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Equities wobble
International Perspective - May 19, 2017
By Anne D. Picker, Chief Economist


Global Markets

Equities had an unsettling week as discomfort with the U.S. political situation led to a massive midweek selloff. Equities globally dropped along with the U.S. currency especially against safe havens such as the yen and Swiss franc. Meanwhile growth prospects improved in the first quarter in the euro area and Japan.


Eurozone first quarter gross domestic product expanded 0.5 percent for a second consecutive quarter. From a year ago, annual growth slipped to 1.7 percent from 1.8 percent in the fourth quarter. While the flash release does not contain key GDP expenditure components it does flesh out the regional breakdown. This confirms that the quarterly expansion was built upon a solid performance by Germany (0.6 percent), supported by Spain (0.8 percent) and a number of smaller members including Finland (1.6 percent), Latvia (1.5 percent) and Lithuania (1.4 percent). Portugal (1.0 percent) also had a good period. France and Italy lagged, but were up a quarterly 0.3 percent and 0.2 percent respectively. By contrast, Greece (down 0.1 percent after down 1.2 percent) slid back into recession (again) and was the only country providing data not to register a rise in GDP. In the graph above, the annual changes show that Spain is outperforming the other large members of the euro area.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 May 12 May 19 Week 2017
Australia All Ordinaries 5719.1 5870.9 5769.0 -1.7% 0.9%
Japan Nikkei 225 19114.4 19883.9 19590.8 -1.5% 2.5%
Topix 1518.61 1580.71 1559.7 -1.3% 2.7%
Hong Kong Hang Seng 22000.6 25156.3 25174.9 0.1% 14.4%
S. Korea Kospi 2026.5 2286.0 2288.5 0.1% 12.9%
Singapore STI 2880.8 3255.3 3216.9 -1.2% 11.7%
China Shanghai Composite 3103.6 3083.5 3090.6 0.2% -0.4%
India Sensex 30 26626.5 30188.15 30464.9 0.9% 14.4%
Indonesia Jakarta Composite 5296.7 5675.2 5791.9 2.1% 9.3%
Malaysia KLCI 1641.7 1775.9 1768.3 -0.4% 7.7%
Philippines PSEi 6840.6 7815.5 7767.6 -0.6% 13.6%
Taiwan Taiex 9253.5 9986.8 9947.6 -0.4% 7.5%
Thailand SET 1542.9 1543.9 1549.6 0.4% 0.4%
UK FTSE 100 7142.8 7435.4 7470.7 0.5% 4.6%
France CAC 4862.3 5405.4 5324.4 -1.5% 9.5%
Germany XETRA DAX 11481.1 12770.4 12638.7 -1.0% 10.1%
Italy FTSE MIB 19234.6 21575.5 21567.5 0.0% 12.1%
Spain IBEX 35 9352.1 10897.0 10835.4 -0.6% 15.9%
Sweden OMX Stockholm 30 1517.2 1646.5 1629.2 -1.0% 7.4%
Switzerland SMI 8219.9 9123.4 9022.5 -1.1% 9.8%
North America
United States Dow 19762.6 20896.61 20804.8 -0.4% 5.3%
NASDAQ 5383.1 6121.2 6083.7 -0.6% 13.0%
S&P 500 2238.8 2390.9 2381.7 -0.4% 6.4%
Canada S&P/TSX Comp. 15287.6 15537.9 15458.5 -0.5% 1.1%
Mexico Bolsa 45642.9 49426.1 49067.5 -0.7% 7.5%


Europe and the UK

Although European markets managed to dent losses from earlier in the week with Friday's gains, the markets suffered their worst week since November because of the mid-week sell-off. The FTSE was a notable exception — it advanced three of five days and was helped by a mini flash crash in the value of the pound sterling on Thursday. Investors were encouraged by higher crude oil prices which climbed back above $50 a barrel at the end of the trading week. On the week, the CAC, DAX and SMI retreated 1.5 percent, 1.0 percent and 1.1 percent respectively.


However, the FTSE was up 0.5 percent. UK investors looked through the political uncertainty to a better earnings season and improved UK retail sales data which pointed to a brighter outlook for consumer-facing stocks. On Tuesday, the FTSE set a record high passing 7,500 for the first time. The multinational groups that make up the majority of the FTSE tend to benefit from a weaker pound, which makes their exports more competitive and increases the relative value of overseas earnings. This is similar to the response of Japanese exporters to fluctuations in the yen. The Bank of England highlighted this trend in its inflation report last week, which pointed out that domestically focused UK stocks are lagging behind the global trend.


