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Equities regain composure
International Perspective - February 16, 2018
By Anne D. Picker, Chief Economist


Global Markets

Global equities rebounded from the previous week's losses with gains ranging from a low of 5 points (Sensex) to 5.4 percent (Hang Seng) and 5.3 percent (Nasdaq). Investors were still wary about inflation but more sanguine about future central bank interest rate increases with many market participants raising expectations to four fed fund rate increases from the Federal Reserve rather than the three implied in the last dot plot graph from the FOMC's December 12 and 13, 2017 meeting.


Investors will continue to monitor data looking for signs of inflation. In the U.S., faced with robust growth and now a sudden huge amount of fiscal stimulus in the pipeline, the Federal Reserve is likely to raise interest rates three times in 2018, with rising speculation around a fourth increase before the year is out. However, the European Central Bank, trying to generate inflation out of a Eurozone economy that is now booming by any historical measure, is still pouring on stimulus. It is not likely to raise interest rates until well into 2019.


The rapid market recovery from a higher-than-expected rise in U.S. inflation reported on Wednesday took some by surprise, and investors said the bounceback indicated underlying strength in the market — it may be an indication that inflation is not as big a threat as people made it out to be in the past couple of weeks.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Feb 9 Feb 16 Week 2018
Australia All Ordinaries 6167.3 5937.5 6004.78 1.1% -2.6%
Japan Nikkei 225 22764.9 21382.6 21720.25 1.6% -4.6%
Topix 1817.56 1731.97 1737.37 0.3% -4.4%
Hong Kong Hang Seng 29919.2 29507.4 31115.43 5.4% 4.0%
S. Korea Kospi 2467.5 2363.8 2421.83 2.5% -1.9%
Singapore STI 3402.9 3377.2 3443.51 2.0% 1.2%
China Shanghai Composite 3307.2 3129.9 3199.16 2.2% -3.3%
India Sensex 30 34056.8 34005.76 34010.76 0.0% -0.1%
Indonesia Jakarta Composite 6355.7 6505.5 6591.58 1.3% 3.7%
Malaysia KLCI 1796.8 1819.8 1838.28 1.0% 2.3%
Philippines PSEi 8558.4 8503.7 8612.44 1.3% 0.6%
Taiwan Taiex 10642.9 10371.8 10421.09 0.5% -2.1%
Thailand SET 1753.7 1786.5 1805.89 1.1% 3.0%
UK FTSE 100 7687.8 7092.4 7294.70 2.9% -5.1%
France CAC 5312.6 5079.2 5281.58 4.0% -0.6%
Germany XETRA DAX 12917.6 12107.5 12451.96 2.8% -3.6%
Italy FTSE MIB 21853.3 22166.8 22797.88 2.8% 4.3%
Spain IBEX 35 10043.9 9639.6 9832.10 2.0% -2.1%
Sweden OMX Stockholm 30 1576.9 1500.2 1556.93 3.8% -1.3%
Switzerland SMI 9381.9 8682.0 8986.72 3.5% -4.2%
North America
United States Dow 24719.2 24190.90 25219.38 4.3% 2.0%
NASDAQ 6903.4 6874.5 7239.47 5.3% 4.9%
S&P 500 2673.6 2619.6 2732.22 4.3% 2.2%
Canada S&P/TSX Comp. 16209.1 15034.5 15452.64 2.8% -4.7%
Mexico Bolsa 49354.4 47799.1 48882.780 2.3% -1.0%


Europe and the UK

European equities along with those in Asia and North America participated in the global rebound after last week's plunge. European indexes were up four of five days and tended to follow the U.S. lead in recovering lost ground as investors began to get more comfortable with rising bond yields and the potential for Federal Reserve rate increases with many analysts penciling in four increases rather than three. The FTSE advanced 2.9 percent after declining for four consecutive weeks. The CAC added 4.0 percent, the DAX was 2.8 percent higher and the SMI climbed 3.5 percent. Trading action at the end of the week was driven largely by the positive reaction among investors to a batch of encouraging earnings reports. However, the weekly gains did not wipe out the losses incurred so far in 2018.


