Global Markets

Most global equity indexes advanced last week despite investors' concerns regarding war in Ukraine and debt uncertainty for Greece.

After 16 hours of talks in the Belarus capital of Minsk, world leaders agreed to end the turmoil in eastern Ukraine with a ceasefire beginning February 15. The deal also involves a withdrawal of heavy weapons from the front line.

An emergency meeting between Greece and its European ended without agreement late Wednesday as both sides refused to step back from the brink and seek a compromise to avoid Greece's exit from the Eurozone. The current bailout is due to expire on February 28 unless Athens requests an extension. According to Eurogroup President Jeroen Dijsselbloem, "We had an intense discussion and constructive, covering a lot of ground, also making progress, but not enough progress at this point to come to joint conclusions." Further he said that talks on Greece would continue. Eurozone finance ministers will gather again on February 16.

Riksbank

Sweden's Riksbank cut its main interest rate into negative territory for the first time and announced a bond buying program, as it joined a widening group of central banks trying unconventional measures to battle low inflation. The Riksbank, the world's oldest central bank, lowered its repurchase rate — the rate it charges banks to borrow money from it overnight against collateral — to minus 0.1 percent from zero and said it would buy government bonds worth 10 billion Swedish kronor ($1.2 billion). The repo (repurchase) rate had stood at zero since October 2014. According to the bank, "these measures and the readiness to do more at short notice underline that the Riksbank is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation." The Riksbank has an inflation target of 2.0 percent.

In response to the move, the Swedish krona weakened against the euro. Analysts were initially underwhelmed by the scale of the bond buying program but noted the Riksbank's comment that it is ready to do more in between scheduled meetings.

In addition to cutting the repo rate, the central bank reintroduced rates for what it calls its fine-tuning operations at 0.1 percentage point either side of the repo rate. The lower rate, at minus 0.2 percent, functions like a deposit rate with the central bank, while the higher rate, at zero, functions like a lending rate. Having to pay a deposit rate equivalent of 0.2 percent discourages commercial banks from parking money with the Riksbank.

In cutting rates, Sweden joins the European Central Bank and Swiss National Bank which have eased policy recently in an attempt to push inflation closer to target. Denmark's central bank does not have an inflation target but has been forced to slash rates to keep its currency peg to the euro. The SNB and the Danes both have deposit rates of minus 0.75 percent and the ECB has announced a massive expansion of its bond buying program.

Global Stock Market Recap

Europe and the UK

Equities advanced last week thanks to investor optimism that ongoing Greek debt negotiations will eventually result in a new agreement. A better than expected fourth quarter Eurozone GDP report also boosted morale. Eurozone economic growth picked up in the fourth quarter suggesting that lower oil prices and a weak euro boosted demand and in turn underpinned activity. However, the overall expansion in the Eurozone was driven mainly by Germany. The FTSE was up 0.3 percent, the CAC gained 1.5 percent, the DAX added 1.1 percent and the SMI was 0.7 percent higher on the week. In intraday trading Friday, the DAX vaulted over 11,000 but closed below that mark.

Greece and its international creditors reportedly held talks Friday on reforms needed to keep the country financed. The talks are said to increase the possibility of reaching an interim compromise deal at another Eurozone finance ministers meeting on Monday. After effectively shutting off Greek banks from one key channel of financing last week, the European Central Bank has reportedly raised its emergency liquidity assistance to Greek banks.

Bank of England's Quarterly Inflation Report

The forecast in the Bank of England's new Quarterly Inflation Report (QIR) calls for inflation to decline to an average level of just above zero next quarter before (given current market interest rates) rising to 1.96 percent in two years' time and to 2.15 percent by early 2018. However, while the new inflation forecasts hint that there may be some upside risks to interest rates further out, it is worth noting the generally dovish tone of BoE Governor Mark Carney's letter to the Chancellor which explains why inflation is currently beneath its 1 percent lower target limit. In the letter, the Governor somewhat surprisingly reneges on the Bank's previous assertion that official borrowing costs could not be cut any further for fear of damaging the workings of UK financial markets. Apparently, such risks are no longer viewed so significant. The letter points out that the Bank is prepared to cut the Bank Rate (0.5 percent) and increase QE (£375 billion) should the threat of deflation become real.

The BoE's new economic forecasts suggest that without the slide in oil prices, monetary policy might be tightened rather sooner than anticipated in the markets. Expectations for real GDP growth have been revised up from the November QIR. The ILO unemployment rate is seen falling to 5.5 percent in the third quarter and to 5.0 percent — the Bank's assumed long-term equilibrium level — by the end of the forecast period.

