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INTERNATIONAL PERSPECTIVE

Equities rally in February
Econoday International Perspective 2/27/15
By Anne D. Picker, Chief Economist

  

Global Markets

While equities were mixed last week, all indexes followed here posted positive results for February as a whole. Chinese investors returned from the extended Lunar New Year holiday and now are waiting for the outcome of the National People's Congress which will meet this week. In Japan, equities climbed despite a spate of negative economic data. And Federal Reserve Chair Janet Yellen delivered her semi-annual monetary policy testimony to the Senate Budget Committee on Tuesday and the House of Representatives Financial Services Committee on Wednesday. There were no surprises. And in Europe, investors are breathing easier after Greece and the Eurogroup extended until June the country's bailout program which was set to expire on February 28.

 

Second estimates of GDP were released for Germany, the UK and the U.S. during last week. Who performed the best' Well it depends on which measure of GDP you use. On an annualized basis such as is used in the U.S., Germany grew at an annualized rate of 2.8 percent in the fourth quarter while both the U.S. and UK grew 2.2 percent. However, using the annual change which is more common in Europe, comparing fourth quarter 2014 with the same quarter in 2013, the UK grew 2.7 percent, the U.S. 2.4 percent and Germany, only 1.5 percent.


 

Global Stock Market Recap

2014 2015 % Change
Index Dec 31 Feb 20 Feb 27 Week Feb 2015
Asia/Pacific
Australia All Ordinaries 5388.6 5845.6 5898.5 0.9% 6.2% 9.5%
Japan Nikkei 225 17450.8 18332.3 18797.9 2.5% 6.4% 7.7%
Hong Kong Hang Seng 23605.0 24832.1 24823.3 0.0% 1.3% 5.2%
S. Korea Kospi 1915.6 1961.5 1985.8 1.2% 1.9% 3.7%
Singapore STI 3365.2 3435.7 3402.9 -1.0% 0.3% 1.1%
China Shanghai Composite 3234.7 3246.9 3310.3 2.0% 3.1% 2.3%
India Sensex 30 27499.4 29231.4 29220.1 0.0% 0.1% 6.3%
Indonesia Jakarta Composite 5227.0 5400.1 5450.3 0.9% 3.0% 4.3%
Malaysia KLCI 1761.3 1807.9 1821.2 0.7% 2.2% 3.4%
Philippines PSEi 7230.6 7825.4 7730.57 -1.2% 0.5% 6.9%
Taiwan Taiex 9307.3 9529.5 9622.1 1.0% 2.8% 3.4%
Thailand SET 1497.7 1603.5 1587.0 -1.0% 0.4% 6.0%
Europe
UK FTSE 100 6566.1 6915.2 6946.7 0.5% 2.9% 5.8%
France CAC 4272.8 4830.9 4951.5 2.5% 7.5% 15.9%
Germany XETRA DAX 9805.6 11050.6 11401.7 3.2% 6.6% 16.3%
Italy FTSE MIB 19012.0 21842.6 22337.8 2.3% 8.9% 17.5%
Spain IBEX 35 10279.5 10879.3 11178.3 2.7% 7.4% 8.7%
Sweden OMX Stockholm 30 1464.6 1664.3 1691.0 1.6% 7.5% 15.5%
Switzerland SMI 8983.4 8892.2 9014.5 1.4% 7.5% 0.3%
North America
United States Dow 17823.1 18140.4 18132.4 0.0% 5.6% 1.7%
NASDAQ 4736.1 4956.0 4963.5 0.2% 7.1% 4.8%
S&P 500 2058.9 2110.3 2104.5 -0.3% 5.5% 2.2%
Canada S&P/TSX Comp. 14632.4 15172.2 15234.3 0.4% 3.8% 4.1%
Mexico Bolsa 43145.7 43551.3 44190.2 1.5% 7.9% 2.4%

 

Europe and the UK

Equities here were up for the week. Investors breathed a sigh of relief when an agreement was reached between Greece and its lenders. On the week, the FTSE was up 0.5 percent and toyed with a record high. The CAC and DAX added 2.5 percent and 3.2 percent respectively while the SMI was 1.4 percent higher. The indexes (except the SMI) added to January's gains. The FTSE advanced 2.9 percent, the CAC jumped 7.5 percent and the DAX added 6.6 percent.

