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International
Perspective
By Anne D. Picker, International Economist
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Rate
Fears, Rocky Week |
Financial
markets gyrate while waiting for changes in interest rates and G-7.
Financial
Markets
The financial markets were uneasy last week with all the major equity markets
sinking except for the Toronto Stock Exchange Composite 300. Currencies, especially
the yen, suffered from pre Group of Seven "meetingitis". They were wary of what
key finance ministers and central bank chairmen might have to say at the conclusion
of Saturday's meeting. As it turned out, the communiqué was strikingly
similar to the one issued at the September 1999 meeting.
Selected
World Stock Market Indexes
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Index
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21-Jan
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14-Jan
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Week%
Change
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Asia
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Australia
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All Ordinaries
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3103.40
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3131.60
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-0.90
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Japan
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Nikkei 225
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18878.09
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18956.55
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-0.41
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Hong Kong
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Hang Seng
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15108.41
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15542.23
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-2.79
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S. Korea
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KOSPI
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925.16
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948.03
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-2.41
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Singapore
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Straits Times
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2278.48
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2392.53
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-4.77
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Europe
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Britain
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FTSE 100
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6346.30
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6658.20
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-4.68
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France
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CAC
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5681.32
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5787.44
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-1.83
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Germany
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DAX
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6992.75
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7173.22
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-2.52
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North
America
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United States
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Dow
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11251.71
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11722.98
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-4.02
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Canada
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TSE Comp 300
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8634.91
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8357.50
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3.32
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Mexico
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Bolsa
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6890.78
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7381.49
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-6.65
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Equities
Europe
Major European markets declined last week, with market participants taking
their cues from the Dow, which dropped 2.6 percent on the week. (However, the
Nasdaq continued its record setting ways). Investors on Wall Street are increasingly
nervous about the prospect of an interest rate hike at the Federal Reserve's
February meeting, and the overseas markets have also caught the interest rate
worries. Rising crude oil prices are fueling fears of rising inflation and higher
interest rates throughout Europe. The graph above shows last week's day-by-day
point changes on the London FTSE 100, German DAX and French CAC.
After rising slightly on
Monday, the FTSE 100 sank steadily through
the rest of the week. The decline was blamed on inflationary pressures from
the rising crude prices, which hit a nine year high during the week. The weak
Dow put pressure on overseas markets and London markets were no exception. On
Thursday, stronger than expected producer prices fueled worries that British
interest rates would have to increase yet again. Losses were by no means catastrophic,
but the market felt uncomfortable and will continue to feel uncomfortable until
the interest rate story is told. The FTSE 100 closed the week at 6346, down
311.9 points or 4.7 per cent.
The global interest rate
worries were never far away. Rising bond yields in the United States and elsewhere
were interpreted as a signal that interest rates may be going up. Although the
European Central Bank, which met on Thursday, voted to leave rates on hold for
the time being, analysts expect an increase in February or March. The U.S. Federal
Reserve's open market committee meeting scheduled for February first and second
is looming, and the Bank of England's monetary policy committee meeting on February
ninth and tenth follows shortly after. Dealers say the odds favor U.S. and British
increases, with the ECB to follow.
In Paris and in Frankfurt,
stocks were mixed on the week. In Paris, the markets suffered a wave of profit
taking, particularly in technology and media stocks. The
CAC 40 index closed at 5681, down 106 points or 1.8 percent. In
Germany, insurers and telecommunication stocks likewise succumbed to profit
taking. The DAX index retreated 120 points
or 2.5 percent to end the week at 6993.
Asia
All major Asian equity markets ended lower on the week. And although the
Nikkei stormed ahead to its highest close in more than two and a half
years on Monday (19437), it ended up closing down 78 points or 0.4 percent at
18878 on the week. Technology stocks drove the Nikkei higher on Monday, taking
their cues from the Nasdaq's 107 point gain the previous Friday. However, profit
taking set in amid uncertainty over the U.S. stock market and on a lack of confidence
in Japan's economic recovery. The Bank of Japan's monthly report indicating
that the economy is well on the way to improvement failed to rouse sentiment
as the strength of the yen exerted additional downward pressure on the market.
The Hong Kong Hang
Seng index, after managing increases on Monday and Tuesday, declined
the rest of the week. Analysts said that traders are concerned about possible
U.S. interest rate increases. Any rise in U.S. rates impacts local Hong Kong rates.
On the week, the Hang Seng declined 434 points or 2.8 percent to close the week
at 15108.41.
Americas
Canada
The Toronto Stock Exchange Composite 300 index (TSE) was the star performer
last week, climbing to record setting levels. The TSE jumped 3.3 percent to
end the week at 8635. Strong economic numbers including a widening trade surplus
and continued low inflation helped. The markets now feel that the Canadian economy
is robust enough to withstand a U.S. interest rate increase and a possible matching
increase by the Bank of Canada.
Currencies
Euro
The euro continued to struggle despite vigorous pronouncements about
the European Monetary Union's promising growth outlook in the run up to the
G-7 meeting. The latest drop in the value of the fledgling European currency
came despite mounting speculation that euroland interest rates will rise again
soon. Further evidence of building European inflationary pressures was provided
by German wholesale price data for December, which climbed 3.7 percent when
compared with last year. This was the largest annual increase in five years.
