Japan's savings rate turns negative

Japan's high savings rate, considered one of the drivers of its trade surplus in the past, is no more. From Bloomberg:

The savings rate in the year through March was minus 1.3 percent, the first negative reading in data back to 1955, the Cabinet Office said. Real earnings fell 4.3 percent in November from a year earlier, a 17th straight decline and the steepest tumble since December 2009, the labor ministry said today...

The savings rate, which the Cabinet Office calculates by dividing savings by the sum of disposable income and pension payments, peaked at 23.1 percent in fiscal 1975.

As Japan’s population ages, its growing ranks of elderly are tapping their savings, according to the Cabinet Office. Consumers also ran down savings to make purchases ahead of a sales tax-increase in April, the first since 1997.

Stocks rally but also face risks

Stock markets mostly rose last week.

The MSCI All-Country World Index rose 2.3 percent, led by stocks in the United States and Europe. The Standard & Poor’s 500 Index jumped 3.4 percent while the STOXX Europe 600 Index rose 3.0 percent.

Asia underperformed last week, with the MSCI All-Country Asia Pacific Index slipping 0.2 percent. However, the Shanghai Composite Index jumped 5.8 percent to close at a four-year high.

While the rally last week left the S&P 500 just 5 points below its all-time high achieved on 5 December, some investors are seeing danger in the sudden rally.

A post from the Wall Street Journal's Moneybeat blog over the weekend pointed out that the recent rally may have been the result of fund managers buying stocks to make their funds look good.

“If you are among the 85% of money managers behind the S&P 500, this is a chance to catch up,” Jack Ablin, chief investment officer at BMO Private Bank, was quoted as saying.

Stocks would then be at risk if managers shift some money elsewhere early next year.

The Wall Street Journal also quoted Kristina Hooper, US investment strategist at Allianz Global Investors, as saying that with the Federal Reserve ending its bond purchases and preparing to raise short-term interest rates, “we are likely to see more volatility going forward”.

However, the Wall Street Journal also noted that stocks normally perform well in late December and January, a period that we are now entering.

US stocks rebound as oil rallies, Chinese stocks hit 4-year high

US stocks finally saw a strong rebound on Wednesday that saw it erasing almost half of its December loss. Bloomberg reports:

The S&P 500 surged 2 percent to 2,012.89 by the 4 pm. close in New York, the biggest one-day gain since October 2013 to reduce the index’s December decline to 2.6 percent. Yields on 10-year Treasury notes climbed eight basis points to 2.14 percent and the Bloomberg Dollar Spot Index rose 0.9 percent as the yen slid. Oil rallied from five-year lows to fuel gains in energy stocks, while the ruble strengthened before Russian President Vladimir Putin holds his annual media conference.

The Fed said it will be patient on the timeline for higher rates, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raising its assessment of the labor market. It was another step in the Fed’s exit from the loosest monetary policy in its 100-year history...

Brent, the benchmark for half the world’s oil, advanced 1.9 percent from a five-year low. WTI shrugged off an increase in supplies at Cushing, the delivery point for Nymex futures. to rise 1 percent to $56.47 a barrel.

Elsewhere, most markets performed less impressively.

In Europe, the STOXX Europe 600 Index closed with a 0.1 percent gain after having lost as much as 1.1 percent at one point on Wednesday.

Earlier in Asia, stocks were mixed but China's stock market jumped 1.3 percent to a four-year high.

Markets fall as oil hits five-year low

Global markets suffered steep falls last week.

Stocks fell sharply, with the MSCI All-Country World Index falling 3.8 percent last week. The Standard & Poor’s 500 Index fell 3.5 percent. The STOXX Europe 600 Index plunged 5.8 percent, its worst week in three years. The MSCI All-Country Asia Pacific Index fell 2.0 percent.

Sentiment in stock markets were hurt by continuing declines in oil prices last week. West Texas Intermediate oil fell 12 percent, hitting its lowest level since May 2009 on Friday, while Brent fell 11 percent, hitting its lowest level since July 2009.

Oil touched its lows for the week after the International Energy Agency reduced its 2015 demand forecast by 230,000 barrels, the fourth cut in its forecast in five months.

The falls in stocks and oil hit speculative grade credit. The iShares iBoxx High Yield Corporate Bond exchange-traded fund fell 3.4 percent last week, the biggest decline since 2012.

Government bonds in financially-troubled economies also fell. Greece’s 10-year yield rose 192 basis points, the biggest weekly increase since May 2012.

Conversely, yields of government bonds considered safe havens fell. The yield on the United States 10-year Treasury note fell 23 basis points last week, the biggest decline since June 2012. The yield on German 10-year bunds fell 16 basis points.

Economic data last week showed strong growth in the US but weakness elsewhere.

In the US, retail sales rose 0.7 percent in November and the Thomson Reuters/University of Michigan's preliminary reading on the consumer sentiment index for December showed a rise to 93.8, the highest reading since January 2007, from 88.8 in November.

However, in the euro area, a report last week showed that industrial production rose just 0.1 percent in October.

