A massive sell off on the Tokyo Stock Exchange, the world's second largest stock exchange, forced the TSE to end Wednesday's trading 20 minutes early and to institute emergency measures for Thursday - including curtailed trading hours - in a desperate attempt to prevent a recurrence of Wednesday's near collapse. The collapse left TSE's reputation in shreds. Its trading system was on verge of a breakdown. Hours were abbreviated and a ceiling of 4 million transactions or over 8.5 million orders was put in place. Wednesday's meltdown was the most recent of a series that has plagued the TSE, all centering around its technology and its inability to deal with recent high trading volumes and its inflexibility in dealing with problems. There was a total systems failure last October that stopped trade for nearly an entire day followed a few weeks later by a computer glitch that contributed to a ¥40 billion ($350 million) loss at Mizuho Securities.
Wednesday's failure centered around panicking investors who were eager to jettison stocks in the wake of a raid by prosecutors on internet services company Livedoor. A surge in sell orders was prompted by an investigation into alleged illegal activities at the internet company Livedoor. This event combined with disappointing results from U.S. companies Intel and Yahoo, a rise in oil futures and a drop in U.S. share prices put even more pressure on the TSE's fragile systems. The TSE's efforts to promote itself as a world-class exchange have been severely undermined by its failures. It had to postpone its exchange listing that had been scheduled for this year and its president resigned to take responsibility for the earlier computer-related problems.
The outcome of the extraordinary events is that the robustness of the trading system on the world's second-largest bourse is now seriously compromised. Investors have been left asking whether the TSE's management is qualified to oversee the design and implementation of the improvements to the trading system that are so obviously needed. Two upgrades in the past three months have proved to be inadequate. The exchange said that it plans a third upgrade on January 30 that will increase the capacity for transactions to 5 million a day.
Crude continues its climb on supply threats
Crude oil surged to a three-month high, surpassing $66 a barrel in New York on concern that Iranian and Nigerian shipments could be disrupted. In Nigeria, the worsening unrest has involved crude oil supply disruptions and sabotage. And the current crisis in Iran is over its nuclear research policy. The U.S. and Europe are threatening to refer that country to the United Nations Security Council and in return, Iran has threatened to retaliate using its status as the world's fourth largest oil exporter as a weapon. Iran produced about 3.9 million barrels of oil a day in December with most going to Europe and Asia. World oil demand is expected to accelerate throughout 2006 as Chinese and U.S. consumption picks up according to the International Energy Agency. The IEA predicts that demand will grow to 85.1 million barrels a day, after gaining 1.3 percent last year. The agency is the adviser to 26 consuming nations. The Strait of Hormuz, which lies between Iran and Oman, controls access to the Persian Gulf and is an extremely vulnerable point in the crude distribution system. Between 16.5 million and 17 million barrels of oil a day moved through the strait in 2004, according to the U.S. Energy Department.
Global markets plod on
Stocks rebounded vigorously on Thursday, with the Nikkei gaining 2.3 percent after sinking nearly 6 percent in the previous two days. And while stocks elsewhere also were up on Thursday, investors continued to worry about climbing oil prices and corporate earnings. Aside from Japan, other markets were mixed on the week as the disappointments and surprises of earnings season were unveiled. The rising price of oil benefited mining stocks in the UK, Canada and Australia. But on Friday, U.S. stocks were dragged down by disappointing earnings reports. Investors in Europe, Canada and Mexico followed suit and sold.
Global Stock Market Recap
Europe and the UK
Equities had a choppy, volatile week, thanks to climbing crude oil prices and supply worries because of Nigeria and Iran. The on-set of profits season began in earnest and the ups and downs there were reflected in the quixotic behavior of investors. The precipitous declines in Japan rattled investors elsewhere, but things quickly settled down as Japan took steps to calm things down. The FTSE benefited from improving mining share performance (the sector includes oil companies), while the CAC and DAX wavered on profits warnings. The problem with profit warnings is that they give no warning at all on what counts for investors - the share price of the company. Companies can sound the alarm for any number of reasons, both backward and forward-looking. Over-optimistic management can be just as much to blame as any downturn in the broader economy. All three indexes lost ground on the week with the FTSE down 0.7 percent, the CAC down 1.6 percent and the DAX sinking 2.4 percent. Friday's declines reflected disappointing U.S. earnings news that depressed the Dow and Nasdaq. Europe and the UK followed those indexes downward.
Asia/Pacific
The big news in equities here and around the globe centered upon the investigation into Livedoor that sparked the biggest declines in the Nikkei and Topix in nine months on Tuesday and Wednesday. Concerns grew over allegations that the Internet company's top executives may have been directly involved in market manipulation. Late on Monday, Japanese prosecutors and officials from the Securities and Exchange Surveillance Commission raided Livedoor's offices and the homes of three executives, removing documents and computers in their search for evidence that the group had deliberately misled investors (one executive committed suicide after the raids). The spreading of false information in an attempt to boost share prices is a violation of the Securities and Exchange Law and could lead to major fines or imprisonment of up to five years. Japan, like the U.S., had tightened securities laws after the Enron debacle a few years ago. Livedoor was not a list member of either the Topix or Nikkei. Rather it was a component of a relatively new market - Mothers. Tokyo Stock Exchange established the new market named Mothers (market of the high-growth and emerging stocks) in 1999 in order to provide venture companies access to funds at an early stage of their development and to provide investors with more diversified investment products.
