Most equity markets were up last week on the back of continued takeover activity combined with a scaling back of U.S. interest rate expectations. The Federal Reserve's Beige Book indicated that the U.S. economy had expanded at a 'moderate or steady' pace this year with little sign that wages were creating inflationary pressure. Analysts reduced their forecasts for further rate increases in the fed funds rate which is currently 4.5 percent. However, declining rate expectations were a negative for the U.S. dollar, which dropped against the yen, euro and sterling. The dollar was also pressured by a record U.S. current account deficit for the fourth quarter of $225.9 billion or 7 percent of GDP. And investors kept an eye on possible central bank moves in Japan as well where the markets have been pricing in interest rate increases somewhat prematurely. On the week, only the STI of those indexes followed here fell, and it edged down only slightly. Only the Kospi remains down on the year.
Global Stock Market Recap
Europe and the UK
The FTSE ended the week at 5,999.4 after spending a good part of Friday over the key psychological level of 6,000. The index hit a fresh high on Thursday and by midday Friday was up 40 points to 6,033, its highest level since March 2001. Analysts said that there is a 'feel good' factor in London because of merger and acquisition activity especially in the insurance sector. At a five-year high, the FTSE is marking the third anniversary of a bear-market bottom on March 12, 2003 that followed the dotcom crash. The low was reached shortly before the Iraqi War began. Since then, the FTSE has soared by 82.5 percent.
Analysts point out that it is very unusual to have such a long run without a correction of at least 10 percent. The latest increases have been propelled by a wave of mergers and acquisitions, strong corporate earnings, and healthy global economic growth and low inflation. But there are plenty of analysts who think a correction is overdue. David Schwartz, a stock market historian, pointed out that as the rally enters its fourth year, many markets - and not just the FTSE 100 - are trading far in excess of normal historical patterns.
A flurry of takeover talk particularly in the insurance sectors also boosted Europe's markets. But despite strength in banking and oils, gains were eroded in Friday afternoon trading by auto sector weakness. On the week the CAC and DAX were up by 1.4 percent and 1.3 percent respectively. The FTSE was up 1.6 percent on the week.
Asia/Pacific
After a volatile week, Japanese stocks gained on Friday and reversed losses of earlier in the week. Brokerages led the advance after Marusan Securities Co. tripled its annual dividend and investors bet improved economic growth would lead to increased stock purchases which in turn would bolster brokerage house earnings even more. For the week, the Nikkei gained 1.4 percent and the Topix advanced 1 percent. Monday morning's GDP release showed that the economy expanded at a 5.4 annualized rate in the fourth quarter and was growing faster than the remaining Group of Seven countries (U.S., Canada, Italy, Germany, France and the UK).
Early in the week Japanese real estate stocks plunged, taking domestically-focused shares with them. Investors began to worry about the impact of potential interest rate increases on real estate stocks, which are highly leveraged compared with other sectors. Some analysts have dismissed the concerns, arguing that real estate companies will be able to offset higher prices by raising rents. But the market appears to disagree, and the fall in real estate prices brought the sector's sub-index back below the level it reached at the end of last year. But Toshihiko Fukui, governor of the Bank of Japan, said on Thursday that it was too early to discuss when to end the zero interest rate policy, since the Bank has only just ended its quantitative easing framework.
Of the six Asian/Pacific stock indexes tracked here, only the STI declined last week. The all ordinaries was up thanks to BHP, the world's biggest mining company, and Rio Tinto Group, the third-biggest miner, as commodity and energy prices were up last week. Copper in Shanghai was up as much as 2.1 percent while a measure of six metals including copper was up in London yesterday.
Currencies
The dollar was down against both the euro and yen after a mild U.S. inflation reading and a disappointing retail sales report eased speculation that the Federal Reserve would increase interest rates beyond 5 percent this year. And the dollar continued to soften after the Beige Book reinforced this view and said that growth was moderate in the first two months of the year and higher costs for raw materials and energy persisted. And while analysts are cutting back on U.S. interest rate projections, they are increasing those for both Japan and Europe. This will narrow the spread between countries, making U.S. investments less enticing. The current spread between the U.S. and the EMU is currently 200 basis points and 450 basis points with Japan. The UK also has a 4.5 percent policy interest rate.
Indicator scoreboard
EMU - February harmonized index of consumer prices was up 0.3 percent and 2.4 percent when compared with last year. Core HICP which excludes energy and unprocessed food was up 0.2 percent and 1.3 percent on the year. Energy price increases, while no longer having an impact on the month-to-month change, is still a driver of year-on-year increases.
