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Equities rise to the occasion
International Perspective - January 6, 2017
By Anne D. Picker, Chief Economist


Global Markets

Equities began the New Year on a positive note but faded as the week wore on as investors reacted to key economic data. However, on the week, all equity indexes followed here advanced. Major questions carried over from the old year — among them the uncertainty regarding U.S. fiscal policy and UK Brexit policy that have yet to be made clear.


One of the key events last week was the release of minutes from the December FOMC meeting. At that time, the committee increased the fed funds rate for the first time in a year. The U.S. dollar tumbled after the release with market players deciding that the Fed was not as hawkish as it was expected to be given the prospects of increased fiscal spending by president-elect Trump. However, the currency quickly recovered after the release of the employment report.


The other key event was the release of the U.S. employment situation for December. The report remained strong even though the increase in employment (156,000) did not meet expectations. Rather it was the wage component this time that garnered attention with a monthly jump of 0.4 percent or 2.9 percent from a year ago.


Economic data were encouraging with signs of growth sprouting globally.


Global Stock Market Recap

  2016 2016 2017 % Change
Index Dec 31 Dec 30 Jan 6 Week 2016
Australia All Ordinaries 5719.1 5719.1 5808.98 1.6% 1.6%
Japan Nikkei 225 19114.4 19114.4 19454.33 1.8% 1.8%
Topix 1518.61 1518.61 1553.32 2.3% 2.3%
Hong Kong Hang Seng 22000.6 22000.6 22503.01 2.3% 2.3%
S. Korea Kospi 2026.5 2026.5 2049.12 1.1% 1.1%
Singapore STI 2880.8 2880.8 2962.63 2.8% 2.8%
China Shanghai Composite 3103.6 3103.6 3154.32 1.6% 1.6%
India Sensex 30 26626.5 26626.46 26759.23 0.5% 0.5%
Indonesia Jakarta Composite 5296.7 5296.7 5347.02 0.9% 0.9%
Malaysia KLCI 1641.7 1641.7 1675.49 2.1% 2.1%
Philippines PSEi 6840.6 6840.6 7248.20 6.0% 6.0%
Taiwan Taiex 9253.5 9253.5 9372.22 1.3% 1.3%
Thailand SET 1542.9 1542.9 1571.48 1.8% 1.8%
UK FTSE 100 7142.8 7142.8 7210.05 0.9% 0.9%
France CAC 4862.3 4862.3 4909.84 1.0% 1.0%
Germany XETRA DAX 11481.1 11481.1 11599.01 1.0% 1.0%
Italy FTSE MIB 19234.6 19234.6 19687.71 2.4% 2.4%
Spain IBEX 35 9352.1 9352.1 9515.90 1.8% 1.8%
Sweden OMX Stockholm 30 1517.2 1517.2 1522.10 0.3% 0.3%
Switzerland SMI 8219.9 8219.9 8417.46 2.4% 2.4%
North America
United States Dow 19762.6 19762.6 19963.80 1.0% 1.0%
NASDAQ 5383.1 5383.1 5521.06 2.6% 2.6%
S&P 500 2238.8 2238.8 2276.98 1.7% 1.7%
Canada S&P/TSX Comp. 15287.6 15287.6 15496.05 1.4% 1.4%
Mexico Bolsa 45642.9 45642.9 46071.570 0.9% 0.9%


Europe and the UK

Equities advanced in the first week of the year despite the many lingering uncertainties from 2016. The laundry list of political uncertainties includes Brexit and national elections in several European Union countries including Germany in 2017. Not to be dismissed are the unknowns emanating from the U.S. as a new president takes over on January 20. The FTSE was up 0.9 percent, the CAC and DAX both added 1.0 percent and the SMI advanced 2.4 percent.


Eurozone economic and business confidence strengthened to the highest level in more than five years in December, shrugging off the uncertainties. The economic sentiment index improved to 107.8 in December from 106.6 in November. This was the highest level since March 2011, when the reading was 108.3 and also above the expected level of 106.8.


Good news for the European Central Bank was that both consumer and producer prices in the Eurozone improved in December with the former increasing 1.1 percent on the year and the latter, 0.1 percent. The PMIs continued to climb into positive territory as well. In Germany, the jobless rate remained stable at 6.0 percent but factory orders tumbled 2.5 percent. And in the UK, the manufacturing, services and construction PMIs all climbed further into positive territory belying expectations of a weakening economy.


Asia Pacific

Equities were higher across the board in the holiday shortened first week of the year. Gains ranged from 0.5 percent (Sensex) to 6.0 percent (PSEi). Among the major indexes, the Nikkei was up 1.8 percent, the Hang Seng increased 2.3 percent and the Shanghai Composite and the All Ordinaries both were 1.6 percent higher. Stocks continued to track foreign exchange fluctuations particularly on Friday prior to the U.S. employment situation report.


