Global Markets

Investors were jittery, selling equities as the U.S. dollar soared while the euro — according to some traders — heads towards parity with the U.S. currency. The crisis with Greece and Europe is lingering as negotiations creep along, trying the patience on both sides. The European Central Bank meanwhile began its bond buying program Monday which was another cause of uncertainty. In the UK, the approaching national election is elevating nerves.

Global Stock Market Recap

Europe and the UK

European equities mostly advanced last week fuelled by the slide in the euro as the European Central Bank began its bond buying plan that is keeping Eurozone yields near record lows. The week saw diverging central bank policies in the Eurozone and the United States with the former battling to compress yields further while the latter paves the way for a rate increase. In the process the U.S. dollar soared to fresh 12-year highs against the euro. The FTSE dropped 2.5 percent on the week — its biggest drop so far this year. The CAC was up 0.9 percent, the DAX added 3.0 percent and the SMI was 0.8 percent higher. The DAX has advanced for nine consecutive weeks, while the CAC has increased for straight six weeks and the SMI eight.

As the ECB begins its bond buying program there are concerns that the plan to pump more than a trillion euros into the Eurozone economy will send stronger members such as Germany (that could arguably do without the support) into overdrive, while fostering complacency among laggards. The plan is aimed at lifting Eurozone inflation from below zero back up toward the ECB's target of just under 2 percent. But the risk is that it inflates real estate and share price bubbles and might cause Germany, which already has record low unemployment of 6.5 percent, to overheat. Such a scenario could widen the gap between rich and poor member states, further stretching the already strained fabric of European integration.

The ECB and its constituent national central banks plan to spend €60 billion a month, mainly on sovereign bonds until at least September 2016. Buying sovereign bonds will hold down governments' borrowing costs and keep market interest rates low. This should encourage investors to move into riskier assets that will spur growth while as the same time, push down the euro. Updated forecasts by ECB staff this month projected the QE program will raise growth rates in the Eurozone and lift inflation from below zero up to 1.8 percent in 2017 in line with the ECB's goal of just under 2 percent. The lower euro, especially against the U.S. dollar, would spur exports to the U.S. and provide greater profits for Eurozone exporters.

Asia Pacific

Equities were lower last week, with the exception of the Nikkei (up 1.5 percent) and the Shanghai Composite (up 4.1 percent). The combination of a strengthening U.S. currency and a looming Federal Reserve meeting dampened risk taking. The situation with Greece also kept investors wary.

The Shanghai Composite advanced 4.1 percent on the week led by financials after People's Bank of China Governor Zhou Xiaochuan said the bank will maintain its prudent monetary policy. Allaying investor concerns on the economy, Zhou called the money supply growth "appropriate" and indicated that the bank plans to implement a deposit insurance scheme in the first half of the year. Zhou also said that the probability is "very high" China will fully liberalize rates later this year. The index rallied despite disappointing economic data for January and February on the hopes of further PBoC stimulus.

Foreigners have been investing in Japan. The yen's weakness as well as companies returning cash via dividends and share buybacks has been supporting the stock market. The safe haven Japanese yen weakened while oil prices steadied, underpinning investor sentiment. However, gains were not widespread as investors braced for next week's FOMC meeting. The Nikkei closed above 19,000 for the first time since April 2000. Easy Bank of Japan monetary policy and asset buying has provided stock market support while at the same time, weakening the yen. It is unclear how much more yen weakening can be expected. Now investors are closely watching yearly wage negotiations in Japan to see whether businesses will reward workers.

The Sensex declined four of five days and lost 3.2 percent on the week. The index rallied Thursday amid reports that the Modi government had struck a deal with Congress to ensure a smoother path for the Insurance Laws Amendment Bill. Two key bills aimed at reforming coal and mines sectors were delayed, but the select committees have been asked to submit their reports by March 18, two days before Parliament goes into a month long recess. The International Monetary Fund raised its economic growth forecast for India but called for continuing fiscal consolidation and higher spending by cutting subsidies to resume an 8 percent or 9 percent — or an even higher — growth rate in coming years.

