Global Markets Weekly - 23 November 2009
- Global markets hit new highs this week.
A broad range of asset markets hit new highs this week before retreating in the face of profit taking. Many commodities, equity and bond markets recorded new price highs for the year. This extraordinary conjunction of market moves was driven by policy-makers around the world reiterating that low interest rates and other stimulative measures would remain in place. At the Asia Pacific Economic Cooperation (APEC) forum there was a commitment to maintain stimulus measures until the recovery was on a "solid footing". Similar statements followed from the Bank of England and Ben Bernanke, the Chairman of the Federal Reserve. As a consequence bond markets rose, with two-year treasury yields falling to the low for the year. Equities and other economically sensitive assets also benefited, while investors bought inflation hedges such as gold.
- Still waiting for "durable growth"…
APEC’s closing communiqué, urging caution on the outlook for the global economic recovery, was borne out by the data this week, which confirmed a continuing, but still patchy and fragile, recovery. While Japan reported a growth rate of 4.8% in the third quarter, its equity market failed to join the rally. This highlights that, even in Asia, a developed economy can be dogged by excessive debt and a damaged banking system.
- … as economic news remains mixed, suggesting the recovery is yet to become self-sustaining.
Retail sales in both the UK (+0.4%) and US (+1.4%) rose in October, with UK sales volumes now back above their pre-recession highs. But the underlying rise in the US, excluding the subsidized purchases of autos, was just 0.2%, reflecting weak consumer confidence. The fragility of the economic recovery was illustrated by the stalling of the improvement in US housing starts, following the withdrawal of government support. Consequently, the mortgage subsidy has been swiftly reinstated. The recovery remains very dependent on stimulus measures like the home buyer tax credit and ‘cash for clunkers’ programme. Although a recovery is underway, it is yet to become self-sustaining and the economic risks are still firmly on the downside.
- Inflation heads higher – but underlying trends in developed economies suggest that it will fall back again later in 2010.
Higher-than-expected consumer prices data reignited the debate over the risk of inflation. In the UK, CPI inflation rose to 1.5% in October, up from 1.1% in September. Meanwhile, in the US, CPI inflation, which in this case includes housing costs, was - 0.2% up from a low of -2.1% in July. Even the euro-zone saw inflation accelerate though it remained negative at -0.1%. In each of these countries the collapse of the oil price to its low point last December and subsequent rebound, means that energy prices have swung from depressing the annual inflation rate to now boosting it. Our forecasts suggest that the underlying inflation rate will remain subdued in developed economies, given the downward pressure on wages from still rising unemployment. This means that headline inflation should fall back in 2010, once the rebound in commodity prices has dropped out of the figures.
- Inflationary risks are focused on emerging markets and ‘asset bubbles’.
The risks faced by emerging economies, which experienced a short sharp growth recession and are recovering quickly as global trade bounces back, are instead biased to inflation. This increases the pressure on governments to allow currency appreciation or raise interest rates. Hence, an increasing number of countries are looking at Brazil’s imposition of capital controls as a potential way of avoiding undesirable inflation, without jeopardising the benefits to growth.
Indices, Interest rates and Inflation
|
Close - 23 Oct 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,685 |
-1.0 |
-0.4 |
10.0 |
21.6 |
|
FTSE 100 |
5,251 |
-0.9 |
0.2 |
10.4 |
18.4 |
|
S&P 500 |
1,091 |
-02 |
0.0 |
8.3 |
20.8 |
|
Nasdaq Composite |
2,146 |
-1.0 |
-0.8 |
7.9 |
36.1 |
|
DJ Stoxx (Europe) |
264 |
-1.8 |
-3.9 |
6.5 |
18.7 |
|
Nikkei 225 |
9,498 |
-2.8 |
-8.1 |
-8.5 |
7.2 |
|
Hang Seng |
22,456 |
-0.4 |
0.3 |
10.5 |
56.1 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Sep-09 Forecast |
Dec-09
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0.25 |
0.25 |
0.25 |
-0.2 |
16-Dec |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.5 |
10-Dec |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.1 |
03-Dec |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.2 |
18-Dec |
View the full Global Markets Weekly report (pdf, 78KB).
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