Global stocks gain in 2012 thanks to quantitative easing

Despite all the anxiety over sovereign debt in Europe for most of the year and then the so-called fiscal cliff in the United States towards the end of the year, global stock markets managed to put up a good performance in 2012.

With just one trading day left in the year, the Morgan Stanley Capital International All-Country World Index is up 12.58 percent from the start of the year. The table below shows the gains made by the major stock markets around the world according to the Morgan Stanley Capital International indices.

	Percentage gain
	Local currency (percent)	US dollars (percent)
USA	11.63	11.63
Japan	18.85	6.21
UK	6.42	10.62
Germany	25.24	27.55
France	15.28	17.41
China	18.43	18.65

The strong gains by stocks were achieved not only despite European sovereign debt concerns and potential US fiscal tightening but also despite weak global economic growth.

While the US economy maintained growth through the first three quarters of the year, the eurozone economy contracted 0.2 percent in the second quarter and 0.1 percent in the third quarter, which means that the latter has technically fallen into recession. Japan's economy can also be said to have fallen into recession after contracting 0.03 percent in the second quarter and 0.9 percent in the third quarter. China's economy also slowed in 2012.

There is no mystery to what fuelled markets in 2012 in the face of so many headwinds: quantitative easing by central banks.

The Federal Reserve launched its initial round of asset purchases in 2009 during the last recession and has continued to add to its purchases since, the most recent boost coming earlier this month.

The Bank of Japan, which had begun quantitative easing way back in 2001, also expanded its asset-purchase programme this month, its third increase in four months.

The European Central Bank introduced its own form of quantitative easing under the Long Term Refinancing Operation in December last year in response to the sovereign debt crisis, and followed that up with a pledge by President Mario Draghi in July this year to “do whatever it takes to preserve the euro”.

Government bonds are the direct beneficiaries of quantitative easing, but the depressed bond yields that result have forced investors to reach for return in higher-risk equities, thus pushing up prices of the latter.

However, while quantitative easing has boosted stock prices around the world, it has not prevented recession in Europe and Japan, although it may have helped keep the US economy growing.

It remains to be seen how much quantitative easing will help markets as well as the real economy going forward.

US economy shows more signs of growth

Friday brought yet more signs that the US economy is continuing to grow.

A report from the National Association of Realtors showed that its pending home sales index rose 1.7 percent in November to 106.4, the highest level since April 2010.

The MNI Chicago Report’s business barometer rose to 51.6 in December from 50.4 in November.

US stocks fell on Friday though. The S&P 500 lost 1.1 percent, its fifth consecutive day of decline, as investors continue to focus on the lack of progress on the budget.

US unemployment claims fall, new home sales rise, Japanese industrial output falls

US economic data on Thursday were mostly positive.

Applications for unemployment-insurance payments fell by 12,000 to 350,000 in the week ended 22 December. The four-week moving average fell to 356,750, the lowest since March 2008.

New home sales rose 4.4 percent in November to a 377,000 annual pace, the highest since April 2010.

However, the Conference Board’s consumer confidence index fell to 65.1 in December from 71.5 in November.

Japanese economic data on Friday were mixed.

Industrial output fell 1.7 percent in November, reversing the 1.6 percent gain in October, which had been the first increase in four months. However, manufacturers surveyed by the government expect output to rise 6.7 percent in December and 2.4 percent in January.

Also signalling weakness for Japanese manufacturing was the Markit/JMMA manufacturing PMI, which fell to 45.0 in December, a 44-month low, from 46.5 in November.

More positively, Japan's unemployment rate fell to 4.1 percent in November from 4.2 percent in October while household spending rose 0.2 percent in November from a year earlier.

However, the core consumer price index, which excludes volatile fresh-food prices, fell 0.3 percent last month, pushing the 12-month rate down to -0.1 percent.

US home prices rise, yen falls

US home prices continued their rebound in October. The S&P/Case-Shiller home price index increased 4.3 percent from October 2011, the biggest 12-month advance since May 2010.

Meanwhile, in markets, the yen was making the news. From Bloomberg:

The yen slid to a 16-month low against the euro before data tomorrow that may show a decline in Japan’s consumer prices, fanning speculation Prime Minister Shinzo Abe will push the central bank to boost cash infusions.

