Global Markets Weekly  - 6th August 2007

Key global market developments

·A major rotation in equity market leadership seems to be taking place. Since the middle of June developed equity markets have fallen by around 7% as weakness in the corporate debt markets finally spread to equities. Equity market corrections often herald a change in market leadership. So, is this the start of a wider bear market of the start of rotation in equity markets? Well, valuations of global equities are by and large not demanding, the cost of money is not painfully expensive and global growth looks unlikely to plummet. If the purpose of the current shake-down is to start the rotation away from the most cyclical assets then it is important to consider which assets will start to outperform. We think that possible candidates include: technology stocks, large cap stocks, growth stocks and Asian equities.

·Market speculation that central banks will step in and bail out investors seems wide of the mark. The current credit crunch begs the question of whether central banks will step in and cut rates as they did in 1998 when Russia defaulted on its debt and Long Term Capital Management, a large US based hedge fund, had to be rescued. We doubt that they will, unless the situation gets considerably worse and threatens to destabilise the ability of investment grade companies to raise finance. Central bankers are probably relieved to see some of the recent more gregarious examples of risk-taking punished. Central banks may soon offer some soothing words but we would be surprised if these were matched by rate cuts unless of course things get much worse.

·Oil prices rose to an all-time high of $78.77 per barrel on Wednesday but there are three reasons why prices may be close to a peak.  Firstly, speculative long positions are already close to record highs. Secondly, global spare capacity is well above its recent lows and thirdly, a substantial risk premium for hurricane damage and other supply shocks are already priced in. There is a good chance that prices may drop back below $70 per barrel in the autumn as the hurricane and US driving seasons come to an end. Should we be worried if oil prices don’t fall back? The last few years have shown that surging oil prices are a much weaker headwind for economic activity than many had feared. For a start, prices are only this high because of the buoyancy of the global economy. In short, the state of the global economy is driving oil prices, rather than the other way around. Oil is also less important than it was. This reflects greater energy efficiency, the development of alternative energy sources, and the increasing share of less energy-intensive services in overall output.

·To be bearish today is to say that US housing will prove to be enough of a drag to trump most other indicators. Investors who today sell stocks to buy bonds are inherently saying that the fallout from the US housing market bubble bursting trumps everything else.  We tend to believe that the US economy is not a “one-horse town” and that its diversity and depth will prove to be a lot more resilient than most people expect. Most indicators are still pointing towards decent growth. Consequently, we are still advising clients to hold equities. We also believe that the current liquidity squeeze, which may bring valuation down a little further, may prove to be a good entry point for equities which today trade at attractive valuations.

Indices, Interest rates and Inflation

	Close 03-Aug-07	1 Week%	1 Month%	3 Months%	YTD %
FTSE all share	3224	0.4	-5.9	-5.1	0.1
FTSE 100	6224	0.2	-6.3	-4.8	0.1
S&P 500	1433	1.8	-6.0	-4.6	1.0
Nasdaq Composite	2511	-2.0	-5.1	-2.1	4.0
DJ Stoxx (Europe)	409	-0.3	-6.3	-4.6	3.5
Nikkei 225	16980	-1.8	-6.5	-2.4	-1.4
Hang Seng	22538	-0.1	-1.8	9.0	12.9

 

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-07 Forecast	Jun-08  Forecast	Current	Next Date
US (Fed Funds)	5.25	5.25	5.50	2.7	07-Aug
UK (Base rate)	5.75	6.00	6.00	2.4	02-Aug
Euro-zone (Repo Rate)	4.00	4.50	4.50	1.9	02-Aug
Japan (Call rate)	0.50	0.75	1.25	0.0	23-Aug

 

	Selected Global Indicators	Consensus Forecast	Previous Result		Date	Time (BST)
UK	Industrial Production (Jun)	0.8%	0.5%	yoy	06 - Aug	09:30
US	Unit Labour Costs (Q2)	1.8%	1.8%	yoy	07 - Aug	13:30
US	FOMC Rate Decision Expected	5.25%	5.25%	-	07 - Aug	19:15
JN	Machine Orders (Jun)	-9.0%	-3.1%	yoy	08 - Aug	00:50
GE	Trade Balance (Jun)	17.9B	17.5B	month	08 - Aug	07:00
FR	Trade Balance (in euros, Jun)	-2.8B	-3.0B	month	08 - Aug	07:45
UK	Bank of England Quarterly Inflation Report	-	-	-	08 - Aug	10:30
US	MBA Mortgage Applications (Aug)	-	-0.3%	mom	08 - Aug	09:30
US	Wholesale Inventories (Jun)	0.4%	0.5%	month	08 - Aug	15:00
UK	Total Trade Balance (Gbp/MIn,Jun)	-3900	-3511	month	09 - Aug	09:30
US	Initial Jobless Claims	310K	307K	week	09 - Aug	13:30
UK	Indutrial Prduction (Jun)	1.0%	1.0%	yoy	10 - Aug	05:30
FR	Industrial Production (Jun)	-0.1%	-0.3%	yoy	10 - Aug	07:45
US	Import Price Index (Jun)	0.9%	1.0%	mom	10 - Aug	13:30
US	Monthly Budget Statement (Jul)	-$32.4B	-$33.2B	month	10 - Aug	19:00

Disclaimer

Issued by Coutts & Co, which is authorised and regulated by the Financial Services Authority.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.  Past performance is not necessarily a guide to future performance.  Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation.  The information shown is believed to be correct but cannot be guaranteed.  Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice.  Any Coutts company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned.

The research and analysis in this document have been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being made available to you on this understanding.  Neither Coutts & Co nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis.

Not all products and services offered by the individual Coutts companies are available in all jurisdictions, and some products and services may be available only through particular Coutts companies.  Investment services for US residents are provided by Coutts & Co Investment Management Limited, an Investment Advisor registered with the Securities and Exchange Commission under the Investment Advisors Act 1940 and authorised and regulated by the Financial Services Authority in the UK.

None of the overseas Coutts companies or offices is an Authorised Person subject to the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors and depositors, and compensation under the Financial Services Compensation Scheme will not be available in respect of business transacted with them.

Coutts (Cayman) Limited. Registered Office: Coutts House, 1446 West Bay Road, PO Box 707, Grand Cayman KY1-1107, Cayman Islands.  Licensed under the Banks and Trust Companies Law (2003 Revision). Coutts (Cayman) Limited is not regulated by the Cayman Islands Monetary Authority in its conduct of securities investment business.

Coutts Offshore Europe Limited.  Registered office: 23-25 Broad Street, St Helier, Jersey JE4 8ND.  Regulated by the Jersey Financial Services Commission for carrying on investment and trust company business. Regulated by the Guernsey Financial Services Commission for carrying on investment business.  Trading in Jersey as Coutts Channel Islands.  Business address in Isle of Man: PO Box 59, Royal Bank House, 2 Victoria Street, Douglas, Isle of Man, IM99 1DU.  Licensed by the Isle of Man Financial Supervision Commission for Investment and Corporate Service Provider business.  Trading the in Isle of Man as Coutts Isle of Man.