All indexes gained in December (except the Nasdaq). However, all were up in the fourth quarter. Stocks were influenced in part by easing energy prices and improved growth prospects in Europe and Asia. Active merger activity inspired investors in Europe and the UK. The Kospi faltered in December - it was up 0.2 percent - as investors worried that the rising value of the South Korean currency, the won would weigh negatively on exporters' profits. Over the year, stocks survived uncertainty about U.S. interest rates and growth. Stocks posted solid gains for the first four months of the year. But then inflation and growth concerns triggered a sell off in the spring and early summer. But in August, stocks began to rebound and did so for most of the rest of the year. Only the Topix, Kospi. Nikkei and Nasdaq failed to record double digit gains for the year.

Global Stock Markets in 2006

Central Bank interest rates go in one direction - up
It was unanimous. Worldwide growth begets higher interest rates at the major central banks. And while the Federal Reserve paused after August, the remaining banks continued their upward trajectory for interest rates. They are expected to continue to do so in 2007. During 2006, the Bank of England increased their policy interest rate by 50 basis points (from 4.5 percent to 5 percent) while the European Central Bank increased rates by 125 basis points (from 2.25 percent to 3.5 percent). Both the Federal Reserve and Bank of Canada increased rates by 100 basis points, with Canadian rates remaining below those of the U.S. The target Fed funds rate increased from 4.25 percent to 5.25 percent while the Bank of Canada's rate climbed from 3.25 percent to 4.25 percent. Even the Bank of Japan finally was able to inch above their zero interest rate to 0.25 percent. The Reserve Bank of Australia, with the highest rates of the banks followed here, went even higher to 6.25 percent from 5.5 percent a year earlier. It should be noted that all of the banks with the exception of the Fed have an explicit inflation target of some sort in contrast with the Fed's informal 'comfort zone'. Improved economic growth allowed the banks to take steps to reign in inflationary pressures that emanated from soaring energy prices.

Europe and the UK
The DAX, CAC and FTSE 100 all turned in double digit gains for the second year. This also was the fourth year in a row that the three indexes have improved their performances after reaching their nadir in 2002. The DAX climbed 22 percent over the year, the CAC was up 17.5 percent and the FTSE 100, 10.7 percent. The three indexes had strong Decembers and fourth quarter growth as well. The indexes gained on improved growth despite climbing interest rates and stronger currencies. The FTSE benefited at times and sometimes suffered from booming energy and commodity prices. Investors were conflicted in trying to decide whether higher energy and commodity prices would sap consumer strength or contribute more to profits. The positives going forward rely on strengthening domestic growth, while inflation is under control. On the corporate side, strong earnings, merger activity and companies flush with cash are expected to contribute positively to continued equities performance.

Asia/Pacific
The Hang Seng index was Asia/Pacific's star performer, climbing 34 percent on the year after gaining just 4.5 percent in 2005. Singapore's STI was not far behind, gaining 27.2 percent after gaining 13.6 percent in 2005, while the Australian all ordinaries turned in an impressive 20 percent gain after a 16.2 percent 2005 increase.

What a difference a year makes. In 2005, the Topix appreciated by a torrid 43.5 percent pace. In 2006, however, it struggled to reach parity with the 2005 close. A hefty December gain pushed it over that level by 1.9 percent. While not as extreme, the Nikkei, widely picked at the start of 2006 to be one of the year's star performers, also lagged behind. The index managed to gain 6.9 percent after jumping 40.2 percent in 2005. However, that was the market's fourth straight yearly advance, something that has not occurred in over two decades. In contrast to its European and British counterparts, Japan has not participated in the takeover activity that has sparked these markets. A handful of unsolicited or hostile bids all failed.

The Bank of Japan has replaced the Federal Reserve with a dubious honor. Namely, as each indicator is released the 'will they or won't they increase interest rates' debate erupts anew. Unlike elsewhere, Japan released its major indicators in the past week. It was a mixed lot so that each release added fuel to the 'when will they raise rates' arguments.

