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Global Markets Weekly - 19 October 2009

• Dow Jones broke the 10,000 level for the first time in a year on better than expected Q3 earnings results....
  The US third quarter earning season is about to enter its two-week peak period. On balance, the companies that have already reported announced stronger-than-expected profits and improving outlooks, including JP Morgan, Goldman Sachs, Citigroup, Intel, Google and Johnson & Johnson. Overall, 32 of the 37 S&P500 companies that have reported since October 7 posted positive surprises, exceeded analysts' expectations by an average 18% according to Bloomberg. If these initial results are any guide for what is coming next, the flow of positive news should create a supportive environment for equity markets in the near term.
• ...as investors' appetite for risk increases.
  For several months we have highlighted that our proprietary investor sentiment indicator seems to have moved from a long period of risk-aversion to risk seeking, with obvious implications for risk assets such as equities. However, one specific component of our risk appetite indicator, the Vix index of US equity volatility remained at a high level, around 25. Last week, the Vix hit a 13-month low of 21.55, approaching the 10-to-20 range that characterised the previous bull market in 2003-2007.
• China gives V sign for recovery, as the rebound in trade exceeds expectations.
  Positive market announcements were complimented by good economic news. Particularly notable, was the sharp rise in Chinese imports which are now just 7% below their historic peak, while exports remain 15% short of their previous record. This indicates that China's recovery is a positive driver of the global economic recovery. Confirmation came from the Chinese money supply figures with M2 having surged by 29% in the year to September, rebounding since a weak figure caused the August sell-off on fears that the Chinese authorities were seeking to clamp down on the property market boom.
• Fed battles baffle market.
  A series of hawkish speeches punctuated by some more dovish ones, created uncertainty amongst investors as to the likely drivers and timing of potential US interest rate rises. As a consequence, we saw a few days of US dollar strength before the publication of the minutes of the last Fed meeting and a dovish speech from Don Kohn provided clarity low levels of interest rates for an extended period". The dollar subsequently hit new lows for the year. This cautious stance was underlined by the subdued inflation figure (core CPI +0.2% mom, +1.5% YOY) and retail sales (-1.5% mom).
• Currency markets highlight long-term headwinds for developed markets.
  Currency markets are proving to be a key part of the process of global re-balancing. Dollar weakness represents the reduced role of the US consumer. While the renminbi remains in a tight band, futures are now discounting a 2.7% increase as investors anticipate a resumption of a policy of appreciation. This process represents a key headwind to growth, as Japan and Germany can attest with strong currencies hitting exporters. The ZEW economic survey in Germany fell back to 56.0 from 57.7 in defiance of consensus expectations for a further increase. Industrial employment also contracted by 4.4% over the year and the 10.2% decrease in hours worked indicates that, but for the government part-time working subsidies, this figure would have been worse. By contrast, while gold marked time, oil took the lead from a weak US dollar and buoyant Chinese economic news to hit $78/bbl, a twelve month high.

Indices, Interest rates and Inflation

 

View the full Global Markets Weekly report (pdf).

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