Discordant pressures Econoday International Perspectives 9/18/00 By Anne D. Picker, International Economist

Oil, tropical storms, the euro and earnings don't mix
The embattled euro was in the spotlight again last week as it plummeted to yet another new low Friday. Blockades and demonstrations throughout Europe and Britain pressured markets as truckers sought relief from high energy prices. Only France capitulated to their demands much to the dismay of other European countries and Britain.

Investors worried about corporate earnings. Third quarter earnings linked to the weak euro and the high price of oil, addled equity markets as some international companies said that earnings would be hit by weak overseas currencies. It rattled investors and dragged down old economy stocks and limited a technology sector rebound. Technology stocks fueled a sharp selloff Friday as a new spike in oil prices and a sinking euro heightened investors' concerns about corporate profits.

Of the markets tracked here, only the Toronto Stock Exchange composite 300 managed to gain on the week, rising 2.25 percent. The Australian all ordinaries broke even. The remaining indexes, especially the Hong Kong Han Seng, sank with a thud.

 

Selected World Stock Market Indexes
	Index	Sept 15	Sept 8	Percent Change
Asia
Australia	All Ordinaries	3281	3279	0.05
Japan	Nikkei 225	16213	16502	-1.75
Hong Kong	Hang Seng	16250	17275	-5.94
S. Korea	Kospi	628	654	-3.90
Singapore	Sing. Strait	2054	2135	-3.81
Europe
Britain	FTSE 100	6417	6601	-2.78
France	CAC	6615	6703	-1.32
Germany	DAX	7000	7268	-3.69
North America
United States	Dow	10927	11222	-2.63
	Nasdaq	3835	3979	-3.62
Canada	TSE Composite	11064	10820	2.25
Mexico	Bolsa	6835	6903	-0.99

South Korean markets were closed Monday, Tuesday and Wednesday.
Hong Kong markets were closed on Wednesday.
Japanese markets were closed on Friday.

Europe and Britain
Europe and Britain were besieged by rebellious truck drivers who blockaded refineries as they looked for relief from high energy prices. Only France resorted to old policies and politics and gave in, much to the dismay of other European leaders who were looking to draw a line in the sand. Distribution was disrupted and many gas stations ran out of fuel, rekindling bad memories of past oil shortages. Apparently just in time inventories only work when things flow smoothly. This in turn, affected investors who worried about the impact this would all have on third quarter earnings and economic growth.

Investors remained skeptical that the increase in energy production beginning October 1 by OPEC producers would bring crude prices down. As a result, oil prices soared to heights not seen for 10 years. (See below) When the week finally ended, all three indexes were battered by investor doubts. The London FTSE 100 was down 183.40 points or 2.78 percent to close at 6417.30. The Paris CAC sank 88.71 points or 1.32 percent, ending the week at 6614.65. The Frankfurt DAX was the worst performer of the three. It ended the week at 6999.54, down 268.23 points or 3.69 percent.

Asia
Asian markets were down again this week, with the Hong Kong Hang Seng hit the hardest. The Hang Seng ended the week at 16,249.53, down 1,025.92 points or 5.94 percent. Investors are worried that the unusually large number of new placements that will be coming on the market might lure funds away from existing stocks. The market is expected to approach its capacity to absorb new issues in October.

Japanese investors were disappointed by the less than expected growth in gross domestic product because government expenditures accounted for most of the increase while investment was down. The only ray of sunshine was that consumer spending was positive. (See indicator scoreboard below.) Investors also continued to fret over the continuing high number of bankruptcies being reported. As the three day weekend approached, with markets closed on Friday, investors lost interest. The Nikkei 225 closed the week at 16,213.28, down 288.27 points or 1.75 percent.

Currencies
The euro fell again to new record lows despite foreign exchange sales by the European Central Bank. The ECB said that this was not intervention in the currency market, but rather regular sales of profits earned on foreign exchange trading. Indeed, the amounts were small, and after an initial boost, traders decided nothing had changed and sold euros, pushing it to an all time low Friday afternoon in U.S. trading. Downward pressure was exacerbated by remarks made in the ECB's monthly press conference Thursday. While the ECB was pleased that the initial reaction to their sales had been positive for the euro, their emphasis on the fact that this was not intervention on their part negated the rise, and the currency continued to fall.

Contributing to the rhetoric was the Richmond Federal Reserve Bank president, who said that while he expects the euro to survive, the drop in value might spark inflation. And this raises concern for the euro's longer term viability. Traders sold the euro.

