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Global Markets Weekly - 22 June 2009

• Survey evidence continues to point to economic recovery.
  The run of good news on the global economy continued last week. Significantly, the turnaround in the key OECD leading indicators was confirmed by the improvement in the US Conference Board leading indicators, which recorded a rise of 1.2% in May, after a similar gain in April. This amounts to the best back-to-back performance since 2001. We also saw a further reduction in the rise of US unemployment claims, with continuing claims falling by 148,000. Unemployment is still rising – and will likely to continue to do so for the rest of the year – but the peaking in the rate of job losses is yet another sign associated with a turn in the economic cycle. Meanwhile, ten leading US banks announced that they will be repaying the Treasury $68bn of the emergency TARP capital injections.
• But markets have faltered on the realisation that growth rates will be hindered by headwinds.
  But even as there seems to have been confirmation that the US economy is set to recover in the second half of this year (in line with our forecasts and current consensus expectations), markets have stalled. Equities have fallen across the globe, with developed markets down by 2.9% on average and the more economically-sensitive emerging markets off by 4.5%. For investors, the saying, "It is better to travel hopefully than arrive," is often apt. In this case confirmation of an imminent recovery has coincided with reminders that headwinds to growth remain in the aftermath of the global credit crunch.
• UK consumers are choosing to save rather than spend, while rising government deficits reveal the damage recession has wrought.
  These four headwinds - consumer de-leveraging, fiscal tightening, muted growth in bank lending, and greater regulation and state planning of the economy – were in the spotlight last week. UK retails sales declined by 1.6% year on year, the fastest rate of decline since 1992 and providing confirmation that households are choosing to rebuild their savings rather than shop. Conversely, increases in the British government’s expenditure are rising faster than inflation at a time when revenue is being eroded by the recession. As a result, public sector borrowing jumped by £19.9bn in May, the biggest amount since monthly records began, bringing the total deficit over the past 12 months to £104bn. Similar trends were behind Ireland’s credit rating being downgraded by S&P for the second time in three months. 
• The contours of the financial sector will continue to change, through regulation and further losses.
  In addition, we got a glimpse of how regulation will mould the new financial sector landscape. Proposals for tighter regulation were lined up in the US by President Obama and Treasury Secretary Tim Geithner, and by the Bank of England’s governor in the UK. In Switzerland, the central bank called for powers to break up banks seen as ‘too big to fail’. Not to be left out of the rhetoric, the ECB warned that banks in the eurozone face $283bn of further losses this year and next as they are forced to write-off bad loans. Indeed, if proof were needed of how difficult the financial sector environment will remain, Moody’s downgraded 30 Spanish banks and regional saving institutions, while Standard & Poors lowered its credit ratings on 22 US banks.
• As a result, volatility will continue to plague markets over the next few weeks.
  In such an environment, it’s hardly surprising that caution has returned as a watchword for equity investors, and markets are expected to remain volatile in the coming weeks. The VIX implied volatility index has moved back above the psychologically important 30 level that is seen as a key point of resistance, and the S&P500 has also been moving back dangerously closer to its 200-day moving average.

Indices, Interest rates and Inflation

 

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