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Global Markets Weekly

• The G20 meeting's message that policy will remain stimulative...  In a light week for data, financial markets digested the previous weekend’s communiqué from G20 finance ministers and central bank governors. The communiqué reinforced the impression given by central bankers at August’s annual get together at Jackson Hole that policy-makers intend to keep policy ultra-stimulative until a self sustained private-sector economic recovery is clearly well under way. In terms of practical measures, that probably means no rate rises until late next year - and perhaps even a second US fiscal package.
• ...and a burst of M&A activity drove equities to new highs for the year.  This, along with M&A activity, helped both developed and emerging equity markets to new highs for the year, as they put recent fears about the sustainability of the recovery behind them. Volumes in global mergers and acquisitions have fallen constantly since peaking in the second quarter of 2007, and the current quarter could be the lowest since at least 1999. But, over the past two weeks, hopes of a rebound in global deal-making have been raised by US food giant Kraft’s £10.2 billion bid for Cadbury, a potential merger of France Télécom’s and Deutsche Telekom’s UK units to create the country’s largest mobile-phone operator, and Walt Disney’s purchase of comic-book creator Marvel Entertainment for about $4 billion.
• The pick-up in investor sentiment should make markets less prone to severe corrections. Investor sentiment has remained at elevated levels in recent weeks, further evidence that investors have shifted from risk-aversion to risk-seeking. Such a shift is supportive for riskier assets, so any market corrections are likely to be shorter and smaller than those of the past two years.
• Bond yields fell further, to record lows in Europe and the UK. In government bond markets, policy-makers’ dovish talk has pushed UK and eurozone two-year yields to record lows over the past two weeks, while US yields have fallen back towards their low. Gilts also got a slight boost from the news that ratings agency Moody’s isn’t expecting to cut their credit rating, now that politicians are publicly starting to accept the need to make painful choices on taxes and spending if the budget deficit is to be brought under control.
• The UK recession seems to be ending but has been exceptionally severe. Further good news for the UK came when the National Institute of Economic and Social Research’s unofficial estimate of monthly UK GDP showed that, in the three months to August, the economy grew – albeit very slightly – for the first time in a year and a half. So, with a lag of a quarter, the UK economy has probably joined Germany, France and Japan in a return to growth, after contracting by almost 6%. That is more severe than the recessions of the early 1990s and mid-1970s, which wiped some 2.5% and 4% off GDP, respectively. The early- 1980s recession was similar in magnitude but not quite as rapid. In speed of descent, this recession looks more like the Great Depression.
• Rising risk appetite and waning trust in fiat currencies is weakening the US dollar. The US dollar continued to head back towards its trade-weighted low of March 2008. In the absence of significant data, this seems at least in part to be a resumption of the carry trade, as investors borrow dollars at increasingly attractive rates to invest in higher yielding or riskier assets around the world. While US interest rates have been low for an extended period, it is only recently that credit spreads have reduced, banks have become more willing to lend and, finally, investors have recovered their risk appetite. But, with the price of gold close to $1,000, it also betrays investors’ waning trust in fiat currencies.

  Indices, Interest rates and Inflation

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