Global Markets Weekly - 11 May 2009
- The equity rally continued, led by financial stocks.
With forward-looking indicators of growth from various regions of the global economy steadily improved last week, markets for riskier assets, including equities, extended their nine week long rally . Equity markets have been driven higher by their most cyclical sectors and by those that suffered most in the sell-off, especially banks and other financial companies.
- The economic outlook is brightening, amid signs of a pick-up in global trade.
Purchasing managers’ indices (PMIs) suggest that the near-term outlook for growth, though still disappointing in absolute terms, should prove a significant improvement on the economic free fall around the turn of the year . German factory orders were particularly encouraging. They rose 3.3% in March - driven higher by export orders - after six months of declines. Along with better-than-expected trade data from Asia over recent weeks, this supports the view that global trade volumes, after falling at an annualised rate of 40% in the final quarter of 2008, are starting to recover.
- Credit conditions are still tightening, despite progress in stabilising the financial system.
One driver of the rapid fall in global trade during 2008 was the reduced availability of trade finance . Several central bank surveys in recent weeks have shown credit conditions still tightening, but far more slowly. The Federal Reserve (Fed) survey of senior loan officers suggests that credit conditions are now tightening at a pace consistent with a normal recession. So government efforts in the US and elsewhere have successfully combated the direct effects of the extreme risk aversion and credit restrictions since Lehman Brothers failed last September.
- And concerns linger over consumer and corporate creditworthiness.
However, it will prove more difficult to redress the more cyclical problem of tighter credit conditions caused by genuine concerns about companies’ and households’ ability to repay loans during a recession - rather than as a result of the state of banks’ balance sheets. In past US recessions, it has taken around three years for banks to move from their current pace of credit tightening to outright credit easing. Government initiatives, such as the stress tests of the 19 largest US banks, should allay investors’ concerns about the stability of the financial sector but do little to address the cyclical problem of credit availability.
- Yet central banks are alert to the need for continued policy action.
Indeed, the withdrawal of aggressive quantitative easing (QE) measures by the Fed since the start of the year has coincided with a rapid slowing in the pace of broad money growth in the wider economy . This suggests that, with banks keen to shrink their balance sheets, net credit creation continues to require the Fed’s active support. And announcements from both the Bank of England and the European Central Bank – that they will respectively extend and initiate their own QE programmes – show their awareness that official support is still required for private-sector credit creation.
- Despite the welcome signs of an improving outlook...
Economic numbers which increasingly point to a retreat from the extreme slowdown and risk aversion of late 2008 are welcome , especially recent evidence that the pace of US job losses may be easing – a prerequisite for improving consumer confidence.
- ...de-leveraging means that growth, when it returns, will be disappointingly weak.
During the recent equity rally, investors have begun to see an eventual road to recovery opening before them. This is a reasonable conclusion to draw from improving lead indicators of growth. However, the quick and smooth return to trend rates of growth now expected by some commentators and investors would require the financial sector to be healthy and independently functioning. With the financial sector still weak, this road to recovery will be much longer than in previous recessions. Investors who are expecting a sprint finish, rather than a gruelling marathon, may yet be disappointed.
Indices, Interest rates and Inflation
|
Close - 8 May09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,281 |
4.9 |
14.2 |
6.0 |
3.3 |
|
FTSE 100 |
4,462 |
5.2 |
13.7 |
4.0 |
0.6 |
|
S&P 500 |
929 |
5.9 |
12.6 |
7.0 |
2.9 |
|
Nasdaq Composite |
1,739 |
1.2 |
9.3 |
9.3 |
10.3 |
|
DJ Stoxx (Europe) |
230 |
4.4 |
13.5 |
6.5 |
3.3 |
|
Nikkei 225 |
9,433 |
5.1 |
9.8 |
16.8 |
6.5 |
|
Hang Seng |
17,390 |
12.0 |
20.1 |
27.4 |
20.9 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Mar-09 Forecast |
Jun-09
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0-0.25 |
0-0.25 |
0-0.25 |
-0.4 |
24-Jun |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
2.9 |
04-Jun |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
0.6 |
04-Jun |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
0.3 |
22-May |
View the full Global Markets Weekly report (pdf).
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