Global Markets

Global equities were mixed in a holiday shortened week. Escalating tensions in Ukraine once again weighed on investor morale as did a weak Chinese flash manufacturing PMI reading for April. As would be expected as the pace of earnings season picked up, there were both positive and negative surprises for traders to consider. Merger activity in Europe and the U.S. was also added to the mix. On the week, global indexes were split between gains and losses. Gains ranged from 1.3 percent (All Ordinaries) down to 0.1 percent (IBEX). Losses ranged from 2.9 percent (Shanghai Composite) to 0.1 percent (SET, DAX and S&P).

A preliminary look at April manufacturing

Eurozone April flash composite PMI output climbed to a reading of 54.0 — its highest in nearly three years — from the final March reading of 53.1. The improvement in overall private sector activity was largely due to faster growth in services where the flash PMI was up 0.9 points from its final March reading to a 34-month peak of 53.1. Manufacturing saw a more modest 0.3 point gain. However, at 53.3, manufacturing was expanding at a marginally faster rate.

At 56.5 for the Eurozone, the output index for manufacturing hit a three month high in April. Regionally the performance gap between France and Germany remains a real worry. At 5.8 points, the French shortfall in its composite output index was more than double the final March reading. However, away from France, the rest of the single currency bloc expanded at its strongest pace since February 2011.

China reports only a flash manufacturing PMI. Manufacturing activity continued to contract for a fourth month. This time, the reading was 48.3, up from March’s final of 48.0. In the U.S., the flash manufacturing reading was 55.4, slightly lower than March’s final of 55.5.

Global Stock Market Recap

Europe and the UK

Equities gyrated between gains and losses last week ending the week on a negative note amid escalating tensions between Russia and the West over Ukraine. German shares were hit especially hard. The FTSE outperformed other indexes in this region even though it slipped on Friday from its seven week closing high Thursday despite favorable earnings reports from Pearson and William Hill. The index was up 0.9 percent for the holiday shortened week. Major UK companies receive about 0.3 percent of their sales from Eastern Europe and therefore were not as hard hit as eastward looking Germany. The CAC managed to edge up 0.3 percent while the SMI was virtually unchanged. However, the DAX slipped 0.1 percent. But the prospect of more sanctions and strained ties between Russia and the Western powers curbed appetites for shares across Europe.

Equities began the week Tuesday with a rally following a four day Easter holiday weekend. But sentiment changed as tensions ratcheted up between Ukraine and Russia. Investors pulled away from risk assets as a consequence. Gains mid-week were bolstered by a combination of better earnings reports and merger activity along with improving PMI readings in Europe.

On Thursday, European Central Bank President Mario Draghi said in a speech in Amsterdam that the ECB should reflect on the frequency of its policy meetings to keep expectations for further stimulus at bay. The Governing Council currently meets once a month to set interest rates. Mr Draghi then holds an hour long post meeting news conference where he explains the policy decision. As a frame of reference, the Federal Reserve and the Bank of Canada meet eight times a year. However, monthly meetings are held by the Bank of England and the Reserve Bank of Australia among others. The Bank of Japan meets 14 times a year.

Mr Draghi said the European Central Bank might start broad based asset purchases if the inflation outlook worsens. According to Mr Draghi, the objective here would not be to defend the current stance, but rather to increase meaningfully the degree of monetary accommodation. “The Governing Council is committed — unanimously — to using both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation.” Draghi’s comments are his most explicit so far on what would prompt action similar to the quantitative easing programs at the U.S. Federal Reserve and Bank of England. April inflation data April 30 will give further clues as to whether consumer price gains are accelerating as the economy recovers or if the euro area is teetering close to deflation. Inflation slowed to 0.5 percent in March, the weakest pace in more than four years and well below the ECB’s goal of just under 2 percent.

Mr Draghi also said publishing minutes is the “logical next step” in the ECB’s efforts to improve transparency and accountability, and this might in turn trigger a reflection on how often the bank decides monetary policy. He backed plans to publish non-attributed minutes of its Governing Council meetings, a proposal that would move the ECB closer to its peers in UK, U.S. and Japan. The ECB president said he is convinced that publishing an account of the main arguments raised in the Bank’s monthly policy meetings “would be useful” and “will on balance serve to strengthen the governing council’s collegiate decision making and communication.” The ECB has long resisted such a move, arguing that its monthly press conferences are sufficient to explain the thinking behind its monetary policy decisions. However, since last year the ECB has begun to reassess its position, with a final decision on the matter now expected for this summer.

Asia Pacific

Equities were mixed last week with holidays shortening the trading week in Australia and Hong Kong. Investors were concerned about the escalating tensions in Ukraine and weighed this against positive earnings from a number of major U.S. firms. The Nikkei retreated 0.6 percent on the week after jumping 3.3 percent the week before. The Shanghai Composite and Hang Seng declined 2.9 percent and 2.4 percent respectively on the week. The Kospi lost 1.6 percent. At the end of a week shortened in a number of markets by the Easter holidays, the best performer was in Australia. The All Ordinaries was up 1.3 percent in a three day trading week shortened by both Easter and by Anzac Day.

