Global Markets

Both economic and geopolitical events sent investors scurrying from risk assets to safe havens last week. European equities were particularly affected by the escalation of hostilities in Ukraine and Sunday's upcoming election in Crimea. In Asia and elsewhere, investors fled from risk. The main economic reason was a slew of weak Chinese data. Exports dropped while prices softened and retail sales and industrial output came in under analysts’ projections. While the months around the Lunar New Year inevitably impact data, these were soft across the board and highlighted apprehensions about growth in China.

Concerns regarding Ukraine escalated in the week. As for Russia itself, the drumbeat of negative economic predictions continued. Analysts say that political developments in Ukraine will result in lower investment and higher capital outflows from Russia. Put simply, locals are getting their cash out. An estimate of capital outflows since the start of the year has risen to close to $45 billion, or 60 percent more than in the first quarter of last year. Part of the concern over the Crimea referendum is that it could encourage other pro-Moscow parts of Ukraine to follow suit and potentially embolden Russia in the region. Russia launched new military exercises near its border with Ukraine on Thursday, even as both the U.S. and Europe warned that Moscow risked facing serious steps if annexation is the outcome of a referendum planned for Sunday in the Crimea.

Equities declined with losses ranging from 0.5 percent (Sensex and S&P/TSX Composite) to 6.2 percent (Nikkei).

Reserve Bank of New Zealand

In what was one of the most well signaled monetary policy moves, the Reserve Bank of New Zealand increased its overnight cash rate (OCR) by 25 basis points to 2.75 percent. Analysts expect this to be the first in an extended series of increases over the next few years to head off the inflation pressures generated by the strengthening economy and the Canterbury rebuild in the aftermath of the devastating 2010 earthquakes. A key challenge to the RBNZ will be how to increase interest rates without igniting a potentially damaging jump in the New Zealand dollar (Kiwi). New Zealand is the first developed country to raise interest rates since 2011.

In his statement, RBNZ Governor Graeme Wheeler said that the country’s expansion has considerable momentum with growth becoming more broad-based. He noted that improvements elsewhere in the major economies have required exceptional monetary policy support. The governor said it plans to remove stimulus faster than previously forecast to contain inflation: “It is necessary to raise interest rates toward a level at which they are no longer adding to demand.” The Kiwi gained after Mr Wheeler said further increases are likely in coming months and the OCR may rise by a total of 125 basis points this year. The tightening comes in an election year, with Prime Minister John Key seeking a third term in a poll set for September 20.

Soaring dairy prices, the NZ$40 billion rebuild of earthquake damaged Christchurch and the strongest immigration in 10 years are fueling growth in New Zealand. Wheeler is departing from global peers as surging house prices in the nation’s biggest city of Auckland stoke concerns of a bubble and add to inflationary pressures.

Bank of Japan

As universally expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. The BoJ's monetary policy board decided to keep quantitative and qualitative monetary easing in place to double the monetary base over a two year period. The policy was adopted last April. Its financial asset purchases have a goal of increasing the monetary base at an annual pace of about ¥60 to ¥70 trillion.

The MPB described the economy as recovering moderately. It also said that overseas economies — mainly the advanced economies — are recovering, although a lackluster performance is still seen in part. While exports have leveled off, business fixed investment has picked up on improved corporate profits. Public investment also has increased. With improvement in employment and income, housing investment has continued to increase. Also, private consumption is described as resilient. Industrial production has been increasing at a somewhat accelerated pace.

The BoJ reiterated its inflation target of 2 percent but sees a shortfall. It projects the CPI to be about 1.25 percent for some time excluding the direct effects of the consumption tax which will increase in April from 5 percent to 8 percent.

Global Stock Market Recap

Europe and the UK

Equities declined beset by concerns that the Ukrainian crisis will intensify this weekend when Crimea will vote on whether to join Russia Sunday. Most observers of the region say that Crimea will almost certainly decide to join Russia, triggering possible sanctions against the Kremlin by the U.S. and Eurozone. Investors were nervous ahead of the referendum in Ukraine as its expected outcome is likely to create further instability in the region and markets. Moscow said it would veto a U.S. drafted UN resolution to declare the Crimean referendum illegal. Meanwhile, it was shipping more troops and armor into Crimea and repeating its threat to invade other parts of Ukraine. The Group of Seven nations said that they will not recognize the result of Crimea’s referendum. The U.S., Canada, France, Germany, Italy, the UK and Japan said they would take further action if Russia annexes Crimea following the plebiscite.

