Stocks were volatile last week as investors honed in on northern hemisphere weather reports. The cold, snowy forecasts drove crude prices over the $60 a barrel mark once again. Natural gas prices soared as well thanks to visions of larger heating bills. Gold bugs were out in full force in Japan, where the weak yen has investors looking elsewhere for attractive investments. And central bank announcements did not seem to stir the financial markets. Nine of the 13 indexes followed here were down on the week.
Global Stock Market Recap
Europe and Britain
Equities bounced around last week, showing no clear trend. All three indexes tracked here were down slightly on the week. Climbing crude oil prices made investors edgy and they sold, following those wary investors in the U.S. In London stocks lost ground on Friday as shares in troubled contract caterer Compass came under pressure. Compass is facing multiple legal problems into alleged corrupt buying practices at the United Nations. Weak oil stocks also contributed to lower prices. In Europe, stocks revolved primarily around the ups and downs of oil.
Bank of England interest rate stays at 4.5 percent
The Bank of England's Monetary Policy Committee kept its key interest rate unchanged at 4.5 percent for a fourth month to prevent inflation from accelerating even as economic growth slows. The MPC has said that they are concerned that the surge in oil prices could spark a wage-price spiral. The Bank expects growth to speed up in 2006 driven by consumer spending, business investment and stronger exports. The Bank's inflation measure has been above their 2 percent target for four months. Third quarter GDP was up 0.4 percent, below the 0.6 percent pace of the EMU. It was the first time Britain's quarterly rate of growth lagged that of the euro area in almost five years. In his December 5th pre-budget report, Chancellor of the Exchequer Gordon Brown almost halved his growth forecast for this year to 1.75 percent, putting the UK on course for its slowest expansion in 13 years. Consumer spending, which accounts for two-thirds of the economy and has driven 53 quarters of expansion, slowed in the first half of the year as the housing price bubble deflated.
The Bank of England, which in November reduced its forecast for economic growth in 2005 to about 2 percent from 2.7 percent in February, expects the economy to recover next year. In addition to a modest recovery in consumer spending, stronger exports and business investment are expected to be the main drivers of the economy. A more favorable exchange rate and increased global demand are helping exporters.
Asia/Pacific
Stocks were volatile among the indexes followed here. In Japan, declines in many export and domestic sectors reflected nervousness about high valuations after both the Topix and Nikkei climbed to five-year closing highs. For example, electrical machinery stocks fell as investors wondered whether their belated recent increases had been too fast. Banking stocks have performed extremely well this year and have remained strong despite periodic selling on nervousness that prices have reached unsustainable levels. On Friday, investors shrugged off the downwardly revised third quarter GDP data. They focused instead on the upward revisions for both household spending and business investment.
Continued feverish overseas interest has been the biggest reason behind Japanese stocks' sharp rise recently. Foreign buying of Japanese stocks reached a record level as global investors buy into the country's economic recovery. Overseas investors bought ¥9,441 billion ($78.9 billion) more in Japanese shares than they sold in the year to November 18th according to the Tokyo Stock Exchange. The figure includes trading on the Osaka and Nagoya exchanges. In spite of many years of poor performance, the Japanese stock market remains the world's second largest and foreign investors are drawn to sectors that have undergone successful reform, such as banking. But the strong foreign interest shown contrasts sharply with the skepticism of Japanese institutional investors - they are still net sellers.
Slowing growth keeps Australia's interest rate at 5.5 percent
As expected, the Reserve Bank of Australia left its key interest rate unchanged at 5.5 percent as the economy continues to slow and lower oil prices ease inflation pressures. RBA Governor Ian Macfarlane and the Monetary Policy Board have increased borrowing costs just once in the past two years as slowing consumer demand and falling home building have curbed growth. In contrast, counterparts in the U.S., Canada and New Zealand are raising rates. The RBA releases a post-meeting statement only when interest rates are changed. Third quarter GDP growth slowed to 0.2 percent on the quarter and 2.6 percent when compared with last year. The RBA does not meet in January - it is the RBA's summer holiday. The next scheduled meeting is February 8th.