 

The SMI obliterated its January loss of 6.7 percent and rebounded 7.5 percent in February to recover all of the index's loss and then some that occurred after the Swiss National Bank abandoned its currency cap on January 16. The FTSE touched a record high on Friday, helped by gains in Asian-focused banks. The FTSE has benefited along with other world stock markets from record low interest rates and central bank stimulus measures. Signs of continued economic growth have also pushed the British stock market higher.

 

On Friday, the German parliament approved a four month extension of the Greek bailout program. Despite widespread skepticism in the country, German legislators voted for the bailout extension with an overwhelming majority. The Eurogroup last week agreed to a request by the Greek Government to extend the €240 billion bailout program until June in exchange for a series of economic reforms. The extension will have legal validity only if it is ratified by all Eurozone member states. Although the extension gives the Greeks a lifeline, they face an interim April deadline for convincing Germany and other Eurozone partners that they are serious about their reform drive. If that fails, Athens would run out of cash, likely triggering an unprecedented exit from the single currency bloc. The bailout program for Greece was due to expire on February 28. The doubts about reaching a deal forced customers of local banks to transfer their money out of Greece. There were reports that millions of euros were moved out in the last week.

 

According to remarks by ECB President Mario Draghi to the European Parliament on Wednesday, the quantitative easing program will support economic activity and help to take inflation back towards the target of below, but close to, 2 percent over the medium term. Mr Draghi defended the ECB's action on Greece. "We are ready to reinstate the waiver when the Governing Council decides that the conditions for successful conclusion of the program are in place," he said. "As in the case of the existing purchases of private sector securities, the purchases of public securities have a high transmission potential to the real economy," Draghi said. "We have already seen some positive effects of our measures."


 

Asia Pacific

Equities were mixed last week — investors waited for news about an agreement between Greece and its creditors on a four month extension to its bailout package. They also stayed on the sidelines waiting to hear what Fed Chair Janet Yellen would say in her semi-annual testimony to U.S. Senate and House of Representative committees. There was a full plate of economic data to be parsed as well.

 

The Shanghai Composite advanced 2.0 percent on the week following the Lunar New Year holidays which ended Wednesday. The index added 3.1 percent in February, more than compensating for January's 0.8 percent decline. This week is the annual meeting of the National People's Congress to be held in Beijing. Chinese shares advanced led by financials and builders after the State Council said it will pursue proactive fiscal policies to spur growth and help mitigate the pace of the economic slowdown. Also, there are expectations that the government will announce more easing measures to stimulate the economy at the next meeting of the National People's Congress. The National People's Congress begins this week and there are growing expectations that the government will implement more easing measures to stimulate the economy — a key factor in the strong rally that the market enjoyed late last year.

 

The Nikkei continues to rise, hitting fresh 15 year highs as the yen weakens and investors took some disappointing Japanese economic data in their stride. The index was helped by domestic pension fund buying. Stocks rallied because investors expect continued buying of equities by the country's main pension fund, the Government Pension Investment Fund, as well as increased allocations by foreign funds, which are under pressure to increase their weightings as the market trades at 15-year highs. The Nikkei was the best performer in this region on the week, adding 2.5 percent. The index was up 6.4 percent in February after climbing 1.3 percent in January. While industrial production increased the most in more than three years last month, retail sales slid for the first time in seven months, household spending dropped, the unemployment rate worsened for the first time in four months and consumer inflation continued to ease.

 

The All Ordinaries was up 0.9 percent on the week and added 6.2 percent in February after increasing 3.0 percent in January. Equities were boosted by the Reserve Bank of Australia's cut in its policy interest rate at its February 3rd meeting with the prospect of another cut at its March meeting. A weakening Australian dollar also helped.


