Monday, January 3, 2005
Where is that illusive line in the sand'
When the euro formally began trading at the beginning of 1999, conversion rates were set for the participants in the European Monetary Union. Rates were also set for the Japanese yen, Swiss franc, British pound sterling and the U.S. dollar. For example, the euro was initially pegged at $1.1790 to the dollar. Now a euro costs over $1.36. The euro's nadir was $0.8281 set at the end of October 2000. Since then its value has continued to rise - albeit in fits and starts - until recently when the pace accelerated significantly despite disparities in growth and a cacophony of rhetoric from European leaders. European Central Bank President Jean Claude Trichet has called the euro's rise "brutal". But so far, both the ECB and U.S. Treasury are practicing a policy of benign neglect, allowing the markets to set currencies' values. The markets are wondering just where the threshold of pain is - the line in the sand.
The yen is also increasing in value against the dollar, but the situation here is different. The Japanese have a long history of active intervention in the foreign exchange markets so traders are wary of pushing things too far too fast. It should be noted that there has been no intervention since the close of the fiscal year on March 31, 2004. Japan continued to stay out of the currency market in December even though the yen reached �101.83 per dollar on December 2nd, the highest since January 2000. In a bid to stem the pace of the yen's advance, the Bank of Japan sold a record �14.8 trillion yen ($144.2 billion) in the first three months of 2004 according to the Ministry of Finance.
Given that many of the lows for the U.S. dollar in the past two weeks occurred when markets were thin with traders either away for the holidays or simply minding the store, it remains to be seen whether these levels will hold into the New Year. As traders dither on whether someone will intervene to slow the dollar's decline, the currencies fluctuate. But the trend remains pretty much the same as it has over the past two years - down. The U.S. twin deficits have been identified by overseas analysts as the core reason the dollar's decline will not be solved soon. The merchandise trade deficit will not go away as long as consumers continue to buy, especially from Asian countries such as China and South Korea who have kept their currencies pegged to the dollar. The fiscal deficit problems cannot be solved easily as long as the U.S. continues military actions especially in the Middle East.
On Friday, speculators took advantage of the thin markets to stage a dollar rally. Helped by month-end buying by investors, the dollar rose against the euro and other currencies. The dollar was up against both the yen and euro in U.S. trading despite hitting new lows in shortened overseas trading sessions. Do Friday's last minute gains mean anything' We will have to wait for the return of full trading this week to find out.
Global Stock Markets are up for the second year
Listless trading dominated equities over the past two weeks with many of the equity markets covered here closed for various holidays. There was little reaction to the horrifying earthquake and tsunami in Southern Asia as the world watched casualty figures soar to mind-boggling heights. All equity indexes followed here were up on the year, and their respective performance will be discussed in this Wednesday's short take article. On the week, the CAC drifted down slightly while the Dow and the Toronto S&P/TSX composite slipped about 0.4 percent. For the second month, all indexes followed here were up. On the year, the Mexican Bolsa easily outperformed all others followed here, leaping by 46.9 percent in 2004 after soaring 43.5 percent in 2003.
Global Stock Market recap
Europe and Britain
What a listless trading week this was! London markets were closed on Monday and Tuesday for the Christmas and Boxing Day holidays while Germany took Friday off for the New Year. Both Paris and London closed early on Friday. Trading was volatile and volumes were thin as many investors took vacation and those remaining whiled away the hours refining their positions for 2005. All three indexes - the FTSE, CAC and DAX - were up for the fourth straight month. They were up on the year as well. It was the second consecutive year of gains.
Asia/Pacific
News last week from the region was dominated by the catastrophic earthquake and ensuing tsunami that hit portions of Southern Asia bordering on the Indian Ocean and as far away as Africa. But despite the gloom, equities were basically unaffected. All indexes followed here were up on the week. Indonesian, Indian and Hong Kong stock markets reached record highs on Wednesday, suggesting that investors do not fear a major economic impact. Investors seemed to feel that some of the worst-affected areas were so under-developed that the tragedy would have little impact on Asia's listed companies. In Thailand, the loss of tourism revenue is expected to be offset by government reconstruction spending. However, many experts including the World Bank have pointed out that it is still difficult to assess the magnitude of the disaster and its likely economic impact.
