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Equities - a sea of red ink
International Perspective - March 2, 2018
By Anne D. Picker, Chief Economist


Global Markets

Global equities were down for the week and the month of February. The negative reactions during the week primarily were rooted in whether the Federal Reserve would increase its policy federal funds rate more than the three times indicated in its December 2017 forecasts. Markets responded to comments made by new Fed Chairman Jerome Powell in his Congressional testimony on Tuesday and again on Thursday.


Downward pressure on equities was exacerbated by U.S. President Trump's announcement Thursday that he would impose duties of 25 percent on steel and 10 percent on aluminium. This sparked concerns about retaliatory moves from major trade partners such as China, Europe and Canada. Analysts said that the markets were spooked by the aggressiveness of the message and by its potential of sparking an extended trade war. Possible retaliatory moves were underscored by Canada's quick response, with officials in Ottawa saying they will retaliate against any U.S. tariffs on steel and aluminium products.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Feb 23 March 2 Week Feb 2018
Australia All Ordinaries 6167.3 6105.2 6028.37 -1.3% -0.5% -2.3%
Japan Nikkei 225 22764.9 21892.8 21181.64 -3.2% -4.5% -7.0%
Topix 1817.56 1760.53 1708.34 -3.0% -3.7% -6.0%
Hong Kong Hang Seng 29919.2 31267.2 30583.45 -2.2% -6.2% 2.2%
S. Korea Kospi 2467.5 2451.5 2402.16 -2.0% -5.4% -2.6%
Singapore STI 3402.9 3533.2 3479.20 -1.5% -0.5% 2.2%
China Shanghai Composite 3307.2 3289.0 3254.53 -1.0% -6.4% -1.6%
India Sensex 30 34056.8 34142.15 34046.94 -0.3% -5.0% 0.0%
Indonesia Jakarta Composite 6355.7 6619.8 6582.32 -0.6% -0.1% 3.6%
Malaysia KLCI 1796.8 1861.5 1856.07 -0.3% -0.7% 3.3%
Philippines PSEi 8558.4 8467.6 8458.57 -0.1% -3.3% -1.2%
Taiwan Taiex 10642.9 10794.6 10698.17 -0.9% -2.6% 0.5%
Thailand SET 1753.7 1808.1 1811.98 0.2% 0.2% 3.3%
UK FTSE 100 7687.8 7244.4 7069.90 -2.4% -4.0% -8.0%
France CAC 5312.6 5317.4 5136.58 -3.4% -2.9% -3.3%
Germany XETRA DAX 12917.6 12483.8 11913.71 -4.6% -5.7% -7.8%
Italy FTSE MIB 21853.3 22672.2 21912.14 -3.4% -3.8% 0.3%
Spain IBEX 35 10043.9 9822.4 9531.10 -3.0% -5.8% -5.1%
Sweden OMX Stockholm 30 1576.9 1577.1 1526.46 -3.2% -0.6% -3.2%
Switzerland SMI 9381.9 8948.2 8628.51 -3.6% -4.6% -8.0%
North America
United States Dow 24719.2 25309.99 24538.06 -3.0% -3.0% -0.7%
NASDAQ 6903.4 7337.4 7257.87 -1.1% -1.1% 5.1%
S&P 500 2673.6 2747.3 2691.25 -2.0% -2.0% 0.7%
Canada S&P/TSX Comp. 16209.1 15638.5 15384.59 -1.6% -1.6% -5.1%
Mexico Bolsa 49354.4 48643.4 47548.100 -2.2% -2.3% -3.7%


Europe and the UK

European equities tumbled Friday to six-month lows after U.S. President Donald Trump said the United States would impose tariffs on imported steel and aluminium. The announcement prompted worries about a global trade war. The concerns sparked a broad sell-off in Europe, weighing especially on the export-oriented German DAX. Investors were worried about the impact the plans to impose the new tariffs will have on global trade. The daily losses grew progressively worse as the week wore on after Monday's positive close. For the week, the FTSE was down 2.4 percent, the CAC declined 3.4 percent, the DAX tumbled 4.6 percent and the SMI lost 3.6 percent. For the month of February, the indexes dropped 4.0 percent, 2.9 percent, 5.7 percent and 3.8 percent respectively.


