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Financial Markets No new records were set in Asian and European equity markets last week. Indeed some market participants must be suffering from whiplash from the plunge then recovery in key equity markets. First there was euphoria - there were no Y2k problems and the New Year passed uneventfully, electronically speaking. After the distractions of Y2k were over, the markets turned their focus on the usual issues - central bank interest rate policy, stock valuations, earnings, and economic performance. Many investors decided to take profits. With the old tax year gone and some equity prices at their highs after the end of year run up, investors cashed in on the profits. The overseas markets drop was compounded by the U.S. markets' slump not only because of profit taking, but because interest rate concerns resurfaced.
Equities Europe Markets began 2000 on a negative note as losses offset the dramatic rally that occurred during the last two weeks of 1999, when low market volume exaggerated price movements. The primary reasons put forward for the decline were profit taking (that is, investors sold shares in an attempt to lock in gains of the stock market rally during the last two weeks of 1999) and investors' fears that the U.S. Federal Reserve could raise interest rates next month. The Bank of England is also expected to raise its base lending rate as early as this week when the Monetary Policy Committee meets. The markets rallied on Friday, taking their cue from U.S. markets and better than expected earnings from key index participants.
The London FTSE 100 started the new year with a hefty hangover Tuesday. The index suffered its biggest ever points loss after two months of euphoria. The FTSE 100 plummeted 264.3 points on its first day of trading. Previously, the FTSE dropped 250.7 points on October 20, 1987, in the middle of the market crash. Dealers said that the traditional January rally came during December. Investors were worried about the prospects for U.K. interest rates ahead of the Bank of England meeting, with the economy running ever stronger. These rate concerns weighed especially on financial stocks. Stocks also plummeted on Wednesday and Thursday. Traders said the correction was overdue after the market's heady run of the past two months and an exceptionally powerful surge that coincided with the Christmas holidays. Markets in Europe also slumped as concerns about a possible increase in interest rates by the European Central Bank intensified after Germany reported that unemployment fell by a larger than expected 68,000 in December. On Friday, good earnings news plus a positive turn on Wall Street gave the markets the impetus to change direction. In Frankfurt, the benchmark DAX index finished up 306.04 points, or 4.7 percent, at 6,780.96. In Paris, the CAC-40 index rose 1.6 percent, while stocks in Milan and Amsterdam surged more than 3 percent. London stocks lagged the continent, gaining less than one percent. Even with the rally on Friday, on the week, the DAX was off 2.6 percent; the CAC was down seven percent, and the FTSE has fallen six percent. Asia The Asian markets suffered from extreme volatility last week also. After a spectacular Monday in Hong Kong and Singapore (other markets were closed) fears of an U.S. rate increase in early February rattled the Hong Kong stock market and the Hang Seng index plummeted 1226 points on Wednesday and 694 points on Thursday. The index recovered somewhat on Friday, gaining 252 points but not enough to recoup its second worst point loss in history. When the week ended, the Hang Seng had lost over nine percent.
Tokyo went back to work Tuesday for a shortened session and promptly pushed the Nikkei over 19000 for the first time since August 1997, as investors celebrated the smooth Y2k turnover. However, shares declined on Wednesday as the benchmark index fell 2.4 percent after investors sold aggressively to lock in profits. Rate fears hit exporters the hardest because market players are worried that any rise in U.S. interest rates will hurt the earnings potential of those companies. At week's end, the Nikkei was down 3.9 percent.
Americas The Dow Industrials and the Toronto Stock Exchange Composite 300 index were the only two major indexes to recover their loses from earlier in the week and close on the plus side. The Dow closed at a new high. The TSE rocketed up 315 points for a leap of almost four percent. Both indexes got a lift from good labor market reports.