The currency held near the lowest since 2010 versus the dollar after Abe said in a media briefing yesterday that “bold’ monetary policy is one of the three pillars of his economic measures. Implied volatility on U.S. stocks jumped to a five- month high yesterday, supporting demand for safer assets.

US economy maintains expansion

Recent data indicate that the United States economy has continued to grow in the fourth quarter.

Purchasing managers' surveys in the fourth quarter have been giving a mixed picture of the US economy.

The Institute for Supply Management's manufacturing PMI fell to 49.5 in November, the lowest since July 2009, from 51.7 in October. The fall below 50 indicated contraction in US manufacturing activity.

However, the ISM's non-manufacturing index rose to 54.7 in November from 54.2 in October, indicating continued growth in the services sector.

Furthermore, contradicting the ISM data, Markit's purchasing managers' survey showed that its US manufacturing PMI rose to 52.8 in November from 51.0 in October, indicating an acceleration in manufacturing activity.

Markit's flash estimate of the manufacturing PMI for December showed another jump to 54.2 this month.

A report from the Federal Reserve Bank of Chicago last week suggests that growth has indeed accelerated recently. Its national activity Index increased to +0.10 in November from -0.64 in October, pushing the three-month moving average to -0.20 in November from -0.59 in October.

The value of the three-month average in October had been the lowest since November 2009. It was also close to -0.70, the value at which the Chicago Fed says indicates an increased likelihood of a recession.

November's increase takes the average away from that value and suggests that the economy is probably continuing to expand.

US economy accelerates, stocks fall

The US economy accelerated in November, with the Chicago Federal Reserve reporting that its national activity Index increased to +0.10 in November from -0.64 in October. The three-month moving average increased to -0.20 in November from -0.59 in October.

Other US data on Friday were mostly also positive.

Consumer spending rose 0.4 percent in November after having fallen 0.1 percent in October. After adjusting for inflation, consumer spending rose 0.6 percent, the largest increase since August 2009.

Personal income rose 0.6 percent in November, the most since February, after a 0.1 percent increase the prior month.

Another report on Friday showed that durable goods orders rose 0.7 percent in November. Orders for non-defense capital goods excluding aircraft rose 2.7 percent after a revised 3.2 percent gain in October.

However, the Thomson Reuters/University of Michigan consumer sentiment index fell to 72.9 in December, the weakest since July, from 82.7 in November. Bill McBride thinks that the decline in sentiment is probably related to concerns over the so-called “fiscal cliff”.

Indeed, concerns over the budget pushed stocks down on Friday after House Republican leaders scrapped a plan to allow higher taxes on top earners. The Standard Poor’s 500 Index fell 0.9 percent and the MSCI All-Country World Index fell 0.8 percent.

BoJ increases monetary stimulus, US growth revised up

The global monetary easing continued on Thursday with the Bank of Japan expanding its asset-purchase programme for the third time in four months. The asset-purchase fund was increased from 66 trillion yen to 76 trillion yen.

Meanwhile, most US data on Thursday were positive.

Revised data show that the US economy grew at a 3.1 percent annual rate in the third quarter, the fastest pace since late 2011.

Existing home sales surged 5.9 percent in November to a seasonally adjusted annual rate of 5.04 million units. It was the fastest sales pace since November 2009.

However, the Conference Board's index of US leading indicators fell 0.2 percent in November.

There were mixed data from Europe.

In the euro area, the European Commission's consumer confidence indicator rose to -26.6 in December from -26.9 in November.

However, in the UK, the GfK NOP consumer confidence index plunged to -29 in December from -22 in December. This comes after flat retail sales in November.

US housing starts fall but building permits rise

Economic reports on Wednesday were mixed.

In the US, housing starts fell 3.0 percent in November. However, building permits rose 3.6 percent to an 899,000 annual rate, the most since July 2008.

In another positive sign for US construction activity, the American Institute of Architects reported that its billings index rose to 53.2 in November, the highest level in five years.

In Japan, exports fell 4.1 percent in November from the previous year, but this was better than the 5.5 percent decline expected and the 6.5 percent contraction in October.

