Global Markets

It was another bleak week for equities and commodities as investors waited for the FOMC meeting which takes place on December 15 and 16. With investors resigned to the fact that the Fed will raise its key fed fund rate on December 16, focus was on crumbling oil prices, especially after OPEC failed to agree to production quotas at their meeting on December 4. Warm weather in the U.S., while welcomed by the populace after last winter's cold and snow, has reduced demand for energy products exacerbating weak demand.

Stock markets worldwide tumbled on Friday as falling Brent crude oil prices to seven-year lows and a drop in China's yuan currency stoked investor risk aversion ahead of a widely anticipated U.S. interest rate increase. Equities sank as crude prices plunged on continued oversupply concerns. Indeed, the International Energy Agency said it sees the oil glut worsening in 2016 as demand slows and OPEC shows no signs of slowing production. All equity indexes followed here were down for the week.

Global Stock Market Recap

Europe and the UK

Equities tumbled last week as continued weakness in commodity prices — especially the drop in crude oil prices — weighed on the markets. Crude prices sank after the International Energy Agency warned that the global supply glut will continue into the New Year.

Investors were also cautious ahead of the Federal Reserve meeting. The FOMC is widely expected to announce an interest rate increase when it concludes its monetary policy meeting on Wednesday. Meanwhile, UK interest rate increase expectations tumbled to their lowest level in two years according to the results of a quarterly survey by the Bank of England. Losses for the week ranged from 3.4 percent (SMI) to 5.7 percent (OMX Stockholm 30). The FTSE lost 4.6 percent, the CAC was down 3.5 percent and the DAX was 3.8 percent lower.

Equities retreated the previous week as well amid a rout in commodities and disappointment over the European Central Bank's decision on December 3, defying a seasonal trend that has yielded gains in five of the past six Decembers. On Friday, the FTSE retreated because investors dumped shares in companies focused on South Africa following a reshuffle in the country's government.

According to the British Chambers of Commerce, the UK economy is set to continue moderate growth, mostly driven by strong expansion in the service sector and consumer spending. However, it trimmed its growth forecast, citing weak merchandise trade and manufacturing activity. Gross domestic product is forecast to grow 2.4 percent this year instead of 2.6 percent. The projection for next year was lowered to 2.5 percent from 2.7 percent. For 2017, growth is projected to be 2.5 percent compared to the previous forecast of 2.7 percent.

Swiss National Bank

The SNB's fourth quarter Monetary Policy Assessment saw no change in the minus 1.25 percent to minus 0.25 percent target corridor for 3-month CHF Libor. The deposit rate was also left unchanged at minus 0.75 percent.

Although the announcement was in line with the majority call in financial markets, there was a significant minority anticipating a 25 basis point cut. In practice, the euro's positive reaction to last week's surprisingly limited easing moves by the ECB was seen by the Swiss central bank as providing the room it needs to keep its powder dry, at least for now. That said, the SNB again emphasized its perceived overvaluation of the Swiss franc and its willingness to continue to intervene in the currency markets as and when necessary to prevent any additional appreciation.

The SNB's economic outlook showed no significant changes from September. Real GDP is expected to expand 1.0 percent this year before accelerating to 1.5 percent in 2016. Forecast inflation remains at minus 1.1 percent this year and minus 0.5 percent in 2016.

Bank of England

As expected, the Bank of England left its monetary policy unchanged. The Bank Rate remains at 0.5 percent and its asset purchase program ceiling at £375 billion. The monetary policy committee said low oil prices and subdued wage growth will keep a lid on inflation. In the minutes of its December meeting, the Monetary Policy Committee weighed "robust growth" in spending against weak overseas demand and expressed concern over the feeble impetus for prices. It said eight of the nine-member MPC voted to leave the benchmark rate at 0.5 percent this month, with Ian McCafferty maintaining his call for a 25 basis point increase.