Bank of Korea

The Bank of Korea unexpectedly cut its base interest rate by 25 basis points to a record low of 1.75 percent. The BoK was the latest central bank to lower borrowing costs to try and spur economic growth. The Reserve Bank of India, Bank of Thailand, Reserve Bank of Australia and the People's Bank of China have cut rates since the start of the year.

The BoK had attempted a tightening cycle in mid-2010, lifting rates from a then record low of 2 percent to as high as 3.25 percent a year later. But it was forced to reverse course in mid-2012 as subdued global growth made for sluggish exports. Under Governor Lee Ju-Yeol, who took the helm 11 months ago, the BoK has appeared to work more in tandem with fiscal policymakers determined to drive Korea out of an economic rut.

But by lowering borrowing costs, the Bank of Korea may contribute to higher levels of household debt. South Korea's household debt-to-income level stood at 144 percent at the end of the second quarter last year. That is higher than in the U.S. before its subprime crisis. And the overhang is making consumers cautious. The BoK cut rates twice last year to try to spur local demand. The moves led to some increase in debt to purchase real estate and house prices in Seoul have begun to recover. But overall domestic spending has remained in the doldrums.

Reserve Bank of New Zealand

As expected, the Reserve Bank of New Zealand kept its key overnight cash rate (OCR) at 3.5 percent where it has been since July 2014. Once again the RBNZ called for a weaker New Zealand dollar (kiwi). Graeme Wheeler, the governor of the Reserve Bank of New Zealand, said that the kiwi is "unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals." The Bank's projections are consistent with a period of stability in the OCR. Future interest rate adjustments, either up or down, will be data dependent.

In its statement, the RBNZ noted that global financial conditions remain very accommodative and are reflected in high equity prices and record low interest rates. However, volatility in financial markets has increased since late 2014 following the sharp drop in oil prices, continued uncertainty about the global outlook and U.S. monetary policy and policy easings by a number of central banks. Growth remains robust in the U.S., but has slowed recently in China. The RBNZ noted that the domestic economy remains strong thanks in part to lower petrol prices which have increased households' purchasing power and lowered the cost of doing business. Employment and construction activity are strong.

Currencies

The U.S. dollar took a respite Thursday but resumed its climb Friday as investors waited for news about the Federal Reserve's expected interest rate increase. A stronger dollar can impact economic growth in the U.S. by making companies less price competitive overseas and at home. Imports cost less thanks to a stronger currency. On the week, the dollar tallied significant gains against all of its major counterparts — the euro, pound sterling, Swiss franc and the Canadian and Australian dollars. The yen was down but not by the magnitude of declines incurred elsewhere.

On Thursday, the euro advanced although there was no specific news driving the rebound. This week's losses for the euro have come as the European Central Bank kicked off its long awaited bond buying stimulus program. ECB purchases have driven down bond yields in the Eurozone, boosting the relative attractiveness of assets elsewhere and weighing down the currency as some investors shift their money outside the bloc. However, some analysts think the divergence between ECB policy and the plans of the Federal Reserve is now priced in to markets.

The U.S. dollar briefly rose above ¥122 for the first time since July 2007 amid speculation that the Federal Reserve is on the verge of raising interest rates, reflecting signs of U.S. economic recovery, particularly after February's surprisingly strong U.S. employment data. Traders bet that the Bank of Japan will keep up its aggressive monetary policy. The decline is the latest fallout from a raft of monetary easing by the world's central banks aimed at firing up economic growth, which is sending currencies down to multiyear lows against the U.S. dollar. Surprise interest rate cuts from other major economies such as China and India have added to downward pressure on many emerging market currencies.

For Japan, the yen has been falling for the past two years, driven by an economic turnaround program touted as Abenomics under Prime Minister Shinzo Abe. In October, the BoJ stepped up a gear, pledging to buy trillions of yen of bonds, stocks and other assets in a bid to generate 2 percent inflation, sending the yen lower against the dollar. The yen's decline slowed in recent months as economists started to doubt whether the Abenomics program was having its intended effect, with inflation struggling to edge higher. But a combination of a rallying dollar on signs that the U.S. will raise rates this year and Japan's steps to put its economy on a firmer footing have weakened the yen and is fueling confidence the yen can move lower.