Prior to the tariff announcement, investors were focused on new Fed Chairman Jerome Powell's testimony before two Congressional committees. On Tuesday, he spoke to the House of Representative's Committee on Financial Services in the Federal Reserve's Semiannual Monetary Policy Report to the Congress and on Thursday to the Senate Banking Committee. His comments about the health of the U.S. economy sent equities lower. Investors thought he was implying that there would be four interest rate increases this year instead of the three that were projected in the December forecast. He clarified his opinion on Thursday.


European politics also weighed on investors with British Prime Minister Theresa May outlining her much-anticipated vision for the UK's post-Brexit relationship with the European Union Friday. On Sunday, Italians will vote in a general election and in Germany, the Social Democratic Party will announce the outcome of last week's party membership vote on whether or not to join Chancellor Merkel in a new Grand Coalition. If the outcome is in favor, it would likely bring an end to five months of uncertainty over the government in Germany.


Asia Pacific

U.S. President Donald Trump's vow to impose tariffs on steel and aluminum imports as soon as next week sent stocks reeling and sparked fears of a trade war. And renewed concerns over a faster pace of U.S. interest rate increases also kept investors nervous. As a result, all equity indexes followed here with the exception of the SET tumbled on the week. Losses ranged from 0.1 percent (PSEi) to 3.2 percent (Nikkei). Only the SET advanced for the month of February. The Jakarta Composite slipped 0.1 percent on the month while the Hang Seng tumbled 6.2 percent.


Investors were cautious at week's end as they waited for the upcoming session of the National People's Congress on March 4 and 5 in Beijing. The gathering of 3,000-plus delegates is expected to set the tone for the year's development plans. The Hang Seng declined 2.2 percent on the week while the Shanghai Composite was 1.0 percent lower. Though China exports relatively little steel to the U.S. it is a target of the Trump administration on a number of other issues ranging from tinfoil to intellectual property rights.


In Japan, equities tumbled and the yen surged as investors fretted about a potential trade war and the prospect of the ECB and Bank of Japan exiting from their respective extraordinary stimulus programs. Investors also got a jolt from comments made by Bank of Japan Governor Haruhiko Kuroda. He said the BoJ will consider an exit from its extraordinary monetary policy if its inflation target is achieved during fiscal 2019.


In his testimony that lasted about three hours, Kuroda said that this doesn't affect his "overshooting commitment," which pledges the BoJ to continue expanding the monetary base until inflation exceeds 2 percent in a stable manner. Even with the recent easing in the pace of bond purchases by the BoJ, the monetary base is still increasing at an annual pace of more than 9 percent. With the Federal Reserve already raising rates and the European Central Bank debating normalization, Kuroda has been under increasing pressure to provide details on when the BoJ may follow suit. The yen surged, yields on Japanese sovereign debt climbed across the curve and equities tumbled.



 The U.S. dollar advanced against most of its major counterparts including the pound sterling, Swiss franc and the Canadian and Australian dollars. However, the dollar retreated against the euro and yen on the week. The dollar was declining Friday even before Bank of Japan's chairman Kuroda spoke. The currency had pulled sharply back from six-week highs after U.S. President Donald Trump's decision to impose tariffs on steel and aluminium that deflated a week-long recovery. Prior to Trump's announcement, the dollar had enjoyed a rebound from three-year lows reached in mid-February as hawkish-sounding comments by new Federal Reserve Chair Jerome Powell sharpened expectations towards the Fed raising rates as much as four times this year.


