Global Markets

What else happened last week other than the Federal Reserve policy meeting' Before the Wednesday announcement, it seemed as though virtually everything was in anticipation of the FOMC and then for the rest of the week, trying to figure out the implications of the word 'patient,' that is it's omission, from the Fed's announcement. Equities alternately rallied and declined all week. And the U.S. dollar plunged Wednesday only to revive Thursday and then retreat again on Friday. Bond yields yo-yoed.

The dovishness of the Fed's comments moved talk of the first fed funds increase from June to September. Traders focused on the fact that the Fed lowered its outlook for interest rates at the end of this year. The median projection for the mid-point of the fed funds target range at the end of 2015 is now 0.625 percent, down from the 1.125 percent projection made in December.

While the removal of 'patient' had been interpreted as a signal for impending tightening, it did not turn out that way. The Fed remains as data dependent as ever. Recent data have been mostly soft especially exports — thanks to the strong dollar. Manufacturing and housing have not lived up to analysts' expectations.

Global Stock Market Recap

Europe and the UK

European markets ended the week firmly positive. Friday's investor optimism stemmed from the assumption that an agreement between Greece and the EU would occur. The FTSE closed for the first time above the 7,000 level with a weekly gain of 4.2 percent. The CAC gained 1.5 percent and the DAX, 1.2 percent. The SMI was up 2.6 percent and has more than gained back its formidable losses that incurred after the Swiss National Bank removed its peg on the Swiss franc. European stock markets have been buoyed by the European Central Bank's bond buying program that is aimed at boosting European economic growth. Record low interest rates from major world central banks have also pushed down returns on bonds and cash, driving investors to the better returns from equities.

Greek Prime Minister Alexis Tsipras has agreed to submit a list of reforms to EU leaders within days to overcome the standstill on the aid program. German chancellor Merkel and other key leaders met Tsipras on the sidelines of the two day EU summit Thursday night. Tsipras said he is more optimistic after the meeting and talks are back on track. He told reporters that all sides are doing their best to overcome Greece's troubles. Merkel said no disbursement of funds will be made unless Athens implements budget measures. Merkel is set to meet Tsipras again in Berlin on Monday.

Switzerland's SMI regained all of its losses following January's decision by the Swiss National Bank to remove its peg on the Swiss franc against the euro. Swiss stocks suffered heavy losses after the move, which sent the currency careening to parity against the euro and pushed several currency brokers into bankruptcy. Just days after touching a record, the SMI index slumped 15 percent wiping an estimated more than SFr62 billion off its market valuation. The climb since then has been aided by brisk flows into European equities as investors warm to the tailwind of monetary easing from the European Central Bank.

Swiss National Bank

Having abandoned its minimum foreign exchange target policy in mid-January, the SNB announced no fresh shifts in its monetary stance. The target corridor for 3-month Swiss franc Libor remains at minus 1.25 percent to minus 0.25 percent with the deposit rate pegged at minus 0.75 percent. The SNB uses Libor as a reference for steering its money market rates, which influence rates on bank lending and mortgages. The Swiss franc, to all intents and purposes, will continue to float freely. The outcome was in line with most expectations although there was some talk of a possible further 25 basis point cut in key rates with a view to putting a lid on the currency.

In response to the currency's sharp appreciation,  however, the central bank was forced to make sizeable changes to its economic forecasts. Growth is now put at 1 percent this year, half the rate contained in the December projection, while inflation is slashed to minus 1.1 percent from minus 0.1 percent. Inflation is also expected to remain below zero in 2016 — the new forecast of minus 0.5 percent again was well short of the previous 0.3 percent call.

The SNB said that the Swiss franc is significantly overvalued and again pledged to intervene as and when it thought appropriate to do so. However, no new minimum euro/Swiss franc target floor was announced so financial markets were left to speculate about whether or not the SNB has adopted a rumored informal CHF1.05-1.10 objective band.

Asia Pacific

Equity indexes mostly advanced last week even though trading stalled on Friday as the gains inspired by the Federal Reserve faded. Stocks in China and Japan finished the week higher, extending their recent gains and flying in the face of concerns about the U.S. Federal Reserve's latest signals on interest rates. Only the Sensex and SET were both down 0.8 percent on the week. No index came close to matching the Shanghai Composite — it jumped 7.2 percent on growing expectations of further monetary easing and stimulus measures to bolster growth. The index has now recorded eight consecutive days of gains.

China's stock market rallied late last year fueled by a November interest rate cut, the first in two years, before a correction in January when investors locked in profits and worries grew over a clampdown by Beijing on investors using borrowed money to buy stocks. But buying picked up after Chinese Premier Li Keqiang said Sunday the government has both the room and the tools to step in should growth falter and affect employment. That is fueling expectations for further monetary easing, in the form of cuts in interest rates or banks' reserve requirement ratios.