Japanese shares climbed to five-month highs after industrial production data released on Tuesday went some way towards justifying the optimists' view that the economy will resume growth after idling for six months. Even though these data were offset by other data showing a drop in household spending and continued deflation, equities continued their upward path. Bank stocks climbed after Mizuho upgraded its profits forecast following a windfall tax decision. The bank recently declared an end to the computer problems that have plagued it since it was formed through a merger of three banks in April 2002. Banks have made a lot of progress cleaning up bad loans, and investors are now hoping for a return to sustainable profitability if the economy keeps growing next year.
In December, both the Nikkei and Topix were the top Asia/Pacific performers. However, for the year, the Australian all ordinaries - up 22.6 percent - followed by the Singapore STI - up 17.1 percent - take the best performance prize.
Indicator scoreboard
EMU - October unadjusted merchandise trade surplus was �5.5 billion, up from �4.2 billion in September. But on a seasonally adjusted basis, the result is different. The October seasonally adjusted surplus was �2.9 billion, down from September's surplus of �4.2 billion. Seasonally adjusted exports were down 0.4 percent while imports were up 1.0 percent. But on the year, exports were up 2.6 percent while imports jumped 6.9 percent.
M3 money supply for the three months ending in November was up 5.9 percent when compared with the same three months a year ago. In November, M3 was up 0.4 percent and 6 percent on the year. The three-month moving average is a key policy measure for the ECB along with the harmonized index of consumer prices (HICP). Money supply growth has remained stubbornly over the Bank's 4.5 percent target since June, 2001.
Germany - November producer prices were down 0.5 percent but up 2.8 percent when compared with last year. The monthly decline was primarily due to lower oil prices. Overall energy prices were down 2.1 percent but were up 4.5 percent. For example, crude oil prices were down 11.1 percent while gasoline prices tumbled 4.5 percent and light heating oil sank 17.9 percent. Excluding petroleum prices, the PPI was unchanged but up 2.3 percent on the year.
France - November seasonally adjusted consumer spending on manufactured goods jumped 1.5 percent and 6.5 percent when compared with November of last year. Auto sales soared by 7.4 percent after sinking by 3.9 percent in the previous month. Household durables posted a 1.7 percent gain while clothing and textiles were up 0.9 percent.
November seasonally adjusted unemployment rate remained at 9.9 percent for the fourth month. However, the number of unemployed was up by 19,000, erasing most of the 22,000 decline of the past two months. Unemployment is measured according to the International Labour Organization's definition that excludes jobseekers who did any work during the month.
Italy - Third quarter seasonally adjusted unemployment rate remained unchanged from the second quarter at 8.1 percent. This is the lowest level since the data series began in 1992. But the reason the rate is so strong isn't that more people are finding work but that older workers are sticking it out beyond the age of 50 because of reforms in the country's pension system. ISTAT said changes in the survey method intended to harmonize data-collecting with the methods followed by other major EU economies mean the latest unemployment figures are not comparable to the old series. The release of third-quarter unemployment data was delayed by over five hours due to a strike by ISTAT workers, who are protesting against funding cuts for the statistics institute included in the government's 2005 budget. ISTAT researchers are also demanding pay raises and the long-term hire of workers on temporary contracts.
November producer price index was down 0.1 percent but was up 4.2 percent when compared with November 2003. The monthly decline reflects drops in energy prices including refined petroleum products. Energy prices were down 0.7 percent but were up 8 percent on the year. Six of 18 price categories were down on the month.
Britain - December Nationwide house price index slipped 0.2 percent but was up by 12.7 percent when compared with last year. Housing price increases have slowed thanks to the Bank of England's interest increases.
