Monday, February 23, 2004
Last Week's Highlights
Continued focus on the U.S. dollar
Once again the currency markets commanded investor attention. The dollar bungee jumped against the euro and strengthened against the yen, thanks to massive Bank of Japan intervention and a rising terror alert in Japan and despite soaring Japanese fourth quarter GDP.
The dollar hit an all time low of $1.2930 against the euro during European trading Wednesday, before rebounding as traders shied away from testing the $1.30 level thought to be the ECB's "line in the sand". The euro began strengthening on Monday after ECB president Jean Claude Trichet said (in testimony to a European Parliament commission) that the eurozone economy was recovering and gave no signal that the ECB would change interest rates. Trichet also repeated the ECB's view that excessive volatility in foreign exchange markets is undesirable. His comments were in line with the G-7 communiqu� earlier this month. But he sent a signal that the ECB remains concerned about the euro's strength and its potential impact on economic growth. On Thursday, the dollar managed to hold most of its gains from the previous day's rebound, something it has had difficulty doing of late. The dollar's slide was reversed in part after French President Jacques Chirac called for stability in exchange rates and German Economic and Labor Minister Wolfgang Clement said the euro's gains need to be bearable. The ECB hasn't intervened in the currency markets since 2000, when it purchased the currency after the euro fell to record lows.
The yen dropped on the full weight of Bank of Japan covert intervention. With the Japanese fiscal year end looming on March 31, a cheaper yen will enhance exporters' profits. It is rather common to expect market machinations as the year end approaches. Last year, for example, desperate efforts were made to inflate stock prices because of the key role these play in the capitalization schemes of banks. The yen continued to drop after the trade minister said sudden gains would have a large impact on Japan's economy, confirming that Japan would continue to sell its currency. Japan spent a monthly record �7.15 trillion ($67.7 billion) in January in its efforts to force the yen's value downward. The yen's drop accelerated on Friday after Japan raised its terror alert to the highest level, mobilizing heavily armed police around airports, nuclear plants and government offices to guard against a possible attack.
U.S. assets are still attractive to foreigners
Foreign investors gave a vote of confidence in U.S. assets markets last year by increasing the amount of money they invested here even as the dollar fell, according to capital flow data from the U.S. Treasury. A monthly report showed net inflows into U.S. markets in December totaled $75.7 billion, down from $87.5 billion in November. In 2003, net inflows averaged $59 billion per month, up from $47.9 billion in 2002. The data indicate that the U.S. has attracted more than enough funds to balance the current account deficit - one of the big fears that prompted the dollar's fall. The data also underlined the continued dependence of the dollar on inflows from Asian central banks, many of which have been struggling to preserve their export competitiveness by preventing their currencies from rising.
Global Stock Markets
Profit taking after recent gains dominated trading at week's end, negating increases from earlier in the week, especially in the Americas. Britain and France turned in the best results. Stocks were down in South Korea, the U.S., Canada and Mexico. With profits season all but over except for the stragglers other news will now garner more attention.
Global Stock Market Recap
Europe and Britain
Earnings and mergers were in the spotlight last week. On Tuesday, British investors celebrated when Vodafone decided to pull out of the bidding for AT&T Wireless and let Cingular Wireless' last minute bid win the price war for the company. And then on Thursday, a favorable earnings report from RBS (Royal Bank of Scotland) boosted the FTSE once again. The index had its biggest gain since December 1st. RBS is the fifth biggest company on the FTSE 100, with its shares comprising 4.6 percent of the index. On Friday, the FTSE hit a 10-month high during afternoon trading, maintaining the week's positive trend even though at day's end the index was dragged down by falling U.S. shares.
European equity markets were buoyed by a batch of strong corporate earnings for most of the week, but gave back some of those gains as worries about chip makers dominated trading on Friday. Profit taking was evident after the indexes recorded their best day in almost three months Thursday. All three indexes tracked here were up on the week, with the FTSE scoring the most impressive gains.
Asia/Pacific
Both the Nikkei and Topix were up for a second week as massive intervention in the currency markets pushed aside dollar depreciation worries and the yen moved lower when compared with the U.S. dollar. With the fiscal year end not too far off, investors are watching exporters' profits carefully. A lower yen will enhance repatriated profits. The Nikkei index is dominated by exporters.
The Nikkei also benefited from the IPO floatation of Shinsei Bank, which was resuscitated by Ripplewood, a U.S. private equity company. The Shinsei is the first bank in the country's history to have been relisted on an international capital market after collapsing and being revived by new owners. Shinsei was previously called Long Term Credit Bank. It was nationalized in 1998 before being sold to a consortium of international investors led by Ripplewood.
But on Friday, investors sold chip stocks when a key measure of industry health was lower in January than December, although it remained above the level that indicates a growing market. The declines were not limited to Japan, but affected chip stocks in South Korea and other Asian countries as well.
The Hang Seng Index continues to out perform its Asian counterparts followed here. Last week, stocks were up thanks to expectations that banks would provide proof that industry profits are increasing as the sector benefits from improving economic growth. The Hang Seng is up 10.3 percent on the year.
Indicator scoreboard
EMU - December industrial output crept up 0.2 percent and was up 2.3 percent when compared with December of last year. Output was up in Portugal, Germany, Finland, France and Belgium. Output declined in Ireland, Luxembourg, the Netherlands, Spain and Italy. No data were available for Greece and Austria. Energy, durable and nondurable consumer goods were up on the month but capital goods were down.