Also, Japan's leading index for October has been revised up to 92.8 from 92.5. In September, the index was at 91.8. The coincident index was revised up to 90.7 from 90.6 but remained lower than the 91.3 reading in September.

In the euro area, construction output fell 1.6 percent in October, the most in six months. However, in Germany, Ifo's business climate index rose to 102.4 in December from 101.4 in November.

Housing continues recovery in US and China

US housing continues to show signs of recovery, with the NAHB/Wells Fargo Housing Market index rising to 47 in December, its highest level since April 2006, from 45 in November, according to a report on Tuesday from the National Association of Home Builders.

China's housing market is also turning up. Home prices rose month-on-month in 53 of 70 major cities monitored by the National Bureau of Statistics in November, up from 35 in October.

Also rising is UK consumer prices. The UK inflation rate held at 2.7 percent in November, the same as in October.

UK house price inflation has slowed though. House prices rose 1.5 percent in October from a year ago compared with 1.7 percent in September.

Worldwide central bank easing has apparently helped global reflation, and that trend continued on Tuesday with central banks from Sweden, Turkey and Hungary all cutting interest rates.

IMF raises 2013 growth forecast

The IMF has raised its forecast for economic growth next year, based on an interview of managing director Christine Lagarde by Chile's La Tercera newspaper on Sunday. Reuters reports:

“The overall (global) outlook for 2013 is for growth of 3.6 percent on average. We believe emerging economies and low-income economies will expand 5.6 percent, while advanced economies will grow 1.6 percent,” Lagarde said, according to the newspaper.

However, growth in the US may be lacklustre for a while.

The Federal Reserve Bank of New York’s general economic index fell to minus 8.1 in December from minus 5.2 in November, according to a report on Monday. It was the fifth consecutive decline in the index.

Federal Reserve Bank of Richmond President Jeffrey Lacker sees weak growth extending into next year. From Bloomberg:

“My best guess is that growth will continue into next year at an annual rate of 2 percent and that beyond 2013 we should see growth begin to firm,” Lacker said to the Charlotte Chamber of Commerce’s annual economic outlook conference.

Economy shows improvement as Fed announces more stimulus

Preliminary readings from purchasing managers' surveys for December released last week showed improvement in the global economy.

In the United States, Markit's US manufacturing PMI jumped to 54.2 in December from 52.8 in November.

In the euro area, Markit's composite index rose to 47.3 in December from 46.5 in November. The services index rose to 47.8 from 46.7 while the manufacturing index rose to 46.3 from 46.2.

HSBC's China manufacturing PMI rose to 50.9 in December from 50.5 in November.

These preliminary readings suggest that the improvement we saw in November (see “Global economy shows acceleration in November”) has been sustained.

However, in his latest commentary, John Hussman maintains his pessimistic view of the global economy.

Strong leading indicators such as the CFNAI and the Philly Fed Index have been weak for many months, and the deterioration in new orders has moved from a slowing of growth to outright contraction in recent months. In the order of events, a slowing in real sales, personal income, and personal consumption expenditure typically follows – these are called coincident indicators. These growth rates generally only weaken materially once a recession is in progress, and reach their highest correlation with recession about 6-months into the downturn. That’s what we’ve begun to observe over the past few months, adding to our impression that the U.S. joined a global (developed economy) recession during the third quarter of this year.

Despite the improvement seen from the purchasing managers' surveys, the Federal Reserve announced yet more monetary stimulus at its monetary policy meeting last week.

Hussman, who has been critical of Fed policies in recent years, says in his latest commentary that monetary policy “has become a roach motel – easy enough to get into, but impossible to exit”. He said that if the economy eventually strengthens at some point past 2013, “the Fed would have to sell nearly $3 trillion” of US debt, and such a level of monetary tightening is likely to be disruptive.

Tankan shows weakness in Japan but rest of world report better data

Early on Friday, the Bank of Japan reported that its Tankan survey showed a fall in its sentiment index for large manufacturers to minus 12 in the fourth quarter from minus 3 in the third quarter.

Economic data for the rest of the day were better though.

The flash HSBC China manufacturing PMI rose to 50.9 in December from 50.5 in November.

Markit's composite index for the euro area rose to 47.3 in December from 46.5 in November. The services index rose to 47.8 from 46.7 while the manufacturing index rose to 46.3 from 46.2.

