Monday, March 15, 2004
Global Stock Markets
Stocks were already down last week thanks to so-so economic data but they sank even lower after the terrorist bombings of Spanish railroad stations on Thursday morning. Stocks plummeted in Europe, Britain and in the Americas. Worries of terrorist threats have been just below the surface since Sept 11th so it wasn't surprising that investors fled to the safety of bonds. Stocks in Europe and the Americas steadied on Friday despite ongoing worries about the impact on confidence, especially in Europe where growth is tepid at best. The South Korean Kospi sank on the political turmoil stemming from the impeachment of its president, President Roh Moo Hyun. All indexes followed here were down on the week, with the FTSE, DAX, Dow and Nasdaq sinking below year-end levels.
Global Stock Market Recap
Europe and Britain
European stock markets suffered their worst trading session of 2004 Thursday after Wall Street's miserable performance on Wednesday was followed by a series of explosions in Madrid. All European indexes dropped as investors were reminded that the terrorism threat exists in Europe as well as in the United States. Germany's DAX took the heaviest punishment, sliding 3.5 percent Thursday. France's CAC 40 dropped 3 percent and Switzerland's SMI lost 2.9 percent. The massive retreat clouded the overall picture but travel, insurance and related sectors took the worst punishment. European indexes began to rally this time last year, bringing an end to a three-year bear market. At that time they were at their lowest levels in more than six years. The recovery started amid optimism that the pending war in Iraq would be short and a global economic rebound, led by the U.S., would lift corporate earnings.
Many investors shifted to bonds amid renewed fears about international terrorism following the bomb blasts in Spain. But others switched their portfolios out of shares most exposed to recovery - technology and cyclicals such as autos - and into more defensive areas such as food companies, utilities and tobacco stocks. One of the reasons for the switch is fear that the U.S. economic upturn may prove to be more fragile than expected, as February's jobs data seemed to indicate.
Over the past year, technology companies have led the European rally. Shares of companies such as Ericsson AB, the world's biggest maker of wireless networks, rose four-fold. Insurers also benefited as the market's rebound caused the value of their equity holdings to appreciate. Optimism that these industries will keep leading gains has diminished as the U.S. failed to create as many jobs as analysts expected. The European economy also is expanding at a slower pace than some forecast.
The British economy is robust with growth estimates being revised upwards and unemployment at all time lows. But there are still problems - the trade deficit in goods hit a record in January and high household debt levels are a concern for investors. London and other European markets follow Wall Street, and any slowdown in the U.S. will inevitably be followed elsewhere.
Asia/Pacific
All Asian indexes followed here were down on the week although they all still remain above their 2003 yearend levels. Many of the week's losses were initially set off by the weak U.S. employment report on March 5th. Any twitch here is usually enough to provoke a reaction in Asia, where economies are reliant on exports to the U.S. for their growth. On Friday, exporters such as Sony Corp. slid on concern that terrorists may target countries including the U.S. and Japan and damage consumer sentiment. Asian stocks slid, led by Qantas Airways Ltd. and All Nippon Airways Co., on concern that the threat of terrorism will deter travelers and hurt tourism just as it was beginning to recover. The attack is viewed as another jolt to market sentiment, which is already deteriorating on concerns about the pace of U.S. economic growth. The markets' major concern is that the next terrorist attacks may take place soon.
The South Korean National Assembly voted to impeach President Roh Moo Hyun, sharply escalating the political turmoil in South Korea as the country struggles to revive a lagging economy and grapple with a nuclear-armed North Korea. It is the first time South Korean lawmakers have impeached a president. Roh's powers were suspended and the prime minister, Goh Kun, took over his duties. If Roh is forced to step down, a special election will be held to replace him. The legislature impeached Roh, who began serving a five-year term early last year, over what experts say was a relatively minor violation of election law. The impeachment culminated a long-running struggle between the progressive Roh and his conservative opponents who control the legislature. That raises the prospect of a prolonged period of political uncertainty as the government faces important economic and foreign policy questions. And investors don't like uncertainty. South Korea's stock market and currency plunged. The Kospi initially plummeted 5.5 percent but pulled off its lows to end Friday's session down 2.5 percent.
Currencies
The pound sterling sank on Tuesday after the British trade deficit surged to record levels. The deficit hit �5.6 billion in January, largely driven by sinking exports. A 30 percent drop in exports to the U.S. heightened concerns that the strength of sterling, which hit an 11-year high against the dollar last month, is finally beginning to hurt exporters. Sterling dropped from $1.8492 against the dollar to $1.8024 by week's end. However, some analysts don't expect the currency to slide for long given the relatively high interest rates in Britain that make investment there very attractive. The Bank of England's key interest rate is currently 4 percent, with many expecting the rate to go higher in the next several months.
The euro fell against the dollar last week while the yen was stronger. The yen strengthened against the dollar early in the week amid speculation that the Bank of Japan had temporarily stopped intervening in the market to push the yen lower. Initially the dollar fell against the euro on Thursday after bomb explosions on Spanish commuter trains raised concerns that U.S. allies may be targeted for terrorist attacks. But the euro sank as more evidence accumulated that European growth, rather than speeding up, is slowing down as French and German factory output fell. Gaining was the Swiss franc, which traditionally benefits in times of international crisis in part because of Switzerland's perceived political neutrality.
The yen was up after the Ministry of Finance said that overseas investors bought more Japanese shares during the week ended March 5th than any other week since April 2001. However, should the yen continue to climb against the dollar it may spur the Bank of Japan to sell yen, as Japan seeks to limit the currency's gains before the end of the fiscal year on March 31st.
