Global Markets

Equity indexes mostly gained in 2014, the exceptions being the Kospi, KLCI, FTSE and CAC. The largest gains were in the Asia Pacific region with the Shanghai Composite soaring 52.9 percent, the Sensex adding 22.9 percent and the PSEi and Jakarta Composite increasing 22.8 percent and 22.3 percent respectively.

The returns were not as positive for the fourth quarter and the month of December however. Ten indexes retreated on the quarter with losses ranging from 9.0 percent (MIB) to 0.9 percent (FTSE). Gains ranged from 1.7 percent (All Ordinaries, Jakarta Composite and the SMI) to 36.8 percent (Shanghai Composite). December was still worse with only six indexes advancing on the month. Investors sold off energy stocks as crude oil prices continued to decline. Uncertainties surrounding the political situation in Greece also made investors wary.

Monetary policy continues to be the focus of investors. While the U.S. looks to tighten in 2015, the Eurozone appears to be going in the opposite direction and the Bank of Japan continues its ultra easy policies. The Bank of England, which was expected to increase its Bank Rate in 2015, now has analysts wondering if it will be put off to 2016 given some recent weak economic data.

Manufacturing PMIs

Global manufacturing growth continued to moderate at the end of 2014, with production and new orders both rising at the slowest pace in almost a year-and-a-half. December's reading was 51.6, down from 51.8 in November and its lowest since August 2013. Global manufacturing production rose for the 26th successive month.

North America remained the prime driver of the expansion, as growth stayed relatively muted in both the Eurozone and Asia. There were also signs of further slowing in North America, however, as rates of output expansion eased in both the U.S. (11-month low) and Canada (three-month low). Among the Asian manufacturing economies, Indonesia and South Korea reported contractions in production, while China stagnated. India continued to perform strongly, with growth hitting a two year peak. A modest expansion was also seen in Japan.

Eurozone manufacturing activity was a little weaker than originally thought in December. At 50.6, the final PMI was 0.2 points short of its flash estimate but still 0.5 points above its final November reading and above the 50 growth threshold. Solid growth in Ireland, Spain and the Netherlands, alongside mild expansions in Germany, Austria and Greece were partly offset by accelerated rates of contraction in France and Italy. Regionally, Ireland (56.9) was comfortably the best performer ahead of Spain (53.8) and the Netherlands (53.5). Germany (51.2) returned to (sluggish) growth but the other countries all saw declines in activity, notably in France (47.5) and Italy (48.4).

Global Stock Market Recap

Europe and the UK

Equities were down on the week and in December and continued their lackluster performance into 2015. Friday's comments from European Central Bank President Mario Draghi hinting at full scale quantitative easing failed to inspire much buying interest after Eurozone manufacturing activity grew at a slower pace in December than previously estimated.

Mr Draghi said that the risk of deflation in the euro area has risen over the months and the ECB is preparing to react to such a threat, if necessary. In an interview with German financial daily Handelsblatt, published Friday, Draghi said, "The risk that we do not fulfill our mandate of price stability is higher than six months ago." As a reminder, the ECB's meeting schedule has been changed — rather than monthly meetings, the governing council will meet eight times a year. The first meeting of 2015 is January 22. Southern European stock markets rallied after Mr Draghi's remarks, outperforming other markets in the region, as expectations grew that the European Central Bank would take more steps to boost the Eurozone's economy. Investors have speculated that quantitative easing would have the strongest effect on the Eurozone's weakest economies, namely Greece, Spain, Portugal and Italy.

In the fourth quarter, four of seven indexes retreated — the FTSE (down 0.9 percent), CAC (down 3.2 percent), MIB (down 9.0 percent) and IBEX (down 5.0 percent). The FTSE which is loaded with energy stocks declined along with crude prices. For the year, the FTSE was down 2.7 percent — all lost in the fourth quarter. The CAC retreated 0.5 percent.

The OMX and SMI were the best regional performers in 2014. The former was up 9.9 percent and the latter, 9.5 percent. While both indexes also advanced in the fourth quarter, the OMX edged up 0.2 percent in December while the SMI slid 1.8 percent.

Asia Pacific

Most equity indexes advanced on the year with only the Kospi (down 4.8 percent) and KLCI (down 5.7 percent) retreating. Annual gains were led by the Shanghai Composite (up 52.9 percent) and the Sensex (up 29.9 percent). In contrast, the Hang Seng added only 1.3 percent, significantly underperforming its mainland counterpart. The PSEi and Jakarta Composite added 22.8 percent and 22.3 percent respectively.

