Global Markets

Central bank use of negative interest rates came to the fore after simmering in the background as a little used tool. Among the central banks employing negative rates are the European Central Bank, the Bank of Japan, the Swiss National Bank and Riksbank.

Since the financial crisis, many investors relied on the thought that some combination of actions by central banks — bond buying, bold promises or flirtations with negative interest rates — would be enough to keep the global economy out of recession. But investors' distress over the latest move by a major central bank — the surprise decision on Thursday by the Riksbank (the Swedish central bank) to lower its short-term rate to minus 0.50 percent from minus 0.35 percent — has heightened fears that these actions are now making things worse, not better. Global stock markets sank, the price of oil plunged to a 13-year low and investors fled to safe havens such as gold and U.S. Treasury bills.

The Riksbank has been criticized in the past for prematurely raising rates and Thursday's rate cut was opposed by two bank deputies. At the European Central Bank, Jens Weidmann, President of the German Bundesbank, remains at odds with ECB President Mario Draghi in terms of how loose policies should be. And in the United States, the Federal Reserve is seen by some market participants to be wavering in its commitment to higher rates in light of the market turmoil. And in her semi-annual testimony on Wednesday and Thursday to Congress, Fed Chair Janet Yellen sought to dispel the notion that interest rates might be headed anywhere but up.

The move by the Swedish central bank was intended to counter the dual threat of deflation and an appreciating currency, which poses a threat to growth for the export-driven economy. But many investors saw the rate cut as a desperation move and the latest sign that global central bankers are moving toward a round of competitive devaluations — also known as currency wars — as a way to stimulate their economies.

In other words, drastic steps by central bankers in Europe, Japan and China to keep their currencies weak and exports strong may not only be counterproductive in terms of stimulating global growth but may have other consequences as well. Negative interest rates, for example, are not only bad for bank profits and lending prospects, they can also make savers more fearful, hampering the central aim which is to get people to spend and not hoard.

Global Stock Market Recap

Europe and the UK

Equities finished the week on a positive note Friday but it was too late to make up for the large losses incurred earlier in the week. Thursday's selloff brought European markets to their lowest levels in over 2 years. A rebound in banks and miners helped lift European stocks from their lowest levels since 2013, trimming a second weekly decline. The shares surged on bargain hunting after being hard hit earlier in the week. Some positive Eurozone growth data also provided a boost to investor sentiment. The FTSE was the best performer losing only 2.4 percent on the week. The SMI retreated 3.8 percent, the CAC plummeted 4.9 percent and the DAX lost 3.4 percent. Also abetting Friday's positive performance were some positive comments regarding oil production and hopes for an agreement in OPEC on production cuts.

European equities have been among the most hurt during the global rout that has erased about $8.6 trillion from stocks worldwide this year alone. Germany's DAX is down 16.5 percent in 2016 and Italy's FTSE MIB is down 22.9 percent. The FTSE is the only index with a single digit loss — 8.6 percent.

The Riksbank cut deeper into negative interest rates Thursday in another attempt to bring krona down and push inflation to the 2 percent target. The bank signaled that it was willing to take rates lower from the current negative levels, among other steps such as an extension of government bond purchases and foreign exchange market interventions if the krona appreciates quickly. The move intensified fears that global policymakers are being forced to take more extreme action to tackle low inflation.

Asia Pacific

Most markets were closed in Asia last week for the Lunar New Year. But those that were open tumbled. The Nikkei led the way downward, losing 11.1 percent for the week. It was the Nikkei's biggest weekly percentage drop since October 2008. The Nikkei sank to a fresh 16-month low on concerns over banks' earnings and the strengthening yen amid heightened volatility in global equity and commodity markets.

The dollar hit as low as ¥110.985, its lowest level since October 2014 on the heels of the Bank of Japan's move on January 29 to adopt negative interest rates. On Friday, Japanese shares were hammered as a litany of worries weighed on investors, from slowing global growth to the health of the world's banks. The Nikkei's year-to-date decline of 21.4 percent is now almost as steep as the losses in China's mainland stock market (down 21.9 percent), the epicenter of the global stock selloff at the start of the year. Both the Shanghai Composite and Taiex were closed for the weeklong Lunar New Year holiday observance.

According to some analysts, the Bank of Japan is partly responsible for the latest market gyrations. The BoJ's recent adoption of negative interest rates is raising concerns about the profitability of banks, leading to selloffs in their stocks. Some analysts are now expecting additional easing from the BoJ following last month's decision to move to negative interest rates. The BoJ next meets on March 14 and 15.