Some analysts described last week's plunge as a case of irrational exuberance brought to a halt by irrational pessimism. The drop appeared to most analysts to have little to do with fundamentals, but rather started to feed upon itself, as retail investors in particular raced to sell before their comrades could send prices down even further. Most analysts still find many reasons to be cheerful about the Japanese market. Corporate profits are set to rise this year for the fourth successive year - the first such run since the 1970s. And consumer price deflation appears to be coming to an end at last while there are clear signs of a pick-up in the Japanese real estate market.
Bank of Japan - no policy change
The Bank of Japan met on Thursday and Friday and at the conclusion of the meeting, monetary policy was left unchanged with interest rates remaining near zero and money supply accommodation left in place. The bank's target for reserves it makes available to lenders remains between ¥30 trillion and ¥35 trillion. The BoJ continues to predict that consumer price deflation is nearing an end and it will be adjusting its policy accordingly. BoJ Governor Toshihiko Fukui told reporters after the meeting that the chances of a shift in policy would increase over the course of the next fiscal year which begins on April 1st.
Currencies
As the week ended, eyes in the currency markets shifted to interest rate spreads, with the Federal Reserve expected to increase U.S. fed funds rate when it meets on January 31st. In a heavy week of Fed speak, several FOMC members expressed concern about inflation as oil prices reached their highest since September. The dollar rallied in 2005 given the Fed's eight 25-basis-point increases. The fed funds rate is currently 4.25 percent. But the dollar was pressured after it was reported that Iran is transferring assets held abroad amid international criticism over its nuclear program.
The yen was up against the dollar on Friday after Bank of Japan Governor Fukui predicted a positive trend for consumer prices. The BoJ said growth is faster than it predicted in October, spurring speculation it is moving toward ending its near five-year-old policy of pumping cash into the banking system to keep rates at zero percent. Earlier in the week, the yen tested 12-day lows against the dollar and euro after Japanese shares plummeted, a black eye that raised concerns whether foreign investors would liquidate their holdings.
Indicator scoreboard
EMU - November industrial production was up 1.3 percent and 2.6 percent when compared with last year. Energy output was up by 3.6 percent while intermediate and capital goods were both up 1.4 percent. Durable consumer goods output also was up but nondurables output was down. Output in Germany, Luxembourg and Finland were down.
December unadjusted harmonized index of consumer prices was up 0.3 percent and 2.3 percent when compared with last year. Core HICP, which excludes energy and unprocessed food, was up 0.4 percent and 1.4 percent on the year. Prices were up for recreation & culture, hotels & restaurants and food. The increases were somewhat offset by price declines for clothing, communications, transportation and alcohol & tobacco.
November unadjusted merchandise trade deficit was €2.3 billion. Imports and exports were up 7.9 percent 5.1 percent respectively. Imports were up thanks to energy. On a seasonally adjusted basis, the trade balance was barely in surplus (€0.1 billion).
Germany - December producer price index was up 0.3 percent and 5.2 percent when compared with last year. Energy prices jumped 0.8 percent after dropping 0.9 percent in the previous month. On the year, energy prices were up 19.5 percent. Excluding energy, the PPI was up 0.1 percent and 1.2 percent on the year.
France - December consumer spending on manufactured goods was down 1 percent but up 1.4 percent when compared with last year. Overall spending was pulled down by a sharp 4.1 percent drop in clothing outlays after they had jumped 4 percent in the previous month.
Italy - November seasonally adjusted industrial output edged up by 0.1 percent but was down 0.6 percent when compared with the same month a year ago. Consumer goods output was down 0.4 percent while investment and intermediate goods were up 0.7 percent and 1.4 percent respectively. Chemical products and synthetic fibre output sank 3.9 percent.
November merchandise trade deficit ballooned to €1.2 billion from €280 million in October. The deficit grew mainly due to increased energy imports. Exports were up 5.1 percent while imports climbed by 7.1 percent when compared with last year.
November seasonally adjusted industrial orders were up 1.8 percent and 4 percent when compared with last year. Domestic orders, which account for about 70 percent of the index, were up 2.1 percent and 3.1 percent on the year. Foreign orders were up 5.8 percent and 4.4 percent on the year. Orders were up in seven of ten categories.
Britain - December producer output prices were down 0.2 percent but up 2.4 percent when compared with last year. Excluding food, beverages, tobacco and petroleum, output prices were up 0.1 percent and 1.6 percent on the year. Input prices were up 0.9 percent and 17.2 percent on the year - the highest since records began in 1991. Excluding food, beverages, tobacco and petroleum industries, prices were up 0.4 percent and 11 percent on the year.