 

India's Sensex was virtually unchanged on the week and edged up 0.1 percent in February after adding 6.1 percent the month before. Equities rallied Friday after the Economic Survey for 2014-15 was tabled in Parliament ahead of the General Budget and set the agenda for reforms needed to push growth to double digits in the coming years. The Economic Survey, which outlines the broad direction of the Union Budget and the economic performance of the country, noted that India has reached a sweet spot. It pitched for big bang reforms and called for improving business environment by making regulation and taxes less onerous to help push growth to 8.1 percent to 8.5 percent in the next fiscal year. The Survey recommended revival of public investments in the short term and highlighted the threat arising out of long stalled projects, sending an important message to Finance Minister Arun Jaitley who will unveil the Modi government's first full year Budget on Saturday.


 

Currencies

The U.S. dollar was mixed last week. The currency was down against the pound sterling and Canadian dollar but advanced against counterparts euro, yen, Swiss franc and the Australian dollar. The U.S. dollar has been rallying against the euro in anticipation of interest rate increases from the Federal Reserve in contrast to the beginning of Eurozone quantitative easing.

 

The pound sterling traded near an eight week high against the dollar, drawing support from steady economic growth in Britain, although a drop in business investment was likely to make some investors cautious. British gross domestic product between October and December grew by a quarterly 0.5 percent, slowing from 0.7 percent in the third quarter. That was the slowest quarterly growth rate in a year, but was broadly in line with expectations — and much better than the Eurozone. Sterling's recent gains also come after a steadying of expectations for the Bank of England to deliver an interest rate increase in early 2016, after those were pushed back by more than a year. The BoE has an inflation target of 2 percent. January's reading edged up a mere 0.3 percent on the year. However, recent wage growth data have been solid.


 

Selected currencies — weekly results

2014 2015 % Change
Dec 31 Feb 20 Feb 27 Week 2015
U.S. $ per currency
Australia A$ 0.817 0.784 0.781 -0.3% -4.4%
New Zealand NZ$ 0.780 0.752 0.756 0.5% -3.1%
Canada C$ 0.861 0.797 0.800 0.4% -7.1%
Eurozone euro (€) 1.210 1.138 1.119 -1.7% -7.5%
UK pound sterling (£) 1.559 1.540 1.543 0.2% -1.0%
Currency per U.S. $
China yuan 6.206 6.256 6.269 -0.2% -1.0%
Hong Kong HK$* 7.755 7.760 7.755 0.1% 0.0%
India rupee 63.044 62.221 61.839 0.6% 1.9%
Japan yen 119.820 119.090 119.630 -0.5% 0.2%
Malaysia ringgit 3.497 3.647 3.604 1.2% -3.0%
Singapore Singapore $ 1.325 1.360 1.363 -0.2% -2.8%
South Korea won 1090.980 1112.150 1098.000 1.3% -0.6%
Taiwan Taiwan $ 31.656 31.744 31.458 0.9% 0.6%
Thailand baht 32.880 32.550 32.355 0.6% 1.6%
Switzerland Swiss franc 0.9942 0.941 0.953 -1.3% 4.3%
*Pegged to U.S. dollar
Source: Bloomberg

 

Commodities

Crude oil prices appear to be stabilizing with both the Brent and West Texas intermediate increasing on the month thanks to an improving demand outlook and supply outages. Brent is trading at a premium of about $12 to U.S. crude, which remains hamstrung by massive inventory builds. This is the widest spread since January 2014. Though analysts warn that much of the increase is speculative, Brent is being helped by positive Eurozone and Chinese data plus supply disruptions in Libya.

 

China's implied oil demand is set to grow by 3 percent this year, according to China National Petroleum Corp. Disruptions to production and exports from Libya and Iraq in recent weeks have contributed to tightness in the physical market in the Mediterranean, while in the North Sea, Statoil has shut its Statfjord C platform after discovering cracks in the flare tower.

