Global Markets

There were a number of factors that influenced markets last week and will no doubt have an impact going forward. They were the Russian annexation of Crimea, the People’s Bank of China’s action to widen the yuan’s daily trading range and the FOMC’s policy announcement. Despite the mid-week weakness, most equities rallied and ended positively for the week.

Russia annexed Crimea after 97 percent of the occupied state voted to join the country and secede from Ukraine. Subsequent measures enacted by the Russian parliament made it part of the country. On Friday President Vladimir Putin formally completed the annexation of Crimea, signing into law bills passed by Parliament reclaiming the contested province from Ukraine. The U.S. and EU censured Russia with a series of political and economic sanctions. The European Union and the United States have frozen assets and limited the travel of a number of close associates of Mr. Putin’s for their part in Crimea’s annexation. As he cemented Russian control of Crimea, Mr. Putin declared a temporary halt in the battle of economic and political sanctions between Moscow and the West.

The People's Bank of China widened its daily trading range with the dollar on Saturday, March 8. Now the yuan will be allowed to increase or decrease 2 percent from a daily midpoint rate that the PBoC sets each morning. Many market participants have long viewed the yuan as a one-way appreciation bet. Authorities are trying to change that by demonstrating that it is now more of a genuine market that can go up and down like any other currency. A PBoC spokesman said in a separate statement that the new flexibility would help improve efficiency and increase the decisive role of the market to allocate resources. Although widening the trading band is aimed at introducing more two way price swings into the market, the last change in April 2012 — doubling the band to 1 percent — largely failed to do so. Instead, the spot price consistently traded near its strongest permissible level after briefly heading lower following the band widening.

On Wednesday, the Federal Reserve's latest policy statement and new forecasts raised jitters about the prospect of interest rates increasing sooner than anticipated. Stocks retreated during Fed Chair Janet Yellen's post meeting press conference, although they recovered some ground in late trading. Traders said the afternoon's losses were driven mostly by fast-trading short-term investors. Stocks turned lower as the Fed's statement said officials predicted their target interest rate would be 1 percent at the end of 2015 and 2.25 percent a year later — higher than previously forecast — as they upgraded projections for gains in the labor market. However, all U.S. and European equity losses were more than recovered after investors thought more about Fed policy going forward.

Global Stock Market Recap

Europe and the UK

Equities finished the week on a positive note as traders shrugged off Federal Reserve Chair Janet Yellen’s comment that U.S. interest rates may rise as soon as next spring, a bit earlier than most economists had forecast. Traders ignored the surrounding caveats to that statement. However, equities rebounded after some upbeat U.S. data that helped ease concerns about a Fed move. On the week, the FTSE was up 0.4 percent, the CAC gained 2.8 percent, the DAX added 3.2 percent and the SMI advanced 2.2 percent.

In the UK, stocks also responded Wednesday to Chancellor of the Exchequer George Osborne’s budget with the insurance sector hit by a surprise pension reform. The Chancellor’s budget scrapped a requirement that pensions savings be used to buy an annuity. It also imposed a tax on certain betting machines. But the FTSE managed to snap a streak of three straight weekly losses as mining stocks were up on hopes that China would take more steps to stimulate its economy. Some investors are starting to buy into the sector's recent dip on speculation about new stimulus measures from China, where authorities have given indications they are considering moves to support slowing economic growth. China's health is a key factor for the FTSE given the mining sector's heavy weighting in the index. It is the fourth biggest sector, accounting for almost 9 percent of the index.

Swiss National Bank

There were no surprises from the SNB at its quarterly Monetary Policy Assessment. It reaffirmed the importance of the CHF1.20 target floor against the euro. The SNB lowered its inflation profile and seems ready to do more if inflation continues to surprise on the downside. The SNB acknowledged the slowdown in fourth quarter GDP growth, attributing it to a “decline in exports, which led to a corresponding decrease in value added in the manufacturing industry.” However the central bank expects economic activity to pick up again in the first quarter of 2014 and is expecting 2 percent growth for 2014 as a whole.

In its updated forecasts the SNB now sees even less chance of future inflation developments putting any upside pressure on interest rates. At zero percent, consumer price inflation this year is expected to be 0.2 percentage points less than anticipated in December and the 2015 projection has been revised down by the same amount to just 0.4 percent. Even in 2016 prices are seen increasing just 1.0 percent over the year. The downward adjustments were attributed by the SNB to a slightly firmer Swiss franc delaying the anticipated acceleration in prices.

In the meanwhile, the heating housing market required attention. The SNB reiterated that the Federal Council in January increased the sectoral countercyclical capital buffer (CCB) from 1 percent to 2 percent resulting in a temporary increase as of 30 June 2014, in capital requirements for mortgage loans on residential property in Switzerland.