Germany, which has strong trade links with Russia and Eastern Europe and is a large consumer of Russian gas, has been hit especially hard. Markets have grown increasingly nervous ahead of a referendum on Sunday over the future of Crimea. German Chancellor Angela Merkel on Thursday said that the European Union was ready to impose sanctions on Russia if it does not change course in Ukraine. Even so, the crisis in Ukraine has flared up at a time when many analysts are revising down their targets for European equities after a lackluster earnings season.

Concerns about China also added to investors’ worries after data showed its economy slowed markedly in the first two months of the year. Growth in investment, retail sales and factory output all dropped to multi-year lows.

The FTSE lost 2.8 percent, the DAX declined 3.1 percent, the SMI slid 3.2 percent and the CAC dropped 3.4 percent. The indexes have lost all of their 2014 gains and then some. A stronger euro also spooked investors as it continued to climb against the U.S. dollar.

Asia Pacific

Equities tumbled last week except in Indonesia (up 4.1 percent) and Thailand (up 1.3 percent). Losses in the major indexes included 6.2 percent for the Nikkei, 5.0 percent for the Hang Seng and 2.8 percent for the Kospi. All three are down for the year. Most major indexes in the region were down four of five days during the week.

The rout started Monday as reports from China showed a slowdown in the retail, manufacturing, housing and investment sectors, raising concerns over the health of the economy. Jitters have also risen over debt laden companies with fears that another company could fail to pay off its debts just a week after the country experienced the first default in its corporate debt market. This damaged sentiment toward Chinese companies listed in Hong Kong, with the Hang Seng China Enterprises Index narrowly missing entering a bear market which is defined as a fall of 20 percent or more from a recent peak.

Worries over slowing growth and recent corporate bond defaults in China and reports that Russia continues to escalate the situation in Ukraine by ordering new military exercises in the Crimea region of Ukraine dented investors’ risk appetite. Investors sought refuge in safe haven assets as they awaited the outcome of Sunday's Crimean referendum on joining the Russian Federation and also the FOMC meeting next week.

In Japan, a firmer yen thanks to risk avoidance sent equities — and especially those of exporters — lower. The Shanghai Composite lost 2.6 percent to hover near two month lows, dragged down by financials after the People’s Bank of China moved to tighten restrictions on certain types of mobile payments. In Australia, equities retreated to end at one month lows. Stocks here were dragged down by miners as industrial metal prices extended losses. The Kospi dropped to five week lows amid selling by foreign funds. Overseas investors offloaded shares worth a net 474.2 billion won, while local institutions and retail investors remained net buyers.

China’s overseas shipments unexpectedly declined 18.1 percent in February from a year earlier, compared with analysts’ median estimate for a 10.6 percent increase. Distortions from the Lunar New Year holiday make forecasting more difficult. Producer prices were down 2 percent, the most since July, extending the longest decline since 1999.

Currencies

The euro, yen and Swiss franc were up against the U.S. dollar last week. The dollar, however, advanced against the pound and Australian dollar while it was unchanged against the Canadian dollar. A flight to safety to the yen, Swiss franc and euro sent the dollar lower as investors watched the events in Ukraine with increasing unease.

One of the reasons for the Nikkei's steep decline last week was that the latest developments in Ukraine sent the safe haven yen soaring against both the dollar and the euro. The yen climbed for a fifth day against the dollar as investors sought haven assets before this weekend’s referendum that may lead to Crimea’s secession from Ukraine. The dollar remained lower against the yen on Friday after producer prices slipped 0.1 percent after a 0.2 percent increase the prior month.