Economic data during the week indicated that the Eurozone economies continued to improve in the fourth quarter. Although data from the expenditure side was still not available in the gross domestic product releases, the Eurozone as a whole maintained third quarter advances — it was up 0.6 percent on the quarter and was up 2.7 percent on the year for a decade high. Individual country fourth quarter GDP data confirmed solid growth. Germany also advanced a quarterly 0.6 percent but was down from 0.8 percent from the preceding quarter and up 2.9 percent from a year ago.


The Bank of England is in no rush to increase interest rates and the rates will not go back to levels seen in the past, Chief Economist Andy Haldane said. "We have a very strong eye on inflationary developments, and they're currently ahead of our target," Newcastle Chronicle newspaper reported him as saying. "That's why we've raised rates once already." It seems likely that some further tightening of policy might be needed over the period ahead. "We're in no rush, rates won't remotely go back to levels we've seen in the past, but nonetheless keeping the cost of living under control is, we think, the single best and most important thing we can do to help the economy generally and, within that, in particular those households who are feeling the pinch financially," Haldane said.


Asia Pacific

Equities rebounded this week after last week's heavy losses shrugging off concerns about inflation and higher interest rates. At week's end, trading volumes remained thin as markets in China, Hong Kong, Indonesia, Malaysia, Singapore and Taiwan remained closed for the Lunar New Year holiday. Chinese markets are closed until February 21. The Hang Seng soared 5.4 percent while the Sensex was barely changed for the week. The Kospi and Shanghai Composite added 2.5 percent and 2.2 percent respectively.


On Friday, investors staged a relief rally in Japan after the government nominated Haruhiko Kuroda to serve a second five-year term as governor of the Bank of Japan, — a signal that easy monetary policies will continue. Kuroda's current term ends at the end of April. The appointment was interpreted as a sign of Premier Shinzo Abe's confidence in the governor's efforts to stimulate the economy out of stagnation. Along with Kuroda, the government also submitted two names for deputy governors to parliament for approval. Nominated were Masazumi Wakatabe, a professor at Waseda University and an advocate of aggressive monetary easing, and BoJ Executive Director Masayoshi Amamiya, a veteran central banker known for masterminding monetary policy strategies. The graph pictures the negative BoJ interest rate which has been part of the Bank's easing strategy.



The U.S. dollar dropped against all of its major counterparts last week. It retreated against the yen, euro, pound sterling, Swiss franc and the Canadian and Australian dollars. Japanese policymakers were particularly vocal about the tumbling U.S. dollar as they stepped up warnings against a rising yen Friday, saying recent moves were one-sided and they would respond appropriately, as worries grow that the yen could damage the export reliant economy.


Finance Minister Taro Aso told reporters after a cabinet meeting that he would deal with currency market moves "with a sense of urgency", after the dollar hit a 15-month low against the yen. His comments were echoed by top currency diplomat Masatsugu Asakawa and Chief Cabinet Secretary Yoshihide Suga. Both warned that recent yen gains have been "one-sided".


The recent global stock sell-off increased investor appetite for the yen, which is seen as a safe haven in times of market turmoil. According to Asakawa, the currency market moves over the past several days have been one-sided despite very favorable economic fundamentals. Asakawa added that he was watching currency markets more carefully than ever and was in touch with currency authorities in other countries.


The reappointment of Haruhiko Kuroda as Bank of Japan governor and the nomination of BoJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe as deputy governors had little impact on the yen, although the proposed leadership trio were seen as certain to keep policy on an ultra-loose policy path.


Analysts struggled to explain the dollar's broad weakness, which came as the yield on 10-year Treasuries climbed towards 3 percent and as stock markets and commodities steamed higher. The U.S. currency briefly jumped Wednesday after data showed U.S. inflation was stronger than expected in January, bolstering expectations that the Federal Reserve could increase interest rates as many as four times this year. But it quickly turned lower, eventually posting its worst daily performance in three weeks against a basket of major counterparts. Some analysts suggest that mounting worries over twin deficits in the United States amid a government spending splurge and large corporate tax cuts, as a reason for dollar weakness.