Asia
Japan - November merchandise trade surplus was �990.5 billion, up marginally from October's �852.1 billion. Exports were up 1.0 percent and 12.8 percent on the year while imports were down 1.9 percent but up 17 percent on the year.
October tertiary index was down 0.1 percent but was up 0.6 percent when compared with last year. The October data, which halt two straight months of gains, are distorted in part by a typhoon and earthquakes northwest of Tokyo in Niigata that disrupted transport and kept consumers at home.
November seasonally adjusted industrial production jumped 1.5 percent and 1.8 percent when compared with last year. The lift stemmed from increased semiconductor and automaker output to meet demand in the U.S. and China. Production of transport equipment was up 1 percent, led by compact cars. Output of electronic parts and devices were up 1.3 in November after falling 6.2 percent the previous month. October output was disrupted by Typhoon Tokage - the most destructive in a decade that claimed 61 lives, while a series of earthquakes and aftershocks in Niigata prefecture killed at least 37 people, destroying roads and rail lines.
November unemployment rate dropped to 4.5 percent from 4.7 percent in October. That is the lowest rate since January 1999. The jobless rate fell as the economy shed jobs and people left the workforce. A total of 450,000 people gave up looking for work in November, while the economy lost 150,000 jobs. Demand for workers increased as fewer people sought work. Japan's job-to-applicant ratio rose to 0.92, its highest level since December of 1992.
November spending by households headed by a salaried worker was down 0.7 percent and 0.8 percent when compared with last year. Household spending fell for a third month as consumers cut back on purchases of clothing, fresh food and furniture. Retail sales declined 0.6 percent in November from October, according to another trade ministry report.
Tokyo December consumer prices dropped 0.4 percent but were unchanged when compared with a year ago. Tokyo core CPI, which excludes fresh food, was unchanged on the month and down 0.4 percent on the year. Nationwide November CPI was down 0.2 percent but up 0.8 percent on the year. Core CPI was down 0.3 percent and down 0.2 percent on the year. The pace of the decline in Tokyo consumer prices is considered an early indicator of price trends for the rest of Japan.
Americas
Canada - October retail sales jumped 1.4 percent and 6.6 percent when compared with last year. The main sales contributors were gasoline, up 6.7 percent on higher prices, and autos, which jumped 2.8 percent. Excluding cars and gasoline, retail sales rose 0.1 percent.
October monthly gross domestic product was unchanged and up 3.1 percent when compared with last year. The reasons ranged from lower foreign demand for fabricated goods to labor strife including the National Hockey League lockout and strike activities by some federal government employees. Goods producing industries were down 0.2 percent but were up 3.5 percent on the year. Services were up 0.1 percent for the second month and 3.2 percent on the year.
Bottom line
No doubt 2005 will begin as 2004 ended with focus on the U.S. dollar and its relationships with the world's major currencies - the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. But the unknown is the possibility of any change in the relationship between the Chinese yuan or renminbi and the dollar.
The dollar's decline, especially with the euro, should be put into perspective. While the appreciation of the euro has been eye-catching, it stems in part from the currency's under-valuation immediately after its introduction. But while U.S. exports have responded to the weaker dollar, imports continue to soar making the trade deficit worse. And in the EMU, exporters in weak growth countries that rely on exports (Germany and Italy) feel the pain. But those countries especially in Asia with pegged currencies are reaping gains from insatiable consumers in the U.S.
Energy prices will continue to demand their place in investor decision-making. Since peaking at the end of October at about $55, crude prices have settled in the $41 to $45 range per barrel. Price fluctuations continue to reflect everything from temperature changes and inventory positions in the U.S. to supply concerns that arise amid continued terrorism worries in the Middle East and the reorganization of the Russian oil industry.
Equities and bonds will no doubt continue to respond to similar challenges. But then there are economic indicators and profit expectations to deal with too!
Happy New Year!
Looking Ahead: January 3 through January 7, 2005
Let the New Year begin!