Inflation in the euro area fell to 2.2 percent in November from 2.5 percent in October.

The stream of better data continued with US reports. Industrial production rebounded strongly by 1.1 percent in November after having fallen 0.7 percent in October as a result of Superstorm Sandy. Markit's US manufacturing PMI jumped to 54.2 in December from 52.8 in November.

Meanwhile, consumer prices in the US fell 0.2 percent in November.

US retail sales rebound

The US economy is continuing to show its resilience. A report on Thursday showed that retail sales in the US rose 0.3 percent in November, rebounding from a 0.3 percent decline in October. Excluding autos, gasoline and building materials, retail sales rose 0.5 percent last month after having been flat the previous month.

Another report from the US on Thursday showed that producer prices fell 0.8 percent in November with energy in particular falling by the most since March 2009.

Recent Japanese economic data have not been so good but on Wednesday, a report showed that machinery orders rose 2.6 percent in October, the first increase in three months.

There has been little respite for the euro area though. On Wednesday, a report showed that industrial production fell 1.4 percent in October after having fallen 2.3 percent in September.

Fed unveils new tools, more monetary stimulus

The Federal Reserve introduced yet more policy measures after its latest monetary policy meeting on Wednesday. Bloomberg reports:

Chairman Ben S. Bernanke moved the Federal Reserve further into uncharted policy territory in combating joblessness by tying the bank’s interest-rate outlook to unemployment and inflation, while committing to an even faster expansion of the central bank’s balance sheet.

The actions on the eve of the Fed’s centenary year underscore Bernanke’s hallmark commitment to experimentation and forceful action, derived in part from his research showing too little monetary stimulus produced large economic costs for the U.S. in the 1930s and for Japan in the 1990s. He called the current state of the labor market, with unemployment at 7.7 percent, “an enormous waste of human and economic potential” and said the benefits of more bond buying outweigh the potential risks...

The additional Treasury purchases will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion of short-term Treasuries for an equal amount of long-term debt.

Despite the additional monetary stimulus, markets ended the day little changed.

U.S. stocks erased gains as optimism about the Fed’s additional asset purchases faded and investors focused on the budget deadlock in Washington. The Standard & Poor’s 500 Index closed up less than 0.1 percent at 1,428.48 in New York, after earlier climbing as much as 0.8 percent.

It was a similarly story in Asia today, with Japanese stocks rising 1.15 percent but most other markets making smaller gains. Chinese stocks even fell 0.36 percent.

Markets rise, German investor confidence jumps

Markets have been in buoyant mood recently, and that mood continued on Tuesday with the S&P 500 gaining 0.7 percent and the STOXX Europe 600 rising 0.3 percent to an 18-month high.

US stocks rose despite a report on Tuesday showing an increase in the US trade deficit in October following a 3.6 percent fall in exports and a 2.1 percent decline in imports.

However, another report on Tuesday showed that German investor confidence jumped in December, with the ZEW index of investor and analyst expectations rising to 6.9 from minus 15.7 in November.

Asian stocks were mixed on Tuesday though despite a report showing that Chinese bank lending rose to 522.9 billion yuan in November from 505.2 billion yuan in October.

Japan's economy contracts for second consecutive quarter

There were mixed data from Japan on Monday.

The Cabinet Office confirmed earlier figures that showed Japan's economy shrank 0.9 percent in the July-September quarter. However, data for the April-June quarter was revised down to show 0.03 percent contraction from 0.1 percent growth.

With two consecutive quarters of contraction, Japan's economy can be said to be in recession.

Another report on Monday showed that Japan's current account surplus fell 30 percent from the previous year in October.

The economic weakness has hurt consumer sentiment in Japan. The Cabinet Office's consumer confidence index for general households fell to 39.4 in November from 39.7 in October.

Providers of services, though, became more optimistic in November. The Cabinet Office's economy watchers survey showed that the diffusion index for current conditions rose to 40.0 last month from 39.0 in October while the index for future conditions rose to 41.9 from 41.7.

Elsewhere in Asia, China reported disappointing trade figures on Monday. Exports rose just 2.9 percent in November from the previous year, well down from 11.6 percent in October. Imports were flat in November compared to a 2.4 percent increase in October.