The Nikkei added 1.6 percent on the week. With the end of the fiscal year approaching on March 31, flows back into the yen will pick up as companies repatriate profits. The Nikkei is at its highest level since April 2000. Investors here have been buying on earnings growth prospects and are following the lead of Japan's ¥120 trillion Government Pension Investment Fund which has been increasing its allocation to domestic stocks. The Nikkei climbed to a fresh 15-year high with a stable yen and hopes for an economic recovery underpinning investor sentiment.

Three Japanese public pension funds said Friday that they plan to shift more money into equities from domestic government bonds, following a similar move by the nation's $1.1 trillion Government Pension Investment Fund. The three funds control a combined ¥30 trillion — an amount roughly the size of Greece's gross domestic product. They will adopt the same portfolio as the GPIF, according to a statement on the GPIF's website. The GPIF, the world's largest pension fund, has been shifting assets to domestic and overseas equities since last year. Its reallocation — and expectations that other Japanese pension funds would follow suit — helped fuel the rally and push the Nikkei to a 15-year high. The moves into riskier assets come at the urging of Prime Minister Shinzo Abe who hopes to secure higher returns for pension funds faced with a rapidly aging population while helping to reinvigorate financial markets.

Bank of Japan

As expected, the Bank of Japan left its key interest rate range at zero to 0.1 percent. It said it would continue to buy JGBs at an annual pace of ¥80 trillion. Its board members voted 8 to 1 to keep policy steady. Takahide Kiuchi voted against the decision once again, arguing that an earlier pace of purchases (¥60 trillion) was appropriate.

According to the BoJ, the economy is likely to continue its moderate recovery trend with exports picking up and corporate profits improving. Private consumption as a whole has remained resilient against the background of steady improvement in the employment and income situation, although recovery in some areas has been sluggish.

However inflation expectations have flattened. The BoJ said that annual CPI growth is "likely to be about 0 percent" due to falling energy prices. Japan's inflation target is in focus as the country tries to end two decades of deflation that has contributed to the moribund economy. Two years ago Bank of Japan governor Haruhiko Kuroda set a new 2 percent inflation target and pledged to hit it "at the earliest possible time, with a time horizon of about two years." However the steep drop in global oil prices is expected to plunge Japan back into deflation for much of this year.

Currencies

The U.S. dollar had a rocky ride last week. It rallied against the euro and other major counterparts prior to the FOMC announcement but sank Wednesday after the FOMC announcement only to rally again on Thursday. Friday it once again sank. It was down against all of its major counterparts including the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars for the week. Of late, when the dollar retreats, equities rise. A high dollar is worrisome to investors because in negatively affects U.S. firms' competitiveness abroad as well as their profitability.

After beginning the week at less than five cents away from parity, the euro ended the week above $1.08. The euro was last at parity with the dollar in 2002. The sharp reversal for the euro is but one effect of the dollar's decline since the Federal Reserve affirmed on Wednesday that, when it starts raising interest rates, it will do so slowly.

Foreign exchange traders paid little attention to the UK chancellor's election eve Budget on Wednesday, but sold the dollar aggressively in the late afternoon after the Fed chair laid out a slower pace of U.S. interest rate increases this year. The Fed's forecast proved an impediment, at least a temporary one, to the dollar's rally that has been so loud over the last nine months it has drowned out many of the other forces at play in currency markets. The Fed's caution on the pace of rate increases has bruised the dollar rally that has been fueled, at least in part, by expectations that the Fed would tighten policy just as many other central banks loosen. And for sterling the chief of these is the risk surrounding the general election on May 7, which opinion polls suggest will be the closest since the 1970s. There is a risk of significant swings in sterling in the period immediately after the election should, as polls suggest, neither the Conservatives or Labour win a majority of seats in Parliament. Based on options market moves, investors expect far greater volatility in the pound around the time voters go to the polls, but less so afterwards.

Selected currencies — weekly results

Indicator scoreboard

EMU

February harmonized index of consumer prices was up 0.6 percent on the month but was down 0.3 percent from a year ago, unchanged from the flash report. However, the provisional core estimates were revised a little stronger. Excluding food, alcohol, tobacco and energy and omitting just unprocessed food and energy, prices are now 0.7 percent higher on the year, a tick above both their flash February and final January levels but on par with their December readings. The third core index, which excludes seasonal food and energy, also edged 0.1 percentage point firmer from its final January mark to 0.6 percent. Non-energy industrial goods were down 0.1 percent on the year. Services, however, were up 1.2 percent.  Food, alcohol and tobacco climbed 0.6 percentage points to a 0.5 percent yearly rate while energy rose from a decline of 9.3 percent to a drop of 7.9 percent.