Share prices are falling faster in Japan than the U.S. and Europe, a particularly damaging situation because the market is more central to Japanese economic policy. Prime Minister Shinzo Abe's plan for turning around the economy relies on a rising stock market propelled by a cheap yen and higher corporate profits. That in turn is supposed to make Japanese feel wealthier and get wages and prices rising toward the Bank of Japan's 2 percent target. However, that scenario never fully played out and now is in danger of unraveling back to its initial stages as stocks unwind gains dating to October 2014.

Most of the reasons for Tokyo stock market's plunge this past week were not homegrown. A growth slowdown in China, potential bankruptcies in the energy industry and troubles at European banks are echoing world-wide.

Currencies

The U.S. dollar retreated against all of its major counterparts during the week. Friday's gains pared the weekly losses but did not erase them. The currency was down against the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars.

The ferocious strengthening of the yen (and the tumble in Japanese stocks) against the U.S. dollar especially since the Bank of Japan dipped its toe into negative rates — is the unwinding of a hugely popular investment strategy by offshore investors to buy Japanese stocks while shorting the yen. When foreigners sell Japanese stocks, they simultaneously close out their short yen positions. This causes the yen to rise which investors see as a further sell signal on stocks, since so many Japanese companies are reliant on a cheap currency to remain profitable. It is a classic feedback loop with market shattering consequences.

The BoJ's negative rate policy was hastily rolled out. Going negative was an admission the Bank of Japan's massive quantitative easing program has reached its limits. The BoJ may also just have bad timing, launching its easing as jitters over the Federal Reserve, China and oil boiled over into a broader global selloff.

The dollar hit a 15-month low against the yen on Thursday after comments from Federal Reserve Chair Janet Yellen gave investors no reason to change their minds that the next rate increase will be a long time coming. Yellen made clear in her Congressional testimony that the Fed remained on a path of 'gradual' policy tightening. Yet, she also highlighted growing risks facing the economy. That gave currency investors the green light to continue the current trading theme — buy the safe haven yen.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

Fourth quarter gross domestic product provisionally grew at a modest quarterly rate of 0.3 percent. The increase in total output matched its third quarter gain and put annual workday adjusted growth at 1.5 percent, down just a tick from last time. Among the larger countries, Spain again led the way with a second successive 0.8 percent quarterly gain, well ahead of the 0.3 percent rise posted in France and Germany and even further above a surprisingly weak 0.1 percent advance seen in Italy. Elsewhere, Estonia (1.2 percent) and Slovakia (1.0 percent) had a good quarter but both Finland (minus 0.1 percent after minus 0.6 percent) and Greece (minus 0.6 percent after minus 1.4 percent) fell back into recession and there was no growth at all in either Austral or Latvia. As usual with the flash report, Eurostat provided no details of the GDP expenditure components but national data suggest that domestic demand was disappointingly sluggish. Moreover, with goods production down 0.1 percent on the quarter, the expansion was again uneven and based upon services.

Germany

December industrial production sank 1.2 percent on the month after November's revised decline of 0.1 percent. Annual growth slumped from 0.1 percent to minus 2.3 percent. This matched its worst yearly performance since October 2012. Weakness in December was most apparent in capital goods where production plunged 2.6 percent from November. However, consumer goods also contracted a sizeable 1.4 percent while energy was off 3.0 percent. Intermediates gained 0.8 percent but construction was down 0.2 percent. As a result, total manufacturing followed a 0.5 percent decrease in mid-quarter with a disappointingly large 1.1 percent decline.

December merchandise trade surplus was €19.4 billion, just €0.3 billion less than its unrevised November reading, albeit still at a 4-month low. The unadjusted balance showed a surplus of €18.8 billion, down from €20.5 billion in mid-quarter. The modest headline deterioration was due to a 1.6 percent monthly decline in exports that just more than offset a 1.6 percent decline in imports. Compared with a year ago, exports were up an unadjusted 3.2 percent and imports a slightly stronger 3.5 percent.

France

December industrial production excluding construction dropped 1.6 percent and followed an unrevised 0.9 percent fall in November for the first back-to-back decline since October/November 2014. Annual growth slumped to minus 0.6 percent from 3.0 percent, its first negative reading since July. The year-end slide in output was in part due to weakness in the erratic coke & refined petroleum products area where production contracted a further 2.6 percent from mid-quarter. However, there were losses across the board and particularly marked decreases in food & drink (1.4 percent), electrical equipment & machinery (2.6 percent) and transport equipment (2.6 percent). The other production subsector recorded a 0.1 percent dip and overall manufacturing was off 0.8 percent to more than reverse November's 0.6 percent gain. Elsewhere, mining & quarrying, energy, water supply & waste management dropped 5.2 percent and construction was down 1.6 percent.

