Global Markets

Equities were mixed last week as investors assessed the latest earnings reports, the disappointing results of the Doha meeting and the Japanese earthquake. The latter has global ramifications for manufacturing supply chains. The yen continued to rise against the U.S. currency until mid-week when analysts said they expected the Bank of Japan at its meeting this week will ease its policy to help earthquake stricken areas where devastation is sure to send growth even lower than its already anemic level.

On April 14 a southern island of Japan began experiencing a series of strong earthquakes — the strongest in Japan since the cataclysmic March 2011 earthquake and tsunami that devastated northern Japan's Fukushima. There have been aftershocks too numerous to count along with a tremor registering 7.3 magnitude on the Richter scale. The earthquakes killed many, forced the evacuation of tens of thousands and brought manufacturing in Kumamoto to a halt.

The Kyushu region has attracted manufacturers in part ironically because it is supposedly less prone to earthquakes. A local government homepage to recruit companies proudly claims that the region has not suffered a quake above magnitude 7 for the past 120 years. Kumamoto is home to a large semiconductor industry as well as factories of manufacturers including Sony and Honda. A number of major companies have temporarily suspended production in the area.

Companies are looking into the extent of the damage to their facilities and the area's infrastructure and transportation and are confirming the safety of their employees. An example — Sony Semiconductor Manufacturing said that its Kumamoto plant remained idle because it has been difficult to check damage to facilities because of the concern about further aftershocks. A shortage of parts out of the area forced Toyota to begin temporary shutdowns at its plants across Japan.

Concerns about the disruption caused by last week's earthquake in the southwest of Japan have weighed upon exporters particularly in the electronics industry. Honda and Nissan also closed to assess the impact on the facility and its supply chain. Others with suspended production include Fujifilm Holdings, Nippon Steel & Sumitomo Metal. General Motors said it would temporarily close four North American plants as it assesses the potential impact on its supply chain from the recent earthquakes in Japan. The closures will not have a material impact on the company's full-year financial results for its North American division and will not affect full-year production plans in the region according to GM.

The impact on Japan's major industries is through the supply chain. Big car makers including Toyota have been forced to suspend production nationally. Industrial production is likely to contract in April, increasing the probability that the already weak economy could succumb to negative growth in Q2.

Crude climbs without agreement

Both West Texas intermediate and Brent continued to march to higher levels despite the disappointing outcome of the Doha meetings. Oil had a tumultuous week. First, talks on an output freeze between major oil producing nations fell apart with no agreement on Sunday, sending crude prices sharply lower. But a strike by oil workers in Kuwait, which resulted in a sharp drop in output, briefly supported crude prices. News that the strike had ended weighed on the oil prices early Wednesday. But by mid-morning, oil turned positive after a report from the U.S. Energy Information Administration showed a decline in U.S. crude production, a smaller-than expected build in stockpiles of U.S. crude and strong demand for diesel. Top OPEC officials indicated that members could revive discussions of freezing oil production along with non-OPEC producers in June.

Global Stock Market Recap

Europe and the UK

Equities rallied for the first three days of the week but then retrenched Thursday following the announcement from the European Central Bank. The ECB maintained its rates as expected on Thursday and offered no indications whether further easing measures are in the pipeline. Weakness among automakers dragged the European markets lower on Friday. Investors are concerned that the emission scandal could spread to more car makers. The DAX was up 3.2 percent, the CAC gained 1.7 percent and the SMI added 1.2 percent. However, the FTSE retreated 0.5 percent.

April looks to have been another month of only moderate growth for the Eurozone economy. At 53.0, the flash composite output index was hardly changed from its final 53.1 level in March. Manufacturing was just a tick weaker at 51.5 and services a tick stronger at 53.2. However, within the former, manufacturing output (52.5 after 53.1) showed a more marked deceleration. Regionally, the core countries saw some limited convergence as the French composite output gauge rose 0.5 points to 50.5 while the German index dipped 0.2 points to 53.8, a 9-month low. The rest of the Eurozone also recorded a slower pace of expansion.

ECB on hold

The ECB opted to leave its monetary policy on hold after having eased at its previous meeting. The benchmark refi rate stays at zero percent while the deposit rate remains at minus 0.40 percent and the rate on the marginal lending facility is held at 0.25 percent.