Gold doesn't react
The gold price was unfazed by the renewal of the Central Bank Gold Agreement early last week. The pact allows central banks to sell some of their gold reserves without upsetting the market. Europe's central banks reached a new accord whereby they would limit sales of their gold reserves to 500 tons a year over the five years to September 2009, or a total of 2,500 tons. This was no surprise to traders who had assumed for some time that a renewal would be concluded well before the current pact expired, and that the annual limit would be increased to around 500 tons a year. Greece joined and Britain left, but there was no indication yet of how gold sales would be allocated between the various banks. The price of gold also remained relatively stable despite the flight to quality after the Spanish terrorist attack.
Indicator scoreboard
Germany - January seasonally adjusted industrial output slipped 0.1 percent but was up 1.3 percent when compared with last year. Increasing manufacturing output was more than offset by drops in construction and energy. Virtually all categories were down on the month. Manufacturing output was up 0.7 percent thanks to a 1.5 percent increase in capital goods output. This was partially offset by drops in both consumer durable and nondurable production. Industrial production excluding construction - the figure used by Eurostat in calculating eurozone industrial production data - was up 0.4 percent.
February wholesale prices were up 0.3 percent and 0.1 percent when compared with last year. Agricultural and basic goods price increases were partially offset by declines in seasonal food and energy prices. Excluding oil products, wholesale prices were up 0.4 percent and 1.2 percent on the year.
January seasonally adjusted merchandise trade surplus was �14.5 billion. Exports were up 6 percent when compared with last year while imports were up 3 percent.
France - January seasonally adjusted industrial output dropped 0.5 percent but was up 0.9 percent when compared with January of last year. Manufacturing output was also down on the month, dropping 0.3 percent but climbing 1.1 percent on the year. Autos, consumer goods, energy and capital goods output dropped on the month. Food industry output was up as was construction activity.
January seasonally adjusted merchandise trade surplus was �838 million, up from �736 million in December. Exports were up 1.8 percent while imports increased by 1.5 percent. Semi-finished, electronics, aviation and consumer goods exports offset a decline in autos. Household electronic goods and metal goods imports were up but auto product imports were down.
Italy - Fourth quarter gross domestic product was flat and inched up 0.1 percent when compared with last year. All sectors were down with the exception of construction which managed to inch up 0.1 percent and government which was unchanged on the quarter.
Britain - February producer output prices were up 0.2 percent and 1.6 percent when compared with last year. Core producer prices were up 0.2 percent and 1.4 percent on the year. However, producer input prices sank 0.8 percent and were down 1.9 percent on the year. Output prices were up on increases in alcohol products and food, beverages and tobacco. Input prices fell sharply primarily on drops in prices of other imported parts and equipment, fuels and crude oil prices. Import prices were down reflecting the strength of the pound sterling against the dollar.
January industrial output was up 0.1 percent and 0.4 percent when compared with last year. Manufacturing output was up 0.2 percent and 1.5 percent on the year. Seven of 13 sectors were down on the month. Declines in paper, printing and publishing output and machinery and equipment were partially offset by increases in electrical and optical equipment and chemicals output.
January global merchandise goods trade deficit soared to Stg5.584 billion from Stg3.974 billion in the previous month. Exports sank 9 percent while imports inched up 0.9 percent. A drop in exports to the U.S. contributed to the record deficit. Non-EU exports plummeted 19.3 percent while non-EU imports were up by 7.1 percent. The higher value of sterling contributed to the burgeoning deficit. The services surplus was Stg950 million, up from Stg892 million in December.
Asia
Japan - Fourth quarter gross domestic product was up 1.6 percent and 3.4 percent when compared with the same quarter a year ago. The GDP deflator, a measure of the impact of price changes on real economic growth, stood at minus 2.7 percent in the quarter. Consumer spending rose 0.9 percent while corporate capital spending jumped 6.3 percent. Exports expanded 4.6 percent while imports increased 1.9 percent.
Australia - February employment was up by 1,300 jobs, the smallest increase in seven months. The unemployment rate inched up to 5.9 percent from 5.8 percent as more people looked for work. Full time employment fell 13,100 and part time employment increased 14,400. The Australian Bureau of Statistics has revised the unemployment rate series to bring it into line with guidelines from the International Labor Organization, resulting in upward revisions. The participation rate, a measure of those with jobs or seeking work, was unchanged at 63.5 percent.
Americas
Canada - January merchandise trade surplus slipped to C$5.2 billion from C$5.4 billion in December. Exports declined by 4.7 percent while imports sank 5 percent. Automotive products caused the lion's share of the declines, accounting for over half of the decline in exports and over a third of the decline in imports. Canada's trade surplus with the United States slipped slightly toC$7.3 billion, mainly the result of stalled automotive trade. Exports to the U.S. were down 4 percent while imports declined 4.2 percent.
February employment was down by 21,200 jobs. The decline was in part time jobs that dropped by 32,500. However full time employment was up by 11,400 jobs. The unemployment rate remained at 7.4 percent. Manufacturing employment was by down by 12,000 jobs. Self employment dropped by 21,000 due to weakness in construction and retail trade. Public sector employment was up by 24,000 jobs.
Bottom line
Both the Bank of Japan and the Federal Reserve meet this week. It is unlikely that policy will change. However, Fed watchers will parse the Fed's post-meeting statement for any change in inflection. Some analysts overseas are becoming uneasy with the Fed's loose money policy, while domestic watchers seem more sanguine and willing to wait until employment recovers. All markets will be keeping a watchful eye on ensuing developments in Spain as officials attempt to place blame for Thursday's terrible attacks in Madrid.
Looking Ahead: March 15 through March 19, 2004
A tough week for equities