Monday, March 14, 2005
Global Markets
A fuss was made last week as investors and market observers noted that the Nasdaq hit its peak on March 10, 2000 - five years ago. Other indexes peaked around that time as well including those followed here with the exception of the Mexican bolsa and Australian all ordinaries. Both of these indexes are currently at or near all-time highs.
Bearish dollar sentiment reasserted itself last week in anticipation of the U.S. merchandise trade report. The dollar hit a two-month low as the market reacted to the larger-than-expected deficit. The possibility that global central banks will diversify their currency reserves away from the dollar is preying on investors' nerves.
Global Stock Market Recap
Europe and Britain
Unlike Asian investors, those in Europe and Britain retrenched last week, giving back the previous week's gains and even more in the case of the CAC and FTSE. Stocks were pushed down by the twin pressures of near-record crude oil prices and concerns over the impact of higher bond yields on equity valuations. The collapse of Deutsche B�rse's bid to merge with the London stock exchange put additional negative pressure on the FTSE. But on Friday, investors returned to purchase technology stocks after Intel predicted quarterly sales will exceed analysts' estimates. Lower oil prices also helped lift investor gloom and helped lift shares of British Airways - as did a possible merger between Swiss International Air Lines and Deutsche Lufthansa.
Bid for London Stock Exchange collapses
Deutsche B�rse, operator of the Frankfurt stock exchange, abandoned a �1.3 billion ($2.5 billion) offer for London Stock Exchange (LSE) after growing opposition from its shareholders. The German exchange said it would return funds it would have used for a takeover to investors. LSE rejected Deutsche B�rse's bid in December and the companies had been negotiating an improved offer since. Deutsche B�rse shareholders, including hedge funds and Fidelity Investments, opposed the offer, calling on the Deutsche B�rse to buy back its own shares instead. Deutsche B�rse's withdrawal leaves Euronext NV, operator of the Paris and Amsterdam exchanges, as the only potential bidder for LSE. The German bid was the second attempt in five years to buy LSE. A takeover attempt in 2000 also failed after LSE shareholders objected to plans to concentrate trading of technology stocks in Frankfurt.
Stability pact negotiations look for solution
Possible reform of the Stability and Growth Pact continues to stumble onward. At issue is the Pact's rule that each country should have a debt-to-GDP ratio of 3 percent or less. Each of the major countries has their own pet change to the pact. For example, Berlin is demanding that the costs of German reunification as well as its net payments to the EU budget "be taken into account - but not in the sense of excluding them" from the calculation of Germany's public deficit. The French would like to see exemptions for research and development not to mention outlays for investment, foreign aid and military operations abroad. Ecofin - the committee of finance ministers - still hopes to reach an unanimous proposal to pass onto European government leaders who must approve the changes on March 22nd.
Bank of England keeps the status quo
The Bank of England kept interest rates at 4.75 percent for the seventh month in a row in line with financial market expectations. The decision came after economic data over the past month showed weaker growth in private consumption, the factor the Bank identified as the main risk to its central growth and inflation projections. Mortgage approvals were also lower and there was no improvement in closely watched surveys such as the purchasing managers. In addition, oil prices have started to accelerate again and economic growth in Britain's main trading partner, the EMU, is showing no sign of revival. Interest rates have remained at 4.75 percent since August 2004, after five increases from 3.5 percent since November 2003 which were aimed at slowing down the then buoyant housing market. Since last summer, housing market activity has slowed drastically, with mortgage approvals currently about a third lower than a year ago. Average house prices, meanwhile, have stagnated.
Asia/Pacific
Despite day-to-day fluctuations last week, only the all ordinaries ended the week with a loss. The index was down after oil producers' stocks such as Billiton followed crude prices down at week's end. Lower prices threaten to pare earnings. Oil prices were down after reports of rising U.S. inventories combined with lower shipments to China. The index has been registering all-time highs of late, so it should not be surprising that investors paused to reflect.
The Nikkei and Topix hit their highest levels in 11 months last week. Investors have favored metals and minerals-related stocks because of their exposure to China and India, while domestic oil stocks have traded on crude oil prices. Steelmakers and shipping stocks have also found favor. Foreign investors have largely been responsible for the indexes' gains. The Japanese financial year runs to the end of March and as the date approaches, it is common for domestic institutions to limit activity. Analysts say that many Japanese stocks are relatively cheap in spite of their recent increases. Furthermore, analysts and investors are beginning to see the first fruits of corporate restructuring. Balance sheets have been cleaned up, cross-shareholdings reduced and tougher corporate governance rules introduced.
Currencies
The dollar's trajectory was down last week and the currency was threatening record lows against the euro once again. The rally at the beginning of 2005 has petered out and the downward trend has reasserted itself. The dollar had been boosted by rising U.S. interest rates, which widened the spread between euro short rates and U.S. short rates. The perception that the U.S. economy is more dynamic than the EMU was also a factor. However, investors continue to fret about the U.S. twin deficits and whether foreign investors will be willing to keep investing here. Friday's larger-than-expected trade deficit added more downward pressure on the dollar.
Already jittery investors became more so after remarks by Japanese Prime Minister Junichiro Koizumi. He commented that, in general, diversity in foreign exchange reserves is necessary. This unexceptional statement caused fears that Asian central banks were planning to sell some of their dollar reserves. There was a quick clarification that there were no plans to sell the dollar. This followed a similar incident that occurred last month with the Bank of Korea. On February 22nd, the dollar dropped the most in more than six months against the euro after the Bank of Korea said it planned to buy more non-dollar assets with new reserves. The next day, the Bank retracted its statement and said it planned no dollar sales from its existing reserves.