Selected currencies — weekly results

Indicator scoreboard

EMU

January industrial production was down 0.2 percent but gained 2.1 percent from a year ago. Excluding construction, output was down 0.1 percent and up 1.6 percent on the year. December's decline was reduced by 0.3 percentage points to 0.4 percent and, with the benefit of positive base effects, annual workday adjusted growth accelerated from 1.2 percent to 2.1 percent. The poor start to 2014 was in part attributable to a 2.5 percent drop in energy production, itself the result of the unseasonably warm weather. Intermediates slipped 0.1 percent and durable consumer goods were off 0.6 percent. Elsewhere the news was rather better with capital goods up a solid 0.9 percent and consumer nondurables 0.4 percent firmer. Among the four larger states, output was down 0.3 percent on the month in France but was 0.4 percent higher in Germany, 1.0 percent in Italy and 0.2 percent in Spain.

Germany

January seasonally adjusted merchandise trade surplus narrowed slightly from a smaller revised €18.3 billion in December to €17.2 billion. Unadjusted, the black ink stood at €15.0 billion after €13.9 billion at year-end. Both sides of the seasonally adjusted balance sheet showed solid growth with a 2.2 percent monthly increase in exports easily eclipsed by a 4.2 percent surge in imports. Exports, which stand at a record high, have now risen in five of the last six months while the increase in imports was the first of any size since October. Compared with January 2013, exports rose 2.9 percent and imports 1.5 percent and within these figures sales to and purchases from the other EMU states were up 3.2 percent and 4.0 percent respectively.

France

January industrial production (excluding construction) was down 0.2 percent on the month following a steeper revised 0.6 percent decline in December to reduce annual growth from 0.3 percent to a decline of 0.1 percent, its first negative reading since October last year. However, in line with the December data, headline weakness masked a rather stronger underlying performance. Manufacturing output was up 0.7 percent on the month and now stands 1.4 percent higher on the year. Within manufacturing, food & agriculture were up a monthly 1.8 percent while transport equipment advanced 4.7 percent and the other manufactured products category 0.3 percent. There was also a 12.6 percent surge in the erratic coke & refined petroleum products subsector. Electrical & electronic equipment contracted 2.7 percent but the main damage to overall production was caused by a 4.4 percent plunge in energy & extracted goods, itself reflecting unusually warm weather.

Italy

January industrial production increased 1.4 percent — its best performance since August 2011. That boosted annual production growth from minus 0.7 percent to 1.4 percent. This was only its second positive reading in more than two years. The underlying picture was even brighter than the headline data. The monthly increase in output was restrained by a 2.6 percent decline in the energy sector. More significantly, production of consumer goods was up 2.4 percent, roughly evenly split between durables and nondurables, while capital goods posted a still stronger 3.9 percent surge. Intermediates (0.4 percent) were less robust but relative softness here only came after the sector's outperformance in recent months.

United Kingdom

January industrial production edged up 0.1 percent on the month to boost annual growth from December's revised 1.9 percent to 2.9 percent. Manufacturing output was up a monthly 0.4 percent and was 3.3 percent higher on the year. The monthly advance in manufacturing reflected positive growth in nine of the 13 major subsectors. The largest contribution was made by rubber, plastic products & other non-metallic mineral products where output rose 6.2 percent and added 0.5 percentage points to the overall increase in production. Machinery & equipment not elsewhere classified was close behind with a 5.2 percent gain, somewhat ahead of other manufacturing & repair (3.2 percent). The main areas of weakness were basic pharmaceutical products & pharmaceutical preparations (down 13.9 percent) and coke & refined petroleum products (down 7.3 percent). Early maintenance work at some refineries appeared to be a factor here. Total industrial production was boosted further by a 0.8 percent monthly increase in electricity, gas, steam & air conditioning activity and a 1.9 percent bounce in water supply, sewerage & waste management output. However, mining & quarrying slumped 3.4 percent, at least in part reflecting adverse weather effects.

January merchandise trade balance deteriorated to Stg9.8 billion the deficit was in excess of Stg2 billion above a marginally smaller revised December shortfall and the largest since September 2013. The increase in the red ink reflected a 4.0 percent monthly decline in exports compounded by a 3.4 percent increase in imports, the latter driven by a 57.2 percent surge in erratic items excluding which imports were up 1.7 percent. As a result, excluding oil and other erratics the deficit was Stg8.3 billion, up only Stg0.6 billion from last time. The bi-lateral deficit with the other EU members widened by Stg0.5 billion to Stg5.8 billion as exports slumped 3.7 percent on the month while imports held steady. With the rest of the world the shortfall was up Stg1.7 billion to Stg4.0 billion, reflecting a 4.3 percent reversal in exports and a 7.5 percent jump in imports.

