Investors will be happy to see October end soon with most indexes followed here suffering through their third straight week of decline. Trading has been volatile on a day-to-day basis as earnings, crude oil prices and acts of nature provided fodder for investors' nerves. And price reports from the U.S. and elsewhere also stirred up latent inflationary fears as well. The Hang Seng was up 2 points or 0.01 percent while the Bolsa was up 0.1 percent and the Nasdaq, 0.8 percent. All other indexes followed here were down on the week.
Global Stock Market Recap
Europe and Britain
The FTSE, DAX and CAC all suffered their third straight weekly decline. In just three weeks into the fourth quarter, the three indexes have given back most of their third quarter gains. Inflation concerns combined with declining crude prices sent shares reeling. Oil stocks were a drag on the market after crude prices fell below $60 a barrel in response to weakening demand and the diminished threat posed by Hurricane Wilma. The FTSE with its large energy company component that includes both Shell and BP was hard hit as investors feared reduced earnings stemming from lower crude prices. The FTSE was also hit by higher inflation prospects combined with below trend growth, with the first estimate of UK third quarter gross domestic product edging up only 0.4 percent on the quarter.
European stocks were also down following, to some degree, the ups and downs in U.S. stocks. For example, European equities fell on Friday after U.S. stocks tumbled in the previous session as weak earnings from drug maker Pfizer and fresh fears of rising inflation sparked a sell off. Investors sold stocks like Ericsson, the mobile telecom equipment maker, even though it reported third-quarter pre-tax profit that came in line with market expectations and said that it still expected the global mobile systems market to show moderate growth this year and next.
Asia/Pacific
And things were not much better in Asia/Pacific last week. Basically the reasons for the declines are similar worldwide. Only the Hang Seng managed to hold on to a slight gain - one needs two decimal places to measure it though - but this was after dropping close to 1,000 points or over 6.6 percent in the two preceding weeks. And while both the Nikkei and Topix were down only two of the three weeks, their losses in October continue to mount. The Nikkei is down 3.3 percent while the Topix has lost 2.3 percent. The all ordinaries has lost ground for all three weeks as weakening commodity prices hit shares there hard. The Australian index is down 6.6 percent. And the beat goes on. The Kospi is down 4 percent in October as worries about U.S. growth, which impacts the export-dependent economy, and inflation provoked a sell-off. However, the index has gained the most of the 13 tracked here and is up 32.1 percent on the year. The Singapore STI index was down the last two weeks and has lost 3.3 percent in October.
Americas
The Bank of Canada increased its key interest rate for the second time in six weeks by 25 basis points to 3 percent. In their post-meeting statement, they said more increases would be needed to control inflation driven up by energy prices. The increase narrowed the interest rate gap between the U.S. and Canada to 75 basis points. The fed funds rate currently stands at 3.75 percent with expectations that it will go to 4 percent when the FOMC meets on November first.
Governor David Dodge and the members of the rate setting committee are trying to stem inflation that, according to the bank, will average about 3 percent before slowing to 2 percent in the second half of 2006. The Bank of Canada has an inflation target range of 1 to 3 percent with focus on the mid-point, 2 percent. Contributing to higher inflation are energy prices, which spiked after Katrina and Rita struck U.S. refineries, along with capacity constraints, which could add to upward price pressures and record profits.
In the October Monetary Policy Report, the Bank of Canada signaled that more interest rate increases are on the horizon over the next four to six quarters. The report discusses current economic and financial trends in the context of Canada's inflation-control strategy. In the report, the Bank said that global and Canadian economies have continued to grow at a solid pace and the Canadian economy appears to be operating at full production capacity. The Bank reduced its growth forecast to 2.8 percent this year, 2.9 percent in 2006 and 3 percent in 2007. The reasons for the reduction were placed on past and recent movements in energy prices and in the Canadian dollar exchange rate. They also said that competitive pressures from China and other newly industrialized economies were giving rise to significant ongoing adjustments in the Canadian economy.
Currencies
The dollar was up for a sixth straight week against the yen and the sixth in seven weeks versus the euro as higher U.S. interest rates and bond yields lured international investors. The yen was pushed to a two-year low against the dollar after Japanese Chief Cabinet Secretary Hiroyuki Hosoda signaled the government is comfortable with a weaker currency. A weaker yen benefits exporters' profits when repatriated and makes their products more price competitive in the U.S. The dollar was also boosted by recent Treasury Department data that indicated foreign investors increased their holdings of U.S. Treasury notes, corporate bonds and stocks by the most since April 2004. Japanese investors bought �1.48 trillion ($12 billion) of overseas bonds in the week ended October 8th, the most since June, according to Ministry of Finance figures. The Fed's beige book along with a plethora of "Fed speak" also contributed to dollar strength. The widening interest rate spread between the EMU and the U.S., for example, makes U.S. investment more attractive. Similarly, the narrowing of the spread between other countries such as the UK and Australia also contribute to the positive dollar.
The euro was pressured by a less-than-expected improvement in German investor confidence (ZEW). The dollar is strengthening as the yield advantage on U.S. Treasury notes widens compared with German and Japanese debt. The Federal Reserve has raised its benchmark interest rate 11 times since June of last year to 3.75 percent. The European Central Bank hasn't touched rates since 2003 and the Bank of Japan is flooding the banking system with cash to keep rates near zero. But comments by European Central Bank officials hinted that they might begin raising interest rates next year, which would narrow the U.S. rate advantage.