 

Friday's weekly Baker Hughes rig count declined to 1,267 in the February 27 week, down from 1,310 in the February 20 week. The number of rigs has been declining since September 2014 when the count was 1,931. The data indicate how the U.S. shale industry is responding to lower oil prices, namely by cutting back production.


 

Indicator scoreboard

EMU

January final harmonized index of consumer prices dropped 0.6 percent when compared with a year ago and was its weakest posting since July 2009. Compared with December, the HICP declined 1.6 percent. Excluding food, alcohol, tobacco and energy prices the HICP was 0.6 percent higher on the year and only down 0.1 percentage point from the final December result. That reading matched the results for the HICP omitting just unprocessed food and energy. The third core gauge, which excludes seasonal food and energy, was running at just a 0.5 percent annual rate, a couple of ticks below its December mark. Regionally, Greece (down 2.8 percent) remained at the bottom of the inflation ladder below Spain (down 1.5 percent), Lithuania (down 1.4 percent) and Luxembourg (down 1.1 percent). Only Malta (0.8 percent) and Austria (0.5 percent) currently show annual rates above zero.


 

January M3 money supply was up 4.1 percent on the year, up 0.3 percentage points from its stronger revised December reading to register its fastest pace since April 2009. As a result, the 3-month moving average gained an additional 0.5 percentage points to 3.6 percent. January's advance reflected an improvement in the key private sector bank lending counterpart which slipped just 0.1 percent on the year after a 0.5 percent decline last time. However, within this, borrowing by households was down 0.2 percent on the year, up only a tick from December's decline of 0.3 percent, with loans for house purchase also gaining just a tick to zero. Lending to non-financial corporations was down 1.2 percent. Lastly, borrowing by non-monetary financial corporations (excluding insurance companies and pension funds) climbed from 1.1 percent to 3.0 percent.


 

February EU Commission's economic sentiment index (ESI) was up 0.7 points from a slightly firmer revised January reading to 102.1. The modest increase was large enough for the index to match its highest level since May last year. February's advance was mainly attributable to improving consumer confidence which, at minus 6.7, confirmed its flash estimate and gained nearly 2 points from January. Morale in industry was just 0.1 points firmer at minus 4.7 while retail was 1.5 points better off at minus 2.1 and construction unchanged at minus 26.5. Among the larger member states, the national ESI slipped 0.5 points to 103.3 in Germany but rose 2 points to 98.4 in France and was up 1.4 points at 102.5 in Italy. Spain also saw a small improvement with a 0.8 point increase to 107.4. Elsewhere the survey was cautiously more upbeat, notably and, for the ECB crucially, with regards to inflation expectations. The index for expected factory gate prices gained 0.4 points to minus 5.5 and its counterpart in services was up 2.4 points at 1.6. At least as importantly, consumer inflation expectations rose 1.3 points to minus 2.3, their first improvement in four months.


 

Germany

February Ifo business climate indicator rose a minimal 0.1 points from January to 106.8, its strongest level since the middle of 2014 but still well below that year's high of 111.0. The stability of overall sentiment masked divergent trends in its two components. While the current conditions sub-index slipped 0.4 points to 111.3 — its second consecutive decline — the expectations gauge gained 0.5 points to 102.5, its fourth modest increase in as many months and its highest value since July last year. Confidence was essentially unchanged on the month in all of the major output sectors although services (22.7 after 24.6) saw some softening.


 

Fourth quarter gross domestic product matched its flash estimate and was up 0.7 percent on the quarter. Annual workday and unadjusted yearly GDP growth rates similarly matched their flash estimates of 1.4 percent and 1.6 percent respectively. Total domestic demand expanded 0.5 percent from the third quarter to more than fully reverse that period's 0.4 percent decline. Within this, household consumption was up a healthy 0.8 percent for a second successive quarter and gross capital investment was up 1.2 percent with construction investment gaining 2.1 percent and equipment investment 0.4 percent. Government expenditures followed a 0.6 percent advance with a much more modest 0.2 percent increase while inventories subtracted 0.2 percentage points from the quarterly change in total output. Net exports boosted quarterly growth by 0.2 percentage points as export volumes rose 1.3 percent, down from the third quarter's 2.0 percent rate but still ahead of the 1.0 percent increase recorded by imports.