However, Germany's trade figures released on Monday surprised on the positive side. Exports rose 0.3 percent in October after having fallen 2.4 percent in September. Imports rose 2.5 percent after a 1.4 percent fall the previous month.

Global economy shows acceleration in November

Recent economic data indicate that the global economy improved in November.

Surveys of purchasing managers around the world showed an acceleration in global economic activity in November. The JPMorgan global all-industry output index rose to 53.7 last month from 51.0 in October.

JPMorgan Global All-Industry Indices
	October	November
Output	51.0	53.7
New orders	50.9	52.2
Input prices	57.6	54.9
Employment	50.8	50.0

Improvement in the purchasing managers' data from the United States helped drive the improvement in the global reading. Markit's US manufacturing PMI rose to 52.8 in November from 51.0 in October while the Institute for Supply Management's non-manufacturing index rose to 54.7 from 54.2.

However, clouding the picture for the US somewhat was another report from the ISM showing a fall in its manufacturing PMI to 49.5 in November, the lowest since July 2009, from 51.7 in October.

In the euro area, the contraction in the economy slowed in November. Markit's composite output index rose to 46.5 in November from 45.7 in October. The manufacturing PMI rose to 46.2 in November from 45.4 in October while the services business activity index rose to 46.7 from 46.0.

In China, the manufacturing PMI from the China Federation of Logistics and Purchasing and the National Bureau of Statistics rose to 50.6 in November from 50.2 in October while HSBC's China manufacturing PMI rose to 50.5 from 49.5.

However, there was some contradiction in the services sector data, where the official PMI rose to 55.6 in November from 55.5 in October but HSBC's services PMI fell to 52.1 from 53.5.

Despite the decline in the services PMI, the HSBC China composite output index rose to 51.6 in November from 50.5 in October.

Markit's composite output index for Japan also rose in November to 49.9 from 48.9 in October. The manufacturing PMI fell to 46.5 in November from 46.9 in October but the services business activity index rose to 51.4 in November from 50.0 in October.

Beyond the purchasing managers' surveys, there were other important economic reports last week.

In the US, a report on Friday showed that employment continued to increase at a relatively healthy pace in November. Nonfarm payrolls rose 146,000 last month and helped bring the unemployment rate down to 7.7 percent from 7.9 percent in October.

Also on Friday, a report from Japan showed that its index of coincident economic indicators fell 0.9 point in October. In its assessment of the economy, the Japanese government said the index was “worsening”. Indeed, the index has now fallen for seven consecutive months.

However, the index of leading economic indicators did provide an encouraging sign, rising by 0.9 point in October.

Finally, on Sunday, China reported that industrial production rose 10.1 percent in November from a year earlier, the fastest pace in four months. Retail sales and fixed-asset investment also accelerated in November while inflation rose to 2.0 percent from 1.7 in October.

Japanese economic data indicate possible recession

The Japanese government has given a weak assessment of its economy. Reuters reports:

Japan's government said on Friday that there was "a high possibility" that the economy has slipped back into a recession after an index of economic indicators fell for a seventh straight month in October...

The index of coincident economic indicators fell a preliminary 0.9 point in October from the previous month, the Cabinet Office said on Friday.

On a more positive note, the index of leading economic indicators rose 0.9 point in October.

Elsewhere in the world the economic data on Friday were mixed.

In the US, employment increased by 146,000 in November, helping bring the unemployment rate down to 7.7 percent from 7.9 percent in October.

However, the Thomson Reuters/University of Michigan preliminary consumer sentiment index fell sharply to 74.5 in December from 82.7 in November.

And in Europe, industrial production fell 2.6 percent in Germany and 0.8 percent in the UK in October.

ECB sees eurozone economy shrinking again next year

The European Central Bank left interest rates unchanged on Thursday after its monetary policy meeting but cut its growth and inflation forecasts for the eurozone economy. Reuters reports:

The European Central Bank pondered an interest rate cut on Thursday and predicted the euro zone economy would shrink again in 2013, leaving the door open to a possible reduction in borrowing costs early next year...

In the end, the ECB left its main interest rate at a record low 0.75 percent for the fifth month running despite new forecasts which suggest the euro area economy will contract next year as it has this. It left the deposit rate at zero.

