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INTERNATIONAL PERSPECTIVE

Equities retrench
Econoday International Perspective 4/11/14
By Anne D. Picker, Chief Economist

  

Global Markets

Most equity indexes declined last week. What began as a selloff of U.S. technology and biotechnology shares spread globally taking down all of the major indexes. The losses ranged from 7.3 percent for the Nikkei, 3.9 percent for the DAX and 3.1 percent for the Nasdaq. The declines occurred despite positive data from the U.S. and UK. However, China’s merchandise trade data did disappoint. With earnings season just beginning, U.S. investors were weighed down by the disappointing report for JPMorgan. The disappointing results from JP Morgan have added to concerns about the impending earnings season, which will pick up steam next week.

 

According to the latest IMF World Economic Outlook, the UK will be the fastest growing leading rich economy this year. The fund's forecasts and its renewed support for the UK's deficit reduction program should please the British government after its spat with the IMF over the impact of spending cuts. The IMF concluded that an increasingly sustainable recovery in rich countries has sharply reduced the risks of another global downturn, as it began to look forward to economic normalization. While stressing the world still faced several economic challenges, the forecasts are the fund's most optimistic since the immediate post crisis period.

 

The fund forecasts global growth of 3.6 percent in 2014, rising to 3.9 per cent in 2015. The U.S. is expected to grow 2.8 percent this year, the Eurozone to regain positive momentum with a 1.2 percent expansion and Japan to maintain its recent trajectory with 1.4 percent growth. The UK is expected to grow 2.9 percent — the fastest in the G7 this year. However, the IMF sees risks in emerging markets and warns of low inflation in advanced economies as well as geopolitical issues.


 

Global Stock Market Recap

2013 2014 % Change
Index 31-Dec Apr 4 Apr 11 Week 2014
Asia/Pacific
Australia All Ordinaries 5353.1 5428.6 5423.5 -0.1% 1.3%
Japan Nikkei 225 16291.3 15063.8 13960.1 -7.3% -14.3%
Hong Kong Hang Seng 23306.4 22510.1 23003.6 2.2% -1.3%
S. Korea Kospi 2011.3 1988.1 1997.4 0.5% -0.7%
Singapore STI 3167.4 3212.7 3198.2 -0.5% 1.0%
China Shanghai Composite 2116.0 2058.8 2130.5 3.5% 0.7%
 
India Sensex 30 21170.7 22359.5 22629.0 1.2% 6.9%
Indonesia Jakarta Composite 4274.2 4857.9 4816.6 -0.9% 12.7%
Malaysia KLCI 1867.0 1856.6 1852.7 -0.2% -0.8%
Philippines PSEi 5889.8 6561.2 6596.96 0.5% 12.0%
Taiwan Taiex 8611.5 8888.5 8908.1 0.2% 3.4%
Thailand SET 1298.7 1392.0 1389.2 -0.2% 7.0%
 
Europe
UK FTSE 100 6749.1 6695.6 6561.7 -2.0% -2.8%
France CAC 4296.0 4484.6 4365.9 -2.6% 1.6%
Germany XETRA DAX 9552.2 9695.8 9315.3 -3.9% -2.5%
Italy FTSE MIB 18967.7 22175.5 21198.8 -4.4% 11.8%
Spain IBEX 35 9916.7 10677.2 10205.4 -4.4% 2.9%
Sweden OMX Stockholm 30 1333.0 1369.7 1344.1 -1.9% 0.8%
Switzerland SMI 8203.0 8503.0 8298.8 -2.4% 1.2%
 
North America
United States Dow 16576.7 16412.7 16026.8 -2.4% -3.3%
NASDAQ 4176.6 4127.7 3999.7 -3.1% -4.2%
S&P 500 1848.4 1865.1 1815.7 -2.6% -1.8%
Canada S&P/TSX Comp. 13621.6 14393.1 14257.7 -0.9% 4.7%
Mexico Bolsa 42727.1 40598.3 40380.8 -0.5% -5.5%

 

Europe and the UK

Equities here dropped last week amid concerns that global stocks are due for a significant correction. The CAC and DAX retreated four of five days while the FTSE and SMI were down three. On the week, the FTSE lost 2.0 percent, the CAC slid 2.6 percent, the DAX dropped 3.9 percent and the SMI declined 2.4 percent.

