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Global Markets Weekly - 21 December 2009

• Trend remains up, despite continued volatility.
  Volatile markets and mixed economic and market news did not prevent some equity and other markets from moving higher last week. Global equity markets hit new highs for the year, taking gains to over 20% for the year and over 50% up from the March lows. With investors still having an appetite for risk, government bonds fell back, weighed down by concerns over continued huge government deficits. Commodities posted mixed performance, with industrial metals hitting new highs, but other commodities struggled to advance in the face of a rally in the US dollar.
• Headwinds to growth are clearly present...
  We saw clear examples over the past week of the four key headwinds to growth that we have regularly highlighted this year. The problem of excess government debt was exemplified by Greece, whose sovereign debt is estimated to be 113% of GDP and where the credit rating was downgraded a notch to BBB+ (from A-) and left on negative outlook by Standards & Poor’s. Excess consumer debt problems were seen in the UK, where consumer credit is around 100% of GDP, as retail sales in November unexpectedly fell back by 0.3%. Damaged banking systems, as in the UK where bank lending to businesses fell by 7.6% over the year, are constraining the availability of new credit required to fund recovery and expansion. The negative consequences of new regulation were seen in the reaction to the new ‘Basel Three’ proposals to require increased bank capital. Such regulation could well prevent future crises, but will be a constraint on short-term growth. Japanese bank share prices surged by up to 14% on a newspaper report that implementation would be significantly delayed – before falling back when the report was denied.
• ...requiring further stimulus to ensure that growth is sustained.
  While the Federal Reserve statement noted that "the deterioration in the labour market is abating", we believe that these headwinds to growth, described above, mean that continued fiscal and monetary support are required to help guarantee further growth. In the US, the passage of a new $155bn stimulus bill is intended to boost employment.
• But the fact that economic recovery continues in the face of these obstacles, underpins increasing confidence in the outlook for 2010.
  The Fed’s statement that economic activity had continued to increase gave investors confidence that the underlying trend, beneath the conflicting headlines, is of a sustained economic recovery. The Fed also announced that many of its unconventional measures, including quantitative easing, would start to be unwound in the first half of the year. This move effectively withdraws some of the monetary stimulus from the market and may mean that rate hikes will be delayed longer than currently expected.
• Dollar rally, but pressure remains for emerging market currencies to appreciate.
  While the correlation is normally for a stronger dollar to equal weaker commodity prices, this was not the case this week, as the cause of the strong dollar was the better US economic outlook. So, while gold fell back, industrial metals saw new highs. But the rise of the dollar provides little help for emerging economies threatened by inflation. With India reporting food prices up 16.7%, inflation is set to breach the 6.5% overall target next year. The return of inflation in China also prompted concerns that the government will seek to stifle over-heating, leading to a sell-off in property shares. One potential part of the solution for these countries’ inflation problems is currency appreciation, which is likely to be a key issue for next year.

Indices, Interest rates and Inflation

 

	Close - 27 Nov 09	1 Week%	1 Month%	3 Months%	YTD %
FTSE ALL Share	2,653	-1.1	-3.0	-0.2	20.1
FTSE 100	5,197	-1.2	-2.7	0.5	17.2
S&P 500	1,102	-0.4	-0.7	3.2	22.1
Nasdaq Composite	2,212	1.0	0.9	3.7	40.2
DJ Stoxx (Europe)	267	0.3	-1.6	-1.2	19.9
Nikkei 225	10,142	0.3	4.8	-2.2	14.5
Hang Seng	21,176	-3.3	-7.3	-2.1	47.2

 

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Mar-10 Forecast	Jun-10 Forecast	Current	Next Date
US (Fed Funds)	0.25	0.25	1.00	1.8	27-Jan
UK (Base rate)	0.50	0.50	0.50	1.1	07-Jan
Euro-zone (Repo Rate)	1.00	1.00	1.00	-0.3	14-Jan
Japan (Call rate)	0.10	0.10	0.10	-2.2	26-Jan

 

View the full Global Markets Weekly report (pdf).

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