The yen ebbed lower, as investors sifted through the gross domestic product data. Most of second quarter growth stemmed from government spending. Despite this, the yen remains bolstered by exporters repatriating earnings prior to the end of the third quarter.

Crude prices rise despite OPEC's promise of increased production
Events conspired to add more drama to the crude oil supply story. Tensions escalated between Kuwait and Iraq while a tropical storm set its sights on the oil producing Gulf of Mexico. At the close of trade Friday, light sweet (less sulfur) crude futures were at their highest levels since October 18, 1990. Oil companies said they were monitoring the weather and evacuating offshore workers from the region, which accounts for 20 percent of the U.S. domestic oil production and 25 percent of its natural gas output.

Although the Organization of Petroleum Exporting Countries (OPEC) agreed to pump 800,000 barrels a day more to help cool oil prices, dealers said the markets remained jittery. As evidenced by the graph above, prices didn't come down on the news. U.S. crude stocks are still at very low levels while strong gasoline demand from a record driving season means refiners have little capacity for other products. One consequence of this is that heating oil supplies remain dangerously limited ahead of winter, when demand usually surges.

Indicator scoreboard
EMU - Second quarter gross domestic product rose 0.9 percent and 3.8 percent when compared with last year, the largest increase since 1992, when Eurostat began calculating synthetic EMU GDP. The second quarter rise almost entirely due to stronger consumer spending and increased inventories. Investment and government spending were unchanged compared to the first quarter, while net exports subtracted slightly from growth.

Germany - August wholesale prices rose 0.1 percent and 5.6 percent when compared with last year. A sharp decline in seasonal food prices offset a modest increase in oil prices. Wholesale price index excluding seasonal foods rose 0.4 percent on the month and 5.8 percent on the year. Excluding combustibles and motor fuels, wholesale prices fell 0.1 percent on the month and rose 3.1 percent on the year.

France - August consumer prices rose 0.2 percent and 1.8 percent when compared with last year. On a seasonally adjusted basis, the CPI was up 0.1 percent on the month and 1.8 percent on the year. The CPI, excluding administered prices and volatile sectors like food and energy, rose 0.2 percent and 1.3 percent on the year. Excluding energy, the unadjusted CPI was up 0.2 percent on the month and 0.9 percent higher on the year.

July seasonally adjusted merchandise trade deficit was E817 million. This was the first time in over six years that the trade balance was negative. Exports dropped 9.6 percent while imports were down 3.2 percent. For the three months through July, exports were still up 1.9 percent compared to the previous three month period and 12.8 percent higher on the year. For the three months through July, imports were up 3.1 percent compared to the previous three-month period and 18.9 percent higher on the year.

Britain - August seasonally adjusted retail sales volumes rose 0.6 percent on the month and 4.0 percent above the level a year ago. The data for July were also revised up slightly and now it is estimated that sales volumes rose by 0.1 percent on the month. In the three months to August, sales volumes rose 1.1 percent on the previous three months and were 4.2 percent higher than on the same period a year ago.

August seasonally adjusted output prices were down 0.2 percent because of falling crude oil prices but were up 2.5 percent on the year. This was the biggest monthly drop since May 1986. Seasonally adjusted core output prices (which excludes food, beverages, tobacco and petroleum) were up 0.1 percent on the month and 1.3 percent on the year - the highest rate since August 1996. Seasonally adjusted input prices were up 0.6 percent on the month and by 10.7 percent on the year. Crude oil prices rose 3.9 percent on the month and 54.3 percent on the year. On an unadjusted basis, input prices were up 0.6 percent on the month and up 10.8 percent on the year.

August retail price index excluding mortgages (RPIX) fell 0.1 percent but rose 1.9 percent when compared with last year. Lower gasoline and oil prices helped push the RPIX even further below the 2.5 percent government inflation target. The retail price index (RPI) was unchanged on the month and up 3.0 percent on the year. The RPIY which excludes both mortgage interest payments and indirect taxes fell by 0.1 percent on the month and was up 1.5 percent on the year.

July average earnings rose 3.8 percent when compared with a year earlier. Average earnings in the three months to July rose 3.9 percent. Bonuses, which had pushed earnings higher than the 4.5 percent Bank of England target in the early part of the year, were lower and depressed overall earnings growth. July private sector earnings growth dropped back to 4.0 percent from 4.2 percent in June while public sector earnings growth fell to 3.4 percent from 3.7 percent in June. Earnings growth in the manufacturing sector remained unchanged at 4.7 percent, while it rose to 3.5 percent in the service sector from 3.4 percent in June.