The Bank of England also left monetary policy unchanged after its meeting on Thursday.

Economic data from Europe on Thursday were mixed. German factory orders rebounded 3.9 percent in October after having fallen 2.4 percent in September. However, the UK trade deficit widened in October as exports fell.

US services accelerate but private employment hit by Sandy

Economic data on Wednesday were mixed.

In the US, the Institute for Supply Management’s non-manufacturing index rose to 54.7 in November from 54.2 in October and factory orders rose 0.8 percent in October. However, employment in the private sector rose 118,000 in November according to ADP, down from 157,000 in October as a result of superstorm Sandy.

In the euro area, Markit's composite index rose to 46.5 in November from 45.7 in October after the services index rose to 46.7 from 46.0. However, retail sales in the region fell 1.2 percent in October.

Meanwhile, the services sectors in China and the UK slowed in November. HSBC's services PMI for China fell to 52.1 last month from 53.5 in October while in the UK, the Markit/CIPS services PMI fell to 50.2 from 50.6.

RBA cuts rate to low of last financial crisis

There were few major economic data on Tuesday but there were monetary policy decisions by two major central banks.

The Reserve Bank of Australia cut its official interest rate by 25 basis points to 3.0 percent on Tuesday. This move brought the rate down to the low last seen during the financial crisis in 2009.

In contrast, the Bank of Canada left its interest rate unchanged and maintained a bias towards higher rates.

Manufacturing contracts in Europe and possibly the US

Reports on Monday showed that manufacturing continued to contract in Europe in November but at a slower pace.

In the euro area, Markit's manufacturing PMI rose to 46.2 in November from 45.4 in October.

In the UK, the Markit/CIPS manufacturing PMI jumped to 49.1 in November from 47.3 in October.

Reports on US manufacturing on Monday, however, were contradictory.

Markit's US manufacturing PMI rose to 52.8 in November from 51.0 in October.

However, the Institute for Supply Management's manufacturing PMI fell to 49.5 in November from 51.7 in October. The November reading is the lowest since July 2009 and suggests contraction in US manufacturing activity.

Another report in the US on Monday showed that construction spending rose 1.4 percent in October, the most in five months, to an annual rate of $872.1 billion, the highest level in over three years.

China purchasing mangers surveys turn positive

China's economy appears to be regaining momentum, according to the latest purchasing managers' surveys.

A report today from HSBC showed that its manufacturing PMI rose to 50.5 in November from 49.5 in October, the first time since October 2011 that the reading has been above 50.

A report over the weekend by the National Bureau of Statistics had shown that the official manufacturing PMI rose to a seven-month high of 50.6 in November from 50.2 in October.

Another report today from the NBS showed that the official PMI for China's non-manufacturing sectors rose to 55.6 in November from 55.5 in October.

Moody's downgrades European Stability Mechanism as eurozone unemployment hits record high

Bloomberg reports Moody's move on Friday:

The European Stability Mechanism and European Financial Stability Facility were downgraded by Moody’s Investors Service, which cited a high correlation in credit risk present among the entities’ largest financial supporters.

The ESM was cut to Aa1 from Aaa, while the EFSF provisional rating was lowered to (P)Aa1 from (P)Aaa. Moody’s said in a statement today that would maintain a negative outlook on each.

Economic data from the euro area earlier on Friday had also been negative.

The unemployment rate in the euro area rose to a record 11.7 percent in October from 11.6 percent in September. Inflation slowed though to 2.2 percent from 2.5 percent.

Data on consumer spending in the euro area on Friday were negative. In Germany, retail sales fell 2.8 percent in October. In France, consumer spending fell 0.2 percent in October.

Just outside the euro area, however, UK consumer sentiment improved in November as the GfK NOP consumer confidence index rose to -22, the strongest since May 2011, from -30 in October.

Consumer spending in the US in October, though, was hit by superstorm Sandy, falling 0.2 percent. Income was flat in October.

In another report from the US on Friday, the ISM-Chicago business survey provided a mixed picture. The business barometer rose to 50.4 in November from 49.9 in October but the new orders index fell to 45.3, the weakest reading since June 2009, from 50.6.