Asia Pacific

Asian equities had their biggest weekly drop since September. All indexes retreated on the week. Markets headed lower throughout the week as investors took money out of the market and stayed on the sidelines ahead of next week's Federal Reserve meeting, which is expected to bring the first increase to U.S. interest rates since 2006.

On Friday, investors waited for a weekend update on Chinese retail sales and industrial production. Chinese shares slid Friday after a report billionaire was missing added to concerns that slowing economic growth, a weakening yuan and an anti-corruption campaign is clouding the outlook for corporate profits. The Shanghai Composite dropped 2.6 percent while the Hang Seng lost 3.5 percent on the week.

The Nikkei retreated 1.4 percent on the week as investors here waited for Wednesday's FOMC announcement. Persistent commodity weakness also weighed on investor sentiment. As is usually the case, the relative weakness or strength also affected trading. Equities did not gain on the strength of the third quarter revised growth data. Gross domestic product was revised from contraction to growth and negated the call of yet another technical recession.

Reserve Bank of New Zealand

As expected the RBNZ lowered its overnight cash rate (OCR) by 25 basis points to 2.5 percent. This was the fourth rate cut since June as the dairy dependent economy contends with a price slump in milk and other dairy-related exports. The RBNZ cut its OCR in line with a dovish signal it sent to markets in late October. Subdued inflation made room for the cut.

Governor Graeme Wheeler said domestic conditions have "softened" this year, "due mainly to lower terms of trade." The cuts this year now equal the four rate increases in 2013, when Mr Wheeler tried to get ahead of apparent inflationary pressures. Now he says that monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. The RBNZ expects to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant.

While there was a willingness to cut again, Mr Wheeler's assessment of the economy was rather upbeat and he forecast that inflation will return to the 1 percent to 3 percent target range early next year. On the economy he said, "A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year." And on inflation he said, "The inflation rate is expected to move inside the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation and the lower New Zealand dollar will be reflected in higher tradables prices."

Currencies

 The U.S. dollar declined against the euro, yen, pound sterling and Swiss franc last week. However, the dollar gained against all others followed here including the commodity currencies — the Australian and Canadian dollars. The U.S. currency dropped after the European Central Bank disappointed markets with less stimulus than traders had expected. This sent the euro upward and talk of parity disappeared.

China's People's Bank of China signaled its intention to change the way it manages the yuan's value by potentially loosening its peg to the U.S. dollar and instead letting it track the currencies of its broader trading partners. In an editorial posted on its website Friday night (local time), the PBoC said it makes more sense to measure the yuan's exchange rate against a basket of currencies than the US dollar alone. The foreign exchange trading system run by the central bank will start calculating a yuan exchange rate index Friday to provide a reference against a basket of currencies.  

The US dollar has surged by more than 22 percent against a basket of currencies since June 2014. The Chinese renminbi, which is "fixed" to the dollar each morning and only allowed to trade within a tight band of that rate, has been taken along for the ride. The rapid climb has made the country's exports less competitive with rivals in Southeast Asia, contributing to a slowdown in the economy. The shift can also be seen as a way to give China room to back away from the U.S. dollar, particularly if the Federal Reserve lifts rates next week and the currency strengthens further.

Selected currencies — weekly results

Commodities

Oil declined to the lowest level since 2008 in London amid estimates that the Organization of Petroleum Exporting Countries' decision to scrap production limits will keep the market oversupplied. Oil broke fresh seven year lows this week after OPEC failed to agree to cut production to prop up prices at its meeting on December 4, opting instead to keep pumping apace. This sent the price of crude tumbling, which has, in turn, dragged down the stocks and bonds of companies that pump it.

The global surplus will persist at least until late 2016 as demand growth slows and the Organization of Petroleum Exporting Countries shows "renewed determination" to maximize production, the International Energy Agency said Friday. Oil prices have slumped to levels not seen since the global financial crisis as a result of OPEC's strategy to defend market share against higher cost producers. The group's production rose to a three year high in November as surging Iraqi volumes more than offset a slight pullback by Saudi Arabia.