 

February seasonally adjusted unemployment dropped 20,000 after a marginally steeper revised 10,000 decline in January. The latest drop was the fifth in as many months albeit not quite enough to reduce the jobless rate which remained at 6.5 percent for a third consecutive month. The slide in unemployment was accompanied by another rise in vacancies which were up 2,000 after a 5,000 increase at the start of the year. The apparent buoyancy of the jobs market this month follows January's 41,000 increase in employment, the largest since October.


 

United Kingdom

The second estimate of fourth quarter 2014 gross domestic product was up an unrevised 0.5 percent, down from 0.7 percent in the previous period. Annual growth was confirmed at 2.7 percent. The first look at the GDP expenditure components revealed a 0.5 percent quarterly increase in household consumption, a couple of ticks short of its third quarter pace but in line with its second quarter rate. However, within a disappointing 1.2 percent drop in gross capital formation, fixed investment was down 0.5 percent as spending by businesses contracted a further 1.4 percent after a 1.2 percent slide in the previous period. Weakness in oil and gas was a major factor here. General government consumption was flat. It was the first quarter that it has not grown in a year. Business inventories had a broadly neutral impact. In fact total output would have struggled to keep its head above water but for a marked contribution from external trade. Exports were up 3.5 percent, their best performance since the second quarter of 2013 while imports gained only 1.3 percent. Net foreign trade added 0.6 percentage points to quarterly growth.


 

Asia/Pacific

Japan

Consumer prices continued to weaken in January. The national consumer price index was down 0.2 percent on the month and up 2.4 percent from a year ago. Excluding fresh food, the CPI dropped 0.6 percent and was up 2.2 percent on the year. Excluding both fresh food and energy, the CPI was down 0.5 percent and up 2.1 percent from January 2014. Excluding the impact of the sales tax, the CPI edged up just 0.2 percent on the year, the lowest since May 2013. Since reaching a peak in May 2014, the annual inflation rate has steadily declined, thanks in part to energy price declines. But energy was not the only culprit. For example, TVS increased 3.7 percent on the year in December but only 1.2 percent in January. Electronics goods slipped 0.1 percent after increasing 1.7 percent the month before. However, food excluding perishables was up 3.9 percent in both January and December. The preliminary February CPI which is considered a precursor to the national index was unchanged on the month and up 2.3 percent on the year. Excluding fresh food, the index edged up 0.1 percent and was 2.2 percent higher on the year. Excluding both fresh food and energy the index was unchanged on the month and up 1.7 percent on the year.


 

January unemployment rate increased to 3.6 percent from 3.4 percent in December. The January reading was the highest since September. Expectations were for the rate to remain at 3.4 percent. Employment increased 470,000 from the year before. The number of unemployment dropped 70,000 on the year to 2.31 million. The labour force participation rate was 59.0, up 0.3 percent from the previous year. The employment rate added 0.5 percent to 57.0 percent.


 

January household spending dropped for the tenth consecutive month, this time by 5.1 percent from a year ago. This was the quickest pace since September when spending dropped 5.6 percent. Consumption has now been falling since the country's national sales tax was lifted from 5 to 8 percent. Consumers spent with abandon prior to the sales tax increase in April, stocking up especially on durables. With the exception of medical care (up 2.8 percent) and education (up 3.6 percent), all remaining subcategories of spending declined on the year. Clothing & footwear dropped 15.9 percent, furniture & household utensils were down 8.8 percent and transportation & communication spending was 6.0 percent lower.


 

January retail sales declined 2.0 percent from a year ago. It was the first decline in retail sales since June and confirms the weakness exhibited by household spending which was released earlier. Auto sales dropped for a fourth month, this time by 4.4 percent on the year. Machinery sales sank 8.1 percent and were down for the tenth consecutive month. Fuel sales plummeted 15.6 percent and were down for a fourth month. Apparel sales were up 0.5 percent while food sales gained 2.7 percent.