The pound sterling strengthened Tuesday after British inflation unexpectedly stayed close to its highest levels in six years in January, firming up investors' bets that the Bank of England will raise interest rates again in May. The BoE surprised financial markets at their February 8th meeting by indicating that rates could move up faster than previously expected given that the Bank wanted to bring inflation back to its target of 2 percent within two years rather than three. January consumer prices remained at 3.0 percent on the year, unchanged from the month before.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Feb 9 Feb 16 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.781 0.791 1.3% 1.4%
New Zealand NZ$ 0.709 0.725 0.739 1.9% 4.3%
Canada C$ 0.796 0.795 0.796 0.2% 0.1%
Eurozone euro (€) 1.194 1.224 1.241 1.3% 3.9%
UK pound sterling (£) 1.344 1.383 1.402 1.4% 4.2%
Currency per U.S. $
China yuan 6.534 6.303 6.342 -0.6% 3.0%
Hong Kong HK$* 7.816 7.818 7.822 -0.1% -0.1%
India rupee 64.081 64.398 64.215 0.3% -0.2%
Japan yen 112.850 108.810 106.340 2.3% 6.1%
Malaysia ringgit 4.067 3.940 3.894 1.2% 4.4%
Singapore Singapore $ 1.338 1.330 1.312 1.3% 2.0%
South Korea won 1070.630 1092.070 1063.100 2.7% 0.7%
Taiwan Taiwan $ 29.775 29.311 28.980 1.1% 2.7%
Thailand baht 32.696 31.718 31.306 1.3% 4.4%
Switzerland Swiss franc 0.979 0.9397 0.928 1.3% 5.5%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


Fourth quarter flash gross domestic product estimate was up a quarterly 0.6 percent, down from the third quarter rate of 0.7 percent. On the year, GDP was up 2.7 percent and similarly just below the previous period's 2.8 percent. The report lacks details on the key GDP expenditure components but it does provide the first look at the economic performances of most of the individual Eurozone states. These showed another good period for three of the four larger members. On a quarterly basis, France and Germany both expanded 0.6 percent and Spain was up at 0.7 percent. Only Italy (0.3 percent) disappointed although, apart from France, growth rates cooled a little across the board. Elsewhere, there were notably strong performances from Lithuania (1.5 percent), Cyprus and Finland (both 1.1 percent). All reporting states saw positive growth, the weakest being Italy and Latvia (also 0.3 percent).



Fourth quarter flash real gross domestic product expanded 0.6 percent on the quarter, down from the third quarter's marginally weaker revised 0.7 percent rate. Workday adjusted annual growth was 2.9 percent, up from 2.7 percent last time and the fourth rise in as many quarters. Unadjusted, total output was 2.3 percent above its level a year ago. Being the flash report, there are few details on the GDP expenditure components. However, indications are that quarterly growth came mainly from exports. Government consumption advanced as did investment in machinery and equipment. However, household spending was only flat and capital formation was down.



Fourth quarter flash gross domestic product expanded at a 0.3 percent quarterly rate after increasing an unrevised 0.4 percent in the third quarter It also matched the weakest result since the third quarter of 2016. Annual growth was 1.6 percent after 1.7 percent in the third quarter. Only very limited details of the national accounts are available in the flash report but it was indicated that quarterly growth was built upon positive contributions from both final domestic demand and net exports. In terms of production, there were gains in industry and services, partially offset by a contraction in agriculture.


United Kingdom

January consumer prices were down a monthly 0.5 percent and up 3.0 percent on the year. The yearly rate has now posted 3.0 percent in four of the last five months. The main downward pressure on the monthly change in the yearly CPI rate came from transport which subtracted 0.04 percentage points as fuel prices rose by less than in January 2017. Food and non-alcoholic drinks (down 0.03 percentage points) had the other most significant negative impact. On the upside, the only boost of note came from recreation & culture (0.07 percentage points). The core CPI was down 0.8 percent from December which saw the annual underlying rate increase to 2.7 percent after 2.5 percent.


January retail sales volumes edged just 0.1 percent firmer on the month, barely denting a marginally smaller revised 1.4 percent drop in December. Annual growth was 1.6 percent, up from 1.5 percent last time. Excluding auto fuel, the picture was much the same with a 0.1 percent monthly gain and a 1.5 percent yearly rate. The minimal monthly headline increase was held in check by a 0.4 percent decline in food purchases and masked a respectable 0.7 percent increase in (ex-auto fuel) non-food demand. Within this, the other stores category (2.1 percent) was especially strong and non-specialized stores (0.5 percent) also had a decent period. Even so, there were modest setbacks in textiles, clothing and footwear (down 0.1 percent) and household goods (down 0.6 percent). Auto fuel (down 0.6 percent) similarly weighed.