OPEC is displaying hardened resolve to maintain sales volumes even as prices fall in an oversupplied market, the IEA said in its monthly report. While its policy is hitting rivals, triggering the steepest drop in non-OPEC supply since 1992, world oil inventories will likely swell further once Iran restores exports on the completion of a deal to lift sanctions, it said.

The accumulation of the surplus will actually slow next year to about half the pace observed in 2015 as non-OPEC supply wilts and demand remains strong enough to absorb some of the excess. The combination of rising consumption and an expansion in storage facilities means the world won't run out of space to store the surplus crude, the agency said.

Indicator scoreboard

Germany

October industrial production was up 0.2 percent, the first increase since July. On the year, output edged up 0.1 percent. The headline data were depressed by a 5.9 percent monthly drop in energy output but there were also declines in consumer goods (0.1 percent) and, in particular, intermediates (1.1 percent). However, capital goods were up 2.7 percent, easily more than reversing September's 1.2 percent decline. As a result, overall manufacturing posted a respectable 0.7 percent advance although even this failed to offset a 1.1 percent contraction last time. Construction was up 0.7 percent following a 2.0 percent drop.

October seasonally adjusted merchandise trade surplus was €20.8 billion, up from a slightly smaller revised €19.2 billion in September. The unadjusted reading was €22.5 billion, little changed from September's €22.8 billion. The widening in the adjusted surplus masked some shrinkage in both sides of the balance sheet. Exports were down 1.2 percent on the month following a 2.6 percent increase in September and, at €99.0 billion, saw their second weakest mark since March. Decelerating global growth is taking its toll. Unadjusted annual export growth was 3.3 percent. Meantime, imports declined a much steeper 3.4 percent from September, their third decrease in the last five months and, at €78.3 billion, their second lowest reading since February. The yearly rise in imports slipped to 3.0 percent.

United Kingdom

October industrial production was up 0.1 percent following a smaller revised 0.1 percent dip in September. Annual growth accelerated from an upwardly revised 1.5 percent at the end of last quarter to 1.7 percent. However, manufacturing output declined 0.4 percent from September when it rose a marginally firmer 0.9 percent (revised). Compared with a year ago output was down 0.1 percent. Within the monthly decline in manufacturing, seven of the 13 subsectors posted decreases. The largest drag came from other manufacturing & repair which contracted 5.4 percent on the back of a 21.5 percent plunge in the repair & maintenance of aircraft. Partially offsetting this was a 2.7 percent advance in basic pharmaceutical products & preparations. Elsewhere, total industrial production, mining & quarrying rose 0.9 percent on the month while electricity, gas, steam & air conditioning increased 0.7 percent and water supply, sewerage & waste management 1.7 percent.

The October global deficit on trade in goods widened out to a much larger than expected Stg11.83 billion. Although the September shortfall was revised down to Stg8.80 billion, the latest reading was still a 3-month high and included a Stg2 billion jump in the underlying red ink to Stg10.89 billion. The headline deterioration was mainly attributable to higher imports which surged a monthly 7.0 percent on the back of strong demand for finished manufactures, notably autos. However a near-3 percent drop in exports also helped to push the balance further into the red. Regionally the damage was mostly caused by a Stg2.0 billion worsening to Stg3.7 billion in the deficit with non-EU countries. However, at Stg8.1 billion, the shortfall with other EU members was also up a full Stg1.0 billion. Although the deterioration in volumes was nothing like as marked as in nominal net exports, the October data underline the damage being inflicted on the UK economy by a combination of a (still) consumer led recovery and an overvalued pound.

Asia/Pacific

Japan

Third quarter GDP was revised upward to a gain of 0.3 percent on the quarter from a decline of 0.2 percent in the first estimate. On an annualized basis the 0.8 percent decline in the initial estimate was revised to a gain of 1.0 percent. On the year, GDP was up 1.7 percent, up from 1.1 percent before. The positive revisions mean that the Japanese economy did not suffer another technical recession in the second and third quarters of the year. Most importantly, CAPEX was revised to a quarterly gain of 0.6 percent – the initial estimate had been a decline of 1.3 percent. Instead of subtracting from growth, CAPEX contributed 0.1 point. Consumption was up 0.4 percent (up 0.5 percent previously) but still contributed 0.2 point to GDP. Public investment and inventories contributed minus 0.1 point and minus 0.2 point respectively.

