Global Markets

Equities began trading in the New Year in thin markets as many investors remained on their holiday vacations. Traders took profits after scoring impressive gains in 2013 along with several record highs. Very accommodative monetary policies and an improving economic outlook worldwide led to a stellar year for stocks. Equity strategists see the gains continuing into 2014 as economic growth improves even as the Federal Reserve steadily trims its bond buying stimulus. The Nikkei soared 56.7 percent in 2013 while the Nasdaq added 38.3 percent and the DAX was 25.5 percent higher. However, advances were not universal — the Shanghai Composite and SET both retreated 6.7 percent while the Jakarta Composite lost 1.0 percent.

Manufacturing PMIs mostly improve

Global manufacturing ended 2013 on a strong note as major exporters such as Japan, Germany and Italy posted their fastest growth in years, although China's performance remained modest. December Eurozone manufacturing grew at the fastest rate since mid-2011 thanks to Germany and Italy according to the Markit PMIs. Add in the fastest growth in 7 1/2 years for Japanese manufacturing and no major slowdown in manufacturing output in China, and the stage is set for a solid start to 2014. The Eurozone manufacturing PMI climbed to 52.7 in December from 51.6. In Germany, manufacturing grew at its fastest pace since mid-2011, with its PMI rising to 54.3 from 52.7. However, France continued to contract and at a faster pace with its PMI dropping sharply to 47.0 from 48.4 — a seven-month low.

Manufacturing appears to reviving in several Eurozone countries that have struggled since the sovereign debt crisis broke out more than four years ago. Factory activity expanded slightly in Spain. Irish manufacturing grew for a seventh month. Even Greek manufacturing activity grew. Britain continues to outperform the Eurozone economies. Even though the manufacturing PMI unexpectedly slipped to 57.3 from 58.1, it registered a high level of activity. UK manufacturing output probably grew by 1 percent in the fourth quarter alone according to Markit.

In Asia, the picture was mixed. Already lackluster output slowed in India to 50.7 from 51.3 the month before mainly due to weak domestic demand even though orders from abroad picked up. The HSBC/Markit PMI for China slipped to a three month low of 50.5 in December, consistent with a dip in the official government PMI to a four month low of 51.0. PMIs for two important emerging economies in Asia, South Korea and Indonesia, both rose in December but remained at relatively low levels.

Global Stock Market Recap

Global Stock Market Recap — 2013 quarterly results

Europe and the UK

Equities rebounded on Friday but for most it was too late to offset losses incurred earlier in the week on Monday and Thursday. The FTSE, CAC and DAX lost 0.3 percent, 0.7 percent and 1.6 percent respectively on the week. The SMI added 0.6 percent. All recorded healthy gains in 2013 however. The FTSE was up 14.4 percent, the CAC gained 18.0 percent, the SMI added 20.2 percent and the DAX jumped 25.5 percent. Expectations are that low interest rates combined with steady growth will continue to boost the FTSE in 2014.

Latvia

Latvia joined the Eurozone as its 18th member on January 1st after more than five years since the country plunged into an acute financial crisis in the wake of the collapse of the nation's once thriving easy credit market. Reports suggest that the initial response to the changeover was rather lukewarm as the public seemed to be either indifferent or against the membership. Polls indicate that nearly 50 percent of the people opposed the move. Latvians fear a sudden uptick in prices after the adoption of euro, though the authorities have given repeated assurances that such arguments are unfounded.

Lithuania is on track to be next in adopting the currency in 2015. Like Latvia, it is eager to link itself to the West. After 2015 however, Eurozone enlargement is expected to slow. In Eastern Europe, several countries have not even taken the first step required for euro membership by entering the exchange rate mechanism, a sort of waiting room. The Czech Republic, Hungary and Poland have all pushed back their target dates for membership until near the end of the decade in the face of low public support.

Asia Pacific

Equities were mixed last week in a holiday strewn week. Investors that were back at work took profits in the first two days of trading in the New Year. Markets in Japan were closed for four of five days while others were closed for as many as three days. The weekly results were dragged down by disappointing Chinese purchasing managers’ indexes for both manufacturing and services. Yet at the same time, stock moves seemed divorced from news flows from elsewhere, which were mostly upbeat. Global manufacturing ended 2013 on a strong note as the United States, Japan and Germany all saw demand pick up.

The problem was China, where the CFLP PMI services index slipped back in December, just as manufacturing had earlier in the week. The index measuring non-manufacturing business activity, which is being given increasing focus for indications on Chinese domestic demand, posted a score of 54.6, down sharply from 56.0 in November. The headline figure for services business activity declined to 52.5 from 54.1 in the previous month, while the new orders index remained unchanged at 51.0. Earlier in the week, two measures of factory output indicated that overall expansion in China's manufacturing sector was moderating.

Chinese Premier Li Keqiang vowed to keep liquidity at a reasonable level in 2014 to ensure stability of the economy, according to a report published by Xinhua over the weekend. China will promote financial reform, helping the financial sector to better serve the real economy and aid industrial transformation and upgrading, Li said during a visit to Tianjin. He said the government will stick to the prudent monetary policy next year, keep appropriate liquidity, realize reasonable growth of credit and total social financing and keep price levels stable.