Asia Pacific

Equities were mixed last week with only five indexes increasing on the week. Investors here waited for the Federal Reserve announcement. After retreating Thursday — their first opportunity to react — they rallied Friday, but not enough to cover losses incurred earlier in the week. Helping the indexes to recover Friday was a slew of encouraging overnight U.S. economic indicators that reinforced the view that recent economic weakness was probably due to bad weather. Investors here were soothed after Fitch Ratings said it had maintained its top credit rating on the U.S. In October, Fitch said that it would review the U.S.'s triple-A rating for a possible downgrade due to a budget impasse that it said cast doubt on the effectiveness of the U.S. government and economic policy.

The All Ordinaries edged up 0.1 percent and the Kospi was up 0.8 percent. The Shanghai Composite rallied Friday, climbing 2.7 percent — its biggest single day gain in four months. The China Securities Regulatory Commission allowed two Chinese developers to sell yuan denominated A shares in private placements, spurring speculation that the government would loosen funding restrictions for property developers and lenders to support economic growth. Chinese stocks have had a tough time so far in 2014, with a string of poor economic data helping to sour investor sentiment. Over the last couple of months, the country has seen a slowdown in economic growth, as well as softness in manufacturing and trade data. Disappointing corporate earnings from major companies was another blow for stocks in Hong Kong and Shanghai.

Among the emerging Asian economies, Thai stocks fell for four of five days as investors stayed on the defensive due to domestic political uncertainty, even though the country's Constitutional Court nullified a February 2 general election. No new election date was mentioned. The SET was down 0.9 percent on the week. Elsewhere, Jakarta's Composite dropped 3.7 percent on the week and was Southeast Asia’s worst performer. The STI was virtually unchanged on the week while the Philippines’ PSEi lost 0.8 percent on the week.

Currencies

The dollar was up against all of its major peers with the exception of the Australian dollar amid bets the Federal Reserve is moving toward increasing interest rates. The currency was trading near a five week high that it reached after Fed Chair Janet Yellen said this week borrowing costs could start rising in ‘around six months” after the Fed ends bond purchases. The less dovish than expected policy update helped to support the dollar. According to analysts, the market still has not fully priced in expectations for rate increases ahead from the Fed so there is still scope for further yield increases in the U.S., which would be supportive for the dollar going forward.

Asian currencies had their steepest weekly losses in nine months after the Federal Reserve increased its 2015 interest rate forecast and China doubled the yuan’s trading band. The Fed, while indicating this week that the target rate will stay at zero to 0.25 percent in 2014, said it may reach 1 percent by the end of 2015, higher than 0.75 percent predicted previously. The yuan completed a record five day drop after the People’s Bank of China cut the daily reference rate to the lowest level since November, after it increased the maximum limit the currency can diverge from the fixing to 2 percent from 1 percent. China’s yuan dropped amid signs of slowing growth after reports showed an unexpected slump in exports and slowing factory output. The risk of further defaults is also weighing on sentiment.

Selected currencies — weekly results

Indicator scoreboard

EMU

February harmonized index of consumer prices was up 0.3 percent on the month and 0.7 percent from a year ago. The revision down from the flash annual rate was attributable to a sharper drop in energy prices (now down 2.3 percent on the year). The lower energy prices are not reflected in the core index that excludes food, alcohol, tobacco and energy. Here the annual rate was 1.0 percent, matching its flash estimate and a couple of ticks up on its final January reading. The other core inflation measures also showed a modicum of strength with the both the excluding unprocessed food and energy and the excluding seasonal food and energy gauges a tick firmer at 1.1 percent. Among the larger four members, the yearly inflation rate dropped 0.2 percentage points to 1.0 percent in Germany and by the same amount to 0.4 percent in Italy and a minimal 0.1 percent in Spain. By contrast, the French rate rose 0.3 percentage points to 1.1 percent, but this was due at least in part to new data collection procedures. Top of the inflation ladder were Finland and Malta (both 1.6 percent) just ahead of Austria (1.5 percent). At the other end was Greece (minus 0.9 percent) where prices were lower on the year for the fourth month in a row.

Germany

March ZEW current conditions measure weighed in at a healthy 51.3, up 1.3 points from February for its fourth consecutive monthly increase and its highest level since August 2011. By contrast expectations fell 7 points to 61.5, their second monthly drop in a row and their weakest reading since November last year. Concerns about recent developments in the Crimea appear to have been the major factor here. That said, even after a cumulative decline of almost 12 points since January, expectations are still historically firm and ZEW expressed confidence that the economic upswing is not at risk.