The yen climbed Friday after Bank of Japan Haruhiko Kuroda said the BoJ will consider an exit from its ultra-easy monetary policy if its inflation target is achieved in the fiscal year ending in March 2020. Speculation regarding when the BoJ, which has significantly lagged its peers in moving towards policy normalization, would explore an exit from its current policy has been one of the key themes affecting the yen, adding to global policy uncertainty. Some in the currency market had suspected the BoJ was quietly moving towards a policy exit, despite its reiterations that it would stick to easing. And while the BoJ may not end easing right away, investors received the clearest indication yet as to when the central bank intends to begin stepping away from unorthodox policies. On Wednesday, the BoJ attracted attention when it reduced the amount of 25 to 40 year JGBs it purchased at a regular debt-buying operation to ¥70 billion from ¥80 billion.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Feb 23 March 2 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.784 0.776 -1.0% -0.5%
New Zealand NZ$ 0.709 0.729 0.724 -0.8% 2.1%
Canada C$ 0.796 0.790 0.775 -1.9% -2.6%
Eurozone euro (€) 1.194 1.230 1.233 0.3% 3.2%
UK pound sterling (£) 1.344 1.397 1.379 -1.3% 2.6%
Currency per U.S. $
China yuan 6.534 6.337 6.345 -0.1% 3.0%
Hong Kong HK$* 7.816 7.824 7.831 -0.1% -0.2%
India rupee 64.081 64.729 65.166 -0.7% -1.7%
Japan yen 112.850 106.840 105.680 1.1% 6.8%
Malaysia ringgit 4.067 3.919 3.904 0.4% 4.2%
Singapore Singapore $ 1.338 1.320 1.319 0.1% 1.5%
South Korea won 1070.630 1078.940 1080.460 -0.1% -0.9%
Taiwan Taiwan $ 29.775 29.268 29.273 0.0% 1.7%
Thailand baht 32.696 31.403 31.425 -0.1% 4.0%
Switzerland Swiss franc 0.979 0.9366 0.937 -0.1% 4.4%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


February economic sentiment index (ESI) declined for a second month in a row. A 0.8 point slide to 114.1 from a marginally stronger revised January reading was the second consecutive drop and left the index at a 3-month low. The headline decrease reflected a mild deterioration in morale in most sectors. Industry (8.0 after 9.0) and consumers (0.1 after 1.4) led the way but both retail (4.3 after 5.2) and construction (4.2 after 4.7) followed suit. The only exception was services (17.5 after 16.8) where confidence reversed more than half of January's 1.2 point decline. Regionally among the four large members, just Italy (111.6 after 110.1) posted a rise in its national ESI. France (109.7 after 112.4) saw a relatively sizeable decline and there were smaller declines in both Germany (114.4 after 116.0) and Spain (110.2 after 110.9). However, all remain well above the common 100 long-run average.


February flash harmonized index of consumer prices was up 1.2 percent from a year ago, down from 1.3 percent in January. Excluding energy, food, alcohol & tobacco, the yearly rate was steady at 1.0 percent while without just energy & unprocessed food, inflation was flat at 1.2 percent. Non-industrial goods (0.7 percent) and services (1.3 percent) both saw their respective yearly rates edge higher but food, alcohol & tobacco (1.1 percent after 1.9 percent) weighed while energy (2.1 percent after 2.2 percent) had little effect.



Gross domestic product for the three months to December expanded 0.6 percent following a 0.7 percent quarterly jump in the third quarter. Annual growth climbed from 1.2 percent to 1.9 percent. However, household consumption was only up 0.2 percent, or half the previous period's rate, and equipment and software investment fell 1.2 percent, its first decline in almost three years. Construction (1.1 percent) made solid progress and government consumption advanced 0.5 percent but it was left to inventories (2.0 percent) to do most of the work. Net foreign trade had a negative impact as exports of goods excluding valuables fell 1.4 percent while imports surged 4.4 percent. Services contracted 2.7 percent but imports decreased a much sharper 5.1 percent. However, there was better news on inflation as annual growth of the GDP deflator climbed 0.3 percentage points to (a still sluggish) 0.5 percent.