January industrial output was unchanged and up 2.5 percent when compared with last year. Energy goods output was down 3 percent on the month while capital goods output was up 1.1 percent. Consumer durable goods output was up 0.4 percent but consumer nondurables were down 0.6 percent.
Germany - March ZEW sentiment survey dropped to a reading of 63.4 from 69.8 in February. While expectations were down, the current conditions sub-index improved to minus 8.4 from minus 19.5 in the prior month. The decline was attributed partly to uncertainties over current labor negotiations. The ZEW surveyed 311 German financial experts for their opinions on current economic conditions and the economic outlook for major industrial economies between February 17th and March 6th.
Italy - January seasonally and workday adjusted industrial production was down 0.3 percent but was up 1 percent when compared with last year. On the month, all output sectors were down including consumer goods, capital goods, intermediate goods and energy.
January world merchandise trade deficit ballooned to €4.2 billion - its largest deficit since 1991. The problem continues to be energy imports. Excluding energy, the trade balance would have been a surplus of €243 million. Imports soared by 18.5 percent while exports were up 10.8 percent on the year. Energy imports were up 67.4 percent and consumer goods up 19.1 percent on the year.
Britain - February producer output prices were up 0.3 percent and 2.9 percent when compared with last year. Increased petroleum prices were offset by a decline in tobacco and alcohol prices. Core output prices which exclude food, tobacco, petroleum and beverage prices were up 0.2 percent and 1.8 percent on the year. Input prices were unchanged on the month and up 15 percent on the year.
February claimant count unemployment, which measures those out of work and claiming a benefit, was up by 14,600 to 919,700 -the biggest jump since December 1992. The claimant count unemployment rate was 2.9 percent for the fifth month. Unemployment, as measured by the International Labour Organisation definition, climbed by 37,000 to 1.53 million. The ILO unemployment rate was 5 percent. Employment for the three months to January was down 7,000 resulting in an employment rate of 74.5 percent.
Average earnings for the three months ending in January were up 3.5 percent when compared with the same three months a year ago. Excluding bonuses, average earnings were up 3.8 percent. The Bank of England has a 4.5 percent target for average earnings growth.
February retail sales were up 0.5 percent and 2.1 percent when compared with last year. However, January's data were revised downward - retail sales sank 1.6 percent rather than the 1.3 percent drop originally reported. Clothing and footwear sales were up 3 percent on the month but household goods sales were down 1.1 percent.
Asia
Japan - Fourth quarter gross domestic product was up 1.3 percent from the previous quarter and 4.3 percent when compared with the same quarter a year ago. On an annualized basis, GDP was up 5.4 percent. Spending by businesses grew 0.4 percent while consumer spending was up 0.9 percent. Household investment was up 2.1 percent.
Americas
Canada - January manufacturers shipments dropped 0.7 percent but were up 0.7 percent when compared with last year. The decline was due to a substantial drop in motor vehicles and parts manufacturing. Excluding the motor vehicles and parts industries, shipments edged up by 0.3 percent. January's decline was not widespread as only 7 of the 21 manufacturing industries reported lower shipments, although these industries accounted for just over 50 percent of the value of total shipments. Unfilled orders were up 1 percent and 11.5 percent on the year. New orders were unchanged on the month and down 2.3 percent on the year. Extensive decreases in the transportation equipment sector offset advances in new orders for fabricated metals products, primary metals and machinery.
February consumer price index was down 0.2 percent and up 2.2 percent when compared with last year. The decline was due mainly to lower prices for some energy items, especially gasoline, which dropped 6.8 percent on the month. Excluding energy, the CPI was up 0.2 percent and 1.6 percent on the year. The Bank of Canada's core CPI which excludes eight volatile items was up 0.3 percent and 1.7 percent on the year. Seasonally adjusted, the CPI dropped by 0.3 percent and was up 2.3 percent on the year. Seasonally adjusted core CPI (excluding food and energy) was up 0.2 percent and 1.4 percent on the year.
Bottom line
Carry trades, fashionable for risk takers, could loose their luster as interest rate differentials narrow. Carry traders borrow cheaply in a low interest rate country to buy assets with a higher expected return elsewhere. With increasing interest rates (and narrower spreads), investors are pushed into riskier assets in search of returns. The yen is currently the world's cheapest funding currency, though the Bank of Japan has announced a policy change. The European Central Bank is tightening policy also. This means that the excess global liquidity which has been the fuel for carry trades is being removed. The impact this might have probably is more important for financial markets than the difference between Japanese interest rates of zero and 25 basis points. As interest rates climb, the profitability of carry trades declines.
Equity investors exuberant