In addition to Ukrainian worries, the fourth monthly contraction in China’s manufacturing PMI weighed on investors. Although the reading improved slightly from the March final of 48.0 to 48.3, the index remained below the 50 breakeven point between expansion and contraction. Analysts interpreted this as an indication that there is some fairly serious weakness in China’s manufacturing sector. Premier Li Keqiang last week said China isn’t considering “strong” stimulus, and reiterated that economic growth that is a bit higher or lower than the government’s 7.5 percent target is within a reasonable range. The government lowered reserve ratios in the week at some rural lenders.

Even though the Sensex advanced 0.3 percent on the week, equities ended on a down note after the India Meteorological Department (IMD) released its first official forecast for the year, predicting that India's southwest monsoon could be below normal in 2014 because of a possible El Nino factor.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand increased its overnight cash rate (OCR) by 25 basis points to 3.0 percent. This was the second consecutive increase as the RBNZ pointed to inflation pressures generated by an expanding economy. While headline inflation is moderate — first quarter consumer prices were up 0.3 percent on the quarter and 1.5 percent from the same quarter a year ago — inflation expectations are expected to build over the next two years. It said it will assess the extent to which currency gains curb inflation but added that the high value of the New Zealand dollar is unsustainable. New Zealand was the first developed nation to start raising rates this year. The RBNZ is removing monetary stimulus at the same time as the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan pledge to hold interest rates at record lows to spur lending and stoke their own economies.

RBNZ Governor Graeme Wheeler said that it was necessary to increase interest rates toward a level at which they are no longer adding to demand. The timing and scope of future increases “will depend on economic data and our continuing assessment of emerging inflationary pressure, including the extent to which the high exchange rate leads to lower inflationary pressure.” The Bank revised up its estimate for growth in the year ended March 31 as soaring business confidence, exports and the NZ$40 billion ($34 billion) rebuild of earthquake damaged Christchurch support the recovery. There are some signs Wheeler may not have to lift rates as quickly as he indicated last month. Inflation unexpectedly slowed in the first quarter as currency strength curbed the cost of imported goods.

Currencies

The U.S. dollar was down against three of its major counterparts: the euro, yen and Swiss franc. It was unchanged against the pound sterling. However it was up against the commodity currencies of Australia and Canada. The yen advanced against the U.S. dollar as President Barack Obama discussed deepening sanctions against Russia with European leaders, underpinning safe haven demand. The dollar was down against the euro before the Federal Reserve meets on policy.

The decline of China's yuan continues. The currency has fallen almost daily for three straight months as the economy slows. This in turn is fueling fears that the currency will continue to slide. The yuan has dropped over 3.0 percent against the dollar since the end of January to a 16-month low. Beijing had originally engineered the slide to thwart short-term speculators, betting the yuan would keep going up, and to prepare the market for bigger two-way swings. But the currency's decline has persisted even as the People’s Bank of China has in recent days set a stronger morning guidance rate. That usually sets the direction for the currency, showing the strength of market forces.

While the currency decline is a boon for exporters, it also brings financial risks. This week the yuan in the onshore and offshore markets breached 6.25 a dollar, a significant psychological level where analysts estimate billions in dollars of highly leveraged derivative products known as "target redemption forwards" could turn sour as the yuan unexpectedly declines. Other casualties of the currency's fall include funds investing in so-called dim-sum bonds, or yuan denominated bonds issued outside China, which were top performers among Asian peers last year because of the currency's then resilience.

Selected currencies — weekly results

Indicator scoreboard

Germany

April Ifo overall climate index was up 0.5 points at 111.2. The current situation reading was 0.1 points firmer at 115.3 and the expectations component 0.9 points higher at 107.3. The pick-up in the headline index reversed the bulk of March's dip and puts it at its second highest level since July 2011. Sentiment has now posted modest improvements in five of the last six months. Current conditions have now strengthened for four consecutive months although outside of February (2.0 points) the increases have been only limited. Expectations in April were 1.6 points short of their January high but this is hardly surprising with developments in Ukraine highly charged. Despite the dip, the latest reading is still historically robust. Amongst the major sectors, morale was up in manufacturing, wholesale and services, essentially flat in construction and slightly weaker in retail.

United Kingdom

March retail sales were up 0.1 percent following an increase of 1.3 percent the month before. Annual growth was 4.2 percent, up from 3.3 percent last time. Excluding auto fuel purchases declined 0.4 percent from mid-quarter but the yearly increase was a solid 4.2 percent, a 0.3 percentage point increase from the February rate. Except for a 1.4 percent drop in the food sector, the headline data would have been a good deal stronger as, excluding auto fuel, non-food purchases climbed 0.9 percent on the month. Within this, clothing and footwear were particularly robust, advancing 3.1 percent. Smaller gains were posted at non-specialized stores (0.6 percent) and in household goods (0.4 percent). However, there were reversals in non-store retailing (down 2.2 percent) and in the other stores category (down 0.4 percent). Fuel was up 4.8 percent.