ECB President Mario Draghi's press conference offered few new insights. He indicated that the monetary authority has started to expand its monthly asset purchases by €20 billion a month to €80 billion as it announced it would in March. He also reminded that other measures to boost the economic recovery would be used if deemed necessary. However, there was no new useful commentary on the outlook for interest rates which remains tied to the standard forward guidance line stating that rates will stay at current or lower levels for an extended period and well beyond the current horizon for asset purchases.

Like many other monetary authorities the ECB likes to tie any shift in policy to changes in its economic forecasts. The next set of staff projections will be available for the meeting on June 2nd but this is likely to be regarded as far too soon to have any real idea about the impact of the March ease.

Asia Pacific

Equities were mostly positive last week with eight of 12 indexes advancing on the week. Gains ranged from 4.3 percent (Nikkei) down to 0.6 percent (STI). The Shanghai Composite lost 3.9 percent while the Taiex retreated 1.9 percent. The KLCI and PSEi were down 0.6 percent and 0.9 percent respectively. Stocks declined Monday after oil prices tumbled because a summit of major oil producing nations in Doha failed to reach an agreement to freeze oil production. Japanese shares led regional losses after two powerful earthquakes hit the country, killing at least 41 people and forcing major companies to curtail production.

The Nikkei posted a 4.3 percent gain in volatile trading during the week. The index tumbled 3.4 percent on Monday only to jump 3.7 percent Tuesday. Monday's decline was in part a reaction to the massive earthquakes in the Kumamoto region. But equities rebounded thanks to the tumbling yen and reports that Bank of Japan officials may expand their negative interest rate policy beyond its current applications at its upcoming policy meeting next week.

The BoJ may consider helping financial institutions by offering a negative rate on some loans. Such a discussion could happen in conjunction with a decision to make a deeper cut to the BoJ's current reserve rate, which is already in negative territory. This would mean banks can receive money for borrowing from the Bank of Japan. It would be a plus for bank profitability because it eases the burden from the BoJ's negative interest rates. Crude oil prices played a part as well after top OPEC officials indicated that members could revive discussions of freezing oil production along with non-OPEC producers in June.

Global stocks rallied this month as data pointed to stabilization in Chinese growth, U.S. companies reported better than expected earnings and the Federal Reserve signaled a slower pace of interest rate increases. The pullback in Shanghai shares, which jumped in March by the most in 11 months, comes as the People's Bank of China signals a reduced appetite for monetary easing. The PBoC is expected to take a wait-and-see approach and assess the macro-economic data coming through before adding to stimulus measures.

Currencies

The U.S. dollar was up against the yen, euro, Swiss franc and the Australian dollar. However, it declined against the Canadian dollar and pound sterling. After climbing steadily against the U.S. currency, the yen retreated on speculation that the Bank of Japan could effectively start paying banks to borrow its cash. The Bank of Japan, which meets next week, has two lending facilities. One offers banks zero-interest funding for loans to companies in high growth industries and one provides zero-interest long term funds to banks that increase lending more generally.

Selected currencies — weekly results

Indicator scoreboard

Germany

April ZEW survey shows analysts somewhat less confident about the economy's current situation but more optimistic about the outlook. On a negative note, current conditions were down for a third consecutive month, this time by 3.0 points to 47.7, the lowest reading since February 2015. This index has lost 12 points since it last rose in January. However, by contrast, expectations were up for a second consecutive month. A 6.9 point jump, its sharpest increase since last November, lifted the measure to 11.2, its highest mark since the end of last year. However, the latest print was still well short of the values recorded over most of 2013 to 2015.

United Kingdom

March claimant count joblessness was up 6,700 on the month, its first increase since last August. Following a smaller revised 9,300 decline in February, the increase left the unemployment rate unchanged at 2.1 percent. However, over the first quarter, the number of people out of work decreased 31,000 or nearly 10,000 more than in the fourth quarter of 2015. The ILO data showed joblessness in the three months to February advancing 21,000, its first positive reading since May to July last year. The unemployment rate was 5.1 percent for the fourth consecutive reading. Average earnings growth in the three months to February dropped to an annual rate of 1.8 percent, a 0.3 percentage point decline from the November to January outcome and its slowest pace since the same period a year ago. Within this, February's single month earnings weighed in at just 1.1 percent, down from 2.6 percent in January. That said, a hefty fall in bonus payments did most of the damage and headline regular wages growth was steady at 2.2 percent.

