Monday, November 24, 2003
Last Week's Highlights
Terrorism raised its ugly head and shook investor resolve. Flights of safety to bonds and gold (and the Swiss franc) were evident as terrorists unleashed vicious attacks in Turkey. With attacks occurring in unlikely areas, they worried about the impact on trade and economic growth. And since equity investors in particular tend to be risk averse, stocks suffered most. Only one of the 13 indexes followed here gained on the week - the Toronto S&P/TSX composite. Losses were widespread. Worries about trade barriers also addled investors. U.S. restrictions on steel and last week's imposition of new restraints on selected Chinese textiles heightened trade-war fears as China, Japan and Norway threatened retaliation.
The dollar was under attack as well after a government report showed that net foreign purchases of U.S. securities in September fell to the lowest level in five years. A drop in the amount of stocks and bonds bought by foreigners makes it difficult for the U.S. to finance the deficit in its current account, the broadest measure of trade and investment. The Treasury Department said foreigners bought a net $4.19 billion in September, down from $49.9 billion in August and the smallest since $1.17 billion in September 1998. The current account deficit was at a record $138.7 billion in the second quarter. The U.S. has had to borrow more money overseas to satisfy demand for imported goods and services to finance investment not covered by U.S. savings.
Global Stock Market Indexes
Recap of global markets
Europe and Britain
Trading in Britain and in Europe was tentative last week, and the FTSE, CAC and DAX ended the week lower despite continuing upbeat economic news. Economics was overshadowed by the terrorist attacks in Turkey, deteriorating conditions in Iraq, and demonstrations in London over U.S. President George Bush's visit there. Yet, given the low volatility in the week, geopolitical risk does not appear to be as dominant in investors' minds as it was in the aftermath of September 11th and in the run-up to the Iraq war. However, it is still lurking. Investors have to weigh the longer-term impact of global terrorism and international conflict in their investment strategy.
Asia
All Asian/Pacific indexes except the Kospi were down for a second week. Investors sold despite promising reports of economic growth. One reason could be profit-taking on the part of investors given the strong run ups since last spring. The region's benchmark posted its biggest drop in a month on concern that terrorism will derail global economic growth.
Terrorism hurts market sentiment because it is a risk that investors cannot anticipate. This in turn could hurt exporters. The Nikkei lost 3.1 percent, posting its biggest back-to-back weekly decline since mid-March. South Korea's Kospi index slumped 4.8 percent, the biggest slide in a month. And the Hang Seng shed 3 percent, its biggest decline since late March. Singapore's Straits Times Index lost 4.6 percent, its biggest slide in 10 months.
Currencies
Dollar bearishness continued last week based on concerns about funding the U.S. current account deficit and fears about increased U.S. protectionism. Euro rhetoric surfaced. Both French Finance Minister Frances Mer and German Chancellor Gerhard Schroeder said no one has an interest in a weaker dollar as European exporters fretted that the higher value of the euro would hurt sales and profits. The dollar fell against the euro after Japan and Norway said they would impose duties on U.S. goods in retaliation for U.S. steel tariffs. The move added to risk of a global trade conflict just the day after China threatened a response to American curbs on its textiles. The dollar declined for the second straight week versus the euro.
The yen ended nine days of declines against the euro and rose versus the dollar after the Bank of Japan said the economy is recovering gradually as exports and production rise. Demand for yen increased as BoJ figures showed the Japanese economy will expand 2.4 percent this fiscal year, which ends in March 31st, and 2.5 percent the next year. In contrast, the EMU is projected to grow 0.4 percent this year and 1.8 percent in 2004, according to the European Commission. The Bank of Japan used the word "recovery" to describe the economy for the first time since February 2001. The report echoed the monthly report by the Cabinet Office, which raised its evaluation of the economy for the second time in three months.
Japan's central bank has responded to the currency's 9 percent advance this year by selling yen and buying dollars. Through October, the bank sold a record ¥16.2 trillion ($148.5 billion). It sold again last week. A weaker dollar would slow the recovery in Japan, which depends on exports for growth.
The Swiss franc gained 2 percent against the dollar last week, benefiting from its status as a safe investment currency. The Swiss franc, which had languished for the past six months, is a barometer of investor risk aversion. As long as it remains strong, it speaks of concern over further terrorist attacks.
Indicator scoreboard
EMU - September seasonally adjusted industrial output fell 0.6 percent and was down 1.8 percent when compared with last year. All components were down. France and Portugal were up on the month but all others countries were down. Greece and Austria had not yet reported data for September.
October harmonized index of consumer prices (HICP) inched up 0.1 percent and was up 2 percent when compared with last year. The core HICP, which excludes energy, food, alcohol and tobacco, was up 0.2 percent and 1.7 percent on the year. Six of the 11 eurozone states reported rates below the ECB's inflation ceiling of 2.0 percent while 5 states reported inflation above the ceiling. Greek data are not available for October and September due to strikes in the public sector.
September seasonally adjusted merchandise trade surplus was €8.8 billion, up from the revised €7.7 billion surplus in August. Exports were down 0.9 percent while imports sank 2.4 percent.
Germany - September manufacturing orders were revised to an increase of 1.9 percent from the originally reported 0.9 percent gain. When compared with last year, orders were up 1.1 percent from the originally reported 0.2 percent. Foreign orders were revised to an increase of 0.6 percent from the originally reported decline of 0.5 percent. Domestic orders were revised to a jump of 3 percent from the previously reported 2.1 percent gain. Capital goods, basic goods and consumer goods orders gains were all higher than initially reported. Large revisions to September data are common because the Federal Statistics Office substitutes August data for those surveyed companies that have not yet supplied September figures. Because August orders levels are usually depressed due to summer holidays, a sharp revision frequently occurs when the full September survey data are available.