United Kingdom

February claimant count unemployment fell 34,600 on the month following a steeper revised drop of 33,900 in January. The mid-quarter slide was the most marked since October and means that joblessness has fallen more than 96,000 over the last three months. Indeed, on this definition the number of people out of work has not risen since October 2012. As expected the unemployment rate declined for a ninth consecutive month and, at 3.5 percent, now stands at its lowest level since November 2008. The ILO data showed a 63,000 fall in joblessness over the three months to January and an unchanged 7.2 percent rate. Average earnings growth accelerated to a 1.4 percent annual rate over the November through January period, up from a minimally higher revised 1.2 percent last time. Single month pay was steady but, at a 1.7 percent yearly rate, increases the likelihood of the headline figure rising again next month. Excluding bonuses, three month wages were up 1.3 percent after a 1.0 percent increase in the fourth quarter. This was the third successive month in which regular pay rates have risen.

Asia/Pacific

Japan

February unadjusted merchandise trade gap improved to ¥800 billion after recording a record setting monthly deficit of ¥2.79 trillion a month ago. Exports were up 9.8 percent from a year ago, missing the forecast of 12.6 percent. Imports were up a higher than expected 9.0 percent. Expectations were for a modest 7.2 percent increase. On a seasonally adjusted basis, the deficit was ¥1.13 trillion. Exports were up 2.8 percent on the month while imports were down 6.0 percent. Unadjusted exports to Asia were up 12.5 percent on the year for the 12th consecutive increase while those to China jumped 27.7 percent for the 11th straight time. Exports to the EU were up 13.9 percent for the ninth month while those to the U.S. were up 5.6 percent for a 14th consecutive increase.

Americas

Canada

January manufacturing sales jumped 1.5 percent and were up a solid 5.0 percent from a year ago. Volume sales were not quite as robust with a 0.7 percent advance from their year-end level that made for a relatively modest 1.9 percent annual growth rate. Within the monthly increase in overall nominal sales, 12 of the 21 reporting industries made new headway. Primary metals (8.0 percent) enjoyed a particularly good period and there were respectable gains posted in food (2.7 percent), chemicals (2.3 percent) and computer & electronic products (11.0 percent). However, the best performer was miscellaneous manufacturing which registered a leap of 20.3 percent, easily more than reversing December's 11.8 percent slump. The main areas of weakness were transport (down 1.2 percent) and fabricated metal products (down 2.2 percent). Elsewhere in the survey the news was mixed. On a positive note, new orders were up 2.6 percent from December and backlogs were up 4.8 percent. However, inventories increased a hefty 3.6 percent which was enough to see the inventory/sales ratio climb to 1.42 months, its highest mark since April last year.

February consumer price index was up 0.8 percent on the month. However, with February 2013 having registered an unusually large 1.2 percent jump, base effects saw the annual inflation rate drop from January's 1.5 percent to 1.1 percent, its lowest level since November. Underlying prices were about as firm with the excluding food and energy index also up a monthly 0.8 percent and the BoC's gauge which excludes eight volatile items, 0.7 percent higher. Nonetheless, annual rates for both core measures were also biased down by large gains in the year ago period to leave the former running at a 1.1 percent rate and the latter at 1.2 percent. The seasonally adjusted CPI was up a much more modest 0.3 percent on the month. Excluding food and energy, prices similarly advanced 0.3 percent while the BoC index was up 0.2 percent. Within the adjusted basket the sharpest monthly increase was posted by alcoholic beverages & tobacco products (1.4 percent) ahead of transportation (0.7 percent). Other sizeable gains were recorded in recreation, education & reading (0.6 percent) and food (0.5 percent). The only decline was in clothing and footwear (down 0.6 percent).

January retail sales were up 1.3 percent and 3.7 percent from a year ago. Volumes performed even better, with real sales advancing 1.4 percent from year-end and were 3.1 percent stronger than in January 2013. Within the monthly increase in overall nominal sales, seven of the eleven sub-sectors posted gains. Motor vehicle & parts purchases expanded 2.3 percent and without which the headline increase would have been a more modest 1.0 percent. There was also a 7.0 percent bounce in building material & garden equipment as the recovery in demand here almost offset the weather-hit plunge in December. Other robust advances were posted by general merchandise stores (2.2 percent) and gasoline stations (0.9 percent). The steepest decline was in health & personal care (down 1.3 percent) where sales contracted for the first time since February 2013. The other major decline occurred in sporting goods, hobby, book & music stores (down 2.4 percent).

Bottom line

The Federal Reserve roiled financial markets after it altered its policy statement and following comments by Fed Chair Janet Yellen. Most economic data released during the week were positive, with Japan’s merchandise trade deficit a decided negative. The Swiss National Bank maintained its policy going forward. China widened the range around which its currency could trade.

Investors will hone in on economic data including March flash PMIs in Europe, China and the U.S. The UK produces key economic updates to consumer and producer prices, retail sales and offers the final revision to its fourth quarter 2013 data.

Looking Ahead: March 24 through March 28, 2014

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