Currencies Finally, the yen weakened and the euro strengthened! Just what everyone was waiting for! The correction in equities worldwide also prompted a correction of recent high flying currencies as the Mexican peso, Australian dollar, and the Canadian dollar all trimmed recent gains. Yen The yen dropped last week, propelled by the sinking stock market and Bank of Japan intervention again on Tuesday (See Nikkei/Yen graph above). The arguments in favor of a weaker yen are starting to pile up according to analysts. The risk of further rounds of intervention from the Japanese authorities has dampened enthusiasm for the yen. Japanese exporters have completed most of their hedging for the fiscal year and have little incentive to hedge further at current levels. The yen has been weakened by the relaxed pace with which the Bank of Japan has been withdrawing excess liquidity from the financial system. This is being interpreted as unsterilized intervention and is also placing downward pressure on the yen. There is talk that the Japanese may push for the Group of Seven to address the yen's strength at the upcoming January 22nd meeting in Tokyo. The yen dropped as the Nikkei 225 stock average fell. The dollar and euro benefited amid speculation that non Japanese investors who plowed money into Japan last year might bring some of that money back to the United States or Europe. Last year's 37 percent rally in Japanese stocks was driven in large part by foreign rather than domestic demand. If there is repatriation of equity proceeds, demand for the yen would be dampened. Euro
The euro surged against the dollar as the U.S. stock market tumbled on interest rate jitters and post year end profit taking. When the equity markets rose on Friday, the euro once again declined in value. Analysts expect that with faster European growth, the European Central Bank may raise interest rates to keep inflation from accelerating. That could narrow the spread between U.S. and European interest rates. This in turn would boost the euro by making deposits in that currency relatively more attractive. Again, the market was relieved that there were no Y2K related disruptions and any dollars that were bought last week "just in case" were unloaded. The euro one year on... The European Union's primary purpose in creating the euro was not to compete against the dollar but to further Europe's economic and political integration and complete the EU single market. However, the euro became the world's second currency overnight, and now has the world's largest market in government debt - bigger than U.S. Treasury bonds. Prior to its official start on January 1, 1999, Germany insisted on the need for a strong euro and is now the country most responsible for its recent decline. A major reason for the euro's most recent instability has been erratic policy statements that seemed to retreat from free market principles by resisting hostile foreign takeovers of German industry and by bailing out a big, mismanaged construction company. Given that Germany represents 30 percent of the euroland economy, its political and economic policy making is watched with particular scrutiny by the financial markets.
When the euro was launched, Europe's politicians promised to cut down their deficits and stop meddling in the markets. But investors remain concerned about the willingness to implement harsh structural changes. State interventions, such as those by Germany, weaken the euro on the currency markets. The slow pace of implementing economic reform is undermining the euro. The weak euro is helping European exports recover from the Asian financial crisis. Regardless of its exchange rate, the euro is creating more efficient capital markets and encouraging mergers that will make European industry stronger and more profitable. Meanwhile, increased competition in the world economy, and inside the euro zone itself, is helping to keep inflation down. Unlike the United States, the European Monetary Union is running a healthy current account surplus. But capital is still flowing out of the EMU faster than it is entering partly because of Europeans are continuing to invest abroad. It is also because the United States and Japan seem to many investors to provide more attractive opportunities than continental Europe, despite Japan's continuing economic woes. One reason for the capital outflow is the strength of the U.S. economy. It continues to grow after eight years. To cool down the economy, U.S. interest rates are much higher than the three percent rate of the European Monetary Union. British interest rates are higher too, albeit for different reasons. This attracts euro money, driving down the single currency. At the same time, it makes American and British products less competitive. The U.S. trade deficit is at record highs and the UK's balance of trade is deep in the red as well. However, the EMU's trade surplus continues to grow. Euroland's businesses have taken to the euro. The region has seen a wave of mergers, as companies shaped up to compete in the larger market place. The whole issue of the euro focused the minds of chief executives on European strategies, thinking of Europe as a single market. However, for Euroland citizens, it does not really matter whether the euro is weak or strong, because they do most of their shopping and trading within the euro zone. On the financial markets, the euro is still settling in. Indicator scoreboard... Purchasing Managers Surveys... Around the first of every month, Reuters purchasing managers surveys for the major European countries are released. In Britain, the Chartered Institute of Purchasing and Supply purchasing managers survey is announced. Below is a summary of last week's surveys. A level above 50 indicates the expansion, while a level below 50 indicates contraction.
