Global equity markets are weak today, led by a 3.4% drop in the Nikkei.
Major European bourses are off less sharply, while bond markets are generally stable. The dollar has been unable to regain its composure and remains pinned against what is perceived to be the lower end of its trading range. The release of the U.S. CPI and trade balance data may provide headlines to trade off of, but it's unlikely to alter the market perceptions of the trajectory of either the U.S. economy or monetary policy.
The Nikkei dropped 550 points to register its largest single-day decline in nearly half a year. Exporters led the decline, but reports suggest that Japanese investors were locking in profits ahead of the fiscal year-end in two weeks. The Nikkei had rallied 17% since the start of the month.
Data from the Tokyo Stock Exchange confirm reports suggesting active foreign buying of Japanese stocks in recent weeks.
Japanese government bonds moved higher, with the yield on the benchmark falling 2 basis points to 1.68%. The yield had fallen to 1.615% at one point during the trading session, but it backed up on profit-taking. Many market participants are hesitant to be too aggressive ahead of next week's 10-year bond auction and the end of the fiscal year.
Japanese bonds were supported by confirmation that Japan's Trust Fund Bureau will continue to buy bonds in April.
The trust fund did not buy government bonds in January after the government announced it would reduce its purchases. However, the subsequent rise in yields forced officials to reconsider. The Trust Fund Bureau bought 200 billion yen in bonds last month and bought the same amount today, according to press reports. Finance Minister
indicated that the Trust Fund Bureau will buy government bonds in April. However, the way in which the announcement was made suggests it is not an open-end commitment, but one that depends on market conditions. That said, reports suggest that the Trust Fund Bureau has also experienced a greater investment inflow than it anticipated.
Germany's IFO reported a much greater deterioration in business sentiment than the market had expected.
The IFO survey fell to 89.8 in February from 91.1 in January. The consensus had expected a 0.1-to-0.2-point decline. The index stood at 98.3 a year ago. The February purchasing managers' index also pointed to continued contraction in the economy, despite some strength in recent employment and industrial-order reports.
Meanwhile, the government's tax reform bill is expected to be approved by the upper house of Parliament before the weekend. In the first stage, the tax burden on families is reduced. In the second stage, businesses get their relief. The German government proposes to cut the top corporate tax rate to 25% from 45%, lowering the overall tax burden on businesses to 35%. People close to the situation report that the government, with the Greens' support, is preparing additional legislation that will provide even greater tax relief for businesses and could be unveiled as early as next month. Germany's largest industrial group, among others, has warned recently that if serious tax reform is not forthcoming, German companies would increasingly move abroad. The German finance ministry, sans
, noted that the largest industrial group has not paid taxes since 1995 due to generous write-offs for corporations. This illustrates the larger point. Yes, German corporate taxes are high in a comparative sense, but loopholes and write-offs really lower the effective tax burden.
European equity markets are under pressure today.
Financial sector issues are lower. The largest bank in the eurozone announced a 50% greater share sale to finance its acquisitions in the U.S. and Europe. Oil shares are among the leading advancing issues. Crude oil prices are near five-month highs as many
and non-OPEC oil producers have announced cuts in production. The major indices are approaching support areas outlined
here on Monday. An early advance in the U.S. session will help the European bourses trim these losses. But if the earnings outlook for U.S. companies is so limited despite the strength of the underlying economy, can the earnings outlook for the
, where the economy is less robust, be any better?
European bond markets are generally flat.
European Central Bank
meets today, and any lingering hopes for a rate cut today were dashed by the ECB's monthly report released yesterday. However, broad weakness in the U.K.'s February retail sales report is likely to encourage rate-cut hopes there as early as next month. Retail sales fell 0.3% in February, largely in line with expectations. The 0.2% rise in U.K. retail sales over the past three months is the slowest quarterly performance in nearly three years. This, coupled with the slowest year-over-year rise in M4 money supply in four years, is supporting U.K. debt instruments. Comments from Sweden's central banker
are encouraging speculation of a rate cut there as early as next week. With the rise in oil prices, there has been some switching out of Sweden and into Norway, in both the currency and fixed-income markets.
The dollar is little changed; it's unable to recover yesterday's losses. The euro has flirted with resistance near the $1.1050 area. A convincing move above here will likely trigger stops and fuel another 1-cent gain. Initial support is seen near $1.0980. Against the yen, the dollar looks confined to a range of 117 to 122 until the end of the month, more or less where Japanese officials are thought to desire it.
The U.S. reports February consumer prices and the January trade balance.
The consensus calls for an unchanged CPI on the headline and a 0.2% increase on the core rate when food and energy are excluded. By all measures, price pressures in the U.S. remain weak, even though there still appears a bias in the market to exaggerate them. The trade balance -- or imbalance, as the case may be -- is likely to draw greater attention. Recall that last year the deterioration of the trade balance was front-loaded -- i.e., the deficit grew faster in the beginning of the year than at the end. In fact, the monthly deficit in the final months of 1998 consistently surprised the market in coming in smaller than expected. This said, the market is prepared for renewed worsening at the start of 1999. The consensus calls for a $15 billion shortfall after a $13.8 billion deficit in December. Imports are expected to have rebound, while exports are expected to be soft.
Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at