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ARTICLE ARCHIVES

INTERNATIONAL PERSPECTIVE

Market whiplash
Econoday International Perspective 10/24/14
By Anne D. Picker, Chief Economist

  

Global Markets

Equities gyrated from day to day last week. Despite headwinds, all indexes except the Shanghai Composite were up on the week. Investors were concerned with a variety of events. Earnings season with its deluge of reports last week mollified investors who were fretting about slower growth in China, a health check on the Eurozone's flailing economic growth via the flash PMIs and concerns about the impact of Ebola on world growth. Wednesday's terrorist attack in Ottawa, Canada had only a momentary impact on U.S. and Canadian indexes.


 

Flash PMIs were 'mixed'

According to the flash PMI surveys, economic activity in the Eurozone is expanding slightly more quickly than expected this month. The composite output index weighed in at 52.2, up a couple of ticks from its final September reading (a 10-month low) and indicative of a gentle pick-up in the pace of expansion for the first time in three months. Regionally within the core group of Eurozone countries, a mild acceleration in growth in Germany (composite output index up 0.2 points at 54.3) contrasted with a faster pace of decline in France (down 0.4 points at 48.0). Elsewhere, output growth partially recovered from last month's drop but new business, employment and output price inflation were all soft.

 

While the three Eurozone PMIs contain services and a composite reading, elsewhere the flash is only for manufacturing. In the Eurozone, the manufacturing component edged up to 50.7 from 50.3 last month. In Germany, the manufacturing PMI improved to 51.8 from 49.9 in September. However, France sank further into contraction with a reading of 47.3, down from 48.8. Manufacturing PMIs in Japan and China also improved in October. China's manufacturing PMI inched up to 50.4 from September's final of 50.2 while in Japan, the index reading was 52.8, up from 50.3. However, the U.S. index eased to 56.2 from 57.5.


 

Global Stock Market Recap

2013 2014 % Change
Index 31-Dec Oct 17 Oct 24 Week 2014
Asia/Pacific
Australia All Ordinaries 5353.1 5260.1 5399.3 2.6% 0.9%
Japan Nikkei 225 16291.3 14532.5 15291.6 5.2% -6.1%
Hong Kong Hang Seng 23306.4 23023.2 23302.2 1.2% 0.0%
S. Korea Kospi 2011.3 1900.7 1925.7 1.3% -4.3%
Singapore STI 3167.4 3167.7 3222.6 1.7% 1.7%
China Shanghai Composite 2116.0 2341.2 2302.3 -1.7% 8.8%
 
India Sensex 30 21170.7 26108.5 26851.1 2.8% 26.8%
Indonesia Jakarta Composite 4274.2 5029.0 5073.1 0.9% 18.7%
Malaysia KLCI 1867.0 1788.3 1818.9 1.7% -2.6%
Philippines PSEi 5889.8 7003.2 7103.55 1.4% 20.6%
Taiwan Taiex 8611.5 8512.9 8646.0 1.6% 0.4%
Thailand SET 1298.7 1528.7 1539.9 0.7% 18.6%
 
Europe
UK FTSE 100 6749.1 6310.3 6388.7 1.2% -5.3%
France CAC 4296.0 4033.2 4128.9 2.4% -3.9%
Germany XETRA DAX 9552.2 8850.3 8987.8 1.6% -5.9%
Italy FTSE MIB 18967.7 18701.0 19495.7 4.2% 2.8%
Spain IBEX 35 9916.7 9956.8 10339.3 3.8% 4.3%
Sweden OMX Stockholm 30 1333.0 1310.5 1358.6 3.7% 1.9%
Switzerland SMI 8203.0 8250.1 8532.1 3.4% 4.0%
 
North America
United States Dow 16576.7 16380.4 16805.4 2.6% 1.4%
NASDAQ 4176.6 4258.4 4483.7 5.3% 7.4%
S&P 500 1848.4 1886.8 1964.6 4.1% 6.3%
Canada S&P/TSX Comp. 13621.6 14227.7 14543.8 2.2% 6.8%
Mexico Bolsa 42727.1 43273.5 43665.5 0.9% 2.2%

 