Asia Pacific

Despite worries regarding growth in China and the situations in Greece and Ukraine, most indexes advanced last week. The Swedish Riksbank's surprise monetary policy move also reverberated through the markets. The Nikkei continued to gyrate inversely to the value of the yen.

The All Ordinaries advanced for a fourth consecutive week even though it retreated four of five days thanks to a rebound in commodity prices and several strong earnings reports in the mining sector. The index was up 1.1 percent on the week.

The Nikkei was 1.5 percent higher in a holiday shortened trading week. December private machine orders — considered a proxy for capital spending — increased more than expected and have made investors more confident that fourth quarter gross domestic product will indicate a return to growth after two contractionary quarters. The Nikkei retreated Friday on chatter that the Bank of Japan might have misgivings about its easing program.

The Shanghai Composite added 4.2 percent on the week after the People's Bank of China allowed both financial and non-financial firms operating within the Shanghai free trade zone to borrow funds overseas without prior consent from authorities. The Hang Seng however, was virtually unchanged. Consumer and producer inflation continued to soften in January thanks to weak demand and soft commodity prices.

The Sensex added 1.3 percent on the week. The market had to contend with two curveballs. The first was Monday's report that the Indian economy grew by an inflation adjusted 7.5 percent on the year in the fourth quarter of 2014, faster than China's 7.3 percent expansion. Few took this impressive number at face value. A recent change in the method of measuring gross domestic product and other special factors had a large impact on the reading. The second was the resounding victory of the anti-corruption Aam Aadmi ("Common Man") Party in Delhi local government elections. When the vote count was announced Tuesday, Prime Minister Narendra Modi's Bharatiya Janata Party had suffered its first electoral loss since sweeping to power nationally last May. Many observers sought to put the result in perspective. The upset stems from causes endemic to the capital region and does not bode ill for the Modi government's economic reform program.

Over the last four weeks, India, Singapore, Australia and China have loosened their monetary policy in one way or another. While there are compelling reasons for each of these countries to adopt easier monetary policies, questions must be asked about the risks of region-wide easing. Asian countries are being compelled to loosen their monetary policies because of fears Chinese economic growth will continue to slow. Asia-Pacific countries have become reliant on Chinese growth.

Asian countries also are being pressured to react to the European Central Bank's quantitative easing program. The ECB's move pushed down the euro on currency markets, boosting the economic bloc's export competitiveness. Countries near the euro area have responded in kind. Denmark, which borders the euro area, has trimmed its interest rates four times this year. Europe's easing has also proved contagious for Asia.

Currencies

The U.S. dollar was mixed last week against its major counterparts. It was up against the Australian dollar and the Swiss franc. However, it retreated against the euro, yen, pound sterling and Canadian dollar. Like the U.S. currency, the pound sterling is supported by interest rate differentials reflecting a better economic performance than its European peers and expectations for coming monetary tightening in the UK. The increase of the pound against the euro has hurt exports and has led to a burgeoning trade deficit for the UK.

Fears of a Greek default and an escalating conflict in Ukraine spilled over into emerging markets as investors fled for safer assets, sending currencies in Asia and other developing countries tumbling. Indonesia's rupiah dropped while South Africa's rand hovered close to its weakest in over a decade and the Malaysian ringgit's slide gathered steam. From a political gridlock in Europe over the restructuring of Greece's debt, to ceasefire talks aimed at ending the conflict in Ukraine and weak oil prices, pockets of risk for investors are growing with emerging market assets bearing the brunt.

For investors, the weakness in Asia's foreign exchange markets, which had performed favorably compared to their emerging market peers, is a surprise. As countries in Latin America and emerging Europe have grappled with domestic economic and political challenges, Asia has been resilient with signs of proactive new governments and central banks and also lower currency volatility.

Selected currencies — weekly results

Indicator scoreboard

EMU

December industrial production (excluding construction) was unchanged from November and was down 0.2 percent on the year after sliding 0.8 percent in November. However, the disappointing year-end performance masked solid monthly gains in both intermediates (1.1 percent) and durable consumer goods (2.3 percent) and reflected instead a sizeable decline in consumer nondurables (1.8 percent). Capital goods saw a modest 0.2 percent rise and energy was up 1.0 percent. Regionally it was a mixed bag and while production advanced from mid-quarter in France (1.6 percent), Germany (0.5 percent) and Italy (0.4 percent), it fell in Spain (0.2 percent) and was sharply lower in Portugal (3.6 percent), Malta (3.3 percent) and Greece (1.4 percent).