September industrial production was revised up sharply to a gain of 0.2 percent from the originally reported decline of 1.2 percent. Industrial production excluding construction - the figure used in calculating EMU industrial production - was revised to an increase of 0.2 percent from the originally reported decline of 1.5 percent. Output in the construction sector was revised to a decline of 0.3 percent from the initially reported gain of 1.1 percent. Similar adjustment problems with orders distort the initially reported industrial production data.
Third-quarter real seasonally and calendar adjusted gross domestic product was up 0.2 percent but down 0.2 percent when compared with last year. Net exports more than offset the sharp drop in domestic demand. Domestic demand sank 1.6 percent, private consumption was down 0.6 percent and equipment investment plunged 3.6 percent. Increases in government consumption and construction investment partially offset the declines. And net exports jumped 1.8 percent with exports jumping 3.2 percent while imports were down 1.9 percent.
October producer prices rose 0.2 percent and 1.7 percent when compared with last year. Excluding energy, the PPI was up 0.1 percent both on the month and on the year.
France - Third-quarter gross domestic product was up 0.4 percent but down 0.2 percent when compared with last year. As in Germany, net exports provided the major boost. Exports jumped 1.1 percent after sinking 0.8 percent in the previous quarter, while imports inched down 0.1 percent after managing to climb 0.2 percent in the second quarter. Private consumption was up 0.4 percent, government consumption jumped 0.7 percent and overall investment was up 0.3 percent.
Italy - September seasonally adjusted industrial orders were up 0.6 percent but sank 2.2 percent when compared with last year. Domestic orders were up 1.1 percent but foreign orders fell 2.4 percent on the month. On an annual basis, which is preferred by analysts, domestic orders sank 2.1 percent and foreign orders declined 2.4 percent. Domestic orders account for around 62 percent of the overall index. Orders fell in six of the 10 product sectors.
Britain - October retail price index was up 0.1 percent and 2.6 percent when compared with last year. The retail price index excluding mortgage interest payments (RPIX) was unchanged on the month and was up 2.7 percent on the year. The Bank of England uses the RPIX to measure inflation for policy purposes. The current target is 2.5 percent, just below the October reading. The harmonized index of consumer prices, which will become the new inflation target measure in 2004, was up 0.2 percent and 1.4 percent on the year.
October retail sales volumes jumped 0.6 percent and 3.7 percent when compared with last year. Sales were up for all categories with the exception of textile, clothing and footwear. Non-food store sales were up 0.8 percent while food stores sales climbed 0.4 percent.
Asia
Japan - October seasonally adjusted merchandise trade surplus jumped to ¥1.04 trillion ($9.53 billion) from a revised ¥985.1 billion in the prior month. Exports decreased 2.8 percent and imports sank 4.9 percent. From a year earlier, the trade surplus widened to ¥1.07 trillion. Exports soared 5.4 percent, and imports were up 1.8 percent. Japan's trade surplus with the U.S. fell 15.6 percent to ¥623.2 billion, down for the 10th consecutive month. Exports to the U.S. also fell for the 10th straight month, dropping 6.2 percent to ¥1.194 trillion.
September seasonally adjusted tertiary index, which measures demand for services, soared by 2.2 percent. This is the biggest gain since March 2000. The tertiary index reflects activity in six industries - utilities, transport and telecommunications, wholesale and retail, finance and insurance, real estate and services. The all-industry index, which is used as a proxy for gross domestic product because it adds industrial production, construction, agriculture and government spending to the tertiary index, also was up 2.2 percent.
Americas
Canada - October consumer price index was down 0.2 percent but up 1.6 percent when compared with last year. The monthly decline was due to dropping prices for gasoline and natural gas, traveler accommodations and autos. Price increases occurred for property taxes, beef, and homeowners' maintenance and repairs. Core CPI was unchanged on the month and up 1.9 percent on the year. On a seasonally adjusted basis, the CPI was unchanged on the month and up 1.7 percent on the year.
Bottom line
Japan and Norway said they would impose duties on U.S. goods in retaliation for President Bush's steel tariffs, adding to the risk of a global trade conflict after China threatened a response to American curbs on its textiles. Bush's March 2002 decision to protect steelmakers and limits he announced on Chinese textiles fueled concerns about growing protectionism as each measure sparked a response from the EU, Japan, China and Norway. Global trade is worth $8 trillion a year. World Trade Organization arbitrators ruled the U.S. steel tariffs illegal on November 10th, setting the stage for the EU to impose the largest trade sanctions in the organization's eight-year history and the first ever against the U.S. Japan also said it would retaliate against the U.S. with tariffs of about 30 percent on U.S. iron and steel products along with duties on clothing, leather goods and other household goods. And Norway vowed to stand together with the EU and other countries being hurt by the safeguards when it announced duties on U.S. products including clothing, apples and guns.
Concerns about a trade conflict, which would undermine the global economic recovery by stalling investment and creating uncertainty about the cost of exports, are already reflected in currency markets. The U.S. dollar has declined against 14 of 16 major currencies this year.
This is a holiday-shortened week in the United States. Nevertheless, it will be packed with a plethora of economic news around the globe. If investors pay attention, they could learn critical facts about the status of the global recovery, everything remaining equal, of course.
Looking Ahead: November 24 through November 28, 2003
Geopolitical worries rattle investors