Bank of Japan Governor Toshihiko Fukui acknowledged recently that inflation and consumer spending information has been 'somewhat weak' and the bank should examine more data before deciding when to increase rates. Inflation continues to be near non-existent along with wage growth, which continues to decline. And consumer spending has declined every month this year.

Americas
The Bolsa was the top performer of the thirteen indexes followed here. It soared by 48.6 percent. The index's gains since 2002 have been impressive. The index gained 43.5 percent in 2003, 46.9 percent in 2004, and 37.8 percent in 2005. The four year streak is the longest since 1993. The source for the optimism lies in expectations that new President Felipe Calderon will have support to simplify taxes and boost investment to spur the economy. The Mexican economy expanded at the fastest pace in six years on rising exports to the U.S. and a credit boom that boosted domestic consumption.

Canadian stocks have experienced its longest run of increases since 1989 thanks primarily to commodity producers and technology and telephone companies. The S&P/TSX composite was up 14.5 percent in 2006 following increases of 24.3 percent in 2003, 12.5 percent in 2004 and 21.9 percent in 2005. Canadian companies posted record profits this year as world demand for commodities boosted the value of their exports and growth at home pushed unemployment close to its lowest in more than three decades, prompting consumers to spend more.

The Dow was the only index to lose ground in 2005. However, it has rebounded impressively, setting several new all-time highs during December. The Dow gained 16.3 percent in 2006. The Nasdaq however, fell shy of double digits in 2006. The index was up 9.5 percent after increasing a mere 1.4 percent in 2005. U.S. indexes have generally lagged those overseas but turned in their best performance since 2003's rebound in 2006.

Currencies
Currencies other than the U.S. dollar (British pound sterling, Canadian and Australian dollars, euro) enjoyed a strong year as interest rate differentials played a major role. The euro climbed about 11.4 percent against the dollar thanks to climbing interest rates in Europe and expectations of more increases to come in 2007. The Federal Reserve called a halt to their tightening in August when the target fed funds rate hit 5.25 percent. Since then, the markets have awaited U.S. data releases with even greater-than-normal anticipation as investors seek clues whether borrowing costs will reverse direction early next year to stimulate growth or will increase to ward off inflationary pressures.

January 1, 2007 marks the fifth anniversary of the launch of euro notes and coins that replaced the national currencies (franc, lira, deutschmark, etc.). It is estimated that the value of euro notes is now roughly double the national currencies in circulation at the end of 2001. According to estimates by the Financial Times, euros have overtaken the U.S. dollar in terms of the value of notes in circulation (the estimate includes notes held in commercial bank vaults but exclude note reserves held by central banks). The ECB estimates that between 10 and 20 percent of the €600 billion euro notes in circulation are held outside the eurozone.

Thanks to weak economic data on inflation and spending, the yen faded against the U.S. dollar and other major currencies at year end. Recent data suggest that the Bank of Japan will postpone a rate increase yet again at its January meeting. Low interest rates in Japan have enticed investors to borrow the yen and invest in higher-yielding currencies, that is, carry trade. The currency was at its weakest since 1997 against the Australian dollar and sank to a 12-month low versus the New Zealand dollar. The euro has gained 11.9 percent against the yen as investors bet the European Central Bank will increase rates more than the Bank of Japan in 2007. The U.S. dollar is up less than 1.0 percent against the yen this year.

Bottom line
New economic data have been sparse. Only Japan released its full slate of month-end economic indicators. Overall, the data disappointed analysts who were looking to consumer spending and inflation data to give a signal of future Bank of Japan tightening. Prices barely rose while consumer spending was down. Industrial production data however were stronger than anticipated. New data continue to be sparse for this week, with emphasis switching to Europe and Canada.

The eurozone adds a new member at the first of the year, its thirteenth. The country is Slovenia, the tiny former Yugoslav republic. Slovenia's small size - its population is just 2 million - means that the impact of its entry will be hard to detect given increased demand for cash around Christmas and New Year. It should be noted, that despite its size, its vote will be equal to those of its 12 partners in the European Monetary Union when it comes to voting on key issues such as monetary policy. The European Union also grows in size at the New Year. Bulgaria and Rumania become the 26th and 27th members of the EU.

Looking Ahead: January 1, 2007 through January 5, 2007