The Kospi's decline came in the fourth quarter when the index lost 5.2 percent. However the Nikkei gained 7.9 percent to lift the index into positive territory for the year. The same was true for the All Ordinaries. It was up 1.7 percent in the fourth quarter but was only 0.7 percent higher for the year.

Five of 12 indexes advanced in December — the Shanghai Composite soared 20.6 percent with the four remaining indexes adding from 0.4 percent (STI) to 1.7 percent (All Ordinaries). The Chinese market had been rising steadily for a number of months, turning around years of disappointing performance on the broader market. But the buying of banks and brokerages went into overdrive when the People's Bank of China made a surprise cut on November 21. After that rate cut, the PBoC relaxed rules to boost lending. Beijing relaxed how banks calculate their loan-to-deposit ratio. By allowing banks to add to their deposits the cash they hold from nonbank financial companies, lenders will be free to issue more loans.

China's CFLP manufacturing index slipped to 50.1 in December from 50.3 a month earlier for the lowest reading since June 2013. The HSBC Markit manufacturing PMI indicated contraction with a reading of 49.6, down from a breakeven 50 in November. The readings put into focus expectations that the country may miss its 2014 economic growth target of 7.5 percent. Chinese growth figures for 2014 are scheduled to be released later this month.

The Sensex posted the best annual performance in five years in 2014.Investors poured billions of dollars into Indian stocks on hopes that the country's new government led by Prime Minister Narendra Modi will speed up policy changes to boost the economy. Data from the country's market regulator show foreign investors bought $16 billion worth of Indian shares in 2014. India's government expects the economy to grow 5.5 percent in the year through March, recovering significantly from the below 5 percent expansion in the previous two years. Besides the optimism generated by Mr Modi's promise to overhaul the economy, a sharp drop in global crude oil prices has also helped cool inflation and improve growth prospects.

Currencies

The U.S. dollar started 2015 strongly, with an index tracking its value against a basket run of other currencies surging to a nearly nine year high Friday, spurred by expectations that the Federal Reserve will raise interest rates this year. Accentuating the gap between the stance of the Fed and that of other major central banks, European Central Bank President Mario Draghi told German daily newspaper Handelsblatt in an interview published Friday that interest rates in the currency bloc are set to stay lower for longer. Mr. Draghi also said preparations are being made to "alter the volume, tempo and content of [ECB] measures early in 2015, if needed, to respond to a period of inflation that is too low," fanning speculation that a sovereign bond buying program could be implemented sooner rather than later.

The euro weakened on the comments, but strategists said that the move was more a reflection of the broad rally in the U.S. dollar, spurred by the strength of recent U.S. economic data, which in turn is fuelling expectations for an imminent rate increase. In holiday thinned European trade following Thursday's New Year's Day holiday, the ICE U.S. dollar index climbed to 91, its highest level since March 2006. The divergence expected between European and U.S. monetary policy in 2015 dominated currency markets' thinking last year, and Draghi's signal that the ECB was preparing for more action added to expectations that it will step in soon.

Elsewhere in currency markets, the British pound sterling hit its lowest level against the U.S. currency since August 2013 at just under $1.54, following some lackluster UK manufacturing data.

Selected currencies — weekly results

Indicator scoreboard

EMU

November M3 climbed to 3.1 percent on the year, up 0.6 percentage points from its October level and above 3 percent for the first time since April 2013. As a result, the 3-month moving average picked up from 2.3 percent to 2.7 percent, its highest mark since May 2013. Private sector borrowing improved to a minus 0.9 percent yearly rate from minus 1.1 percent last time. However, borrowing by households was unchanged at minus 0.4 percent and similarly, a 0.2 percent contraction in lending for house purchase matched October. Growth of loans to non-financial corporations was minus 1.6 percent or 0.2 percentage points up from last time but the main boost to overall lending came from non-monetary financial intermediaries (excluding insurance companies and pension funds) where the annual rate accelerated a full percentage point to minus 1.5 percent.

France

Third quarter gross domestic product was up an unrevised 0.3 percent on the quarter and was 0.4 percent firmer on the year, also matching its earlier estimate. Revisions among the GDP expenditure components were small but saw household consumption up a slightly stronger 0.3 percent. Government consumption was 0.6 percent higher after a 0.8 percent increase in the flash report. Gross fixed capital formation was unrevised and so still shows a 0.6 percent drop, its third successive quarterly contraction. Inventory accumulation added 0.3 percentage points to the quarterly change in total output having subtracted 0.1 percentage points last time. Excluding stocks, overall domestic demand added 0.2 percentage points. Exports increased 0.5 percent from the second quarter, less than half the 1.3 percent rate recorded by imports to leave net exports subtracting 0.2 percentage points from quarterly growth.

