Global Stock Market Recap

Europe and the UK
The FTSE, DAX and CAC toyed with their five plus year highs last week. And although they ended Friday on a negative note, they managed to be up on the week. London equities turned lower on Friday after investors took profits following poorly received earnings from advertising and marketing company WPP Group and as drug stocks continued to lose ground. Other media stocks were lower in sympathy including Reuters and Pearson, owner of the Financial Times. Friday's negative trend was underlined after the U.S. GDP report said that the economy grew at its slowest pace since early 2003.

Asia/Pacific
Asian stocks were down on Friday as well but it did not have anything to do with U.S. data. These markets are closed long before U.S. data are released. Rather, the other key economic indicator was the culprit here: Japanese consumer price increases slowed bringing down key Asian indexes. Japanese bank stocks were particularly hard hit because the weaker CPI pushes back chances of a Bank of Japan interest rate increase. Some analysts had been looking for an increase before the end of 2006. Now they are pushing back expectations by as much as six months.

The Tokyo Stock Exchange announced that it has held discussions recently with NYSE Group about forging an alliance of some sort or possibly a business combination. A deal would bring two of the world's most prestigious and important markets closer together and would bring the internationalization of stock-exchange operations one step closer. Consolidation has been picking up. Most recently, the Chicago Mercantile Exchange and Chicago Board of Trade announced an $8 billion merger. NYSE is trying to complete its deal to buy Euronext NV, the pan-European stock- and derivatives-exchange operator. Several obstacles to a formal NYSE-TSE alliance exist. The Tokyo exchange is a private company, although it is planning to go public. Also, an investor seeking to buy 20 percent of a Japanese stock exchange requires government permission under Japanese law. No investor is allowed to own a majority of a Japanese exchange.

In Hong Kong, the Hang Seng set an all-time new high on Thursday but then retreated on Friday with other Asian indexes. With the exception of the Bolsa, the Hang Seng has outperformed all indexes followed here.

Currencies
The yen and euro jumped on the heels of the weaker-than-expected U.S. GDP report Friday. The dollar had already been weakened by the FOMC statement. The yen had slumped to a fresh all-time low against the euro at ¥150.80 and it had lost ground against the dollar as well after Japanese inflation data came in weaker than expected. However, the yen recovered some ground after vice minister for international affairs, Hiroshi Watanabe, said he did not expect the currency to weaken further given Japan's healthy economic fundamentals. Most analysts agreed that the disappointing CPI report would make it extremely difficult for the Bank of Japan to begin signaling the next rate increase around the turn of the year.

Indicator scoreboard
EMU - M3 for the three months ending in September was up 8.2 percent when compared with the same three months a year ago. September M3 was up 8.5 percent. The European Central Bank prefers the three-month moving average and has a target growth rate of 4.5 percent. M3 has been at or above that level since May 2001.

Germany - October Ifo business sentiment index improved to a reading of 105.3 from 104.9 in September. Both current conditions and business expectations were up. The current conditions index climbed to 111.8 from 111.3 while expectations improved to 99.2 from 98.9 in the previous month. Ifo surveys about 7,000 firms in manufacturing, construction, wholesaling and retailing on their assessment of the current situation as well as their six-month outlook.

France - September consumer spending on manufactured goods dropped 2.7 percent, nearly reversing August's 3 percent increase. Spending was up 2.9 percent when compared with last year. Manufactured goods expenditures accounts for over 25 percent of total consumption. Virtually all major categories were down on the month. Clothing was down 9.5 percent while autos were down 0.8 percent.

Asia
Japan - September unadjusted merchandise trade surplus widened to ¥1.014 trillion from ¥948.5 billion in the same month a year ago. Unadjusted exports were 15.3 percent higher than a year ago, while imports were up 16.9 percent. However, on a seasonally adjusted basis, the surplus declined to ¥419.9 billion from ¥661.3 billion in the prior month. Exports were up 1.9 percent while imports were down 0.7 percent on the month.

October Tokyo consumer price index was unchanged and up 0.5 percent when compared with October last year. Excluding only fresh food, the core CPI was up 0.1 percent and 0.1 percent on the year. Excluding both fresh food and energy, the index was up 0.1 percent but down 0.1 percent on the year. September national CPI was unchanged on the month and up 0.6 percent on the year. Excluding only fresh food, the CPI was up 0.1 percent and 0.2 percent on the year. Excluding both fresh food and energy, the core CPI was up 0.1 percent but dropped 0.5 percent on the year. The surprise drop was related to declining clothing and footwear prices and had little to do with recent energy price declines, which should be captured in October's data.

September retail sales dropped 1.6 percent but were up 0.8 percent when compared with the same month last year. Part of the softness reflects dropping gasoline prices after they reached a 16-year high in August. Department store sales were up 1 percent, the first gain in six months, as cooler temperatures drove demand for autumn clothing. The retail report omits spending on services and on the internet.

Australia - Third quarter producer price index was up 1 percent and 4 percent when compared with the same quarter a year ago. Domestic PPI was up 1.3 percent and 4.8 percent on the year. Prices increased for building construction, other agriculture, electricity, gas and water and real estate agents. These increases were partially offset by decreases in petroleum refining and meat products. The imports component fell by 1.1 percent primarily due to price decreases for beverage and malt, electronic equipment and industrial machinery. These decreases were partially offset by increases in tobacco, clothing, knitting mills and other transport.

Third quarter consumer price index was up 0.9 percent and 3.9 percent when compared with the same quarter a year ago. Excluding housing and financial and insurance services, the CPI was up 0.8 percent and 4.2 percent on the year. Prices continue to be above the Reserve Bank of Australia's target of 2 to 3 percent.

Americas
Canada - August retail sales jumped by 1 percent and were up 7.4 percent when compared with the same month a year ago. Auto sector sales, which also include gasoline stations, were up 1.5 percent despite lower gasoline sales. Building and outdoor home supplies sector increased by 1.4 percent. Furniture, home furnishings and electronic stores' sales were up 1.3 percent. Only one sector declined: miscellaneous retailers' sales which include office supply, sporting goods, hobby, music and book stores. Excluding sales by new, used and recreational vehicles and auto parts dealers, retail sales were up 0.4 percent and 7.5 percent on the year. Price adjusted retail sales were up 1.1 percent.

Bottom line
New economic data were highlighted by release of the Japanese CPI data that showed inflation weaker than expected. This disappointed investors looking for a near term increase in the Bank of Japan's policy interest rate. The FOMC met and maintained the status quo. And weaker-than-expected GDP data showed that the U.S. economy grew at a slower pace in the third quarter.

Next week provides a plethora of new data, especially in Europe. On October 31st, the Bank of Japan holds a one-day meeting and releases its outlook for the economy and prices. Market players will be parsing every word, looking for those elusive hints as to where interest rates are headed and when. The European Central Bank meets Thursday. No increase is expected from their current 3.25 percent rate.

The U.S. and Europe will revert to standard time on Sunday, October 29th, but in Australia, Daylight Saving Time begins. Japan does not observe DST so local time there is unchanged. This means that Australian data are available two hours earlier, at 7:30 PM ET the night before while Japanese data will be available one hour earlier, at either 6:30 PM ET or 6:50 PM ET.

Looking Ahead: October 30 through November 3, 2006