Asia/Pacific

Japan

Fourth quarter GDP was revised down to an increase of 0.2 percent on the quarter from the initial estimate of 0.3 percent. The annualized rate was revised down to 0.7 percent from 1.0 percent. Consumer spending, the main driver of growth, was revised down to 0.4 percent on the quarter from an increase of 0.5 percent. Private consumption contributed just 0.2 percentage points, down from the initial 0.3 percentage points. Equipment investment was up 0.8 percent on the quarter, down from the original 1.3 percent. Its contribution to fourth quarter GDP was revised down to 0.1 percentage point from 0.2 percentage points. These data are sure to disappoint. The 0.7 percent expansion is the weakest growth since December 2012, the month Prime Minister Shinzo Abe took office and kick-started his campaign to revive the economy by convincing the Bank of Japan to aggressively expand the money supply. The yen has weakened substantially since the BoJ began its stimulus last April. But the softer yen is not helping GDP growth, however, because Japanese companies have not increased their exports. At the same time, imports are growing due to the increasing local currency cost of buying energy from overseas.

February corporate goods price index was down 0.2 percent on the month and up 1.8 percent from a year ago. Expectations were for a 2.2 percent annual increase. The February annual change indicates that inflation has declined from the previous seven months when the CGPI  annual change was above the 2 percent mark and as high as 2.6 percent in November and 2.5 percent in December and January. Contributions to the weaker price increase in February primarily came from petroleum & coal and nonferrous metals. Petroleum & coal prices were up only 5.8 percent from last February after climbing 10.5 percent in January. Prices eased for nonferrous metals as well – they were down 0.2 percent on the year after increasing 3.1 percent in January.

January tertiary industry activity index rebounded 0.9 percent on the month and was up 2.0 percent from a year ago. In December, the index slid 0.5 percent and was up only 0.3 percent on the year. The tertiary index continues to bounce around from month to month, giving little indication of an upward trend for this sector of the economy. Among the industries that contributed to the increase were wholesale & retail trade, finance & insurance, miscellaneous services (except government services etc.), living-related & personal services & amusement services, information & communications, accommodations, eating & drinking services, transport & postal activities and learning support. Among the industries that declined were medical, health care & welfare, electricity, gas, heat supply & water, scientific research, professional & technical services and compound services.

January seasonally adjusted private machinery orders excluding volatile items such as ones for ships and those from electric power companies rebounded a greater than anticipated 13.4 percent after plunging 17.3 percent in December 2013. On the year orders were up 26.6 percent after increasing just 3.3 percent the month before. Non-manufacturing orders excluding volatile ones were up 12.1 percent after sinking 17.2 percent in December. Orders continue to bounce around wildly despite excluding the exceptionally volatile orders. But the Japanese government continues to say that machine orders are on an uptrend. The total value of machinery orders received by 280 manufacturers operating in Japan increased 12.6 percent from the previous month. Private sector orders were up a monthly 18.3 percent. Private sector orders increased 13.4 percent after declining in both November and December 2013. Government orders slumped 13.9 percent. Overseas orders were up 2.7 percent after rising 8.6 percent in December.

Australia

February employment jumped a much greater than estimated 47,300 jobs. The unemployment rate was 6.0 percent as expected. The number of people employed increased to 11,530,800. The increase was in full time which was up 80,500 to 8,049,900. This increase was offset by a decline in part time employment which was down 33,300 to 3,480,900. The increase in total employment was driven by increases in male and female full-time employment and male part-time employment. The participation rate climbed to 64.8 from 64.6 the month before. Despite the increase in employment, the number of unemployed increased by 9,800 to 742,200 in February. The seasonally adjusted underemployment rate was 7.4 percent in February 2014. Combined with the unemployment rate of 6.0 percent, the latest seasonally adjusted estimate of total labour force underutilization was 13.5 percent, based on unrounded estimates.