Americas
Bank of Canada key interest rate now 3.25 percent
As expected, the Bank of Canada raised its key interest rate by 25 basis points to control inflation and signaled that it would do so again. The economy is currently working at full capacity. The increase, the third since September, brings the target rate for overnight loans between commercial banks to 3.25 percent, the highest since July 2003, and narrows the gap with the 4 percent U.S. federal funds rate to 75 basis points. In its announcement, the Bank said that further reduction in monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters and keep inflation on target. GDP growth currently exceeds the pace that the bank says is the maximum possible without accelerating inflation. The country's vast stores of natural gas and crude oil are boosting the economy, making up for a slowdown in manufacturing shipments caused by the Canadian dollar's increased value against its U.S. counterpart. Canada is the second-largest exporter of natural gas and ninth-largest exporter of oil, according to 2003 figures compiled by the International Energy Agency.
Currencies
The yen extended its bounce from multi-year lows in European trading on Thursday amid further signs that carry trade investors are liquidating short-yen trades. Earlier in the week, the yen fell to a 32-month low against the dollar after Japanese Finance Minister Sadakazu Tanigaki and Bank of Japan Governor Toshihiko Fukui signaled they are comfortable with the currency's 15 percent drop this year. Japan's currency declined to a record low versus the euro after Fukui told reporters in London on December 3rd that a weaker yen is not a problem and Tanigaki said the slide reflects relative economic performance. The yen is set for the biggest annual drop against the dollar since 1979 as the BOJ keeps rates near zero and the Federal Reserve continues to increase the fed funds rate. The weaker currency will help boost the profit of exporters and has helped the Nikkei climb to a five-year high.
A public dispute between Japan's government and the central bank over monetary policy is helping drive the yen lower as overseas investors fret over the bank's independence. The dispute is troubling because it raises doubts about the BoJ's independence from political influence politicians. The government has said it's concerned the economy's recovery from recession will be derailed if the Bank of Japan raises interest rates too soon. A one percent increase is estimated to cost Japanese companies 2.9 trillion yen ($24 billion) in profit according to the government.
The yen, which fell to a 32-month low during the week, has declined 2 percent since November 24th when Prime Minister Junichiro Koizumi said it is "too early" for a change in bank policy. His comments came three days after BoJ Governor Toshihiko Fukui said the bank may revise its deflation-fighting policy that has kept interest rates near zero. Analysts say the possibility that the bank will succumb to political pressure and alter its schedule for raising rates has helped send the yen lower.
Japanese investors clamor for gold!
Japanese investors pushed gold prices to a new long term high for the seventh consecutive session on Friday. Gold hit a high of $525.25 a troy ounce in European trade. Gold already has risen more than 6 percent so far this month, which is more than the amount it was up for the month of November. Previously, gold prices were up more than 7 percent between September and October, having spent the first eight months of the year relatively flat. The next target for gold would be breaking the March 1981 high of $540.50. Both London and New York have lagged the rally in Tokyo, which has been the real driver behind the most recent surge higher in prices, with the Tokyo Commodity Exchange closing limit up on the day. Analysts attribute the demand surge to the continued weakness in the yen which has fallen by more than 10 percent since the beginning of September. Gold has remained above the $500 level for the past seven sessions, and is on track to exceed the 10-day period it remained above this level in 1983. The last time it was trading at $525 was when it was sliding from the all-time record of $850 in January 1980. During this period gold remained above $500 for a period of 13 months. The price of gold bullion has been rising since 1999, marking its longest upward run since it was freely floated in 1968.
The dramatic rise in gold over the past two weeks has caught even gold bulls by surprise. The immediate cause was the move by the Japanese investing public into gold futures as the most highly leveraged vehicle through which they could sell their currency short. Gold markets are small and relatively illiquid, so the Japanese investing public's selling of its currency had a disproportionate effect. Some analysts opine that while the immediate increase in the gold price has really been a decline in the yen, the rise in gold in general is a sign of the markets' displeasure with major global currencies. Right now, gold is pointing out the dilemma for Japanese authorities in accommodating both the borrowing required by the recovery in private sector activity and a need to keep the enormous public debt refinanced at low interest rates.
Indicator scoreboard
EMU - November services activity index edged upward to 55.2 from 54.9 in October. Improved activity in Italy and Spain was offset by declines in Germany and France. New orders were down as were input prices. However, prices changed were up in November. NTC Research in London compiles the index. A reading above the breakeven 50 level indicates that activity is expanding.
October retail sales were up 0.6 percent and up 1 percent when compared with last year. Food sales were up 0.7 percent while non-food sales were up 0.3 percent.