Selected currencies — weekly results

Commodities

Gold

The LBMA announced that the new LBMA Gold Price, which replaces the long established London Gold Fix, will be launched on 20 March, 2015. The ICE Benchmark Administration (IBA) is the new administrator of the LBMA Gold Price. The intellectual property rights will be held by 'Precious Metals Prices Limited', a newly established subsidiary company of the LBMA. IBA will operate a physically settled, electronic and tradable auction process. The price formation will be in dollars and prices will continue to be set twice daily at 10:30 and 15:00 (London time) in three currencies — the U.S. dollar, the euro and the pound sterling. Within the process, aggregated gold bids and offers will be updated in real-time with the imbalance calculated and the price updated every 30 seconds until the buy and sell orders are matched.

Crude oil

According to the Paris based International Energy Agency, the oil market's recent rebound may not last, as the U.S.'s ability to keep pumping more crude has defied expectations and could set the stage for prices to fall again. In its closely watched monthly report, the IEA said U.S. oil production was up 115,000 barrels a day in February with much of it going into storage inventories whose capacity may soon be tested. The IEA represents key energy consuming nations.

Financial markets have been closely watching oil prices, which had recovered to more than $60 a barrel for Brent crude — the global benchmark — after plunging by 60 percent over seven months to less than $47 in January. Oil prices had traded in a fairly narrow range for about a month, raising the question of whether the market had stabilized after a historic collapse. The IEA called the appearance of stability a "facade."

The main driver of the volatility is American oil, much of it produced by hydraulic fracturing of underground shale formations. Shale oil has contributed to a global oversupply of oil and the IEA raised its predictions of American production for the first quarter of 2015. It should be noted that the number of oil rigs has declined steadily for the last 14 weeks. In the most recent week, the count was down 67 rigs from last week to 1125, with oil rigs down 56 to 866 and gas rigs down 11 to 257. The rig count was down 684 from a year ago.

Indicator scoreboard

EMU

January industrial production (excluding construction) slipped 0.1 percent on the month for the first drop since last August. On the year, annual workday adjusted growth was 1.2 percent. January's reversal was dominated by a 2.2 percent monthly decline in durable consumer goods although intermediates (down 0.5 percent) also underperformed. However, both capital and non-durable consumer goods were up 0.1 percent and energy added 0.9 percent. Among the larger states, output was up 0.4 percent from December in France and edged 0.2 percent firmer in Spain. However, German production was only flat and Italy (down 0.7 percent) had its worst month since September.

Germany

January seasonally adjusted trade surplus narrowed to €19.7 billion. The deterioration was attributable to a sizeable 2.1 percent monthly drop in exports, their second drop in the last three months, although even this failed to reverse in full December's strong 2.8 percent rise. Compared with January 2014, total exports were down 0.6 percent with sales to other Eurozone countries 2.8 percent weaker. Imports dropped 0.3 percent from year-end, their second consecutive contraction and their third decrease in the last four months. On the year, they were down 2.3 percent and purchases from other EMU states were down 4.5 percent.

France

January industrial output was up 0.4 percent and was up 0.6 percent on the year, its first positive reading since July 2014. However, the main positive contributions to the headline data came from the more volatile categories which helped mask a 0.1 percent monthly drop in the key manufacturing sector which would have seen a sharper contraction but for a 1.6 percent gain in coke & refined petroleum products. The component covering mining, quarrying, energy and utilities posted a 2.6 percent monthly bounce and there were solid increases in transport equipment (1.8 percent) and food & drink (0.7 percent). Weakness was most apparent in electrical & electronic equipment (down 1.3 percent) and in the other manufactured products subsector (down 0.4 percent). Construction also fell 0.2 percent on the month.

United Kingdom

January deficit on global trade in goods shrank unexpectedly to Stg8.41 billion. January's deficit was down more than Stg1.5 billion from a slightly smaller revised shortfall in December and at its lowest level since March 2014. The improvement was largely attributable to the slide in energy prices which saw oil imports drop Stg1.2 billion on the month and the oil deficit shrink from Stg0.99 billion to Stg0.57 billion. Overall imports fell 7.2 percent on the month and more than reversed December's 3.5 percent spurt. However, exports were also soft, declining a sizeable 4.1 percent after a 2.5 percent advance last time. The bilateral red ink with the rest of the EU was little changed at Stg6.7 billion but the shortfall with the rest of the world narrowed from Stg3.1 billion in December to Stg1.7 billion. Irrespective of the boost afforded the headline balance by smaller energy bills, underlying trade developments were also positive in January. Over the last three months, core export volumes were up 3.4 percent compared with an increase of just 0.8 percent in core imports. Excluding oil and other erratic items, the red ink in January was Stg7.72 billion, still disappointingly large but also the smallest since June 2013.

