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Global Markets Weekly - 17 August 2009

• European economies bounced back in the second quarter...
  The key event of the week was the surprise announcement that the recession has ended in France and Germany. In the second quarter, both economies saw growth of 0.3%, rather than the further contraction widely expected. Overall eurozone GDP fell by just 0.1%, after the savage 2.5% fall in the first quarter.
• ...but markets run into profit-taking.
  Equity markets ended the week lower, despite the news of economic recovery in Europe and subsequently Japan, which had been expected to be laggards in the economic recovery. Investors took profits afterwards, reflecting concerns that further stimulatory measures will not now be forthcoming.
• Central bankers continued to strike a note of caution.
  Notwithstanding the more upbeat news, central banks continued to warn about the weaknesses of the underlying economies. The Bank of England highlighted its concerns in its Quarterly Inflation Report, explaining its decision to extend its quantitative easing programme. The Federal Reserve meeting on Wednesday also struck a cautious tone over the recovery. However, the decision to extend the quantitative easing programme by only another month was taken as a positive signal by the Treasuries market, which rallied, with ten-year bond yields falling to 3.6%, from 3.8%.
• US consumers are still under pressure.
  Retail sales fell 0.4% in July once autos, gasoline and food – the most volatile items – are excluded. A year-on-year decline of 5.5% underlines the problems of US consumers. And these are unlikely to abate any time soon: the increase in unemployment since the start of the recession is the highest since 1945. That was reflected in the productivity figures, which gained 5.8%, driven by a sharp decline in unit labour costs as the 1.8% fall in output was outweighed by a 7.5% drop in total hours worked. However, industry is doing better, with industrial production up 0.5% in July and capacity utilisation increasing, while productivity improvements are positive for corporate profitability, which has underpinned the better-than-expected reporting season for US companies.
• Currency markets were driven by the imbalances in the global economy.
  The decline of the US consumer was clearly reflected in the further improvement of the US trade balance. The global trade imbalances that characterised the US consumer–driven boom are set to continue to correct, which is supportive of the US dollar. The euro was also strong as it benefited from the stronger-than-expected GDP figures.
• Emerging markets were outshone by developed economies - but not overshadowed.
  The correction of global imbalances has some negative implications for export oriented emerging economies. For example, while China is well on course to hit its 8% growth target, its ability to return to its earlier double-digit gains is likely to be restricted by the declining contribution from trade. Nevertheless, we believe it is significant that developed markets ended the week lower on profit-taking, while emerging equity markets retained some of their modest gains. This underlines our view that the current environment is more favourable for growth from emerging markets, which are not as subject as developed markets to the headwinds that still prevail in the global economy.

Indices, Interest rates and Inflation

 

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