 

As it becomes ever clearer that the Federal Reserve is pretty much fixed in its determination to stop quantitative easing late this year, the oxygen that has fueled the five year bull market seems to be draining out of the market. Sectors that benefited the most from the Federal Reserve’s easy monetary policy, such as technology and biotechnology, are the ones that are now suffering.

 

On Thursday resource shares came under heavy pressure after Chinese officials dashed hopes for meaningful stimulus despite disappointing economic data. March merchandise trade report showed that exports were down 6.6 percent from a year ago while imports declined 11.3 percent. Both had been expected to gain in March.


 

Bank of England

As widely expected, the Bank of England’s monetary policy committee left its Bank Rate at 0.5 percent where it has been since March 2009 and its gilt purchases at £375 million. Since the MPC's last meeting, the economy has performed well with more than solid gains in February retail sales and manufacturing output contrasting with a decline in CPI inflation further below its 2 percent medium term target. More up to date business surveys have pointed to a slight cooling in economic activity over the last month or so but growth still looks set to show a healthy clip in the first quarter.

 

The MPC must be quietly pleased with the way the economy is recovering. The only real worries are the persistent sluggishness of private sector non-mortgage lending and the stubbornly large current account deficit. A lower exchange rate might help to address the latter issue and the Bank would certainly favor increased competitiveness. However, with the UK economy comfortably outperforming the Eurozone, a strong pound looks likely to be here for some while yet.

 

The British economy recorded growth of 0.7 percent in the fourth quarter 2013, outpacing much of continental Europe. Growth in the first quarter may have risen further, to 0.9 percent, according to an estimate published by the National Institute of Economic and Social Research. Lower unemployment, most recently reported at 7.2 percent, and productivity gains will most likely lead the Bank of England to keep rates steady into next year.


 

Asia Pacific

Equities were mixed last week. Japanese shares tumbled to six month lows, as jitters over the valuation of many companies in the technology sector kept investors on edge. This overshadowed upbeat U.S. jobless claims data and benign inflation figures out of China. In contrast, equities in both mainland China and Hong Kong rallied after consumer inflation came in at 2.4 percent in March from the year ago period while producer prices remained stuck in deflation, contracting 2.3 percent from a year earlier. Low inflation coupled with weak trade data released Thursday strengthened the case for some smaller, targeted measures from policy makers to support growth. On the week, the Nikkei plunged 7.3 percent while the Shanghai Composite and Hang Seng added 3.5 percent and 2.2 percent respectively.

 

The Nikkei’s loss last week was its biggest one week drop since it plunged 10 percent following the earthquake and tsunami that triggered the Fukushima nuclear disaster in March 2011. Investors questioned the nation's economic recovery amid strong indications that the Bank of Japan will not take additional action to fuel growth in the near term. Selling was also fueled by sharp declines in overseas markets and the yen's gains against the U.S. dollar. BoJ Governor Haruhiko Kuroda perhaps did the most to sour investors' moods toward Japan this week. On Tuesday, he said the Bank would not introduce additional stimulus anytime soon, despite economic headwinds such as an increase in the national sales tax on April first and consistently weak economic data out of China.

 

The Nikkei gained 57 percent last year, as investors bet that Prime Minister Shinzo Abe's aggressive economic program, dubbed Abenomics, would revive the long sluggish economy. Many investors had speculated that the BoJ would soon introduce additional monetary stimulus. But in closely watched comments in his post meeting press conference, Mr. Kuroda made it clear that would not happen, dismissing concerns about the tax increase and giving an upbeat assessment of the economy. A day later, the BoJ backed up Mr. Kuroda's view in its monthly economic and financial report, saying there is almost no slack in the economy, with little excess capacity or labor force. On Thursday, though, the government released data that showed that core machinery orders— a leading indicator of corporate capital investment — in February dropped more than economists had expected.

 

China’s plans to connect the stock exchanges of Hong Kong and Shanghai bolstered speculation the country will lure more investors. Stocks rallied on both venues after China said it would allow a combined 23.5 billion yuan of daily cross-border trading.

 

Elsewhere, the Bank of Korea left its key rate unchanged at 2.5 percent for the 11th straight month in line with expectations, citing signs of recovery at home and abroad. New Governor Lee Ju-yeol chaired the policy meeting for the first time.