December merchandise trade surplus increased to �5.7 billion from �5.1 billion in November. For the full year of 2003, the trade surplus was �72.5 billion, down substantially from the 2002 surplus of �98.9 billion. Exports and imports were up 4.6 percent and 2.9 percent respectively.
Germany - February ZEW (Center for European Economic Research) economic outlook sentiment among financial experts dropped for the second month. The index reading was 69.9, down from 72.9 in January. Those participating in the survey are becoming concerned that the euro's continued appreciation will have a long term impact on corporate profits. They also fear that necessary German economic reforms could be called into question after Chancellor Gerhard Schroeder resigned as chairman of the SPD in the face of internal party opposition to the government's reform efforts. The current conditions sentiment index increased to minus 70.2. The ZEW surveyed 308 German financial experts during the February 2nd to 16th period for their opinions on current economic conditions and the economic outlook for major industrial economies.
January producer price index sank 0.4 percent but managed to inch up 0.1 percent when compared with last year. Excluding energy, the PPI was down 0.1 percent and was unchanged on the year.
Fourth quarter seasonally adjusted gross domestic product inched up 0.2 percent and was unchanged when compared with the fourth quarter of 2002. Increased investment and inventories more than offset a sharp deterioration in net exports and weak private and government consumption. Domestic demand was up 1 percent and 0.3 percent on the year with inventories giving the biggest boost. Total investment jumped 1.6 percent even though it was still down 0.7 percent on the year. Consumer spending continued to be weak - it was down 0.4 percent and 0.8 percent on the year. Both exports and imports were up
December seasonally and workday adjusted manufacturing orders were revised upward to a gain of 1.6 percent from the 1.2 percent originally reported. Foreign orders were revised to an increase of 4.6 percent from the originally reported increase of 3.3 percent, while domestic orders were revised downward to a decline of 0.9 percent from the initially reported decline of 0.6 percent. Capital and basic goods orders were revised upward while consumer goods orders were revised downward.
December industrial output was revised downward to an increase of 0.1 percent from the originally reported 0.6 percent increase. On the year, industrial output was up 3 percent, down from the originally reported 3.5 percent. Output excluding construction, the measure Eurostat uses to compile EMU output, slipped 0.1 percent but was up 3 percent on the year. Capital goods output sank 1.1 percent but remained positive at 4.3 percent on the year. However, consumer durable goods output was up 2 percent on the month but is still declining on the year at 2.8 percent.
France - Fourth quarter gross domestic product was up 0.5 percent and 0.5 percent as well when compared with last year. Private and government consumption were up 0.3 percent and 1 percent respectively. Overall fixed investment jumped 0.7 percent with both business and household investment rebounding from losses in the previous quarter.
Italy - December industrial orders were up 1 percent and jumped 3.8 percent when compared with December 2002. Foreign orders soared 3.8 percent while domestic orders slipped 0.3 percent on the year. Domestic orders account for about two-thirds of the overall index with foreign orders making up the rest. Transportation and precision electrical instruments soared by 23.4 percent and 16.3 percent on the year.
Britain - January retail sales volumes were up 0.5 percent and 6.3 percent when compared with last year. Non-store retailing and repair, which includes mail order businesses, helped to drive the index higher. Non-food store sales also jumped while food store sales were flat.
Asia
Japan - Fourth quarter gross domestic product was up 0.7 percent and 3.8 percent when compared with the same quarter in 2002. On an annualized basis, GDP jumped 7 percent, the best reading since the fourth quarter of 1989. Growth was driven by exports and investments in new factories and machinery. Exports grew 4.2 percent from the previous quarter despite a sharp rise by the yen against the dollar, which makes Japanese products more expensive overseas. Capital investment rose 5.1 percent from the previous quarter. However, deflation continues to be very much evident - the GDP deflator, a measure of how much prices are declining - sank by 2.6 percent on the year. Private consumption was up 0.8 percent.
December tertiary index was up 0.2 percent and 3 percent when compared with last year. Wholesalers, retailers and real estate firms led the gain. The tertiary index reflects activity in six industries - utilities, transport and telecommunications, wholesale and retail, finance and insurance, real estate and services. The broader all industry index fell 0.4 percent but stayed positive when compared with a year earlier with an increase of 2.6 percent. The all industry index is used as a proxy for gross domestic product because it adds industrial production, construction, agriculture and government spending to the tertiary index.
Americas
Canada - January consumer price index inched up by 0.1 percent and was up 1.2 percent when compared with last year. Energy prices jumped 2 percent but were down 1.1 percent when compared with January 2003. Excluding food and energy, the CPI was down 0.1 percent and up 1.6 percent on the year. The Bank of Canada core rate, which excludes eight volatile components, was unchanged for the month and up 1.5 percent on the year. Prices for gasoline, non-alcoholic beverages and fuel oil were up but were offset by declines in the prices for natural gas, travel tours and air transportation. Seasonally adjusted, the CPI was up 0.1 percent and 1.4 percent on the year.
Bottom line
Of interest this week will be whether the dollar can hold onto its gains against the euro and the yen. In Japan, major data releases at week's end will update information on consumer spending and prices as well as unemployment. January merchandise trade data will be available on Monday. First quarter performance will rest on continued export growth to back up fourth quarter gains. In Europe, investors will look to the Ifo survey in Germany for signs that German growth is picking up after its dismal fourth quarter performance. The EU sentiment surveys will also give the latest information on the psyches of consumers and businesses throughout Europe.
Looking Ahead: February 23 through February 27, 2004
Currencies remain center of attention