Currencies

The euro and the pound sterling weakened in thin trading as the year began as speculators booked profits on long positions after a strong 2013. However, the yen enjoyed a short bounce. Borrowing in yen to buy higher yielding assets has been a popular trade, leaving the market vulnerable to sudden, if usually brief, reversals. The U.S. dollar retreated after rising as high as ¥105.44 on Thursday, the strongest level since October 2008. The euro retreated to ¥142.10 from a peak of ¥145.12 on Thursday.

The U.S. dollar surged in the first trading day of 2014, reflecting expectations that a resurgent economy will attract investor funds from around the globe and allow the Federal Reserve to gradually withdraw monetary stimulus. Driving the dollar’s renewed strength is the anticipation that U.S. economic growth this year will outpace the recovery in Europe and elsewhere, which in turn would boost the dollar's value by attracting more investor cash to U.S. shores. As the economy heals, the Federal Reserve is expected to continue reducing its stimulus programs — a move that also helps the dollar because it reduces supply.

Many investors made similar bets at the start of 2013, only to see the currency slide against its major counterparts as the economic recovery moved in fits and starts and a 16-day government shutdown in October threatened to curb growth. But as the year drew to a close, U.S. employment and housing data began painting a rosier picture.

Selected currencies — weekly results

Indicator scoreboard

EMU

November M3 money supply was up 1.5 percent on the year while the three month moving average was up 1.7 percent. Bank lending was again weak, posting a 2.3 percent decline from November 2012 after a marginally steeper revised 2.2 percent contraction last time. Within this, borrowing by households slowed a tick to a minimal 0.1 percent annual rate with mortgage loans unchanged at 0.9 percent. Loans to non-financial corporations were off 3.9 percent after a 3.8 percent October decline, and lending to non-monetary financial intermediaries (excluding insurance companies and pension funds) was down 9.1 percent following an 8.0 percent slide at the start of the quarter.

Asia/Pacific

Japan

November unemployment rate remained at 4.0 percent for a second month. The pace of job creation from a year earlier accelerated to an increase of 740,000 from 450,000 in October, marking the 11th consecutive increase from a year ago. The number of unemployed declined 110,000 on the year for the 42nd straight monthly drop. Payroll jobs were up 230,000 from the previous month to a seasonally adjusted 63.50 million in November, marking the third consecutive increase. The adjusted number of unemployed declined 1.9 percent to 2.61 million after rising 1.1 percent in October.

November household spending edged up a less than expected 0.2 percent from a year ago. Most sub-categories were up but a decline of 0.9 percent in fuel, light & water charges and a drop of 14.2 percent in education dragged down overall spending. On the plus side, food and housing expenditures were up 1.9 percent and 3.7 percent respectively. And furniture & household expenditures gained 5.5 percent from a year ago. The impending April increase in the sales tax has consumers rushing to buy big ticket items before its introduction.

November consumer price index for all items was up 1.6 percent from a year ago. Excluding fresh food, the CPI was up 1.2 percent. Excluding both energy and fresh food, the index was up 0.5 percent. The weaker yen compared with year earlier levels pushed up import costs. Energy costs jumped 7.5 percent after increasing 7.0 percent on the year the month before. TV prices were up 0.1 percent after sinking 3.8 percent in October. Similarly, prices for electronics goods jumped 1.7 percent after sliding 0.9 percent in October. The pace of increased prices picked up as firms have been passing higher import costs of processed food and some components of energy onto consumers thanks to the weaker yen. Higher prices of overseas holiday tours continued pushing up CPI while property and casualty insurance premiums are now showing sharp annual gains after markups in the previous month.

November retail sales jumped 4.1 percent. It was the fourth monthly increase. All subcategories were up from a year ago. Auto sales jumped 13.6 percent from a year ago after increasing 14.6 percent in October and 11.1 percent in September. Fuel sales increased 6.1 percent after rising 4.4 percent in October. Retail machinery sales were up for a second month, this time by 7.8 percent after increasing 5.5 percent the month before. As for household spending, the looming April sales tax increase has sent consumers out to purchase such items as autos in advance of its implementation.

November industrial production was up a seasonally adjusted 0.1 percent and 6.4 percent on the year. Transport equipment output was up 0.7 percent on the month and was 8.4 percent higher from a year ago. Information and communication electronics equipment jumped 3.9 percent and was up 18.8 percent on the year. Chemicals (excluding drugs) were up 1.2 percent on the month and 3.1 percent on the year. Among other commodities that increased were desktop computers, midget passenger cars and semiconductor products machinery. According to the Survey of Production Forecast in Manufacturing, production is expected to increase 2.8 percent in December and increase 4.6 percent in January.

Bottom line

Little economic data were released during the two week holiday period. With investors still on vacation and markets thin, trading will begin in earnest on January 6.

The week brings a slew of economic data along with monetary policy meetings by the Bank of England and the European Central Bank.

Looking Ahead: January 6 through January 10, 2014

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