 

Bank of Japan

As universally expected, the Bank of Japan’ Monetary Policy Board left its key interest rate range at zero to 0.1 percent. Financial asset purchases remained unchanged, with the goal of increasing the monetary base at an annual pace of about ¥60 to ¥70 trillion yen. It maintained its inflation target at 2 percent but sees a shortfall. It projects the consumer price index to be about 1.25 percent for some time.

 

Again, the MPB described the economy as recovering moderately. Overseas economies — mainly advanced economies — are starting to recover although a lackluster performance is still seen in part. While exports have leveled off, business fixed investment has picked up on improved corporate profits. Public investment has increased. With improvement in employment and income, housing investment has continued to increase. Also, private consumption is described as resilient. Industrial production has been increasing at a somewhat accelerated pace.

 

Speaking at a press conference following the BoJ’s statement, Mr Kuroda said the Japanese economy is robust enough to withstand any downturn in spending that is likely to follow last week's increase in the consumption tax — the first such tax increase in 17 years. He acknowledged the tax increase is likely to push the economy into a slump in the current quarter, but he sees the economy rebounding by summer. The upbeat assessment could prove disappointing for investors wishing to see another round of stimulus. The BoJ has been saying for months that it will act further if needed, but in Mr Kuroda's assessment this looks far off. His remarks — broadcast live for the first time — were closely monitored amid strong speculation that the BoJ will soon ease monetary policy further to cushion the blow from the tax increase.

 

Last week's quarterly Tankan survey cast doubt on how well monetary stimulus is working. It showed the outlook among businesses deteriorating and suggested companies generally see the recent inflationary trend levelling off, rather than accelerating towards the bank's 2 percent target.


 

Currencies

The U.S. dollar was down against all of its major counterparts. The currency slid on the week against the euro, yen, pound, Swiss franc and the Canadian and Australian dollars. The downdraft occurred after several Federal Reserve policy makers said projections for an interest rate increase were overstated in minutes from its last meeting. The yen jumped against the dollar after BoJ Governor Kuroda said that the labor market had improved more than was earlier expected.


 

The pound climbed the most in two months after the International Monetary Fund raised its UK growth forecast and February industrial output expanded. This led traders to bet that the Bank of England will hasten interest rate increases. Sterling appreciated to the strongest level in a month against the euro as a report showed wage growth accelerated to the fastest pace in seven years. The latest data and IMF forecast adds to evidence that the recovery in the British economy is strengthening and bolsters the case for the BoE to boost borrowing costs.


 

Selected currencies — weekly results

2013 2014 % Change
Dec 31 April 4 April 11 Week 2014
U.S. $ per currency
Australia A$ 0.893 0.929 0.940 1.1% 5.3%
New Zealand NZ$ 0.823 0.860 0.869 1.0% 5.6%
Canada C$ 0.942 0.911 0.911 0.0% -3.3%
Eurozone euro (€) 1.376 1.371 1.388 1.3% 0.9%
UK pound sterling (£) 1.656 1.658 1.6736 1.0% 1.1%
 
Currency per U.S. $
China yuan 6.054 6.212 6.210 0.0% -2.5%
Hong Kong HK$* 7.754 7.757 7.753 0.1% 0.0%
India rupee 61.800 60.085 60.176 -0.2% 2.7%
Japan yen 105.310 103.290 101.630 1.6% 3.6%
Malaysia ringgit 3.276 3.280 3.237 1.3% 1.2%
Singapore Singapore $ 1.262 1.259 1.248 0.8% 1.1%
South Korea won 1049.800 1053.650 1035.350 1.8% 1.4%
Taiwan Taiwan $ 29.807 30.287 30.088 0.7% -0.9%
Thailand baht 32.720 32.470 32.288 0.6% 1.3%
Switzerland Swiss franc 0.892 0.892 0.876 1.9% 1.9%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Germany

February industrial production was up 0.4 percent on the month following a slightly smaller revised 0.7 percent increase in January. Annual workday adjusted growth was 4.8 percent, down just 0.1 percentage point from last time on the back of unfavorable base effects. February's monthly advance was led by a 1.3 percent gain in intermediate goods, backed up by a smaller increase in consumer goods (0.3 percent). Elsewhere capital goods were down 0.2 percent, energy was down 0.9 percent and construction slipped 0.1 percent.