Europe and the UK

Equities advanced despite volatile trading during the week. For the FTSE, CAC and SMI, it was the first positive week since the week ending September 19th. The FTSE was up 1.2 percent, the CAC gained 2.4 percent, the DAX added 1.6 percent and the SMI jumped 3.4 percent. The Italian MIB and Spanish IBEX were up 4.2 percent and 3.8 percent respectively. The FTSE's weekly gain was the strongest since the week of August 22nd. Equities rallied intermittently during the week amid speculation that the European Central Bank will offer fresh stimulus. This outweighed some disappointing earnings reports. In the past four weeks, European stocks led a rout that helped erase as much as $5.5 trillion from equities worldwide amid concern that a potential recession in the region would undermine growth as the Federal Reserve winds down its asset-purchase program.

 

The week ended on a sour note Friday however after a draft statement reportedly showed more than two dozen banks will fail the European Central Bank's stress test. The results of the ECB's check-up on banks will be made official Sunday. More than a hundred are said to have passed the test, while 25 banks are said to fall short of ECB standards. On Sunday, scorecards for around 150 lenders are scheduled to be made public in a series of announcements in London, Frankfurt and other financial capitals across the continent. They are designed to show how strong balance sheets are and how capable banks are of surviving a deteriorating economic environment.


 

Asia Pacific

Equities advanced on the week with the exception of the Shanghai Composite (down 1.7 percent) in a volatile week of trading. Gains ranged from 5.2 percent (Nikkei) down to 0.7 percent (SET). Investors weighed the latest spate of Chinese economic data and found validation for their expectations of slower growth. Third quarter gross domestic product was up 7.3 percent from a year ago after increasing 7.5 percent in the second quarter. September industrial production was a touch higher than expectations but retail sales were lower. A report Friday showed new home prices in China declined for the first time in nearly two years in September, declining 1.1 percent from a year earlier after rising 0.5 percent in August.

 

The Nikkei snapped a four week losing streak as the U.S. dollar regained some strength against the yen and recent global volatility eased. However, it was a volatile week for the index. The Nikkei jumped 4.0 percent on Monday only to dive 2.0 percent on Tuesday. It rebounded 2.6 percent Wednesday but slumped a modest 0.4 percent Thursday. It ended the week with a 1.0 percent gain. Much of the volatility stemmed from the value of the yen against the U.S. dollar with exporters reacting to the relative changes between the two currencies. The market also rallied on news that Japan's Government Pension Investment Fund, the world's largest public pension fund with some $1.21 trillion in assets, is working on raising its portfolio allocation devoted to domestic stocks to around 25 percent. There was a scramble to cover short positions, pushing shares higher.

 

The Sensex rallied 2.8 percent in a holiday shortened week. The index was up sharply Monday after the government announced deregulation of diesel prices and increased natural gas prices, a move that will help the government reduce its subsidy burden. A strong showing of the Bharatiya Janata Party in the Maharashtra and Haryana Assembly elections also bolstered hopes that Prime Minister Narendra Modi's government will step up the pace of economic reforms.


 

Currencies

The U.S. dollar was up against the euro, yen and Swiss franc. It was unchanged against the pound sterling. The currency retreated against the commodity currencies — the Canadian and Australian dollar. The Canadian currency was little affected by Wednesday's terrorist attack in Ottawa. The yen halted a six day drop against the dollar after a doctor tested positive for the disease in New York, boosting haven demand. The euro rallied Friday as a draft report indicated four of five euro area banks are set to pass a European Central Bank stress test.

 

However, the dollar pared its weekly gain on concern the spread of the Ebola virus may weigh on the economy before the Federal Reserve's policy meeting. Analysts noted that currency traders are positioning themselves before the FOMC meeting on October 28 and 29. The dollar advanced against most of its peers this week after the September consumer price index unexpectedly rose keeping the Federal Reserve's 2 percent inflation target in sight. The six month ascent of the U.S. dollar had stalled over the last two weeks, but has resumed in recent days.

 

ECB President Mario Draghi has not disguised that he is readying more stimulus for an enfeebled Eurozone economy. That prospect has helped drag the euro down from the $1.40 level it was toying with in early March. European companies are already feeling the benefit. A potentially significant headwind to the U.S. dollar sustaining its move higher is that the Federal Reserve — which acknowledged that growth outside the U.S. has deteriorated — pushes back an interest rate increase because of the strength of the currency.


