher on the year. Among the other major components, consumer goods were up a relatively firm 0.3 percent from December (durables 0.5 percent) but capital goods climbed a modest 0.2 percent and basics only 0.1 percent.

February Ifo economic sentiment was up 3 points to a reading of 107.4 — its highest level since April last year. The improvement in the headline index reflected larger than anticipated gains in both the current conditions and expectations components. The former was up 2.1 points at 110.2, its steepest increase in two years and its highest mark since September. At the same time, the more closely tracked expectations index jumped 4 points to 104.6, its best performance since August 2009 and its highest level since July 2011. At a sector level, morale rose most sharply in wholesale and construction but manufacturing also saw a marked improvement as did services leaving just retail unchanged and at the same level for the third month running.

Fourth quarter gross domestic product contracted 0.6 percent on the quarter — the worst performance since the first quarter of 2009. Work day adjusted GDP was up 0.4 percent from a year ago. Within a 0.2 percent quarterly rise in domestic demand, private consumption edged up 0.1 percent having shown no growth in the previous period. Gross capital investment was up 0.4 percent but spending on new equipment was down 2.0 percent and construction was off 0.1 percent. Government expenditure climbed 0.4 percent and inventory accumulation added 0.2 percentage points to the bottom line having subtracted 0.3 percentage points last time. However, net trade worsened sharply as export volumes dropped 2.0 percent from the third quarter and real imports dropped just 0.6 percent. As a result, the foreign trade balance reduced quarterly GDP growth by a full 0.8 percentage points. This was net exports largest negative impact since the start of 2009.

United Kingdom

January claimant count unemployment dropped 12,500 after a steeper revised 15,800 decline in December. The jobless rate by this measure was 4.7 percent. By contrast, the ILO data showed a surprisingly hefty 154,000 increase in unemployment in the fourth quarter. This made for a jobless rate of 7.8 percent. Wages remained very subdued with December headline average earnings up 1.4 percent on the year while regular pay climbed an even weaker 1.3 percent — the smallest increase since June 2010.

Asia/Pacific

Japan

January unadjusted merchandise trade deficit expanded to Y1.629 trillion from Y1.481 trillion a year ago. According to the Ministry of Finance, this was the largest trade deficit ever. On the year, exports were up 6.4 percent while imports were 7.3 percent higher. This was the first increase in exports in eight months while imports have increased now for three consecutive months. Exports to Asia and China were up 8.4 percent and 3.0 percent respectively on the year. Exports to the U.S. were 10.9 percent higher. However those to the EU continued to decline. They dropped 4.5 percent. On a seasonally adjusted basis, the merchandise trade deficit was Y678.9 billion in January. Exports were up 3.6 percent from December and up 2.6 percent from a year ago. Imports were up 1.4 percent on the month and 5.7 percent on the year.

Americas

Canada

January consumer price index edged up 0.1 percent and was up just 0.5 percent on the year and its slowest rate since October 2009. Excluding food and energy, prices slipped 0.1 percent and were up 0.6 percent from a year ago. Similarly, the BoC's preferred index showed only a 0.1 percent monthly increase and was up 1.0 percent on the year — its weakest since January 2011. Seasonally adjusted, the CPI was down 0.1 percent from year-end, a dip driven mainly by a 0.8 percent decline in the cost of clothing & footwear. Transportation charges slipped 0.2 percent and food was off 0.1 percent. The only monthly increase of note was alcohol & tobacco (0.4 percent). Elsewhere within this basket movements were only minor.

December retail sales dropped 2.1 percent on the month, their steepest decline since April 2010. As a result, on the year, sales dropped 0.7 percent, its first negative reading since October 2009. Volume sales performed little better, falling a hefty 1.6 percent from November to stand 1.2 percent lower on the year. Weakness was particularly apparent in the auto sector where nominal purchases were down 6.4 percent from November. Excluding this category, headline sales would have declined a more modest, but still marked, 1.0 percent from mid-quarter and 0.7 percent from December 2011. Elsewhere, another six major categories saw a decline in demand, led by electronics & appliance stores (12.1 percent), general merchandise (3.7 percent), miscellaneous retailers (2.0 percent) and sports & hobbies (1.8 percent). The only notable monthly increases were posted by food & drink (0.8 percent) and building material & garden equipment & supplies (0.7 percent).

Bottom line

Equities were mixed last week as investors responded to currency moves, tepid economic data and FOMC minutes. The Eurozone will remain in recession according to lowered forecasts from the EU. Europe’s flash PMIs showed the currency union continues to contract though Germany continues to show slight growth.

Investors will be paying close attention to Fed Chairman Ben Bernanke’s Congressional testimony on Tuesday and Wednesday, especially after the strong reaction to the minutes of the FOMC’s last meeting. Key Japanese data for January will be published at week’s end. And hopefully, we will know who Japanese Prime Minister Shinzo Abe selects to be his new governor of the Bank of Japan.

Looking Ahead: February 25 through March 1, 2013

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