Italy

December industrial production excluding construction declined 0.7 percent after an unrevised 0.5 percent fall in November to reduce annual workday adjusted growth from 1.1 percent to minus 1.0 percent, its worst performance since January last year. This was also the first time output has contracted in successive months since September/October 2014. Consumer goods were up 0.8 percent but elsewhere it was monthly decreases all round. Intermediates slumped 1.3 percent, capital goods were down 1.3 percent and energy was off 0.8 percent.

United Kingdom

December deficit on global trade in goods narrowed from a significantly larger revised Stg11.50 billion in November to a smaller than expected Stg9.92 billion at year-end. This was the least red ink since September. Total exports fell 0.3 percent on the month but the decline here was more than offset by a 4.8 percent slide in imports, largely reflecting a near-11 percent slump in oil. The balance with other EU members was Stg7.6 billion in the red after a Stg7.97 shortfall last time while net exports to the rest of the world improved by Stg1.18 billion to a deficit of Stg2.36 billion. The drop in the headline shortfall was partially mirrored in the underlying deficit which shrank from Stg10.12 billion to Stg9.66 billion, also a 4-month low. Core exports were 0.6 percent stronger than in November while imports were 1.1 percent weaker. However, underlying export volumes have fallen for three consecutive months now and in December were 6 percent below their September peak.

December industrial production dropped 1.1 percent on the month after a slightly steeper revised 0.8 percent decline in November while the key manufacturing area saw a 0.2 percent decrease, compounding a 0.3 percent mid-quarter drop. Annual growth of the former slid from 0.7 percent to minus 0.4 percent, its first negative print since August 2013, and of the latter from minus 1.2 percent to minus 1.7 percent. The third successive monthly fall in manufacturing output reflected declines in eight of the 13 reporting subsectors. Among these, wood, paper products & printing (2.1 percent) did the most damage but weakness here was effectively offset by a 2.4 percent jump in computer, electronic & optical products. Monthly changes in most other subsectors were relatively small. Total industrial production was further undermined by monthly decreases in electricity, gas, steam & air conditioning (5.4 percent) and oil & gas extraction (4.6 percent). A 0.6 percent rise in water supply & waste management provided only a small lift.

Asia/Pacific

Japan

January producer prices dropped 0.9 percent on the month and declined 3.1 percent on the year. Once again petroleum played a major role in the falling PPI. It marked the 10th month in a row that producer prices have been negative. On the year, producer price deflation was at its worst in September at minus 4 percent. Late last month, the Bank of Japan announced it would adopt negative interest rates in a bid to lift inflation toward its 2 percent target. The price trend from producers, which is often used as a rough proxy for future consumer price inflation, remains disappointing and is likely to pile pressure on the BoJ to boost its stimulus effort. Petroleum & coal products dropped 20.1 percent on the year after sinking 23.3 percent in December. Nonferrous metals plummeted 13.8 percent after 12.6 percent on the year. Most other subcategories continued their declines but not near the magnitude of petroleum and nonferrous metals.

India

Fourth quarter gross domestic product was up 7.3 percent when compared with the same quarter a year ago and down from the revised third quarter rate of 7.7 percent. GDP growth was supported by strength in manufacturing, where output rose 12.6 percent on the year, together with generally buoyant services, notably trade, hotels, transport & communication (10.1 percent) and real estate & professional services (9.9 percent). Utilities (6.0 percent) and construction (4.0 percent) lagged behind.

Bottom line

Equities tumbled once again on worries about oil prices, global growth and central bank policies. There were little new economic data in the week. However, flash fourth quarter gross domestic product data for the Eurozone and Germany indicated modest growth. Fed Chair Janet Yellen endured tough questioning from the House Finance Committee and the Senate Banking Committee regarding Fed policy going forward.

Next week is busier on the economic data front. China posts its January consumer and producer price indexes and merchandise trade data. Japan posts fourth quarter GDP and Australia's labour market will once again be under scrutiny. In the UK, labour market and retail sales data are on tap. Investors will hope that the increase in crude prices on Friday was the beginning of an upward trend.

Looking Ahead: February 15 through February 19, 2016

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