 

Bank of Canada

As widely anticipated, the Bank of Canada left its overnight rate at 1.0 percent, halfway between the similarly unchanged deposit rate (0.75 percent) and Bank Rate (1.25 percent). However, the BoC dropped its explicit neutral policy bias which had tied the timing and direction of the next shift in the monetary stance to future economic developments. Rather, the new statement simply points out that economic activity remains heavily dependent upon monetary policy stimulus. If anything, this hints of a slightly more dovish bias than last time although risks to the official inflation forecast are seen as balanced.

 

As the new Monetary Policy Report made clear, the decision reflects the BoC's creeping concerns about the way in which the local economy has evolved since its last meeting in September. In particular, the central bank acknowledges that downside risks to domestic growth have increased in the wake of economic and geopolitical events overseas. Despite its recent acceleration, inflation is still not viewed as a problem with full capacity not expected to be reached until the second half of 2016. Governor Stephen Poloz's testimony before the Senate Committee on Banking, Trade and Commerce was cancelled due to the terrorist incidents in downtown Ottawa on Wednesday morning. It has now been rescheduled for October 29.


 

Selected currencies — weekly results

2013 2014 % Change
Dec 31 Oct 17 Oct 24 Week 2014
U.S. $ per currency
Australia A$ 0.893 0.876 0.880 0.4% -1.4%
New Zealand NZ$ 0.823 0.793 0.785 -1.0% -4.6%
Canada C$ 0.942 0.887 0.890 0.4% -5.4%
Eurozone euro (€) 1.376 1.276 1.267 -0.7% -7.9%
UK pound sterling (£) 1.656 1.609 1.609 0.0% -2.9%
 
Currency per U.S. $
China yuan 6.054 6.125 6.117 0.1% -1.0%
Hong Kong HK$* 7.754 7.758 7.758 0.0% 0.0%
India rupee 61.800 61.443 61.281 0.3% 0.8%
Japan yen 105.310 106.920 108.110 -1.1% -2.6%
Malaysia ringgit 3.276 3.274 3.278 -0.1% -0.1%
Singapore Singapore $ 1.262 1.275 1.275 0.0% -1.1%
South Korea won 1049.800 1065.800 1057.500 0.8% -0.7%
Taiwan Taiwan $ 29.807 30.401 30.404 0.0% -2.0%
Thailand baht 32.720 32.432 32.410 0.1% 1.0%
Switzerland Swiss franc 0.892 0.946 0.952 -0.6% -6.3%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

United Kingdom

Third quarter preliminary gross domestic product was up 0.7 percent on the quarter following an unrevised 0.9 percent increase in the second quarter. Annual growth was 3.0 percent, down from 3.2 percent in the second quarter. The level of real GDP was 3.4 percent above its pre-recession peak in the first quarter of 2008. As usual, the preliminary estimates are based on output data and the key GDP expenditure components will not be available for another month. The relatively mild deceleration in quarterly growth was wholly attributable to a slowdown in services which posted a 0.7 percent rate, some 0.4 percentage points short of its pace in the second quarter. This reflected mainly weaker rates in distribution, hotels & restaurants (0.5 percent after 1.0 percent), business services & finance (1.0 percent after 1.5 percent) and transport, storage & communication (1.1 percent after 1.5 percent). Government was steady at 0.3 percent. Elsewhere output accelerated. Production industries were up 0.5 percent after a 0.2 percent increase last time (although manufacturing rose only 0.4 percent after 0.5 percent), construction gained 0.8 percent after 0.7 percent and agriculture was 0.3 percent better off having previously contracted 0.3 percent.


 

Asia/Pacific

Japan

September's merchandise trade deficit was ¥958.3 billion, wider than August's revised deficit of ¥949.7 billion. Expectations were for the deficit to narrow to ¥760.6 billion. Exports were up 6.7 percent on the year while imports were 6.3 percent higher. Both rebounded from negative readings in August. Exports to China were up 8.8 percent on the year while those to Asia as a whole were up 8.1 percent. Exports to the EU were up 0.7 percent on the year and to the U.S. were 4.4 percent higher on the year. On a seasonally adjusted basis, the trade deficit ballooned to ¥1.070.1 billion from ¥912.4 billion in August. Exports were up 3.1 percent on the month while imports added 5.0 percent.