In its quarterly review, the Bank for International Settlements said that in third quarter 2004, Asian banks, including central banks, reduced the share of their deposits held in dollars in favor of the euro, yen and other currencies. The share of deposits denominated in the dollar dropped to 67 percent from 81 percent in the same period in 2001. However, total dollar deposits were up. BIS said the evidence is inconclusive that a general shift away from the dollar is underway in the region since dollar deposits "continue to rise in absolute terms, suggesting, at most, that the currency shift is taking place at the margin." Formed in 1930, the BIS provides banking services for 120 financial institutions, including central banks. These data should be interpreted with caution because 42 percent of the region's deposits are held in banks in Singapore and Hong Kong, which don't provide details on the currency in which they are denominated. The figures don't include deposits made or held by Japanese banks.
Indicator scoreboard
Germany - January seasonally adjusted industrial output jumped by 3.1 percent and was up 3.5 percent when compared with last year. Industrial production excluding-construction - Eurostat's preferred figure when calculating eurozone industrial production - was up 3.2 percent and 3.8 percent on the year. All industrial output categories except energy improved on the month. Manufacturing output was up 3.8 percent with durables soaring 5.9 percent, investment goods up 4.9 percent, basic goods up 3.1 percent and nondurable consumer goods up 2.8 percent.
January seasonally adjusted merchandise trade surplus was �12.9 billion, up from �12.4 billion in December. Exports were up 6.1 percent on the month while imports were up 6.6 percent. Both exports and imports were up in trade with EU countries but down with non-
EU members.
France - January seasonally adjusted industrial output was up 0.2 percent and 2.9 percent when compared with last year. Manufacturing output was up 0.5 percent and 4 percent on the year. Output was up for semi-finished, consumer and capital goods. But auto output and energy output were down.
January seasonally adjusted merchandise trade deficit was �931 million, an improvement over December's �2.540 billion deficit. Exports bounced back 50.5 percent after a 2.3 percent decline in December. Robust sales of capital goods were bolstered by several big naval contracts, machine tool sales and a military project. Imports were down 0.2 percent after increasing 2.6 percent in the previous month. Imports were up in all categories with the exception of energy.
Britain - January industrial output was down 0.2 percent but managed to edge up 0.1 percent when compared with last year. Manufacturing output was up 0.2 percent and 1.4 percent on the year. The main reason for the decline in industrial output was due to warmer weather which negatively affected utilities output. Electricity, gas and water output dropped 2.1 percent in January and by 2.3 percent on the year. Mining and quarrying output fell 1.4 percent and was down 7.2 percent on the year.
January global merchandise trade deficit widened to Stg5.174 billion from Stg4.939 billion in December. The non-EU trade deficit also widened to Stg2.992 billion from Stg2.53 billion in December. Excluding oil and erratic items, the goods trade balance widened to Stg5.497 billion from Stg5.344 billion, the highest gap since trade records began in 1967. The total goods and services deficit deteriorated to Stg3.662 billion from Stg3.451 billion. The surplus on the services account was broadly unchanged at Stg1.512 billion compared with Stg1.488 billion in December.
Asia
Japan - February corporate goods price index was up 0.2 percent and 1.3 percent when compared with last year. The pace of increase in Japan's wholesale prices has slowed after peaking at 2 percent in November. Gains slowed to 1.8 percent in December and 1.3 percent in January.
Australia - February unemployment rate remained at 5.1 percent, a 28-year low. Employment was up by 20,000 new jobs. The economy added 37,900 full-time jobs but lost 17,900 part-time jobs. The participation rate was unchanged at 64.1 percent.
Americas
Canada - February employment was up by 26,600 jobs while the unemployment rate remained at 7 percent for the third month. Manufacturing lost 28,000 jobs primarily because of declining exports and the impact of the strong Canadian dollar. Employment was also down by 20,000 jobs in accommodation and food services. These establishments have been negatively affected by the ongoing National Hockey League labor dispute. Employment was up in educational services, information, culture & recreation services, agriculture and in business, building & other support services.
January merchandise trade surplus dropped to C$4 billion from C$5.2 billion in December. Exports were down by 1.6 percent while imports were up 1.9 percent. Exports were up in all sectors with the exception of energy, which sank by 12.5 percent. Exports to the U.S. were down 2.3 percent while imports from the U.S. were up 0.3 percent. The bilateral trade deficit with the U.S. was down to C$8.1 billion from C$8.8 billion in the previous month. The trade deficit with all other countries except the U.S. was C$4.1 billion, up from C$3.6 billion in December. Energy exports declined by 12.5 percent due to price declines - export volume actually was up in January.
Bottom line
Crude prices resumed their climb last week, although profit taking at week's end cut short a test of all-time highs. Another high of a sort was also in the news - that of the Nasdaq five years ago before the "bubble" broke. Equity indexes in both Europe and North America were down on the week. Last week, the Bank of England maintained the status quo. And this week, the Bank of Japan is expected to do the same. The BoJ has vowed not to raise interest rates from their current near zero level until the scourge of deflation is erased from the country.
Looking Ahead: March 14 through March 18, 2005
Memories of peaks past