 

January industrial production was up a greater than anticipated 4.0 percent on the month after increasing 0.8 percent the month before. However, output was 1.3 percent lower than a year ago. The data confirm criticism that Abenomics is great news for Japan Inc which benefits from a weakening yen. But smaller companies and the average person are struggling with higher import costs and stagnant wages. Industries that mainly contributed to the increase were general-purpose, production & business oriented machinery (up 9.4 percent), transport equipment (up 4.5 percent) and electrical machinery (up 5.6 percent). According to the survey of production forecast in manufacturing, production is expected to increase 0.2 percent in February and decrease 3.2 percent in March.


 

Americas

Canada

January consumer prices were down 0.2 percent on the month but were up 1.0 percent from a year ago, its lowest mark since November 2013. Gasoline prices were nearly 27 percent weaker on the year after a 16.6 percent drop in December and accounted for much of the deceleration in the overall measure. However the underlying picture was more robust. Excluding food and energy the CPI was up 0.2 percent on the month which left its yearly change steady at 1.9 percent. Similarly, the Bank of Canada's gauge was also 0.2 percent firmer than in December and equally flat at a 2.2 percent annual rate. Seasonal factors are broadly neutral in January and adjusted for these overall prices also were down 0.2 percent on the month. Similarly adjusted, the ex-food and energy index advanced 0.2 percent and the BoC measure a relatively firm 0.3 percent. Within the seasonally adjusted basket the slump in energy costs was apparent in a 2.5 percent monthly decline in transportation charges but elsewhere prices were somewhat higher. In particular, food gained 0.7 percent, alcoholic beverages & tobacco products 0.5 percent and health & personal care 0.3 percent.


 

Bottom line

Equities were mixed in the last week of February but all indexes advanced for the month. Investors in Europe were relieved that Greece and the Eurogroup managed to postpone until June a resolution to the ongoing crisis. Economic indicators were mixed. Consumer price indexes continued to weaken with Eurozone prices sinking into deflationary territory. In Japan too, prices threaten to once again contract. Janet Yellen's Congressional testimony did not break new ground.

 

The first week of March is chock full of new economic information and key central bank meetings. The Reserve Bank of Australia, the Banks of Canada and England and the European Central Bank all will issue policy statements. Data highlights include manufacturing and composite PMIs. Canada and Australia will publish their respective estimates of fourth quarter growth. And the first Friday of the month brings the U.S. employment situation report.


 

Looking Ahead: March 2 through March 6, 2015

Central Bank activities
March 3 Australia Reserve Bank of Australia Monetary Policy Announcement
March 4 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book Published
March 5 UK Bank of England Monetary Policy Announcement
Eurozone European Central Bank Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
March 2 Eurozone Manufacturing PMI (February)
Harmonized Index of Consumer Prices (February flash)
Unemployment (January)
Germany Manufacturing PMI (February)
France Manufacturing PMI (February)
UK Manufacturing PMI (February)
March 3 Eurozone Producer Price Index (January)
March 4 Eurozone Services & Composite PMI (February)
Retail Sales (January)
Germany Services & Composite PMI (February)
France Services & Composite PMI (February)
UK Services PMI (February)
March 5 Germany Manufacturers' Orders (January)
France Unemployment (Q4.2014)
Italy Gross Domestic Product (Q4.2014 final)
March 6 Eurozone Gross Domestic Product (Q4.2014 second estimate)
Germany Industrial Production (January)
France Merchandise Trade (January)
 
Asia/Pacific
March 2 Japan Manufacturing PMI (February)
China Manufacturing PMI (February)
India Manufacturing PMI (February)
March 4 Australia Gross Domestic Product (Q4.2014)
March 5 Australia Retail Sales (January)
Merchandise Trade (January)
 
Americas
March 3 Canada Gross Domestic Product (Q4.2014)
Monthly Gross Domestic Product (December)
March 6 Canada International Trade (January)

 

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


 

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