The Hang Seng posted its first back-to-back weekly gain since September as a drop in U.S. bond yields lifted property developers and a rebound in the offshore yuan soothed concerns over capital outflows. On the week, most of the gains came after the FOMC minutes showed the majority of its policy makers thought that a gradual pace of rate increases was appropriate amid uncertainty over Donald Trump's fiscal policies.


A slew of purchasing managers indexes were released during the week and the verdict was that growth improved across the region for the most part in December. In China, the Caixin Manufacturing PMI advanced to 51.9 in December from 50.9 in November. The index is now at its highest level since January 2013 and has been at or above the 50 breakeven level for six consecutive months. The Caixin services index climbed to a 17 month high with a reading of 53.4 in December, up from 53.1 in November. The Caixin composite rose to 53.5, up from 52.9.


In Japan, the manufacturing PMI reading climbed to 52.4, up from 51.3 the previous month. This was the index's highest level since December 2015 and provides further evidence of a solid improvement in manufacturing conditions towards the end of 2016. The services index also increased, from 51.8 in November to 52.3 while the composite index increased from 52.0 to 52.8.


However, in India, the PMIs indicated contraction — the manufacturing PMI dropped to 49.5 from 52.3. Survey respondents widely attributed this to the ongoing impact of cash shortages caused by the Indian government's decision early in November to withdraw high-denomination currency notes as legal tender. The services index, while increasing to 46.8 from 46.7, remains deeply in contractionary territory. The composite PMI reflecting activity in both manufacturing and the services sector fell to 47.6 in December from 49.1 in November.



The U.S. dollar was up against the yen and pound sterling but retreated against the Canadian and Australian dollars. It was unchanged against the euro and the Swiss franc. The dollar declined after tradersinterpreted the minutes from the last FOMC meeting to indicate a slower path to interest rate increases, boosting demand for bonds and assets of developing nations.


The offshore yuan surged the most on record after the government encouraged companies to stock up on the currency before the week of lunar New Year celebrations.


The U.S. dollar has been gaining strength on the expectation that the U.S. Federal Reserve will raise interest rates at a more rapid pace this year to counter inflation from a strengthening economy. President-elect Trump is widely expected to unveil a fiscal stimulus package. The Fed reiterated in its minutes that a gradual pace of rate increases going forward would likely remain appropriate. This dampened speculation that the FOMC will step in to counter inflation with higher rates.


Selected currencies — weekly results

2016 2016-17 % Change
Dec 30 Dec 30 Jan 6 Week 2016
U.S. $ per currency
Australia A$ 0.7215 0.722 0.731 1.3% 1.3%
New Zealand NZ$ 0.6948 0.695 0.697 0.2% 0.2%
Canada C$ 0.7443 0.744 0.756 1.5% 1.5%
Eurozone euro (€) 1.0534 1.053 1.054 0.0% 0.0%
UK pound sterling (£) 1.2333 1.233 1.229 -0.4% -0.4%
Currency per U.S. $
China yuan 6.9450 6.945 6.908 0.5% 0.5%
Hong Kong HK$* 7.7533 7.753 7.756 0.0% 0.0%
India rupee 67.9238 67.924 67.418 0.8% 0.8%
Japan yen 116.8100 116.810 116.970 -0.1% -0.1%
Malaysia ringgit 4.4862 4.486 4.473 0.3% 0.3%
Singapore Singapore $ 1.4465 1.447 1.439 0.5% 0.5%
South Korea won 1205.8300 1205.830 1193.000 1.1% 1.1%
Taiwan Taiwan $ 32.3260 32.326 31.823 1.6% 1.6%
Thailand baht 35.8100 35.810 35.740 0.2% 0.2%
Switzerland Swiss franc 1.0174 1.0174 1.0174 0.0% 0.0%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


December composite output index was upwardly revised to 54.4, the strongest pace of business activity since May 2011. The upward revision was wholly due to a faster pace of activity in services where the flash PMI was adjusted 0.6 points firmer to 53.7. New business rose at close to November's rate (a 10-month peak) and backlogs continued to gain ground. Companies responded with a 26th consecutive increase in staffing while an 11-month high in business confidence left it at one of the strongest levels seen in the last five years. Input cost inflation accelerated to a 57-month record, mainly reflecting more expensive fuel and oil. More significantly, output charges were up for a second successive month and by the greatest extent since July 2011. Regionally, in terms of composite output, the best performer was Spain (55.5) which just outpaced Germany (55.2). France (53.1), despite achieving an 18-month high, was still well short of the average as was Italy (52.9) which touched a 2-month low.