October core machine orders soared 10.7 percent after increasing 7.5 percent the month before. On the year, core orders were up 14.2 percent after declining 0.5 percent in September. These data, though very volatile, are a popular proxy for capital expenditures. The total value of machinery orders received by 280 manufacturers increased 20.9 percent from the previous month on a seasonally adjusted basis. Private sector core nonmanufacturing orders added 10.7 percent.

Producer prices declined for the ninth consecutive month in November. The PPI was down 0.1 percent on the month and 3.6 percent from the same month a year ago as deflation continues to grip Japan. Petroleum & coal products, down an annual 24.9 percent, continue to weigh on the PPI. Nonferrous metals were down 9.4 percent on the year while chemicals & related products were 8.4 percent lower. However, food prices were up 1.2 percent and pulp, paper & related products added 1.1 percent.

Australia

November employment soared by 71,400 – analysts expected it to decline by 10,000. The unemployment rate slid to 5.8 percent, below expectations of a 6.0 percent rate. The participation rate increase by 0.3 points to 65.3 percent. Full time employment increased 41,600 to 8,205,800 and part-time employment increased 29,700 to 3,694,800. Unemployment decreased 2,800 to 739,100. The number of unemployed persons looking for full-time work decreased 9,400 to 517,400 and the number of unemployed persons only looking for part-time work increased 6,600 to 221,700.

China

The November merchandise trade surplus as measured in yuan was CNY343.1 billion, down from CNY393.22 billion in October. In yuan terms, exports dropped 3.7 percent on the year while imports sank 5.6 percent. The drop in exports was the steepest contraction in three months. The surplus in US dollar terms was $54.1 billion. Exports were down 6.8 percent on the year after declining 6.9 percent in October. However, imports improved to a decline of 8.7 percent after sinking 18.8 percent the month before. On a seasonally adjusted basis, exports were up 0.4 percent on the month while imports dropped 3.6 percent. China's surplus with the U.S. was $22 billion. On the year, exports dropped 5.3 percent while imports fell an even further 6.4 percent.

November consumer price index was up 1.5 percent from a year ago after climbing 1.3 percent in October. For the year to date, the CPI was up 1.4 percent for the fourth month. The urban CPI was up 1.5 percent after 1.3 percent while the rural CPI was up 1.3 percent and 1.2 percent. The CPI was unchanged on the month. Food prices were 2.3 percent higher after gaining just 1.9 percent the month before. Nonfood prices were up 1.1 percent after 0.9 percent. Transportation & communication prices declined 1.4 percent, the least that they have been down since May.

The November producer price index was down 5.9 percent on the year for the fourth consecutive month. The PPI has been in negative territory now for 45 consecutive months. For the year to date, the PPI was down 5.2 percent after 5.2 percent in October. On the month, the PPI was 0.5 percent lower. Raw materials procurement, fuel and power dropped 6.9 percent for a second month. Production materials were 7.6 percent lower for a second month. Consumer goods were down 0.4 percent for a second month as well.

Bottom line

The Bank of England and the Swiss National Bank both opted to keep their respective monetary policies unchanged. However, the Reserve Bank of New Zealand lowered its overnight cash rate to 2.0 percent thanks mostly to weak daily exports. Economic data were mixed. The U.S. dollar retreated and commodity prices continued to tumble.

At last! The Federal Reserve meeting is here with an announcement along with Chair Janet Yellen's press conference on Wednesday. The Bank of Japan also meets. The quarterly Japanese Tankan Survey results will be reported. The CAPEX component will be tracked closely. The UK posts its labour market report for November. Both ZEW and Ifo will publish December results of their respective surveys.

Looking Ahead: December 14 through December 18, 2015

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