Asia/Pacific

Japan

March merchandise trade deficit was ¥1.446 trillion. Exports were up a much lower than expected 1.8 percent on the year while imports were up a greater than anticipated 18.1 percent. It was the 13th straight increase on the year for exports while imports were up for the 17th straight month. For the fiscal year 2013, the trade deficit was ¥13.7 trillion, a record high. On the year, exports to China were up 4.3 percent for the 12th consecutive increase while those to Asia were up 1.4 percent. Exports to the EU were 10.0 percent higher. However, exports to the U.S. were up 3.5 percent for a 15th monthly rise. On a seasonally adjusted basis, the March trade deficit was ¥1714.25 trillion.

March consumer prices were up 0.3 percent on the month and 1.6 percent from a year ago. The key core reading which excludes fresh food was also up 0.3 percent but climbed 1.3 percent on the year for a third consecutive month. Excluding both food and energy, the CPI was up 0.3 percent but only 0.7 percent on the year. Core CPI was up 0.8 percent for the fiscal year ending in March for its first increase in five years. Energy costs jumped 6.1 percent after increasing 5.8 percent in February. This emphasizes the importance of imported oil prices as a factor increasing the CPI. Among components other than energy, TV prices dropped 4.6 percent on the year after sliding 5.8 percent the month before. Electronics goods prices edged up only 0.1 percent on the year after jumping 6.3 percent.

April Tokyo CPI which includes the increase in the sales tax from 5 percent to 8 percent was up 2.0 percent on the month and 2.9 percent on the year. Core excluding fresh food was up 2.0 percent and 2.7 percent from a year earlier – the biggest jump since 1992. Tokyo’s price data provide a first look at the effects of the April 1 tax increase that is dampening consumer demand and is projected to tip the economy into a one quarter contraction. Investors are assessing prospects for extra monetary easing, with Bank of Japan Governor Haruhiko Kuroda’s board set to meet on April 30 to review policy and release updated forecasts for inflation and growth.

Australia

March quarter consumer prices were up 0.6 percent on the quarter after increasing 0.8 percent in the December 2013 quarter. On the year, the CPI was up 2.9 percent, just below the upper limit of the RBA’s inflation target range. The trimmed mean was up 0.5 percent and 2.6 percent while the weighted median was up 0.6 percent and 2.7 percent on the year. The most significant price increases on the quarter were tobacco (up 6.7 percent), automotive fuel (up 4.1 percent), secondary education (up 6.0 percent), tertiary education (up 4.3 percent), medical & hospital services (up 1.9 percent) and pharmaceutical products (up 6.1 percent). However, these increases were offset by price declines for furniture (down 4.3 percent), maintenance and repair of motor vehicles (down 3.3 percent), international holiday travel and accommodation (down 2.4 percent) and domestic holiday travel and accommodation (down 2.4 percent). The tobacco price increase was caused by the federal excise tax rise from December 2013 as well as a March 2014 biannual indexation. The increases for medical and hospital services and pharmaceutical products were a result of the cyclical reduction in the proportion of patients who qualify for subsidies under the Medicare Benefits Scheme and Pharmaceutical Benefits Scheme at the start of each calendar year.

Americas

Canada

February retail sales were up 0.5 percent on the month and 3.7 percent from a year ago. The February gain follows the weather impacted (and downwardly revised) rebound in January retail sales. However, most of the monthly gain was attributable to higher prices as volume sales were up just 0.1 percent from the start of the year. But seven of the 11 subsectors did benefit from the monthly increase in nominal demand with health & personal care (2.6 percent) in particular faring well. General merchandise (1.4 percent), clothing & clothing accessories (1.5 percent), electronics & appliances (1.3 percent) and home furnishings (2.7 percent) also increased. However motor vehicle & parts were unchanged on the month. Food & drink added 0.5 percent. The worst performer was building material & garden equipment & supplies (down 1.4 percent) ahead of miscellaneous retailers (down 0.6 percent) and gasoline (down 0.3 percent).

Bottom line

Equities were mixed last week in holiday trading. The Reserve Bank of New Zealand increased its policy interest rate for a second consecutive meeting.

The week ahead provides ample economic data for investor guidance. Both UK and U.S. preliminary estimates of gross domestic product in the first quarter will be tracked with interest as will the slew of final April manufacturing PMIs. The Bank of Japan announces its monetary policy decision as does the Federal Reserve. The U.S. employment situation will be released as well.

Looking Ahead: April 28 through May 2, 2014

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