Indicator scoreboard
EMU - September harmonized index of consumer prices was up 0.5 percent and 2.6 percent when compared with last year. The jump was attributed to the 15.2 percent increase in energy prices on the year. The strongest downward effect came from non-energy industrial goods, including cars, clothing, footwear, and technical and electrical appliances. The ECB's preferred inflation measure, the core HICP (excludes energy and unprocessed food), was up 1.5 percent on the year. Only Finland and the Netherlands had inflation rates below the ECB's 2 percent target.
August industrial output was up 0.8 percent and 2.5 percent when compared with last year. Output was down in Germany, the Netherlands, Belgium and Finland on the month but was up for the remaining EMU members (no data for Austria were available). Consumer durable goods were up 0.9 percent and 2.2 percent on the year while nondurable goods were up 1.2 percent and 3.4 percent on the year.
August merchandise trade balance registered a deficit of €2.7 billion compared with a surplus of €7.9 billion in July. Imports were up 4 percent on the month but 20.4 percent on the year. Exports were down 6.4 percent but up 13.8 percent on the year. The EMU had a trade surplus with most of its major trading partners with the exception of China, Russia and Japan. On a seasonally adjusted basis, exports were up 3.4 percent but imports jumped by 5.1 percent.
Germany - October ZEW expectations index among German financial experts reading was 39.4, up from 38.6 in the previous month. While easing oil prices and continued growth added to the index's stabilization, at the same time continued uncertainty about the policies of the new German government dampened expectations. Both the expectations and current conditions indexes improved. The ZEW surveyed 324 German financial experts for their opinions on current economic conditions and the economic outlook for major industrial economies between October 4th and 17th.
September producer price index was up 0.4 percent and 4.9 percent when compared with last year. Excluding energy prices, the PPI was up 0.3 percent and 1.5 percent on the year. Nondurable consumer goods prices were up 0.7 percent and 1.8 percent on the year. Durable goods prices were flat but up 1.3 percent on the year.
France - September consumer spending on manufactured goods was down 0.6 percent but was up 4.2 percent when compared with the same month a year ago. Most sectors declined with the exception of auto sales, which were up 1.9 percent. Clothing sales declined 3.8 percent while household durables dropped 1.4 percent.
Italy - August seasonally adjusted industrial orders were up 1 percent and 12.9 percent when compared with last year. Domestic orders were up 2.8 percent and 11.4 percent on the year while foreign orders were down 2.2 percent but up 15.5 percent on the year.
August seasonally adjusted retail sales were up 0.6 percent and 0.4 percent when compared with last year. Nonseasonally adjusted retail sales were up 2.4 percent on the year. Both food and non-food sales improved on the year. ISTAT cautioned that August's data are particularly volatile due to the vacation season, and said that sales volumes are roughly 20 percent lower then when compared with other months of the year.
Britain - September consumer price index was up 0.2 percent and 2.5 percent when compared with last year. This was the third successive month that the rate of inflation has exceeded the Bank of England's 2 percent target. Gasoline prices were the reason once again for the higher prices. Offsetting this increase were declines in prices for clothing and footware along with those for airfare and foreign holidays. The retail price index excluding mortgage interest payments - the Bank of England's former inflation measure - was up 0.4 percent and 2.5 percent on the year.
September retail sales volumes were up 0.7 percent and 0.7 percent when compared with last year. Food sales were up 1.4 percent while non-food sales climbed by 0.4 percent. There was positive growth in all sectors with the exception of non-store sales - they sank 3.1 percent.
Third quarter preliminary estimate of gross domestic product was up 0.4 percent and 1.6 percent when compared with the same quarter a year ago. Services output, led by business & finance and government, was up 0.6 percent and 2.2 percent on the year. However, industrial output dropped 0.6 percent and was down 1.3 percent on the year mainly due to declining oil and gas production (annual maintenance work had gone on longer than usual). Manufacturing output was up 0.4 percent but utilities output sank 1.8 percent and mining and quarrying production plummeted 6.8 percent. Excluding the volatile mining and quarrying sector, output would have been up about 0.6 percent on the quarter.
Asia
Japan - August tertiary index was up 1.7 percent and 3.1 percent when compared with last year. The tertiary index reflects activity in 11 service industries, among which are utilities; transport; telecommunications; wholesale and retail; finance and insurance; real estate; restaurants and hotels; medical, health care and welfare.
August all industry index was up 1.1 percent and 2.1 percent when compared with last year. The all industry index takes a reading of activity in the industries that comprise the tertiary index combined with activity in the construction, agricultural and fisheries industries, the public sector and industrial output. This index is considered a close approximation for gross domestic product growth as measured by industrial and service sector output.
Americas
Canada - August retail sales were down 0.3 percent but were up 7.3 percent when compared with last year. Excluding the auto group, retail sales edged up 0.2 percent and were up 6.6 percent on the year. Higher gasoline prices drove up sales by 3.2 percent, offsetting the 2.1 percent decline of new autos sales. Five of eight sectors declined on the month. Constant dollar sales, which are adjusted for changes in prices, were down 1 percent.
Bottom line
Overseas equities continue to take their cues from U.S. stocks - but at the same time they have performed better than those in the U.S. this year. Even with the huge losses racked up in October, only two of those followed here are below 2004 year end - the Dow and Nasdaq. And yet the U.S. economy continues to do better than most other countries, and investors will be waiting to see if the first estimate of third quarter U.S. GDP continues that trend. Internationally, this week offers a host of Japanese data including unemployment, industrial production, the very important consumer price index and worker household spending. In Europe, money supply, a new flash estimate of consumer prices and the European Union business and consumer sentiment survey highlights the data releases there.
Inflation fears unsettle investors