 

Australia

Third quarter consumer prices were up 0.5 percent on the month for the second consecutive quarter. On the year, the CPI eased to an increase of 2.3 percent after climbing 3.0 percent in the second quarter. Second quarter inflation was also up 0.5 percent on the quarter but jumped 3.0 percent from the previous year. The Reserve Bank of Australia's inflation target range is 1 percent to 3 percent and the latest reading is close to the range mid-point. The RBA's preferred measures – the trimmed and weighted means — showed higher rates of inflation. The trimmed mean was up 0.4 percent on the quarter and 2.5 percent on the year – lower than the second quarter readings of 0.7 percent on the quarter and 2.8 percent from a year ago. The weighted mean was up 0.6 percent and 2.6 percent, virtually the same as in the second quarter.


 

China

Third quarter gross domestic product was up 7.3 percent from the same quarter a year ago after increasing 7.5 percent in the second quarter. It was the weakest growth since the first quarter of 2009. On the quarter, GDP was up 1.9 percent. For the nine months through September, GDP was up 7.4 percent from a year ago. For the year to date, consumption accounted for 48.5 percent of GDP growth.


 

September industrial production grew 8 percent on the year after increasing only 6.9 percent in August, which was its lowest since 2008. On the month output was up 0.91 percent after increasing a monthly 0.22 percent in August. For the nine months through September, output was up 8.5 percent from a year ago. During the same months in 2013, output was up 9.6 percent on the year. Output improved in 7 of 13 subcategories on the year in September. Auto output was up 4.5 percent after increasing 3.1 percent in August. Communication improved to 16.6 percent from 9.6 percent the month before. Chemicals were up 10.4 percent after 8.9 percent. Machinery was up 9.5 percent after slipping to an increase of 8.3 percent in August. However, output was lower for textiles (5.3 percent after 5.7 percent the month before), non-metal minerals (8.4 percent after 8.9 percent). Transport equipment output was up 9.7 percent in September after increasing 16.1 percent in August. 


 

September retail sales were up 11.6 percent on the year after increasing 11.9 percent in August. For the month of September, retail sales were up 0.85 percent after increasing 0.89 percent the month before. For the nine months through September, sales were up 12.0 percent compared with an increase of 12.9 percent for the same months in 2013. Urban sales eased to an increase of 11.4 percent from 11.8 percent in August. Rural sales were up 12.5 percent after 12.8 percent in August. Sales improved in September for stationery, household nondurables, autos and gold, silver & jewelry. However sales were lower than August for clothing, home appliances, cosmetics, furniture, building & decoration materials, communications equipment and oil & oil products.


 

Bottom line

Equities rebounded from the previous week's losses even though trading was volatile. Positive earnings data helped buoy investors. The Bank of Canada kept its monetary policy interest rate at 1.0 percent again. Minutes from both the Reserve Bank of Australia and Bank of England held no surprises.

 

The last week of the month is always a busy one on the economic data front. Prominently, Japan releases its monthly major indicators. And the earnings flow will continue unabated. The Bank of Japan and the Reserve Bank of New Zealand meet. But all eyes will be on the FOMC announcement during the Wednesday global market day.


 

Looking Ahead: October 27 through October 31, 2014

Central Bank activities
October 29 United States FOMC Announcement
October 30 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
October 31 Japan Bank of Japan Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
October 27 Eurozone M3 Money Supply (September)
October 30 Eurozone EC Business and Consumer Confidence (October)
Germany Unemployment (October)
Spain Gross Domestic Product (Q3.2014 preliminary)
October 31 Eurozone Harmonized Index of Consumer Prices (October, flash)
Unemployment (September)
France Consumption of Manufactured Goods (September)
Producer Price Index (September)
 
Asia/Pacific
October 28 Japan Retail Sales (September)
October 29 Japan Industrial Production (September)
October 31 Japan Consumer Price Index (September)
Household Spending (September)
Unemployment (September)
Australia Producer Price Index (Q3.2014)
 
Americas
October 29 Canada Industrial Product Price Index (September)
October 31 Canada Monthly Gross Domestic Product (August)

 

Anne D Picker is the author of International Economic Indicators and Central Banks.


 

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