China

February merchandise trade deficit was $22.96 billion. Exports missed expectations sharply, dropping 18.1 percent for the biggest percentage drop since the decline of 23.4 percent in August 2009. Imports were up 10.1 percent on the year. Iron ore imports sank to 61 million tons in February, down sharply from January's 86 million tons. Data covering the first two months of the year combined painted only a slightly healthier picture, with exports down 1.6 percent on the year and imports up 10 percent. This resulted in a trade surplus of $8.89 billion, down 79.1 percent on the year. The General Administration of Customs said the Chinese New Year holiday caused sharp fluctuations in foreign trade growth and inflated the trade deficit because Chinese companies typically front-load exports before the holiday. The sharp fall in the value of the yuan in February also appears to have hurt the export numbers and to the benefit of the import numbers. Exports to the U.S. dropped 11.3 percent after increasing 10.7 percent in January when compared with a year ago. Exports to the EU dropped 14.4 percent after sinking 27.1 percent in January. Exports to Japan were down 11.0 percent after increasing 15.0 percent the month before.

February consumer price index was up 2.0 percent on the year after increasing 2.5 percent in January. On the month, the CPI was 0.5 percent higher. While providing good news for consumers, the data suggest the economy is losing steam and prompted some analysts to call for government support with stepped-up spending and monetary easing. The urban CPI was up 2.1 percent after 2.6 percent while the rural CPI was up 1.7 percent after 2.2 percent last time. Food prices eased to an increase of 2.7 percent from 3.7 percent in January while non-food prices eased to 1.6 percent from 1.9 percent. Among the subcategories, only prices for clothing increased more than in January. Clothing prices were up 2.2 percent on the year after 1.9 percent in January. Housing prices were unchanged for a third month and were up 2.8 percent on the year. Recreation and education prices slid to an increase of 2.1 percent from 3.3 percent last time.

February producer price index dropped 2.0 percent from a year ago after declining 1.6 percent in January. On the month, the index was down 0.2 percent after slipping 0.1 percent the month before. Analysts say part of the price decline in the manufacturing sector is a result of cheaper raw materials prices on global markets, which companies pass on to their customers. But it may also indicate weak demand in China's domestic market. Among the subcategories, only prices for clothing & related products increased. They were up 0.8 percent after increasing 0.7 percent in January from a year ago. Production materials were down 2.5 percent after sliding 2.0 percent the month before while consumer goods were down 0.3 percent, unchanged from January. However, ferrous metals dropped 4.2 percent after 2.9 percent while non-ferrous metals prices dropped 6.9 percent after declining 6.0 percent the month before.

Industrial output growth cooled more than estimated in January and February, signaling an economic slowdown that makes the government’s 2014 expansion target harder to reach. January/February industrial production was up 8.6 percent on the year after increasing 9.7 percent in December. This was below expectations for a 9.5 percent increase and the weakest start to a year since 2009. Output was up 0.61 percent on the month after 0.64 percent in December. The National Bureau of Statistics of China did not release a breakdown between January and February. Motor vehicle output, which had been running in the mid-20 percent range for October, November and December was up only 12.5 percent from a year ago. Growth also slowed for communications, power & thermal, electricity, steel products and cement among others. However, non-metal output along with machinery and general equipment output was up from December.

January/February retail sales advanced 11.8 percent from a year ago, the slowest pace for the period since 2004. Sales were up 0.71 percent on the month after increasing 0.93 percent in December. Growth in both urban and rural retail sales eased. Urban retail sales were up 11.7 percent after increasing 13.4 percent in December and 13.6 percent in November. Rural sales were up 12.8 percent after increasing 14.8 percent the two preceding months. All major sales categories were weaker in January and February. Auto sales were up 11.5 percent after increasing 13.4 percent in December. Furniture sales eased from 20.1 percent in December to 11.8 percent. Grain and food oil sales eased to 10.1 percent from sales in the upper 14 percent range for the three preceding months. Communication equipment sales increased 12.9 percent after sales increases that ranged from 21.8 percent in December and 39.8 percent in November.

Bottom line

The Reserve Bank of New Zealand increased its policy interest rate while for the Bank of Japan, no changes to policy were made. Chinese data disappointed with prices easing while other major indicators were weaker than expected. Investors sought safe harbors, avoiding risk as the tensions in Ukraine continued to rise.

The Federal Reserve announces its policy decision on Wednesday. Elsewhere, all eyes will be on the developments in Ukraine.

Looking Ahead: March 17 through March 21, 2014

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