In China, a report last week showed that industrial production rose 7.2 percent from a year ago in November, slowing from the 7.7 percent year-on-year increase in October. Trade shrank in November as exports rose 4.7 percent from a year earlier, down from an 11.6 percent rise in October, while imports fell 6.7 percent last month after having risen 4.6 percent the previous month.

Also last week, Japan revised down its third quarter GDP data to show a contraction of 0.5 percent, worse than the preliminary estimate of a 0.4 percent contraction. Another report showed that Japanese machinery orders fell 6.4 percent in October.

Stocks fall as oil sinks

Markets fell on Wednesday. Bloomberg reports:

U.S. stocks led global equities lower for a third day, as a rout in energy producers spread to the broader market after oil sank to a five-year low. The yen strengthened with Treasuries as investors sought haven assets.

The Standard & Poor’s 500 Index dropped 1.6 percent, extending losses in afternoon trading as all 10 main groups slid at least 1 percent. West Texas Intermediate crude plunged 4.5 percent to settle at $60.94 a barrel, while Brent fell below $65 for the first time since 2009. The yield on 10-year Treasury (USGG10YR) notes dropped five basis points to 2.17 percent. The yen had its biggest three-day gain in more than a year. New Zealand’s dollar soared 1.7 percent at 5:34 p.m. in New York as the central bank said future interest-rate increases can be expected after holding borrowing costs steady today...

The MSCI All-Country World Index dropped 1.2 percent for a third day of losses. It was the biggest retreat since Oct. 10 and the lowest level since Oct. 30.

The fall in the S&P 500 on Wednesday was the biggest since 13 October. It has now fallen for three consecutive days after hitting a record high on 5 December, losing 2.4 percent in the process.

The US stock market's rally from the October low has clearly lost momentum for now.

Emerging market stocks lag as BIS warns of market fragility

Stocks in developed markets saw another strong rally last week but stocks in emerging markets lost ground.

In the United States, the Standard & Poor’s 500 Index rose 0.4 percent last week to a record high of 2,075.37. Helping to propel US stocks up last week was the employment report on Friday showing that the economy added 321,000 jobs in November, the most since January 2012.

The STOXX Europe 600 Index rose 1.1 percent last week to its highest level in almost seven years. European stocks rose even though the European Central Bank refrained from implementing quantitative easing at its monetary policy meeting on Thursday.

In contrast to the positive performance of stocks in developed markets, stocks in emerging markets fell last week. The MSCI Emerging Markets Index declined 1.9 percent, leaving it 1.7 percent down for the year to date.

Emerging markets could face further headwinds.

In its quarterly review published on Sunday, the Bank for International Settlements noted that with the Federal Reserve ending its quantitative easing, the US dollar has appreciated against most currencies, especially against those of commodity exporters. It warned that if the appreciation of the US dollar persists, it may have a “profound impact” on the global economy, and in particular, on emerging market economies where many firms have large US dollar-denominated liabilities.

The BIS also had a warning for financial markets as a whole. In its review, it noted that while financial markets remain buoyant, the spike in volatility in mid-October “underscore how sensitive markets have become to even small surprises” and “suggests that more than a quantum of fragility underlies the current elevated mood in financial markets”.

Indeed, the lagging performance of emerging markets could be a warning sign for the more buoyant developed markets.

At market tops, weaker stocks are often the first to decline. After investors unload the lower-quality stocks, selling then moves to the higher-quality stocks.

Insofar as emerging market stocks are generally considered of lower quality than developed market stocks, it is not inconceivable that we may have been seeing a market topping action unfolding in recent weeks.

Stock market rally may turn into bubble as oil falls

Global stocks mostly continued their rally in November even as oil extended its slump.

The positive performance of stocks is reflected in the MSCI All-Country World Index, which rose 1.5 percent last month.

Driving the rise in stocks were the United States and European markets. The Standard & Poor's 500 Index rose 2.5 percent and the STOXX Europe 600 Index jumped 3.1 percent.

In contrast, Asian stocks fell. The MSCI All-Country Asia Pacific Index fell 0.8 percent in November.

Stocks were boosted by a cut in interest rates by the People's Bank of China last month as well as suggestions by European Central Bank President Mario Draghi that it may increase monetary stimulus.

In contrast to stocks, oil prices plummeted in November, declining for the fifth consecutive month.

West Texas Intermediate oil fell 18 percent last month, the largest one-month percentage decline since December 2008. It fell 10 percent on Friday to close at its lowest since September 2009 after the Organization of the Petroleum Exporting Countries announced that it was keeping its production ceiling unchanged.

Brent crude oil also finished the month down 18 percent.

John Authers at the Financial Times thinks that falling oil prices could stoke a stock market bubble.

Authers wrote that cheaper oil provides a boost to the economy while lowering inflation. The latter in turn allows central banks to keep monetary policy loose.

“So if Opec will not act to keep a floor under the oil price,” he wrote, “this certainly stokes the risk that the current rally in the US stock markets carries on until it boils over into a bubble.”