Global Markets Weekly - 1 September 2009
- Equity markets have paused for breath, but upside data surprises should fuel further advances over the balance of the year.
The rally in risk assets, which has seen equity and commodity prices rise in fits and starts by almost 50% from their lows, paused for breath last week. With market sentiment approaching bullish territory, this was probably driven by profit taking rather than weak macro data or poor earnings news. In fact, much of the global activity and housing market data surprised strongly on the upside last week. Since early May, the data have consistently surpassed the market’s relatively pessimistic expectations. So, although in the very near term equity markets may pull back a little, given the strong run of recent weeks, they have the potential to hit new highs between now and the end of the year as continued positive data surprises cause investors to place a lower probability on a second leg of the recession.
- US news flow has already pleasantly surprised - but rising unemployment will limit strong gains in confidence…
In the US, consumer confidence, durable goods orders and new home sales were all better than expected. August consumer confidence rose 6.7 points to 54.1, driven mainly by the expectations index, which reflected advances in equities and signs that US house prices are bottoming. Although confidence is recovering from its February nadir, it remains at historically low levels and it is unlikely to rise strongly in the months ahead in the face of further job losses. At its present level, confidence is consistent with consumer spending rising marginally in the third quarter (Q3). Meanwhile, the rise in durable goods orders has increased the chance of business investment rising in Q3 for the first time in seven quarters.
- …and, along with credit constraints, slow the pace of house price increases.
US new home sales for July similarly surprised on the upside. Total home sales have now risen for four months running and are up by 16% from their February low. The rising number of sales is starting to stabilise house prices. After almost three years of declines, the Case- Shiller house price index rose 1.4% in June, after increasing 0.5% in May, as cheap valuations drew bottom fishers into the housing market. A similar dynamic is at work in the UK. The Nationwide’s house price index rose for the fourth consecutive month in August. Prices have now advanced by 6% from their low and are 15% below their October 2007 peak. Despite the rapid pace of the falls in this house price recession, credit constraints and the weak labour market mean that the recovery over the coming years is likely to be a gradual process.
- Disappointing eurozone lending numbers argue for monetary policy to remain loose.
There was also better-than-expected activity news in Europe, with the German IFO index of business confidence rising for the fourth month in a row. By contrast, the eurozone lending numbers were weaker than expected. Although narrow money growth accelerated, broad money growth and loan growth continued to fall. Without a lasting turnaround in lending growth, the ECB’s monetary policy will remain expansionary.
- Potential moves to further encourage banks to lend have depressed short-dated gilt yields and sterling.
Last week saw two-year gilt yields reach a record low of 86 basis points. This followed speculation that the Bank of England may start trying to encourage banks to lend more by paying a negative interest rate on banks’ excess reserves. In response, the level of reserves held at the central bank have fallen by £25 billion to £138 billion, and it seems at least some of that money has made its way into the short end of the gilt market. Lower short rates are proving to be bad news for sterling, which has now fallen 3% on a trade-weighted basis since early August.
Indices, Interest rates and Inflation
|
Close - 31 Aug 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,521 |
0.2 |
7.1 |
11.9 |
14.1 |
|
FTSE 100 |
4,909 |
0.3 |
6.5 |
11.1 |
10.7 |
|
S&P 500 |
1,021 |
-0.5 |
3.4 |
11.0 |
13.0 |
|
Nasdaq Composite |
2,009 |
-0.4 |
1.5 |
13.2 |
24.7 |
|
DJ Stoxx (Europe) |
258 |
0.0 |
5.7 |
13.3 |
15.8 |
|
Nikkei 225 |
10,493 |
-0.8 |
1.3 |
10.2 |
18.4 |
|
Hang Seng |
19,724 |
-4.0 |
-4.1 |
8.6 |
37.1 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Dec-09 Forecast |
Mar-10
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0.25 |
0.25 |
0.25 |
-2.1 |
23-Sep |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.8 |
10-Sep |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.7 |
03-Sep |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.2 |
17-Sep |
View the full Global Markets Weekly report (pdf).
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