United Kingdom

Third quarter real GDP expanded at an unrevised 0.7 percent quarterly rate. However, with the second quarter gain revised down a tick to 0.8 percent, the yearly rise in total output was reduced to 2.6 percent, matching its downwardly revised pace of the previous period. Despite the absence of adjustments to the quarterly change in total output there were some modifications to the GDP expenditure components. Household spending was up a marginally firmer revised 0.9 percent but fixed investment growth was pared back to just 0.1 percent (business down 1.4 percent). Government spending was trimmed to a 0.3 percent rate but with exports revised up sharply to 0.6 percent and imports fractionally softer at 1.3 percent, the contribution of net exports was boosted by some 0.3 percentage points to minus 0.2 percentage points.

Asia/Pacific

Japan

Consumer prices continued to increase less in November. This promises to make the Bank of Japan unhappy that its quantitative easing is not having the impact it had hoped for. The latest CPI figures can only add to the BoJ's concerns, all the more so with oil prices continuing to decline. The CPI was down 0.4 percent on the month and was up 2.4 percent on the year. Core CPI excluding fresh food was down 0.2 percent and up 2.7 percent. Since increasing 3.4 percent on the year in both May and June, the annual increase of core has steadily deteriorated. Excluding the sales tax increase, the CPI was up only 0.7 percent, significantly less than the 1.3 percent increase recorded in March. Excluding both energy and fresh food, the CPI was down 0.2 percent and 2.1 percent on the year.

November unemployment was unchanged at 3.5 percent for a second month. Employment was also unchanged from the previous year. The labour force participation rate was down 0.3 percent to 59.4 percent while the employment rate was unchanged at 57.5 percent. The jobs to applicants ratio was up 0.02 points to 1.12, meaning there are 112 jobs available for 100 job seekers, a fresh 22 year high.

November household spending declined for the eighth consecutive month, this time down 2.5 percent from a year ago after declining 4.0 percent in October. Spending on housing plummeted 20.3 percent. Furniture & household utensils slid 4.5 percent while spending on clothing & footwear retreated 0.7 percent. However, spending on medical care and transportation & communication both were up 1.8 percent from a year ago. Education was up 6.9 percent.

Industrial production was down 0.6 percent from the previous month — analysts expected output to increase 0.8 percent. It was the first monthly decline since August. On the year, output was down 1.7 percent. The annual change has been negative since July. General purpose, production and business oriented machinery fell 3.5 percent, electrical machinery was down 2.3 percent and fabricated metals were down 3.7 percent on the month. According to the METI survey, December output is expected to rebound 3.2 percent and add 5.7 percent in January. General purpose, production & business oriented machinery, electrical machinery and information & communication electronics equipment are expected to contribute to the December increase. In January, general purpose, production & business oriented machinery, transport equipment and Information & communication electronics equipment are expected to add to the monthly increase.

November retail sales edged 0.4 percent higher from a year ago. Expectations were for an increase of 1.2 percent. Motor vehicle sales slumped 5.5 percent after sliding 1.5 percent in October. Machinery & equipment sales continued to decline, this time by 1.3 percent. Machinery & equipment has declined every month since the sales tax increase went into effect in April. Fuel sales were down 5.0 percent, reflecting in part the decline in crude.

Bottom line

Equities were mixed last week in light volume surrounding the Christmas and New Year's holidays. Most indexes retreated in December but were mixed last week with little new economic information to propel them either up or down. The U.S. dollar continued to rally against its major counterparts on expectations of an interest rate increase by the Federal Reserve. Lithuania became 19^th member of the European Monetary Union on January 1, 2015.

Trading in the New Year will get a late start in many markets which were closed on January 2nd including those in China, Japan, New Zealand, the Philippines, Taiwan and Thailand. Among the many economic indicators to be released during the week is the flash December harmonized index of consumer prices which will be watched closely in light of recent remarks by ECB President Draghi concerning further stimulus. Forecasts at this writing are for a zero rate on the year, down from 0.3 percent in November. Among other indicators that will be watched are the U.S. December employment situation report and Chinese merchandise trade and inflation data.

Looking Ahead: January 5 through January 9, 2015

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