March retail sales volumes dropped 1.3 percent following a slightly steeper revised 0.5 percent drop in February for their worst performance since January 2014. Annual growth of purchases slowed from 3.6 percent to 2.7 percent. Excluding auto fuel the picture was no better with sales down a still sharper 1.6 percent from mid-quarter after a 0.3 percent slide last time. Food (down 1.9 percent) was especially soft but, without auto fuel, even non-food purchases decreased fully 1.5 percent from February. Within this, clothing & footwear (down 2.3 percent) and household goods (down 2.9 percent) were disproportionately weak. However, with specialized stores down 0.5 percent, non-store retailing off 0.6 percent and the other stores category 0.4 percent lower, all of the major subsectors posted declines. The drop in volume purchases occurred despite fresh falls in prices. The annual decrease in the overall retail sales deflator steepened from 2.5 percent to 3.0 percent while the ex-auto fuel gauge was steady at a minus 2.1 percent rate.

Asia/Pacific

Japan

The stronger yen continued to take its toll on Japanese trade in March as the pace of contraction in imports and exports quickened from the previous month. However, at the same time, the country's trade surplus rose to its highest level in five-and-a-half years. March unadjusted merchandise trade balance was in surplus for the second month. The surplus was ¥754.985 billion, up from a revised ¥242.164 billion in February. Exports dropped 6.8 percent from a year ago for their sixth straight drop while imports declined 14.9 percent for a 15th consecutive drop. From a year ago, exports to Asia were down 9.7 percent and to China exports were 7.1 percent lower. Exports to the U.S. dropped 5.1 percent. However, exports to the EU jumped 12.1 percent for a second consecutive increase. On a seasonally adjusted basis, the trade surplus was ¥276.511 billion, up from ¥150.441 billion in February. On the month, exports edged up 0.1 percent but were down 9.7 percent from a year ago. Imports were down 2.1 percent from February and down 15.1 percent on the year.

Americas

Canada

March consumer prices were up 0.6 percent on the month and were up 1.3 percent from a year ago. Both the CPI excluding food & energy and the BoC's preferred core measure posted a 0.7 percent monthly gain. This left the yearly increase in the former steady at 1.7 percent but lifted the latter's annual rate by a couple to ticks to 2.1 percent, equalling its highest mark since July 2015. Seasonal factors are quite strong in March and after adjustment for these headline prices were up 0.2 percent on the month and so fully reversed their 0.2 percent drop in February. Similarly adjusted, the ex-food and energy index was up also 0.2 percent firmer while the BoC gauge advanced 0.3 percent. Within the adjusted basket the main upward pressure stemmed from alcohol, which was up 0.6 percent and clothing & footwear and recreation, education & reading — both of these subsectors recording a 0.5 percent increase. Health & personal care (0.3 percent) was the other main mover and no category registered a decline.

February retail sales increased 0.4 percent on the month after jumping 2.0 percent in January. On the year, sales were up 5.6 percent. Moreover, with prices weak, the increase in nominal sales was easily eclipsed by volumes which jumped 1.5 percent on the month. Within the monthly nominal headline increase, nine of the eleven reporting subsectors recorded gains. Among these, clothing & accessories (2.7 percent), sporting goods, hobby, book & music stores (2.0 percent) and furniture home furnishings (1.9 percent) stood out. Motor vehicle & parts dealers (1.0 percent) also had a good month and without this category, sales would have risen 0.2 percent from January. The only decline of note was in gasoline (4.9 percent) where falling prices were a major factor.

Bottom line

Economic news was mixed last week. April composite flash PMIs in the Eurozone were stagnant while the manufacturing PMI for Japan declined further into contractionary territory in part due to the earthquakes. March merchandise exports continued to decline. UK jobless rate was unchanged but retail sales retreated more than expected.

The Federal Reserve and the Bank of Japan hold policy meetings this coming week. While the FOMC is expected to maintain the status quo, the Bank of Japan might ease even more given the fallout from the recent earthquakes, already slow growth and non-existent inflation. First quarter growth data will be released for the U.S., UK, France and the Eurozone. Japan will release its end of month slew of data — the data are for March and will not reflect the impact from the earthquakes.

Looking Ahead: April 25 through April 29, 2016

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