On Thursday, Greece's lawmakers approved a reforms package that includes pension cuts and tax increases as demanded by the country's lenders in return for unlocking another tranche of bailout funds and to start discussions over debt relief. The parliament approval came prior to the Eurogroup meeting on May 22 when euro area finance ministers will consider disbursement of the bailout funds and discuss debt relief. Greece had reached a deal with its international creditors on reforms at the beginning of May, thus paving the way for the disbursement of the next tranche of funds from the €86 billion bailout agreed in 2015 and the start of talks on a possible debt relief. It was these reforms that lawmakers approved Thursday even as demonstrators, mainly public-sector trade unions, staged protests outside the parliament.


European Central Bank policymakers agreed that caution was needed in undertaking even subtle changes in communication so as to avoid market volatility similar to the 'taper tantrum' in 2013, according to the ECB's minutes of its monetary policy meeting in late April. Communication should be adjusted only in a very gradual and cautious manner as monetary and financial conditions are particularly sensitive to changes in communication. "After a long period of very accommodative monetary conditions, even small and incremental changes in communication could have strong signaling effects when interpreted as heralding a change in the monetary policy stance."


Asia Pacific

A turbulent week left key Asian equity indexes lower — investors here were mostly focused on the woes in Washington. Mixed economic data earlier in the week combined with sliding oil prices didn't help either. But better than anticipated U.S. economic data towards the end of the week along with rising oil prices balanced concerns surrounding deepening political turmoil in Washington. And a Brazilian political crisis unfolded as well. Brazil's currency — the real — along with stocks and bonds tumbled as President Michel Temer faced calls for impeachment in the wake of a corruption scandal. But Temer said he would not resign and will prove his innocence in the Supreme Court.


Both the Shanghai Composite (up 0.2 percent) and the Hang Seng (up 0.1 percent) managed to advance on the week. The Shanghai Composite's gain ended a five week streak of weekly declines. The Hong Kong Monetary Authority announced a set of rules further tightening mortgage financing in the city at the end of Friday's trading. The measures include an increase in the risk weighting by banks on new mortgages as well as a reduction in the loan-to-value amount that those with an existing mortgage can borrow. "The risk of overheating in the property market in Hong Kong continues to increase," according to Norman Chan, Chief Executive of the HKMA. "The keen competition for mortgage business in the banking sector has heightened the risk of overheating in the property market, and weakened the resilience of banks to cope with a downturn in the market. Given these developments, the HKMA considers that there is a need to introduce new measures to strengthen the risk management of banks."


The Nikkei and Topix retreated 1.5 percent and 1.3 percent respectively as the tumbling U.S. dollar against the yen sent exporters' shares lower. The political situation in the U.S. overshadowed better than anticipated first quarter GDP numbers that saw the Japanese economy grow albeit modestly for the fifth consecutive quarter for the first time since 2004. In an exclusive joint interview with CNBC and Broadcast Satellite Japan Monday. Japanese Prime Minister Shinzo Abe said that the labor market tightness indicates there will be a gradual increase of wages as demanded by market pressures going forward.


The All ordinaries lost 1.7 percent on the week as banks extended recent declines, offsetting gains in the material sector. Banks tumbled on concerns over the proposed $6 billion tax and overheated property markets.



The U.S. dollar tumbled against all of its major counterparts thanks in part to tepid economic housing data and political uncertainty in Washington. The currency was down against the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars. Investors have become concerned that Mr Trump will have difficulty enacting measures that were expected to ramp up economic growth and inflation. At the same time, economic data have disappointed while other trading partners are experiencing a brightening in sentiment. There is concern that the Federal Reserve might not be able to carry through with its projected interest rate increases — this would weigh on banks. The yen and Swiss franc both soared against the U.S. dollar Wednesday as political woes in Washington fueled demand for safe-haven assets.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 May 12 May 19 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.739 0.746 0.9% 3.3%
New Zealand NZ$ 0.6948 0.686 0.693 1.1% -0.2%
Canada C$ 0.7443 0.729 0.740 1.5% -0.6%
Eurozone euro (€) 1.0534 1.093 1.120 2.5% 6.4%
UK pound sterling (£) 1.2333 1.288 1.303 1.2% 5.7%
Currency per U.S. $
China yuan 6.9450 6.900 6.885 0.2% 0.9%
Hong Kong HK$* 7.7533 7.794 7.783 0.1% -0.4%
India rupee 67.9238 64.310 64.638 -0.5% 5.1%
Japan yen 116.8100 113.290 111.170 1.9% 5.1%
Malaysia ringgit 4.4862 4.346 4.322 0.6% 3.8%
Singapore Singapore $ 1.4465 1.404 1.385 1.4% 4.4%
South Korea won 1205.8300 1127.450 1126.910 0.0% 7.0%
Taiwan Taiwan $ 32.3260 30.172 30.188 -0.1% 7.1%
Thailand baht 35.8100 34.650 34.320 1.0% 4.3%
Switzerland Swiss franc 1.0174 1.0013 0.9733 2.9% 4.5%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