The euro ended the week at around $1.0090.
In its most recent monthly
report, the Bundesbank said that German economic growth is recovering, in part
because of the euro's decline against the dollar last year. This helped spur
German exports and revive domestic demand. Accelerating growth across euroland
is expected to result in higher borrowing costs when, if as expected, the European
Central Bank raises interest rates. That could boost the euro by narrowing the
yield advantage that U.S. fixed income securities enjoy relative to European
debt.
Yen
After a lot of rhetoric from participants preparing for the G-7 meeting,
the yen rose against the dollar as traders adjusted their positions ahead of Saturday's
meeting. Japan wanted to focus on exchange rates at the G-7 and lobbied furiously
with their counterparts for a strongly worded statement that would show broad
agreement within the G-7 that a further strengthening of the yen would be bad
for the Japanese and the world economy. Given the perceived differences of opinion
among participants, traders, at week's end, expected little more than a repeat
of last September's communiqué, which stated that the G-7 shared Japan's
concern over a strong yen and would track exchange rate developments closely.
And Japan, for its part, would pledge to continue to boost economic growth through
monetary and fiscal means. The yen ended the week at around 104.70 yen to the
dollar.
Group
of Seven meeting...
The Group of Seven (United States, Canada, United Kingdom, France, Germany,
Italy and Japan) finance ministers and central bank leaders met Saturday in
Tokyo. Russia took part in the talks relevant to it. Unlike the communiqués
of the last two years when the Asian financial crisis and its rippling effects
were the primary subjects, this time the G-7 was optimistic on world growth
and inflation. In their statement, the participants ignored the sinking euro
much to the delight of the Europeans and did not emphasize the strength of the
yen as the Japanese had been looking for. Rather, their statement said pretty
much the same thing as after the September 1999 meeting: They shared Japan's
concern about the strengthened yen on the Japanese economy but there was no
sign that there would be any concerted effort on the part of G-7 to help push
the yen's value down. The Bank of Japan has been fighting a losing battle to
weaken the yen over the past six months. The Bank, at the request of the Ministry
of Finance, intervened in the currency markets 13 times in the last six months
in efforts to weaken the yen, without too much success.
Central bank activities...
European Central Bank - the Bank left all its official rates unchanged
following its regular Governing Council meeting Thursday. The ECB last raised
rates by 50 basis points to three percent on November 4, 1999.
Bank of Japan - The Bank
of Japan's Monetary Policy Board decided to leave its monetary policy unchanged
after a regular meeting Monday. The current interest rate is effectively zero.
Indicator
scoreboard...
Germany
December wholesale prices jumped 0.9 percent on the month and 3.7 percent
when compared with last year, largely due to higher oil prices. This second
consecutive strong monthly increase indicates that price pressures are increasing
in Germany. When compared with last year, the December jump in wholesale prices
was the strongest since April 1995. The index excluding petroleum products rose
0.4 percent on the month and 0.9 percent on the year.
Industrial
productivity per employee and per hour worked in manufacturing
and mining industries both declined in November. Seasonally adjusted productivity
per employee also fell 0.3 percent from October but was 3.5 percent above the
year earlier level.
December's Ifo Institute's
west German business sentiment index
climbed for the seventh time in the last eight months, reaching the highest
level in two years. The December reading rose to 99.6, but was below market
rumors of an index level over 100. East German business sentiment also improved
in December, with the index jumping to 105.3 from 104.1. The east German index
bodes well for future pan German growth.
November pan German real,
seasonally adjusted construction orders
fell 8.1 percent on the month and were down 10.6 percent when compared with
a year earlier. The data confirm concerns that the construction sector has not
yet hit bottom and is likely to continue to drag overall growth down in the
fourth quarter. The drop was due solely to weakness in the west, while demand
increased slightly in the east.
Italy
November industrial production rose a seasonally and workday adjusted 1.1
percent over October boosted by strong output of construction and transportation
goods. This is the first concrete and reliable sign of output recovery. It was
widespread with almost all sectors participating, and reflects the recent trend
of improved orders since last June.
France
November manufacturing output surged up 1.8 percent for an annual gain of
5.7 percent, according to seasonally and workday adjusted data. The largest
monthly gains came from consumer and semi finished goods, both up 2.6 percent,
followed by capital goods, up 1.5 percent.
Britain
November industrial production rose by 0.4 percent on the month and by 2.1
percent on the year, the highest growth rate since July 1997 when it stood at
2.5 percent. The news is a further sign that the economy is recovering rapidly
from its slowdown last winter and is poised for strong growth in 2000. November
manufacturing output increased 0.6 percent on the month and 2.2 percent when
compared with last year. The manufacturing sector recovery has raised its annual
rate of growth to its highest level in almost five years. Manufacturing, which
had been the weakest section of the economy, is growing at a trend rate of 3.5
percent - faster than the larger services sector.
