Global stock markets retreated initially on disappointing U.S. earnings reports that undermined a key support issue for equities. Continued strong earnings growth in the U.S. and elsewhere have been one positive for equity markets, helping to counter worries that rising interest rates around the world would slow economic growth. But investors were distracted by the harsh realities of Middle East uncertainties and with it access to crude oil. On the week, all equity indexes followed here were down with the Nikkei, Topix, Kospi and Nasdaq below their December 31, 2005 levels. The S&P/TSX composite turned in the best performance - it was down only 1.9 points or 0.02 percent, thanks to positive performances by many of the energy companies that are components of the index. The worst performer on the week was the Bolsa - it was down 1,501 points or 7.6 percent.

Global Stock Market Recap

Europe and the UK
It was a dreadful week for European and UK stocks as crude prices climbed and Middle East tensions escalated. Adjusted for inflation, the oil price is at its highest level since the oil crisis of 1979-80 and the Iranian Revolution. On the week, the FTSE, CAC and DAX were down 3.1 percent, 3.5 percent and 4.6 percent respectively. However, all three remain above their year end levels.

In its monthly bulletin which was released Thursday, the ECB continues to see inflationary risks on the upside and said that it was keeping a very close eye on price developments to make sure inflation risks did not turn into reality. This only reinforced analysts' views that several more interest rate increases are probably in the EMU's future. Inflationary worries also surfaced in the UK as economic reports pointed to higher prices. Producer output prices - that is the price of goods leaving British factories - climbed at the highest rate since November 2004, and private sector earnings data showed the fastest rate of increase in 18 months despite higher unemployment.

Asia/Pacific
Asian/Pacific markets were down after a positive Monday. Higher crude prices combined with disappointing U.S. earnings to deflate investors. Investors in Japan were also awaiting the expected interest rate increase from the Bank of Japan. These indexes were afflicted with the same woes as those elsewhere around the globe. On the week, all indexes followed here were down 2 percent or more with the exception of the Kospi - it dropped 'only' 1.5 percent.

A move towards normalizing interest rates
Bank of Japan has begun weaning the country and the world off zero interest rates. The BoJ announced on Friday that it had ended is zero interest rate policy and increased its key policy rate by 25 basis points. Further, it was increasing its discount rate, that is the rate they lend to banks overnight, to 0.4 percent as it continues to normalize its monetary policy. The process was begun in March when it announced that it was ending its policy of quantitative easing which flooded the market with liquidity.

These funds had sloshed around world markets and provided funds to speculators aiming to profit on interest rate spreads. Global hedge funds have borrowed in yen and invested profitably in anything from emerging markets to high-yield debt. Japanese investors have bought high-yielding assets abroad to beat miserable returns at home. At one point in the not so recent past, for example, an investor could borrow at virtually zero in Japan and invest it in a high paying interest rate country such as Australia with its key interest rate at 5.75 percent. Or if one was not risk averse, invest in an emerging economy and earn even more. The recent declines in emerging market stocks have been attributed by some to the withdrawal of these funds by the Bank of Japan. For years, loose money has lubricated markets and encouraged consumers, companies and speculators to borrow handsomely.

Interest rates are still the lowest among the Group of Seven nations. The BoJ is looking to avoid the excesses of the 1980s bubble economy that was followed by a collapse in land prices and three recessions. Bonds were up but the yen fell as Governor Fukui said the bank may keep rates 'very low' to support growth driven by the fastest pace of corporate spending in 16 years. The Bank has been pressured by government officials including Finance Minister Sadakazu Tanigaki who are concerned that higher borrowing costs will hamper government efforts to stop the expansion of public debt, forecast to reach 151 percent of gross domestic product by March.

Canada - The Bank of Canada's surprise statement
While the Bank of Canada was expected to keep its key interest rate unchanged at 4.25 percent, the accompanying statement surprised. It repeated its May statement that said the prior seven moves were sufficient to return inflation to 2 percent. The Bank maintains an inflation target range of 1 to 3 percent tending toward the mid-point of 2 percent. The Bank's rate currently is 1 percent lower than the fed funds target of 5.25 percent. In its statement, the Bank said that "the current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term." That wording surprised some analysts who said they expected a reference to budding inflation or a future rate increase. The Canadian dollar dropped on the news.

There is evidence that the economy could be cooling, with recent reports showing a drop in employment of 4,600 (even though it followed a gain of 96,700 in the previous month) and a narrower trade surplus. It should be noted that the relatively high value of the Canadian dollar is doing part of the Bank's work as it subdues growth especially for those manufacturers who export by making their goods more expensive in overseas markets.

The Canadian dollar has climbed about 40 percent against its U.S. counterpart since 2002. The currency's value makes imports cheap while at the same time slowing exports, which make up 38 percent of the economy. The Bank of Canada's preferred core inflation measure, which excludes eight volatile goods, was up 2 percent in May on the year and at the fastest since December 2003. At the same time, unemployment last month remained at 6.1 percent, the lowest since 1974, and wages rose 3.5 percent from a year earlier.

Currencies
The yen, which had been increasing in value in anticipation of the long awaited move by the Bank of Japan, sank after the fact when Governor Fukui indicated there would not be another increase in the near future. He said the pace of increases would be gradual and that an "accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time." Most analysts have said they do not expect another move during this calendar year. The euro was also down on the week as political tensions provoked a flight to safety.

Indicator scoreboard
EMU - Revised first quarter gross domestic product was up 0.6 percent and 2 percent when compared with the same quarter a year ago. Private consumption was revised down slightly to 0.6 percent from 0.7 percent while capital formation was revised upward to 0.9 percent from the original 0.3 percent estimate.