Preliminary gross domestic product in the three quarters to December edged up a quarterly 0.1 percent, down from 0.6 percent in the three months to September (revised up from the initial estimate of 0.3 percent). Annualized growth was 0.5 percent, down from 2.5 percent in the three months to September. On the year, GDP was up 1.6 percent after increasing 1.9 percent in the previous quarter. Net exports and investment spending were the main factors driving weaker headline GDP growth in the three months to December. After boosting headline growth by 0.5 percentage points in the three months to September, net exports did not make a contribution in the quarter, mainly reflecting a strong rebound in imports. Business investment grew by 0.7 percent on the quarter, down from 1.0 percent previously, while residential investment dropped 2.7 percent on the quarter after declining 1.5 percent previously. Private consumption, in contrast, made a strong rebound after falling by 0.6 percent in the three months to September, increasing by 0.5 percent on the quarter and contributing 0.3 percentage points to headline growth. Public demand also fell by a smaller amount than it did in the previous quarter.


December private sector machinery orders (excluding volatile items) plunged 11.9 percent on the month (seasonally adjusted), down sharply from an increase of 5.7 percent in November. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, machinery orders (excluding volatile items) fell 8.5 percent, down from an increase of 6.1 percent in November. Growth in orders weakened in both the manufacturing and non-manufacturing sectors. Manufacturing orders fell by 13.3 percent on the month after a decline of 0.2 percent the previous month, while non-manufacturing orders (excluding volatile items) dropped 7.3, down from growth of 9.8 percent previously.



January employment increased 16,000, down from a revised increase of 33,500 in December. The unemployment rate fell from a revised 5.6 percent in December to 5.5 percent in January while the participation rate fell slightly from 65.7 percent to 65.6 percent. The increase in employment was driven by part-time employment that outweighed a decline in full-time employment. Part-time jobs increased by 65,900, up from an increase of 19,500 in December, while full-time jobs dropped 49,800, easily reversing the 15,100 increase recorded in December. The total number of hours worked in the month fell 1.4 percent in January after a decline of 0.5 percent in December. Over the last 12 months, full-time employment increased 293,200 persons, while part-time employment increased by 110,100 persons.


Bottom line

Equities rebounded from the previous week's declines and posted gains across the board. Positive growth data from the Eurozone, Germany and Italy also boosted investor morale. Japan's first estimate of fourth quarter GDP however disappointed. Australia's January employment grew while the unemployment rate declined.


There are no central bank meetings scheduled for the upcoming week although minutes from the Reserve Bank of Australia's latest meeting (February 6) and the Federal Reserve's latest FOMC meeting (January 31) will be published. Given the looming March FOMC meeting (March 20 -21) when markets expect another 25 basis point increase, readers will be looking for signals that the majority of the committee is aligned for the increase. They also will be looking to see how the FOMC's views on inflation have evolved. In the UK, there will be two major releases — the labour market report and the second estimate of fourth quarter gross domestic product. Canada will post consumer prices for January and December retail sales.


Looking Ahead: February 19 through February 23, 2018

Central Bank activities
Feb 21 United States FOMC Minutes published
Feb 22 Eurozone European Central Bank Monetary Policy Announcement
The following indicators will be released this week...
Feb 20 Eurozone EC Consumer Confidence (February flash)
Germany Producer Price Index (January)
ZEW Business Survey (February)
Feb 21 Eurozone Manufacturing, Services & Composite PMI (February flash)
France Manufacturing, Services & Composite PMI (February flash)
Germany Manufacturing, Services & Composite PMI (February flash)
UK Labour Market Report (January)
Feb 22 Germany Ifo Business Survey (February)
UK Gross Domestic Product (Q4. 2017 second estimate)
Feb 23 Eurozone Harmonized Index of Consumer Prices (January final)
Germany Gross Domestic Product (Q4. 2017)
Asia Pacific
Feb 19 Japan Merchandise Trade Balance (January)
Feb 21 Japan Manufacturing PMI (February flash)
Feb 23 Japan Consumer Price Index (January)
Feb 22 Canada Retail Sales (December)
Feb 23 Canada Consumer Price Index (January)


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


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