 

February seasonally adjusted merchandise trade surplus narrowed from a slightly larger revised €17.3 billion in January to €15.7 billion. The mid-quarter deterioration reflected weaker exports and stronger imports. The former were 1.3 percent lower on the month, reversing more than half of January's 2.2 percent gain and their second decline in the last three months. The latter were 0.4 percent firmer following a 4.1 percent jump last time to stand at a new record high. Compared with a year ago, unadjusted exports were up 4.6 percent while imports grew 6.5 percent.


 

France

February industrial production excluding construction edged up 0.1 percent and was down 0.8 percent from a year ago. However, the headline data were hit in both January and February by weakness in mining & quarrying and utilities where output contracted 3.6 percent on the month at the start of the year and a further 0.6 percent in mid-quarter. Manufacturing was up 0.4 percent in January and 0.3 percent in February. In fact outside of coke and refined petroleum products (down 0.5 percent), February saw moderate gains elsewhere with transport equipment increasing 0.8 percent, food and beverages and electrical and electronic equipment up 0.2 percent and the other manufactured products category advancing 0.3 percent.


 

United Kingdom

February industrial production was up 0.9 percent and 2.7 percent on the year. Manufacturing output was up 1.0 percent and 3.8 percent from a year ago. Within what was the third consecutive monthly increase in manufacturing output, seven of 13 subsectors made fresh progress. The strongest gain was posted by basic pharmaceutical products and preparations (9.3 percent) which alone accounted for more than half the overall advance. Other gains were registered by transport equipment (2.8 percent) and food, drink and tobacco (1.4 percent). The main areas of weakness were chemicals (down 3.6 percent) and other manufacturing and repair (down 1.1 percent). Elsewhere within total industrial production, the volatile oil and gas extraction category jumped a monthly 6.7 percent, mining and quarrying was 3.5 percent higher and water supply and sewerage grew 0.2 percent. However, electricity, gas, steam and air conditioning declined 2.8 percent.


 

February global goods trade gap narrowed from a smaller revised Stg9.5 billion in January to a much as expected Stg9.1 billion in February. However excluding oil & other erratic items, the deficit was Stg8.5 billion, up from Stg8.0 billion. The modest overall improvement masked a contraction in both sides of the balance sheet with exports falling 1.6 percent on the month and imports off a steeper 2.2 percent. For the former, the mid-quarter drop followed a 5.3 percent drop in January and left their level at its lowest mark since November 2010. Weakness in aircraft parts was largely to blame. At the same time the reversal in imports, which was more broad-based, comfortably eclipsed a 1.4 percent spurt at the start of the year and constituted a fourth decline in the last five months. Regionally the shortfall with the EU rose from Stg5.6 billion to Stg6.2 billion but was offset by a Stg1.0 billion drop to Stg2.9 billion in the deficit with the rest of the world.


 

Asia/Pacific

Japan

February machine orders excluding those for ships and those from electric power companies dropped a much greater than expected 8.8 percent on the month. Analysts expected orders to decline 3.4 percent. In January, orders were up 13.4 percent. On the year, orders were up 10.8 percent. Analysts expected an increase of 17.1 percent. Orders were down for most manufacturing and nonmanufacturing categories. The data indicate that companies are shying away from new investments. Manufacturing orders swooned 11.9 percent on the month while nonmanufacturing orders (excluding volatile orders) dropped 8.4 percent. Orders from overseas were up 2.4 percent after increasing 2.7 percent in January.


 

March corporate goods price index was unchanged on the month. The CGPI increased 1.7 percent from March a year ago for the twelfth consecutive rise. Analysts expected an annual increase of 1.6 percent. The March annual change indicates that inflation has declined from the previous eight months. The CGPI annual change was above the 2 percent mark through January but slid below that level in February with the easing in the inflation rate continuing into March. The CGPI was up as high as 2.6 percent in November and 2.5 percent in December and 2.4 percent in January. Contributing to the weaker price increase in March primarily came from nonferrous metals and information & communication equipment. Nonferrous metals prices were down 1.3 percent on the year after slipping 0.2 percent in February. Information & communication equipment prices slid 3.4 percent after declining 3.5 percent the month before.