Flash fourth quarter gross domestic product expanded 0.3 percent on the quarter. On the year, GDP was up 0.9 percent. As is usual with the provisional estimate, Eurostat provided no information on the details on the national accounts. Among the larger four member states solid provisional quarterly expansion rates were posted by Germany and Spain (both 0.7 percent). However, the French economy grew a minimal 0.1 percent and Italy only stagnated. Elsewhere Estonia (1.1 percent) enjoyed a very good quarter and there were respectable performances in Slovakia (0.6 percent) and the Netherlands and Portugal (both 0.5 percent). The only quarterly contractions were recorded in Greece (0.2 percent), Finland (0.3 percent) and Cyprus (0.7 percent) which remains mired in recession.

Germany

Flash fourth quarter gross domestic product was up 0.7 percent. This was the strongest since the first quarter of 2014 and followed an unrevised 0.1 percent gain in the previous period. On the year, GDP was up 1.4 percent. No details of the GDP expenditure components are provided in the initial report but it was indicated that domestic demand was largely responsible for the quarterly increase in total output. Household consumption as well as construction and investment in machinery and equipment all made positive contributions. Exports similarly had a good quarter but gains here were essentially offset by higher imports.

France

December industrial production excluding construction jumped 1.5 percent on the month. On the year, output was down 0.1 percent, a marked improvement on the previous month's drop of 2.8 percent. The monthly gain in overall production was broad-based and while a 3.4 percent jump in refining dominated, there were solid increases in transport equipment (2.9 percent), food & agriculture (1.5 percent) and electronics & machinery (1.2 percent). With the other goods subsector expanding 0.8 percent, manufacturing output was up 1.2 percent and easily more than reversed its 0.5 percent drop in mid-quarter. Elsewhere, energy & extracted goods production climbed 2.8 percent and construction advanced 0.4 percent.

Flash fourth quarter gross domestic product expanded at a quarterly rate of just 0.1 percent. The increase followed an unrevised 0.3 percent increase in the third quarter. On the year GDP was up 0.2 percent. Final domestic demand added only 0.1 percentage points to the quarterly change in total output as a very modest 0.2 percent advance in household consumption and a 0.4 percent gain in government spending were almost offset by a 0.5 percent decline in gross fixed capital formation, its fourth drop in as many quarters. Particularly disappointing was a renewed decline in business investment after having stabilized in the previous period but a second successive 1.5 percent slump in household investment was just as worrying. Inventories subtracted 0.2 percentage points after a 0.3 percentage point contribution in the previous quarter. A slight improvement in the real trade balance reflected a 2.3 percent jump in exports that outpaced a 1.7 percent increase in imports and added 0.1 percentage points to quarterly growth.

Italy

Fourth quarter gross domestic product was virtually unchanged on the quarter and was down 0.3 percent from the same quarter a year ago. The only additional information provided by Istat indicated that the fourth quarter would have seen another decline in real GDP but for growth in services which offset fresh declines in both the goods producing sector and agriculture. The Italian economy has not seen positive quarterly growth since the second quarter of 2011 during which period real GDP has contracted by 5 percent.

United Kingdom

December industrial production slipped 0.2 percent on the month and was up 0.5 percent from the same month a year ago. Manufacturing edged up 0.1 percent after increasing 0.8 percent the month before. On the year, output was up 2.4 percent after increasing 3.0 percent in November. The minimal monthly advance in manufacturing output reflected gains in eight of the 13 subsectors among which computer, electronic & optical products (6.7 percent) was easily the main driving force. The steepest drop was in other manufacturing & repair (3.6 percent). Total industrial production was hit by a 1.4 percent monthly decline in mining & quarrying (crude petroleum & natural gas extraction down 3.1 percent) and a 1.6 percent reversal in utilities. Electricity, gas, steam & air conditioning expanded 0.6 percent.

Asia/Pacific

Japan

December machine orders excluding volatile ones for ships and those from electric power companies jumped a greater than expected 8.3 percent on the month and 12.0 percent from a year ago. For the year 2014, these orders were up 4.0 percent. These data are very volatile, especially since the sales tax was implemented in April. Orders are looked upon as a proxy for capital spending. Total orders were up 8.6 percent on the month. Nonmanufacturing orders excluding volatile orders were up 7.2 percent after increasing 0.5 percent last time. Overseas orders however, dropped 6.9 percent after sliding 6.0 percent in November. In the January to March period, the total amount of machine orders was forecast to decline 2.5 percent and private sector orders excluding volatile ones were expected to increase 1.5 percent from the previous quarter respectively. This forecast was basically made by summing up the figures from 280 machinery manufacturers.