May ZEW survey found analysts more confident about the German economy's immediate progress and also a little more optimistic about the outlook. The current conditions gauge rose a further 3.8 points to 83.9, its third increase in as many months and its highest reading since July 2013. It now stands more than 30 points above its level a year ago. Expectations were rather more cautious but still advanced 1.1 points to 20.6, similarly their third straight gain and their best mark since August 2015.


United Kingdom

April consumer prices were up a monthly 0.5 percent and 2.7 percent on the year — their highest reading since July 2013. The main upward pressure on the monthly change and in the yearly rate came from the unwinding of March's Easter effects, notably in transport where prices spiked nearly 19 percent on the month. Higher vehicle tax duties were also an issue here. Similarly, the holiday period contributed towards a 1.1 percent monthly gain in clothing & footwear prices compared with a 0.4 percent decline in April 2016. Elsewhere, higher energy charges introduced by some of the major suppliers similarly contributed. Core CPI also rose 0.5 percent on the month and, at 2.4 percent, its annual rate was up 0.6 percentage points and at its strongest mark since November 2012.


April claimant count unemployment rose 19,400 after a significantly sharper revised 33,500 jump in March. The latest increase was enough to lift the jobless rate a tick to 2.3 percent, its second consecutive rise and its highest reading so far this year. However, the ILO figures showed joblessness declining 53,000 over the first quarter and employment jumping a very healthy 122,000. As a result, the unemployment rate dropped to from 4.7 percent to 4.6 percent, its lowest reading since 1975. Moreover, the single month (March) rate was just 4.3 percent, down 0.5 percentage points from its February mark. At the same time, vacancies in January to March climbed 22,000 to a new record high of 777,000. However, earnings remained subdued with the headline rate for the first quarter edging just a tick firmer to 2.4 percent. Excluding bonuses, the rate slipped 0.1 percentage points to just 2.1 percent.


April retail sales jumped 2.3 percent after declining 1.4 percent in March — their strongest increase since January 2016. Annual growth of volumes doubled to 4.0 percent, equaling a 5-month high. Excluding auto fuel, the picture was similarly robust with purchases up 2.0 percent from March and 4.5 percent from a year ago. The buoyancy of last month must be at least partly attributable to Easter effects but all-round strength suggests that underlying demand picked up significantly too. Excluding auto fuel, non-food sales climbed a monthly 2.3 percent led by the other stores category (7.7 percent after minus 6.7 percent) and non-store retailing (4.4 percent after minus 1.6 percent). Household goods (1.9 percent) expanded for a third straight month but there were setbacks for clothing & footwear (down 0.8 percent but possibly weather-related) and non-specialized stores (down 0.9 percent).




First quarter gross domestic product was up 0.5 percent on the quarter or at an annualized pace of 2.2 percent. On the year, GDP was up 1.6 percent. The main expenditure components contributing to the quarterly 0.5 percent increase were private consumption (0.2 percentage points) net exports (0.1 percentage points) and the change in private inventories (0.1 percentage points). Investment and government spending were flat on the quarter. The economy has now grown for five consecutive quarters for the first time since 2004.



April employment increased 37,400 after adding 60,900 in March. The unemployment rate slid from 5.9 percent to 5.7 percent, while the participation rate was steady at 64.8 percent. The employment increase was entirely driven by part-time jobs, which were up 49,000 after a decline of 13,600 in March. Full-time jobs declined 11,600, partly reversing the strong increase of 73,900 recorded in March. Over the last 12 months, seasonally-adjusted full-time employment has increased by 80,700 persons, while part-time employment has increased by 111,300 persons. The number of people looking for work fell by 19,100 in April, with the number looking for full-time jobs dropping by 12,300 and the number looking for part-time employment down 6,800. At 5.7 percent, the unemployment rate is back at the level recorded in January but remains a little above recent lows seen last year.