Asia/Pacific

Japan

Revisions to Japanese Gross Domestic Product failed to amend the narrative of an economy struggling to emerge from last year's recession. Fourth quarter GDP was revised down to quarterly growth of 0.4 percent from 0.6 percent in the first estimate. Annualized growth was estimated at 1.5 percent, down from the previous 2.2 percent. When compared with the fourth quarter of 2013, GDP was revised down to minus 0.7 percent from the original estimate of minus 0.4 percent. Business spending, originally up 0.2 percent from the prior quarter, is now estimated to have contracted by 0.1 percent. The upside was that private consumption, which originally grew just 0.3 percent, was revised up to a 0.5 percent estimate.

A proxy for capital expenditures, January private machine orders excluding volatile items such as ships and orders from electric power companies were down 1.7 percent on the month but were 1.8 percent higher on the year. Total orders were up 14.2 percent on the month. Nonmanufacturing orders excluding volatile orders were up 3.7 percent after 7.2 percent last time. Orders from overseas jumped 24.2 percent.

Producer prices were unchanged on the month in February and were up only 0.5 percent from the same month a year ago. Between June and January, the annual rate of increase declined with January's reading a low 0.3 percent. Excluding the impact of the sales tax, the PPI dropped 2.3 percent on the year after declining a revised 2.5 percent in January. Falling petroleum prices continue to be a major drag on the index. They were down 23.1 percent on the year. Chemicals & related products were also lower, down 5.1 percent. Electrical components and devices slipped 0.1 percent. All other subcategories advanced.

January tertiary index was up a greater than expected 1.4 percent on the month but was 1.1 percent lower on the year. Among the industries that contributed to the gain were wholesale & retail trade (3.3 percent), transport & postal activities (2.8 percent), scientific research, professional & technical services (2.5 percent), living-related & personal services & amusement services (2.1 percent) and miscellaneous services excluding government services etc. (1.4 percent). However, electricity, gas, heat supply & water, finance & insurance, accommodations, eating & drinking services, real estate & goods, rental & leasing and learning support declined on the month.

Australia

Employment in February increased more than expected while the unemployment rate was lower than anticipated. The unemployment rate slipped to 6.3 percent from 6.4 percent in January. Expectations were that the rate would remain unchanged at 6.4 percent. The labour force participation rate declined to 64.6 from 64.7 the month before. Employment was up 15,600 to 11,652,400 in February 2015. The increase in employment was driven by increases in both full-time (up 10,300) and part-time employment (up 5,300). The number of unemployed decreased 15,800 to 777,300. The decrease was driven by those looking only for part-time work, down 18,600. The underemployment rate was 8.6 percent, a decrease of 0.1 percentage points from November 2014 based on unrounded estimates. Combined with the unemployment rate of 6.3 percent, the latest seasonally adjusted estimate of total labour force underutilization was 14.9 percent, a decrease of 0.1 percentage points from November 2014.

China

February's merchandise trade surplus was $60.62 billion, up from January's $660.03 billion. Exports soared 48.3 percent on the year while imports sank 20.8 percent, surpassing the 19.9 percent slide in January. This reversed January's 3.3 percent decline. The data were likely affected by the Lunar New Year holiday and analysts tend to look at the combined trade data for the two months to help smooth out distortions caused by the long Lunar New Year holiday, which fell in mid-February this year but in early February in 2014. The customs office said local exporters usually make concentrated shipments ahead of the New Year, which may have distorted export figures for January and February. For the first two months of 2015, exports rose 15 percent from a year ago, while imports fell 20.2 percent. The import decline was partly due to the sharp fall in prices for key commodities such as oil and metals. Crude-oil imports fell 46 percent in value but were up 11 percent in volume. Iron-ore imports showed a similar trend, losing 39 percent in value but gaining 11 percent in volume. Analysts expect that low commodities prices coupled with generally weak domestic demand should ensure further trade surpluses for China in the coming months.