August unemployment rate slipped to 3.6 percent, down from 3.7 percent in July. This is the lowest unemployment rate since October 1975. The unemployment rate as defined by the International Labor Organization stood at 5.3 percent, down from 5.5 percent in the previous three months. The employment level in the three months to July rose 93,000 on the previous quarter and was up 354,000 on the same period a year earlier.

Asia
Japan - Second quarter gross domestic product rose 1.0 percent on the quarter and was up 4.2 percent on an annualized basis. Second quarter private consumption was up 1.1 percent or 4.5 percent annualized. Private investment in housing was down 0.8 percent or 3.0 percent annualized while investment in equipment and facilities was down 3.3 percent or down 12.7 percent annualized. The GDP deflator was down 1.9 percent on the year, the worst result since the third quarter of 1996. Government consumption was down 1.3 percent on the quarter while public investment was up 13.6 percent on the quarter. Public demand was up 5.2 percent on the quarter or 22.6 percent annualized.

July revised industrial production fell 0.9 percent from the previous month. On the year, industrial production rose 4.2 percent, revised down from the previously estimated 4.4 percent. Production capacity, before adjustment for seasonal factors, was down 0.1 percent during July bringing the index for the category to 98.9, its lowest level since the ministry adopted its current standards for calculating the data in 1995. Production capacity was also down 1.5 percent from the same month a year earlier. The shipments sank 1.8 percent.

Australia - Second quarter gross domestic product rose 0.7 percent and 4.7 percent when compared with a year ago. Government spending on buildings, roads and equipment fell 19.4 percent from the first three months of the year. The chain price index, which measures overall price changes and not just at the consumer level, rose 0.5 percent in the second quarter and 2.3 percent from a year ago.

Americas
Canada - August consumer price index dropped 0.2 percent from July, but was up 2.5 percent from a year earlier. Gasoline prices were down 3.5 percent from July, but up 13.4 percent from a year earlier. Excluding food and energy, the index was up 0.2 percent from July, and up 1.5 percent from a year earlier. Seasonally adjusted CPI was unchanged from the previous month following a 0.3 percent increase in July.

BOTTOM LINE
Political problems continue to spark unease about the euro. And with Denmark's referendum on whether to join the EMU fast approaching (September 28), the markets are bound to apply judgement to the outcome. Should Denmark vote not to join the EMU as recent poles indicate, it would remove pressure off of Britain to join also. It would also weaken the euro even more, something the ECB would not like, given that EMU inflation is currently 2.4 percent and above the bank's two percent target.

The weak euro is sure to come up at the Group of Seven meeting in Prague next weekend. A problem for the ECB is the lack of support for intervention among some European finance ministers. And the likelihood of an international agreement on coordinated intervention is low.

 

Looking Ahead: September 18 to September 22, 2000
Central Bank Activities
Sept 20	Japan	Bank of Japan Monetary Policy Board
		July 17 Meeting Minutes
Sept 20	Britain	Bank of England Monetary Policy Committee
		September 6 and 7 Meeting Minutes
Other meetings
Sept. 21 to 28		International Monetary Fund/World Bank Annual Meeting
		In Prague, Czech Republic
Sept. 23		Group of Seven Meeting in Prague, Czech Republic
The following indicators will be released this week...
Europe
Sept. 18	EMU	Harmonized Index of Consumer Prices (August)
Sept. 20	Germany	Ifo Business Sentiment Index (August)
	Italy	Gross Domestic Product (Q2, 2000)
Sept 21	Italy	Industrial Production (July)
	Britain	CBI Industrial Trends (August)
Sept 22	EMU	Merchandise Trade (July)
	Germany	Producer Price Index (August)
Asia
Sept. 18	Homg Kong	Unemployment (June to August)
Sept. 19	Homg Kong	Gross Domestic Product (Q1, 2000)
Sept. 22	Homg Kong	Consumer Price Index (August)
Americas
Sept. 19	Canada	Manufacturing Shipments and Orders (July)
Sept. 20	Canada	Merchandise Trade (July)
Sept. 21	Canada	Retail Sales (July)

Release dates are subject to change.
For U.S. data releases, see this week's Simply Economics.