December flash harmonized index of consumer prices was up 1.1 percent from a year ago. It equaled its highest level since August 2013. Both core rates — the rate excluding energy, food, alcohol & tobacco and omitting just energy & unprocessed food — edged up to 0.9 percent. Most of the headline gain was attributable to sharply stronger inflation in energy where the rate jumped from minus 1.1 percent to plus 2.5 percent, and food, alcohol & tobacco, which saw a 0.5 percentage point bounce to 1.2 percent. Non-energy industrial goods were only flat at 0.3 percent and services just 0.1 percentage point higher at 1.2 percent.



November manufacturing orders tumbled 2.5 percent but were up 3.3 percent on the year. November's monthly slide was wholly attributable to capital goods which posted a 4.8 percent drop, albeit after 7.3 percent leap last time. Basics were up a further 0.5 percent and consumer & durable goods were 1.5 percent higher. Regionally, weakness was roughly evenly spread between the domestic and overseas markets. The former saw demand contract 2.8 percent and the latter 2.3 percent. Orders from the rest of the Eurozone were down 2.7 percent, somewhat ahead of a 2.0 percent decrease for the rest of the world.




November merchandise trade surplus was A$1.243 billion. This was the first trade surplus since early 2014 and was mainly driven by a sharp increase in exports in response to higher global commodity prices. Exports rose 8.4 percent on the month while imports slipped 0.1 percent. On the year, exports rose 15.7 percent while imports fell 2.4 percent. Increased exports were mainly driven by non-rural goods, which account for almost 62 percent of the total. Exports of rural goods, around 13 percent of total exports, also recorded strong growth of 17.3 percent in November. Exports of services (around 21 percent of the total) were flat on the month, while exports of non-monetary gold (around 5 percent of the total) fell 17.9 percent.




December employment jumped 53,700 while at the same time, the unemployment rate increased to 6.9 percent from 6.8 percent as more people participated in the labour market. The participation rate increased to 65.8 percent from 65.6 percent in November. The number of self-employed declined 18,400. Public employment increased 28,600 while private employment increased 43,500. The number of private sector employees rose 44,000 while the number of public sector employees increased by 29,000. At the same time, self-employment was little changed. Employment increased by 28,100 in professional, scientific and technical services and by 13,900 in health care and social assistance. In contrast, employment declined by 6,800 in agriculture. In the fourth quarter of 2016, employment increased 108,000, the largest increase since the second quarter of 2010. This followed a gain of 62,000 in the third quarter. In the 12 months to December, employment gains totaled 214,000.


November trade balance surprised and recorded its first trade surplus since September 2014, moving from a C$1.0 billion deficit in October to a C$526 million surplus in November. Exports were up 4.3 percent on the strength of increased exports of metal and non-metallic mineral products as well as record exports to countries other than the United States. Imports were up 0.7 percent on the month, mainly on higher imports of energy products. Exports increased 4.3 percent. Export volumes rose 3.5 percent. Overall, 10 of 11 sections increased — a first since May 2014. In November, exports excluding energy products were up 4.7 percent. Year over year, total exports increased 5.2 percent. Total imports were up 0.7 percent with 7 of 11 sections recording gains. Prices increased 1.0 percent, while volumes were down 0.3 percent. Higher imports of energy products and consumer goods were mostly offset by lower imports of aircraft and other transportation equipment and parts, and motor vehicles and parts. Year over year, total imports declined 0.8 percent. Exports to countries other than the United States rose 9.5 percent while imports from countries other than the United States were up 3.5 percent. Exports to the United States also rose in November, up 2.5 percent while imports from the United States were down 0.7 percent.


Bottom line

Equities advanced on the week while the U.S. dollar was mixed. Most economic data were positive including the December PMIs. Canadian employment surprised on the high side while U.S. employment disappointed. However, U.S. wages rebounded.  


Economic data in the coming week focus on industrial output and merchandise trade in Europe. In the Asia Pacific, however, consumer prices in China and India will draw attention. Improving inflation data have been taken as a sign of stabilizing growth in China and investors will be looking for further improvement.


Looking Ahead: January 9 through January 13, 2017

The following indicators will be released this week...
Jan 9 Eurozone Unemployment Rate (November)
Germany Industrial Production (November)
Merchandise Trade (November)
Jan 10 France Merchandise Trade (November)
Jan 11 UK Industrial Production (November)
Merchandise Trade (November)
Jan 12 Eurozone Industrial Production (November)
Asia Pacific
Jan 10 Australia Retail Sales (November)
China Consumer Price Index (December)
Producer Price Index (December)
Jan 12 India Consumer Price Index (December)
Industrial Production (November)
Jan 10 Canada Housing Starts (December)


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


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