Fourth quarter gross domestic product was up an annual 7.2 percent, up from 6.4 percent in the previous period and the best performance since the third quarter of 2016. It also supports hopes that the negative effects of the goods and services tax (GST) introduced in the middle of last year and the ban on high value currency notes implemented in November 2016 have started to fade. Household consumption was up by a solid 5.6 percent on the year and government final consumption by 6.1 percent. However, gross fixed capital formation (12.0 percent) showed the strongest gain. Stock building had a negative impact which should help the first quarter economy while exports rose 8.7 percent, a rate matched by imports. Of note, there was also a sizeable 7.2 percent increase in the statistical discrepancy.




Fourth quarter gross domestic product (GDP) was up 0.4 percent on the quarter for a second consecutive quarter. On an annualized basis, GDP was up 1.7 percent after increasing a revised 1.5 percent in the third quarter. The 1.7 percent and 1.5 percent growth rates in the fourth and third quarters fell sharply below the 4.4 percent and 4.0 percent growth rates in the second and first quarters of the year. Similarly, the 0.4 percent quarterly increase in the fourth quarter followed 1.1 percent and 1.0 percent in the second and first quarters of the year. Business investment increased a quarterly 2.3 percent with investment in residential structures up 3.2 percent on the strength of both resale activity and new construction. Businesses also increased outlays for the fourth consecutive quarter on machinery and equipment (3.0 percent) and non-residential structures (1.3 percent). Real household final consumption expenditure slowed to 0.5 percent following a 0.9 percent increase in the previous quarter. Spending was up on durable, semi-durable and non-durable goods, as well as on services. Export volumes increased 0.7 percent following a 2.7 percent decline in the third quarter, while real imports were 1.5 percent higher. Improved terms of trade boosted economy-wide purchasing power, and real gross national income increased 1.0 percent. Export prices rose 3.6 percent in the fourth quarter on the strength of energy products, compared with a 1.5 percent increase in import prices.


Bottom line

Equities tumbled both for the week and the month of February. Investors paid close attention to Fed Chairman Powell's Congressional testimony and U.S. President Trump's announcement regarding the imposition of tariffs on imports of steel and aluminum. Canada, Brazil and the European Union have already threatened countermeasures. The International Monetary Fund on Friday said Trump's move likely would damage the U.S. economy as well as the economies of other nations.


Another busy week is ahead with the Banks of Canada and Japan, Reserve Bank of Australia and the European Central Bank holding policy meetings. None are expected to change their current policies. And in China, investors will keep an eye on the upcoming session of the National People's Congress on March 4 and 5 in Beijing. The gathering of 3,000-plus delegates is expected to set the tone for the year's development plans.


Among the many data releases next week, Australia posts fourth quarter gross domestic product and January merchandise trade and retail sales data. Germany releases January data for manufacturing orders and industrial product. Output data will also be posted for France and the UK. China releases February consumer and producer price indexes.


Looking Ahead: March 5 through March 9, 2018

Central Bank activities
March 6 Australia Reserve Bank of Australia Monetary Policy Announcement
March 7 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book published
March 8 Eurozone European Central Bank Monetary Policy Announcement
March 9 Japan Bank of Japan Monetary Policy Announcement
The following indicators will be released this week...
March 5 Eurozone PMI Composite & Services (February)
Retail Sales (January)
Germany PMI Composite & Services (February)
France PMI Composite & Services (February)
Italy PMI Composite & Services (February)
UK PMI Services (February)
March 7 Eurozone Gross Domestic Product (Q4.2017 final)
March 8 Germany Manufacturing Orders (January)
March 9 Germany Industrial Production (January)
Germany Merchandise Trade (January)
France Industrial Production (January)
UK Industrial Production (January)
Merchandise Trade (January)
Asia Pacific
March 5 Japan PMI Manufacturing (February)
March 6 Australia Retail Sales (January)
March 7 Australia Gross Domestic Product (Q4.2017)
March 8 Japan Gross Domestic Product (Q4.2017 second estimate)
Australia Merchandise Trade Balance (January)
March 9 China Consumer Price Index (February)
Producer Price Index (February)
March 7 Canada International Trade (January)
March 9 Canada Labour Force Survey (February)


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


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