Average
earnings growth
remained steady in the three months to November although the rate of
increase is still likely to cause concern to the Bank of England. Earnings growth
in the three months to November was 4.9 percent higher than in the same three
months a year ago, and equaled the increases of the previous three months.
December's unemployment
rate slid to four percent, its lowest level since January 1980.
The total number of jobless, based on the claimant count method, fell 21,900 in
December after seasonal adjustment. Claimant count unemployment figures are based
on the number of people claiming unemployment related welfare benefits. Unemployment
based on standard definitions recommended by the International Labor Organization
rose 11,000 in the September to November period after seasonal adjustment, while
the ILO unemployment rate was unchanged at 5.9 percent.
December producer
prices rose 2.3 percent on the year and 0.3 percent on the month.
This is the highest rate of producer price inflation for three years. The jump
was driven by the rising cost of fuel and raw materials bought by manufacturers.
Excluding volatile items such as oil, output prices rose by only 0.4 percent
on the year and were unchanged on the month. Input
prices, the price of raw materials and fuels entering the factory,
soared 12.1 percent on the year - the fastest rate of increase in five years.
Crude oil prices now stand 164.8 percent higher than a year ago, the biggest
jump since records began in 1974.
Americas
Canada
November factory shipments leaped 1.8 percent led by increases in electrical
and electronic products and wood, while unfilled orders slipped 0.4 percent.
Factory shipments were up in 17 of 22 major groups, representing 71.7 percent
of the total. Unfilled orders fell 0.4 percent, the first decrease after six
consecutive months without a decline. The drop was mainly attributed to motor
vehicles (down 5.4 percent) and aircraft and parts (down 1.0 percent).
The November merchandise
trade balance rose to C$3.1 billion, its highest level since
July 1999. This follows a strong third quarter, where merchandise trade contributed
to the first positive balance of the current account since the last quarter
of 1996. Down 0.2 percent, imports edged lower for the first time since January
1999, due primarily to lower imports of computers, compressors, telecommunications
equipment and cattle. Exports rose 1.4 percent to a level almost as high as
the August 1999 record mainly the result of strong exports of high tech products,
in particular nuclear, electronic and aeronautics products, as well as of minerals
and natural gas. The trade surplus with the United States rose to C$5.798 billion
from a revised C$5.194 billion in October. Canada posted a deficit of C$261
million with Japan, a decline from the revised C$144 billion deficit in the
prior month. All other countries also showed a deficit.
December consumer
price index crept up 0.1 percent, but jumped 2.6 percent when
compared with last year. Excluding energy and the volatile food component, the
core measure dropped 0.1 percent in the month. This left the year over year
rate for core prices unchanged and lower than expected at 1.6 percent. Thus
inflation remains in the bottom half of the central bank's target range of 1
percent to 3 percent.
End note...
The interrelationships between
global markets were easily observed last week. When the Dow fell markets in
Asia and Europe followed suit. The Group of Seven continues to look for more
balanced growth between Europe, Asia and the Americas. And as the indicators
above show, things are improving in Europe. However, growth without the necessary
structural changes in the labor markets and fiscal policies will put a lid on
how fast and how far the European economies can run. Yet the changing environment
since the inception of the euro - and its subsequent weakness - has benefited
European exports and domestic demand.
Looking ahead...
Central
Bank Activities |
Jan 25 |
UK |
Bank of
England - Third Gold Auction on behalf of the UK Treasury |
Jan 26 |
UK |
Minutes - Bank of
England Monetary Policy Committee Meeting of December 8th and
9th, 1999
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Other
Meetings |
Jan 26 |
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World Economic
Forum, Davos, Switzerland |
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The
following indicators will be released this week... |
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Europe |
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Jan 24 |
Germany |
Producer
Price Index (December) |
Jan 25 |
France |
Consumer
Price Index (November) |
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UK |
Retail
Price Index (December) |
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EMU |
Balance of Payments
(November)
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Jan 26 |
EMU |
Harmonized
Consumer Price Index (December) |
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UK |
Retail
Sales (December) |
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Germany |
Import/Export
Prices (December) |
Jan 27 |
EMU |
Balance
of Payments (Q3, 1999) |
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UK |
Trade Deficit
(November) |
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CBI |
Industrial
Trends Survey (January) |
Jan 28 |
EMU |
Industrial
Production (November) |
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Germany |
Industrial
Production (November) |
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France |
Unemployment
(December) |
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UK |
Gross Domestic
Product (Q4, 1999) |
Sometime
this week |
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ECB |
M3 Money
Supply (December) |
Asia |
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Jan 28 |
Australia |
Consumer
Price Index (December |
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Hong Kong |
External
Trade (December) |
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Japan |
Industrial
Production (December) |
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Consumer
Price Index (December) |
Americas |
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Jan 24 |
Canada |
Wholesale
Trade (November) |
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Mexico |
Trade Balance
(December) |
Jan 26 |
Canada |
Retail
Sales (November) |
Jan 28 |
Canada |
Industrial
Product Price Index (December) |
Release dates are subject
to change.
For U.S. data releases,
see this week's Simply Economics.
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