February consumer price inflation improved to a reading of 1.4 percent from a year ago after increasing 0.8 percent in January. Expectations were for an increase of 0.9 percent. On the month, the CPI was up 1.2 percent after inching up 0.3 percent last time. For the two months of January and February, the CPI was up 1.1 percent. Urban prices increased 1.5 percent in February after a 0.8 percent gain while rural consumer prices were up 1.5 percent after 0.8 percent. Food prices added 2.4 percent after a 1.1 percent increase last time while non-food inflation was 0.9 percent higher after adding 0.6 percent in January. Prices for tobacco & alcohol declined 0.6 percent after sliding 0.4 percent last time. Transportation & communication prices were down for a sixth consecutive month, losing 1.7 percent after 2.2 percent. Clothing prices were up 2.9 percent for a second month.

Deflationary forces remain evident in the producer sector. February producer prices dropped 4.8 percent, marking a 36th straight month of falling prices. This is the biggest annual drop since October 2009. In January, the PPI was down 4.3 percent. On the month, the PPI was 0.7 percent lower. Raw materials procurement, fuel & power dropped 5.9 percent after sinking 5.2 percent in January. Production materials lost 6.2 percent after sliding 4.5 percent the month before. Consumer goods were down a modest 0.1 percent for their fourth consecutive decline. Among consumer goods, prices for clothing and related items added 0.8 percent.

Combined January/February industrial output was up a disappointing 0.45 percent on the month and 6.8 percent from a year ago. The annual increase was the lowest since August when output increased 6.9 percent and the slowest since 2008. Output is considered a good proxy for broader economic growth. Seven subcategories increased production while six produced less. The People's Bank of China has already cut interest rates twice in the past three months in its efforts to boost the economy.

Retail sales for January/February were up a less than anticipated 10.7 percent when compared with the previous year. Sales were up a monthly 0.93 percent. Data are often skewed for the first two months of the year because of Lunar New Year dates which vary from year to year. Urban retail sales were up 10.6 percent after increasing 12.0 percent in December while rural sales were up 11.6 percent after 12.4 percent. Among the subcategories, oil and oil product sales dropped 6.7 percent after increasing 1.0 percent. However auto sales improved to an increase of 10.8 percent after a sluggish 6.1 percent. Communications equipment increased 38.5 percent, down from December's 58.1 percent increase. Sales of clothing, grain & fuel oil, clothing and stationery were weaker on the year.

Americas

Canada

February employment declined 1,000 after a sharp 35,400 jump in January. However, combined with a tick up in the participation rate to 65.8 percent, the minimal decline in jobs was still enough to lift the jobless rate 0.2 percentage points to 6.8 percent, its highest mark since last September. The decline in headline employment was wholly attributable to 34,900 slump in part time positions as full time jobs climbed 34,000. However, private sector headcount was down 29,000 leaving a 24,300 increase in the public sector and a 3.600 gain in the number of self-employed to limit the overall decline. There was a similarly sharp contrast between goods producing and service sector industries. The former saw a 24,100 drop, largely due to a near-20,000 decline in manufacturing. Natural resources (down 16,900), agriculture (down 1,600) and utilities (down 1,100) were also weak but construction (up 15,500) had a good month. Services recorded a 23,200 increase, built upon a 15,400 advance in education and a 12,400 rise in trade. Health care & social assistance (up 9,700) and accommodation & food services (up 5,200) similarly added to headcount. Even so, there were decreases in information, culture & recreation (down 12,400) and the other services category (down 11,500).

Bottom line

Equities were mixed last week as investors reacted to the ECB's bond purchase program and the continuing Greek debt negotiations. Disappointing Chinese data contributed to global growth concerns. However, January/February data tend to be distorted by the Lunar New Year holidays.

Attention this coming week will be on the Federal Reserve and on Chair Janet Yellen's press conference. The Bank of Japan meets as well. The Swiss National Bank gives its first quarterly Monetary Policy Assessment since it removed the cap on the Swiss franc.

Looking Ahead: March 16 through March 20, 2015

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