Germany

March ZEW current conditions index added a surprising 9.6 points from its mid-quarter reading to 55.1. This was its fifth consecutive increase and the highest mark since July 2014. Expectations were up only 1.8 points to 54.8, but this was also their fifth advance in as many months and their best result since February last year. The ongoing improvement in sentiment reflects optimism about the potential combined effects of QE, low oil prices and the slide in the value of the euro. The results should bode well for stronger readings on the March PMIs and Ifo survey.

United Kingdom

February claimant count unemployment dropped a further 31,000 but followed a slightly steeper revised 39,400 decline at the start of the year. The unemployment rate extended its downward trend, dipping an additional tick to just 2.4 percent. The ILO data were similarly buoyant. Over the three months to January, joblessness on this definition decreased 102,000 which put the jobless rate at 5.7 percent. Over the same period, total employment rose a very respectable 143,000 of which, significantly, full-time positions were up some 98,000. The employment rate (73.3 percent) climbed 0.3 percentage points to hit a new record high.

Asia/Pacific

Japan

Japan's trade deficit for February was much smaller than anticipated. The February deficit was ¥424.6 billion from a year ago. Analysts expected a deficit of ¥963.3 billion. The reduction was due to rising exports while at the same time, imports declined. On the year, exports were up 2.4 percent compared with the forecast of a 0.3 percent increase. Imports sank 3.6 percent – the median forecast was for an increase of 3.9 percent. The rise in exports could indicate that a weakened yen is finally providing support for Japanese exporters, but the drop in imports could point to sluggish demand at home. Exports were up for a sixth consecutive month while imports suffered their second decrease. Exports to the U.S. were up 14.3 percent on the year while those to China shrank 17.3 percent. Exports to the EU gained 1.9 percent. On a seasonally adjusted basis February's deficit climbed to ¥638.8 billion from ¥412.3 billion in January. On the month, imports slid 3.4 percent while exports dropped 7.0 percent.

Americas

Canada

January manufacturing sales dropped 1.7 percent and were up 2.9 percent from a year ago. Headline sales were hit by weaker prices. Volumes performed somewhat better in recording a 1.0 percent decrease from year-end. Within the overall monthly nominal decrease, sales declined in 14 of the 21 reporting subsectors. The main area of weakness was petroleum & coal (down 11.9 percent), but machinery (down 8.9 percent) and chemicals (down 4.5 percent) also struggled as did primary metals (down 4.3 percent). On a brighter note, there was a surge in aerospace product & parts (21.7 percent), largely reflecting, however, exchange rate volatility. Other transportation (30.1 percent) and computer & electronic products (5.3 percent) also gained. Other readings were also mixed. On the positive side, new orders were up a more than healthy 12.1 percent from December, again due to a bounce in the erratic aerospace products & parts category, and backlogs expanded 7.2 percent. However, inventories jumped 2.2 percent to lift the inventory/sales ratio by a sizeable 0.05 months to 1.39 months.

February consumer prices were up 0.9 percent on the month for the steepest gain in two years. On the year, the CPI was up 1.0 percent. A 9.4 percent jump in gasoline costs was a key factor in the headline monthly advance. Core CPI excluding food and energy gained 0.7 percent on the month and 1.8 percent on the year. The Bank of Canada's preferred measure which excludes eight volatile items was 0.6 percent higher from January and 2.1 percent above its year ago level. Seasonally adjusted prices were significantly less buoyant and posted a monthly increase of 0.2 percent. Similarly, both the excluding food and energy index as well as the BoC's core gauge edged up only 0.1 percent. Overall prices were lifted by a gasoline-led 0.6 percent jump in transportation and a 0.6 percent gain in recreation, education & reading. Elsewhere household operations, furnishings & equipment and the alcoholic beverages both added 0.3 percent. .

January retail sales dropped 1.7 percent on the month but were up 1.2 percent from a year ago. Volume sales were down 1.2 percent. Within the overall nominal monthly drop, gasoline sales were off 8.8 percent due to weakness in prices. Motor vehicle & parts dealers (down 1.4 percent) also had a poor period as did food & drink (down 1.2 percent), furniture & home furnishings (down 2.1 percent), sporting goods, hobby, book & music stores (down 5.3 percent) and general merchandise (down 1.1 percent). The best performing subsector was electronics & appliances (3.8 percent) although clothing & accessories (1.5 percent) similarly performed well.

Bottom line

The news last week revolved around the Federal Reserve's decision and the response of the financial markets to that decision. Elsewhere, the Bank of Japan kept its bond buying program and interest rates unchanged. The Swiss National Bank also kept its monetary policy unchanged but lowered its growth forecast going forward. UK unemployment continues to decline. Japan's merchandise trade deficit was cut in half thanks to rising exports and dropping imports.

The coming week is relatively quiet. There are no major central bank meetings and the reverberations of the Fed's move will undoubtedly continue to affect the financial markets. The highlight of the week will be the flash estimates for March PMIs. Japan will release its spate of data at the end of the week.

Looking Ahead: March 23 through March 27 2015

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