 

Australia

March employment surprised with an increase of 18,100 after a revised gain of 48,200 in February. Analysts expected an increase of 5,000. At the same time, the unemployment rate dropped to 5.8 percent from 6.1 percent in the prior month. Analysts expected the unemployment rate to be unchanged. The labour force participation rate slid 0.2 percentage points to 64.7 percent in March. The change in payrolls has been volatile in recent months, leading to widely divergent expectations. For example, estimates for March ranged from a loss of 20,000 jobs to a gain of 25,000. Details in the employment data were less solid than the headline. Full time jobs actually dropped 22,100, while part time jobs increased by 40,200. The number of people employed increased by 18,100 to 11,553,200 in March. The increase in employment was due to increased female and male part time employment, up 40,200 to 3,524,000. This was offset by a drop in full-time employment, down 22,100 to 8,029,100. The number of people unemployed decreased 29,900 to 713,200.


 

China

March merchandise trade surplus was $7.71 billion. Analysts expected a deficit of $4.66 billion. This followed the previous month’s deficit of $22.99 billion. Both exports and imports were down. Exports were down 6.6 percent from a year ago while imports declined 11.3 percent. Both had been expected to gain in March. For the three months of 2014, the trade surplus was $16.74 billion, down 61.1 percent from the same three months a year ago. The trade balance with the U.S. was $13.21 billion in March. Exports edged up 1.2 percent on the year while imports sank 11.6 percent. The March surplus with the European Union was $5.2 billion. Imports and exports were up 12.2 percent and 8.8 percent respectively from March 2013. However, the trade balance with Japan was in deficit for the second consecutive month. The March deficit was $0.03 billion. Exports were up 11.0 percent while imports slid 0.7 percent from a year ago.


 

March consumer prices were up 2.4 percent on the year as expected after increasing 2.0 percent in February. On the month the CPI slid 0.5 percent after increasing 0.5 percent in February. For the year to date, the CPI was up 2.3 percent compared with the three months a year earlier. Urban prices were up 2.5 percent on the year while rural prices climbed a more subdued 2.1 percent. Both urban and rural prices were higher than those in the prior month. In February they were up 2.1 percent and 1.7 percent respectively. Prices for tobacco & alcohol and transportation and communication continued to fall. Food prices were up 4.1 percent after rising 2.7 percent in February.


 

March producer price index decline accelerated. The PPI dropped 2.3 percent after sinking 2.0 percent in February. The PPI has now declined for a 25 straight month. This is the longest unbroken run of producer price deflation since the Asian Financial Crisis and highlights the extreme bloat in the Chinese industrial base. The PPI slipped 0.3 percent on the month after declining 0.2 percent the month before. For the year to date, the PPI is down 2.0 percent when compared with the same three months a year ago. Prices declined for all subcategories except clothing & related products. Most of the declines accelerated from the month before. For example, production materials declined 3.0 percent after 2.5 percent in February.


 

Bottom line

Equities retreated as investors became jittery about valuations and the onset of earnings season. The Banks of Japan and England met and left their monetary policies unchanged. Data from China, especially its merchandise trade report, missed estimates by a wide margin.

 

The Bank of Canada meets this week while the U.S. Federal Reserve publishes its Beige Book in anticipation of its next FOMC meeting on April 29 and 30. UK inflation and labour market data will be monitored very closely. China’s estimate of first quarter GDP growth along with March industrial output and retail sales also will be carefully watched.


 

Looking Ahead: April 14 through April 18, 2014

Central Bank activities
April 16 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book 
 
The following indicators will be released this week...
Europe
April 14 Eurozone Industrial Production (February)
April 15 Eurozone Merchandise Trade (February)
Germany ZEW Business Survey (April)
UK Consumer Price Index (March)
Producer Price Index (March)
April 16 Eurozone Harmonized Index of Consumer Prices (March final)
Italy Merchandise Trade (February)
UK Labour Market Report (March)
April 17 Germany Producer Price Index (March)
 
Asia/Pacific
April 16 China Gross Domestic Product (Q1.2014)
Industrial Production (March)
Retail Sales (March)
April 18 Japan Tertiary Index (February)
 
Americas
April 15 Canada Manufacturing Sales (February)
April 17 Canada Consumer Price Index (March)

 

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