Germany - May seasonally adjusted merchandise trade surplus was €12.9 billion, up from April's reading of €12.4 billion. Exports were down 1.5 percent while imports dropped 2.6 percent. The unadjusted trade balance was also €12.9 billion, up slightly from the May 2005 reading of €12.1 billion.

May real seasonally adjusted retail sales (excluding auto and gasoline station sales) were revised to a decline of 0.4 percent in contrast to the originally reported drop of 2.2 percent. Including auto and gasoline sales, retail sales were down 0.3 percent. These data were revised from an originally reported drop of 2.6 percent.

France - May industrial output was up 2 percent and 2.7 percent when compared with last year. Manufacturing output jumped by 2.5 percent and 3.8 percent on the year. Auto production soared by 5.4 percent but remained below the May 2005 level by 2.3 percent. Consumer goods output was up 1.8 percent while capital goods output climbed by 2.6 percent.

May merchandise trade deficit improved to €1.8 billion when compared with the larger April deficit of €2.0 billion. Exports were up 1.9 percent while imports were up 1.5 percent.

Italy - May industrial output was up 0.9 percent and 2.9 percent when compared with last year. April output was down 0.8 percent, blamed in part on calendar effects stemming from the late Easter holiday. Consumer goods output was up 4.1 percent while capital goods were up 0.3 percent.

Britain - June producer output prices edged upward by 0.1 percent and were up 3.3 percent when compared with the same month a year ago. The increase was due to higher prices for secondary raw materials and especially scrap metals. Core output prices, which exclude food, tobacco, beverage and petroleum prices, were up 0.3 percent and 2.9 percent on the year. Producer input prices were down 0.4 percent but jumped 10.9 percent on the year. Crude oil prices eased 1.2 percent but were still up a very substantial 24.6 percent on the year.

May global merchandise trade deficit widened to Stg6.753 billion from Stg5.568 billion in April. Exports were down 0.6 percent while imports soared by 3.9 percent. The oil balance sank to a deficit of Stg320 million after recording a surplus of Stg201 million in April. The deficit for erratics more than doubled. It was Stg296 million vs. April's deficit of Stg105 million in April. National Statistics said this was due in part to aircraft and precious stones.

June claimant count unemployment was up by 5,900 but the claimant count unemployment rate remained at 3 percent for the fourth month. Unemployment as defined by the International Labour Organisation was up by 90,000 for the three months ending in May. This translated to an unemployment rate of 5.4 percent, up a notch from 5.3 percent in the previous three months. Employment for the same three months increased by 59,000 for an employment rate of 74.6 percent.

Average earning for the three months through May was up 4.1 percent when compared with the same three months a year ago. This was below the pace for the previous three months of 4.4 percent. For the month of May, average earnings were up 4.3 percent on the year, reflecting higher public sector bonus payments and higher retail overtime. The Bank of England has a target growth rate for average earnings of 4.5 percent.

Asia
Japan - June corporate goods price index edged down 0.1 percent but was up 3.3 percent when compared with June 2005. The increase reflects higher fuel and commodities costs which in turn have prompted price increases by manufacturers.

Australia - June employment jumped by 52,000 jobs after a revised 47,700 job increase in May. The unemployment rate remained at 4.9 percent - a 30-year low - for the second month. Full time jobs were up 24,400 while part time jobs were up 27,600. The participation rate, which measures the labor force as a percentage of the population aged over 15, was up by 0.3 percentage points to 64.8 percent.

May merchandise trade deficit more than doubled in May to A$2.3 billion from A$1.1 billion. Exports sank by 3.3 percent while imports were up by the same amount. Imports of intermediate goods, which include fuel, surged 8 percent and imports of capital goods, which include business machinery and vehicles, were up 3 percent. Imports of consumer goods fell 1 percent. Australia imports about 69 percent of the crude oil used in its refineries. Crude oil imports climbed 20 percent while imports of petroleum products jumped 51 percent. Farm exports, such as meat, sugar, wheat and wool, dropped 1 percent. Shipments of non-rural goods, which include minerals, declined 5 percent. More recently, an unusually severe cyclone season in northwestern Australia closed ports, rigs and mines, disrupting output and exports of gas and crude oil. Exports of metals including iron ore rose 12 percent while coal shipments declined 7 percent. Gas exports dropped 26 percent.

Americas
Canada - May merchandise trade surplus was C$4.1 billion, up from C$3.9 billion in April. Imports were down 0.8 percent while exports edged down 0.2 percent. The decline in exports can be attributed to energy exports, which dropped 4.6 percent after soaring 7.2 percent in the previous month. Declines were in both the price and volume of energy exports. Excluding energy, total exports would have been up 0.9 percent. The trade surplus with the U.S. edged down to C$8.22 billion from C$7.26 billion in the previous month. Excluding the U.S., the trade deficit was up to C$4.1 billion from C$3.9 billion in April.

May factory shipments were up 0.3 percent and 0.7 percent when compared with last year. Shipments for petroleum were down 6.7 percent while autos declined 5.2 percent. Some refineries were shut down for maintenance work. Excluding automobiles, parts and accessories, shipments were up 1 percent. Excluding aerospace orders, shipments fell 1.1 percent. Aerospace shipments rose 80 percent to C$1.6 billion after dropping 37 percent in April. Ten of the 21 manufacturing industries tracked gained in May. Makers of primary metals such as copper and zinc boosted shipments by 4.1 percent. New orders were up 0.7 percent while unfilled orders were down 0.7 percent.