Producer prices continued to weaken in January. The PPI dropped 1.3 percent on the month and edged up only 0.3 percent from the same month a year ago. Since June, the annual rate of increase has declined with the pace of the weakening picking up speed in the last few months. Excluding the impact of the sales tax, the PPI dropped 2.4 percent on the year after declining 1.0 percent in December. Petroleum prices were a major drag on the index. They were down 23.1 percent on the year. Chemicals & related products were also lower, down 4.7 percent. All other subcategories advanced.

Australia

January's report missed estimates of both employment and unemployment. Employment was expected to decline 5,000. Instead employment dropped 12,200. The unemployment rate was expected to edge up to 6.2 percent but registered an increase to 6.4 percent. The seasonally adjusted labour force participation rate remained at 64.8 percent in January as expected however. There was a bright spot in December – employment was revised upwards from 37,400 to 42,300. The number employed decreased by 12,200 to 11,668,700 in January 2015 (seasonally adjusted). The decrease in employment was driven by a decline in full time employment which was partly offset by an increase in part time employment, up 17,800. The seasonally adjusted number of unemployed increased 34,500 to 795,200. The December results, which were strong, seem incongruous with a slowdown in the economy and raised questions at the time over the accuracy of the data. Methodological changes over recent months have prompted the Australian Bureau of Statistics to launch an independent review of the changes and make several revisions to previously published data in recent months.

China

China's January merchandise trade surplus soared to $60.03 billion from $49.60 in December. Both exports and imports dropped from a year ago. Exports dropped 3.3 percent while imports plunged 19.9 percent. The majority of the drop in imports was the result of falling commodity prices, especially coal and oil. China's iron ore imports and crude oil imports dropped by 9.4 percent and 0.6 percent respectively by volume. However, in value terms, iron ore imports dropped by 50.3 percent and crude oil imports declined by 41.8 percent. On a seasonally adjusted basis, exports dropped 10.5 percent after increasing 1.2 percent in December. Imports plunged 15.1 percent on the month after edging up 0.2 percent the month before. On the year, exports declined 1.4 percent after climbing 6.6 percent the month before while imports slid 14.5 percent on the year after declining 6.2 percent in December. However, analysts say strong seasonal distortions due to the Lunar New Year holiday — when consumption usually spikes and production falls — make it difficult to interpret January trade numbers. Last year the holiday fell in January and this year it falls in February. The trade report indicates that China's economy is facing increasing difficulty and that the government needs to act more aggressively to support it.

January consumer prices were up 0.8 percent on the year, less than expectations of a 0.9 percent increase. The January reading was down from December's 1.5 percent increase. Beijing targets consumer price inflation at 3.5 percent, but weakening growth is keeping prices benign. On the month, the CPI was up 0.3 percent for a second month. Nonfood CPI was up 0.6 percent on the year after increasing 0.8 percent the month before. Food prices were up 1.1 percent on the year after increasing 2.9 percent the month before.

The producer price index dropped for a 35th consecutive month, as falling energy and commodity prices continued to push the index down. The January index fell more sharply than anticipated, by 4.3 percent on the year. In December, the index was down 3.3 percent. On the month, January's PPI was down 1.3 percent after sliding 0.6 percent in December.

Americas

Canada

December manufacturing sales were up 1.7 percent after sliding 1.3 percent in November. On the year, shipments were 5.2 percent above their level in December 2013, up from a 2.6 percent annual rate in mid-quarter. Moreover, with prices falling, volume sales were even stronger and recorded a hefty 2.9 percent jump from November. Within the monthly increase in total nominal shipments, seventeen of the twenty-one reporting subsectors registered advances. Among these, transportation (6.3 percent) was especially robust but plastics & rubber products (4.3 percent), machinery (5.2 percent), non-metallic mineral products (3.4 percent) and wood (4.3 percent) also performed very well. The headline would have been stronger still but for a 9.3 percent drop in petroleum &coal products. Excluding this category, sales were up 3.2 percent. New orders gained 1.5 percent on the month and backlogs expanded 0.3 percent. With inventories off 1.4 percent, the inventory/sales ratio dropped fully 0.04 months to 1.34 months.

Bottom line

Equities mostly advanced last week. Investors are optimistic that the Greek debt issue will be resolved and that the war in Ukraine will cool down. Economic data were mixed although signs of growth emerged in Europe. China's consumer and producer price data disappointed as did its exports in January. And in Australia, employment dropped and unemployment jumped. The Riksbank cut its policy interest to minus 0.1 percent.

Both the Federal Reserve and the Bank of England will release minutes of their recent meetings. The Bank of Japan's monetary policy board meets — no change in policy is anticipated. Japan releases two key economic reports — January merchandise trade and fourth quarter gross domestic product. Meanwhile, the Greek negotiations will continue and investors will watch to see if the ceasefire in Ukraine actually holds.

Looking Ahead: February 16 through February 20, 2015

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