Germany - October real seasonally adjusted manufacturing orders were up 2 percent and 9.3 percent when compared with last year. Domestic orders were up 1.2 percent while foreign orders jumped 2.8 percent. Domestic orders for basic and capital goods were both up 1.2 percent while consumer and durable goods orders were up 3.4 percent. Foreign orders for basic goods jumped by 4.2 percent while capital goods climbed 1.7 percent. Consumer and durable goods soared by 5 percent.
October industrial production was up 1.1 percent and 4.2 percent when compared with last year. Manufacturing production was up 1 percent and 4.7 percent on the year.
October seasonally adjusted merchandise trade surplus was €12.7 billion, down from €14.8 billion in September. Exports were down 0.6 percent while imports were up 3.1 percent. Imports from countries outside the EU jumped 12.9 percent after increasing by 8.9 percent the previous month. Exports to these countries slowed - they were up 11.6 percent after soaring by 18.3 percent in September.
France - October seasonally adjusted industrial output sank 2.5 percent and was down 1 percent when compared with the same month a year ago. Manufacturing output plummeted 2.4 percent and was down 1.4 percent on the year. October reversed September's gains and more. Auto output sank 9.2 percent while capital goods dropped 1.4 percent, consumer goods were down 0.8 percent and semi-finished goods declined 1.8 percent.
Italy - Third quarter gross domestic product was up 0.3 percent and 0.1 percent when compared with the same quarter a year ago. Export and domestic demand growth were partly offset by declining inventory accumulation. Private consumption was up 0.4 percent and 1.4 percent on the year. Capital investment was up 1.3 percent and 0.2 percent on the year.
Britain - October industrial production was down 1 percent and dropped 1.8 percent when compared with last year. Manufacturing output declined 0.7 percent and was down 0.9 percent on the year. Output fell in 10 of 13 manufacturing sub-sectors with the sharpest declines occurring in the transport equipment, electrical & optical equipment and paper, printing & publishing. Warm weather in October depressed output of the utilities industries and gas production.
October global merchandise trade deficit narrowed to Stg4.552 billion from Stg5.6 billion in September. Excluding oil and erratic items the goods trade deficit was Stg4.836 billion, only slightly below September's Stg4.939 billion shortfall. The oil and erratics returned to surplus after two months in deficit due to a fire in one oil-field in the North Sea along with delayed maintenance work. The erratics balance returned to surplus mainly due to higher aircraft and aircraft parts exports to the EU.
Asia
Japan - Third quarter gross domestic product was revised downward to an increase of 0.2 percent from 0.4 percent on the quarter. GDP was up 2.8 percent on the year. The Cabinet Office on December 2nd announced changes to the way it calculates parts of GDP including imputed rents and software. Private consumption was up a revised 0.4 percent from the originally reported increase of 0.3 percent. Today's revision takes into account figures released last week by the Ministry of Finance showing capital spending grew 9.6 percent in the third quarter from the same period a year earlier. The figures measured by the ministry's capital spending report make up about 60 percent of corporate investment as measured by GDP. Private non-residential investment was up a revised 1.6 percent from the originally reported 0.7 percent increase. The GDP deflation was minus 1.4 percent.
Australia - October merchandise trade deficit eased to A$1.33 billion ($999 million) from a revised A$1.56 billion in September. Exports were up 2.3 percent thanks to increased exports and minerals and coal. Imports were up 0.6 percent. Capital goods, which include business machinery and vehicles, jumped 7 percent and while consumer goods fell 2 percent. October's shortfall extends the run of trade gaps to 45 months, the longest run of deficits since the 56 months ending in February 1985. Exports of commodities to China were up. China is Australia's second-largest export market behind Japan.
Third quarter gross domestic product was up 0.2 percent and 2.6 percent when compared with the same quarter a year ago. Consumer spending was up 0.3 percent while business inventories subtracted 0.5 percentage points from growth. Government investment dropped 5.2 percent as it spent less on defense. However, business investment was up 2 percent. The implicit price deflator for consumer spending was up 1.9 percent on the year.
November employment was up by 28,000 jobs while the unemployment rate edged down to 5.1 percent from 5.2 percent in October. Full-time employment gained 48,100 but part-time positions fell 20,100. The participation rate was unchanged at 64.4 percent in November.
Bottom line
Both the Federal Reserve and the Bank of Japan meet next week. It has been long assumed that the Fed will increase the fed funds rate by another 25 basis points to 4.25 percent. It is also assumed that the BoJ will leave its policies unchanged. They will conclude the major bank meetings for 2005. Both the Bank of Canada and the European Central Bank have already increased rates in December, both by 25 basis points.
Investors wander from equities