March manufacturing sales rebounded from February's decline to gain 1.0 percent on the month as expected. However, most of the increase was the result of higher prices — volumes were up only 0.2 percent. The gain reflected higher sales in the transportation equipment and food industries. Overall, sales were up in 16 of 21 industries, representing 71 percent of the Canadian manufacturing sector. Sales of durable goods rose 1.3 percent while sales of non-durable goods increased 0.7 percent. On the year, sales were up 8.2 percent after increasing 6.2 percent in February. Excluding motor vehicles and parts, sales were up 0.5 percent on the month. In the first quarter, sales were up 2.2 percent after increasing 2.4 percent in the previous quarter. Transportation, a key Canadian industry, was up 2.1 percent after declining for two months. Food industrial sales were up 2.6 percent. These gains were partially offset by a 1.7 percent decline in the petroleum and coal product industry, mostly reflecting lower prices. After removing the effect of price changes, sales volumes of petroleum and coal products edged down 0.2 percent.


March retail sales rebounded an unadjusted 0.7 percent after declining 0.4 percent in February thanks to higher motor vehicle & parts sales. Sales were up in 6 of 11 subsectors, representing 53 percent of total retail trade. After removing price change effects, sales volumes were up 1.2 percent. On the year, sales were up 6.9 percent after increasing 5.1 percent in February. Both January and February were revised upward. Excluding autos, however, retail sales disappointed as they contracted 0.2 percent after remaining flat in February. Motor vehicle & parts (up 3.2 percent) recorded the largest gain in dollar (C$) terms across all subsectors. Sales at general merchandise stores were up for the third consecutive month. Electronics & appliance stores also continued their upward trend in March. Sales that are traditionally associated with the important housing purchases and home renovation sector showed growth in March with sales at building material & garden equipment & supplies dealers and furniture & home furnishings stores up for the sixth time in seven months. Amid lower consumer prices for food purchased from stores led to lower receipts at food & beverage stores.


Bottom line

Economic data were mixed just about everywhere with the exception of Canada where just about all the news was good including retail sales, manufacturing sales volumes, motor vehicle sales and consumer prices. In Japan, GDP and producer prices were partially offset by declining machine orders. And in Europe, the euro area trade surplus widened and consumer confidence improved. UK retail sales were up but so were both the consumer and producer price indexes. In Australia, employment increased and the jobless rate declined. Market response to the data was largely offset by continuing concerns for the political situation in Washington and worries about whether the administration's growth agenda will be delayed.


The coming week is a busy one. The Eurogroup meets in Brussels to discuss the ongoing Greek problem. OPEC meets in Vienna on May 25 where production quotas are on the agenda. And the Group of Seven will meet in Sicily on May 26 and 27. May flash PMIs will be released for the Eurozone, France and Germany along with the U.S. and Japan. Japan will post its trade balance at the beginning of the week and the CPI at the end of the week. The Bank of Canada announces its monetary policy decision on Wednesday — no change is anticipated in its 0.5 percent interest rate.


Looking Ahead: May 22 through May 26, 2017

Central Bank activities
May 24 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Publishes Minutes from May 2,3 FOMC Meeting
The following indicators will be released this week...
May 23 Germany Gross Domestic Product (Q1.2017 final)
Ifo Business Survey (May)
May 24 Eurozone Manufacturing, Service & Composite PMI (May flash)
Germany Manufacturing, Service & Composite PMI (May flash)
France Manufacturing, Service & Composite PMI (May flash)
May 25 Spain Gross Domestic Product (Q1.2017 final)
UK Gross Domestic Product (Q1.2017 second estimate)
Asia Pacific
May 22 Japan Merchandise Trade Balance (April)
May 24 Japan Manufacturing PMI (May flash)
May 26 Japan Consumer Price Index (April)
May 23 United States New Home Sales (April)
May 24 United States Existing Home Sales (April)
Manufacturing PMI (May flash)
May 25 United States Initial Unemployment Claims (week ending prior Saturday)
International Trade in Goods (April)
May 26 United States Durable Goods Orders (April)
Gross Domestic Product (Q1.2017 second estimate)
Consumer Sentiment (May final)


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


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