December consumer price index was up 0.3 percent and 2 percent when compared with last year thanks to falling gasoline prices. While prices for furniture, furnishing & carpets as well as recreation & culture exerted some downward pressure, those from clothing and footware exerted upward pressures. Core CPI which excludes energy, food, alcoholic beverages and tobacco was up 0.4 percent and 1.3 percent on the year. Retail price index excluding mortgage interest payments (RPIX) was up 0.3 percent and 2 percent on the year.
December claimant count unemployment was up by 7,200 to 909,100. The claimant count has increased for 11 consecutive months and is 95,300 higher than the recent low point in January 2005. The claimant unemployment rate is 2.9 percent for the second month. The unemployment rate as measured by the International Labour Organisation for the three months ending in November was 5 percent, up from 4.9 percent in the preceding three months. The number of unemployed increased by 111,000 over the quarter and by 121,000 over the year, to reach 1.53 million. The employment rate for people of working age was 74.5 percent for the three months ending in November 2005, down from 74.9 percent the previous quarter. The number of people employed was 28.76 million, down 22,000 over the quarter but up 221,000 over the year. The quarterly drop in employment was mainly due to the declining number of employees, particularly women.
Average earnings growth for the three month ending in November was 3.4 percent when compared with the previous three months. Private sector earnings growth eased to 3.3 percent from 3.5 percent. Manufacturing sector average earnings were up 4.5 percent from 4.4 percent while average earnings in services edged down to 3.2 percent from 3.4 percent. Excluding bonuses average earnings growth was 3.8 percent, down slightly from 3.9 percent in the previous month.
December retail sales were up 0.5 percent and 4 percent when compared with December of last year. In the three months to December, sales volumes were up 1.6 percent when compared with the previous three months and were up 2.8 percent when compared with the same three months a year ago. Non-food sales were up 1 percent but food sales were down 0.6 percent.
Asia
Japan - December corporate goods price index was up 0.2 percent and 2.2 percent when compared with last year. Prices for nonferrous metals, agriculture, forestry and fishery products were up while metal products such as aluminum window sashes were down.
Americas
Canada - December consumer price index was down 0.1 percent and up 2.2 percent when compared with December 2004. Core CPI, which excludes food and energy, was down 0.1 percent but was up 1.3 percent on the year. The Bank of Canada core rate, which excludes eight most volatile index items, was also down 0.1 percent but was up 1.6 percent on the year. In December, prices were lower for natural gas, women's clothing and fuel oil. However these declines were almost completely offset by higher prices for fresh fruits and vegetables. On the year, gasoline prices were 14.6 percent higher while homeowners' replacement costs were up 5 percent. Offsetting these increases were a drop in computer equipment and supplies prices of 18.1 percent and a 5.8 percent drop in fresh vegetable prices. On a seasonally adjusted basis the CPI was up 0.2 percent and 2.1 percent on the year. Core CPI was up 0.1 percent and 1.3 percent on the year.
November factory shipments plummeted 1.6 percent but were up 2.1 percent when compared with last year. An 8.7 percent decline petroleum and coal products prices at the factory gate, coupled with production slowdowns due to maintenance at some plants, reduced petroleum shipments by 10.8 percent. Excluding the price-influenced petroleum industry, total manufacturing shipments decreased by 0.6 percent. Motor vehicles shipments sank 5.1 percent. Recent volatility in the auto sector made 2005 motor vehicle manufacturing unpredictable. Only 8 of the 21 manufacturing industries reported lower shipments - but among the 8 were some of the largest, accounting for 50.6 percent of the total. New orders fell 1.8 percent, due to substantial decreases in the transportation equipment sector. Excluding transportation equipment, orders edged down by a modest 0.2 percent. Although new orders abated substantially, manufacturers posted the highest level of unfilled orders in almost three years. Unfilled orders climbed 0.6 percent - the ninth increase so far in 2005 and 16 percent above levels of one year ago.
Bottom line
On Monday, Canada will hold a national election for parliament and the country's leader. The most recent polls show that the Conservative party will win and replace the incumbent Liberal party by a slim margin. The numbers suggest the Conservatives, led by Stephen Harper, would form a minority government, forcing them to seek support from opposition parties to pass laws.
On Tuesday, the Bank of Canada will announce the outcome of their monetary policy committee meeting. They are expected to increase their key rate by another 25 basis points to 3.5 percent. The economy continues to operate at near capacity with companies struggling to meet demand. This is despite the steadily increasing value of the Canadian dollar against its U.S. counterpart. Forecasts have the Canadian economy expanding at about 3 percent in 2006. GDP expanded at a 2.8 percent annual rate in the third quarter - the third highest rate in the Group of Seven, behind the U.S. and Japan.
Tumultuous week for Japanese equities