European Monetary Union - December's manufacturing activity expanded for the ninth month in a row and reached its highest level since the survey began in June 1997. The index, based on data from Germany, France, Italy, Spain and Ireland, rose to 57.4 in December from 57.0 in November. The prices index, which is not part of the overall PMI, rose strongly again, to 66.0 in December from 64.8 in November. Italy - The manufacturing sector expanded for the sixth consecutive month in December, although at a slower pace. The seasonally adjusted ADACI/Reuters purchasing managers' index slid to 56.58 from 57.08 in November. Manufacturing price increases accelerated marginally in December. France - Manufacturing expanded for the eleventh straight month in December, as the seasonally adjusted CDAF/Reuters Purchasing Managers Index rose to a record 60.4 from 59.5 in November. The seasonally adjusted price index bounced back up because of rising oil and commodity prices. Germany - The German purchasing managers' index expanded strongly in December to reach its highest level in two years, according to the BME/Reuters Purchasing Managers' Index. The seasonally adjusted index continued the growth trend it began in July this year and rose to 56.36 in December from 55.33 in November. Britain December activity in the manufacturing sector posted the strongest gain in over three years, benefiting from the strength of domestic demand which was boosted by millennium related orders, according to a seasonally adjusted index from the Chartered Institute of Purchasing and Supply. The CIPS purchasing managers' index in December rose to 56.1 compared with 54.7 in November. Other indicators... EMU The November seasonally adjusted unemployment rate remained at 9.8 percent, the same as in October. Both October and September unemployment were revised down. Now September (9.9 percent) is the first month in which joblessness fell below 10.0 percent since December 1992 and confirms that the European labor market is finally starting to benefit from the economic upswing.
October's trade surplus with the rest of the world was up slightly when compared with last year. Exports climbed nine percent when compared with last year while imports jumped 10 percent. This suggests that net exports had a good start in the fourth quarter. The global economic recovery and the recent weakness of the euro are expected to have further positive effects on exports in the months ahead. France December consumer confidence slipped back slightly from a record high in November as households adjusted down their view of past and future living standards in France and the opportunity to buy big-ticket items. Germany December seasonally adjusted unemployment fell 68,000 to a three and a half year low. West German seasonally adjusted unemployment fell 40,000, while east German joblessness fell 28,000. According to figures released separately by the Bundesbank, the seasonally adjusted unemployment rate fell to 10.2 percent from 10.4 percent in November. November real seasonally adjusted manufacturing orders rose 1.2 percent. The increase is solely attributed to foreign demand - up 3.8 percent. Once again, Germany's recovery is mostly export led as domestic orders fell 0.6 percent. Basic goods orders as well as consumer and durable goods increased while capital goods orders declined. Britain House prices continued to soar as evidenced by the Halifax house price index, which jumped 2.6 percent in December. This was the second biggest monthly increase in 1999 (after October's record 2.8 percent increase). The annual rate accelerated to 13.6 percent from 10.7 percent in November - the fastest rate since August 1989 when it stood at 14.2 percent. The jump increases the chances of another interest rate increase this week when the Bank of England's Monetary Policy Committee (MPC) meets. The MPC cited the buoyant housing market as one of the reasons for increasing interest rates towards the end of last year.
The service sector continued to expand strongly in December but at a slower rate according to seasonally adjusted figures Chartered Institute of Purchasing and Supply purchasing managers survey. The main business activity index fell to 58.3 in December from 59.5 in the previous month. Only the computer and information technology sectors suffered as customers delayed the placing of new business until any Y2K problems had been resolved. Americas Canada November industrial product prices were unchanged on the month but when compared with a year earlier, they were up 2.4 percent. Intermediate goods prices rose 0.4 percent on the month while jumping 4.2 percent on the year. Finished goods prices were down 0.4 percent from a month ago, but edged up 0.1 percent against a year ago. The raw materials price index rose 3.4 percent, due almost entirely to higher prices for crude oil. The index was up 23.2 percent when compared with last year. December employment continued to climb, jumping 42,000 jobs, as the labor market continued to build on robust growth in the previous three months. The unemployment rate was unchanged 6.9 because December's employment growth was matched by an increase in the number of people participating in the labor market. This is the lowest unemployment level since August 1981.
Endnote... New data continue to reinforce the improved economic outlook for the European Monetary Union countries. These countries are performing better than Japan, which is relying on government spending and exports to stay afloat - and where domestic demand is still virtually non existent. There is a lot for the European Union to fix. Although unemployment is declining at last, structural labor market problems continue to hamper growth. And taxation remains a very thorny issue. However, the euro has proved to be a boon for business and investment in the EMU. Looking Ahead... Central Bank Activities
The following indicators will be released this week...
Release dates are subject to change. For U.S. data releases, see this week's Simply Economics. |
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