Global Markets Weekly - 16 November 2009
- Positive economic news from Europe and China dominated headlines…
If US economic news flow took centre stage the previous week, last week was essentially about Europe and China. On Friday, the Eurozone officially exited recession as its GDP expanded +0.4% in the third quarter after five consecutive quarters of contraction. While France and Italy recorded positive growth (albeit lower than consensus estimates), Germany reaffirmed its leading status in the region, posting a +0.7% expansion. Although the detailed breakdown is not yet available, the press release alluded to disappointing consumer spending despite the supportive car scrappage scheme. However, this was more than compensated by very positive exports, in spite of the strength of the euro. Earlier in the week, German exports and industrial production jumped 3.8% and 2.7% month-on-month respectively. Germany is proving to be one of the main beneficiaries of the recovery in global trade, especially from Asia. The resurgence of Chinese activity continues with retail sales and industrial production both up over 16% upon a year ago.
- … leading investors to fear improved growth could generate inflationary pressures.
Some market commentators have tried to attribute the recent increase in breakevens to fears that quantitative easing and large government deficits will generate inflation. The bond market's expectation for US inflation over the next ten years has touched a 15- month high. However, at 2.2% 10-year inflation expectations remain below their pre-financial crisis average of 2.5%. Like many markets, the inflation-linked bond market has been extremely illiquid over the past 18 months. The recent rise in breakevens is part of the process of liquidity returning to the index-linked bond market rather than a reflection of growing inflation fears.
- Dollar weakness persists.
Although driven by fundamental factors at present, dollar weakness is in danger of developing a momentum of its own. Comments from the organisation for Asian Pacific Economic Co-operation (APEC) calling for "flexible exchange rates" to facilitate renminbi appreciation along with the failure of the G20 to do anything to support the US dollar, were last week's justification for investors to keep selling the dollar. Investors rightly ignored the US Treasury Secretary's reiteration of support for a ‘strong' dollar. Selling the dollar is partly a reflection of investors' waning faith in fiat currencies. Some investors are selling the dollar to buy real assets either as a bet on economic recovery, or in the case of gold, as a store of value. Others are borrowing and then selling low yielding dollars to finance purchases of higher yielding assets - the 'carry' trade. Provided there isn't another major economic or financial shock, this process is likely to continue over the coming months driving the dollar lower and the price of gold higher.
- US small businesses poured cold water on inflation fears.
The Bank of England published its Quarterly Inflation Report which forecast that inflation will be around 1.7% in two years time and only hit its 2% target in 2012, despite also forecasting a vigorous recovery, with growth exceeding 4%. On the other side of the Atlantic, the US National Federation of Independent Business survey painted a less rosy picture than the previous week’s ISM survey. Compared with large exporters, who are benefiting from the weakness of the US dollar, the perspective of smaller, domestic companies is that, despite some improvement, activity and prices are still falling.
Indices, Interest rates and Inflation
|
Close - 13 Nov 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,713 |
3.0 |
2.3 |
11.3 |
22.8 |
|
FTSE 100 |
5,296 |
3.0 |
2.8 |
11.4 |
19.4 |
|
S&P 500 |
1,093 |
2.3 |
1.9 |
8.0 |
21.1 |
|
Nasdaq Composite |
2,168 |
2.6 |
1.3 |
7.9 |
37.5 |
|
DJ Stoxx (Europe) |
269 |
2.7 |
-0.7 |
7.5 |
20.8 |
|
Nikkei 225 |
9,770 |
-0.2 |
-0.3 |
-7.1 |
10.3 |
|
Hang Seng |
22,554 |
3.3 |
5.1 |
8.1 |
56.8 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Sep-09 Forecast |
Dec-09
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0.25 |
0.25 |
0.25 |
-1.3 |
16-Dec |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.1 |
03-Dec |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.3 |
03-Dec |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.2 |
20-Nov |
View the full Global Markets Weekly report (pdf).
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