Previous Page

Global Markets Weekly - 26 May 2009

• The equity rally ran out of steam last week.
  After a rally of almost two months, equity markets have shown further signs of fading momentum. The S&P 500 is little changed over the past five days, with cyclical sectors no longer outperforming in a coordinated manner.
• The rally has translated into a weaker dollar...
  In foreign exchange markets, the cyclical nature of the rally has shown up in dollar weakness. The US equity market is relatively defensive, tending to outperform when risk appetite is weak. As investors have been attracted to higher-risk markets, the capital outflows have pushed the trade-weighted dollar index down almost 9% over the past two months. This is positive for US exporters, which is why lead indicators of manufacturing activity have increased more in the US than in regions with strong currencies, such as the eurozone and Japan.
• ...even against sterling, despite the UK's fiscal problems.
  In this pro-cyclical environment, the dollar has even weakened against sterling – a currency that has suffered its own particular bad news. On top of the high government borrowing requirement published in the 2008-09 budget, the IMF this week issued a report urging fiscal consolidation, while Standard & Poor’s gave the UK’s AAA credit rating a ‘negative outlook’. This is not the same as an actual downgrade, nor is it as serious as being placed on ‘negative watch’. Nevertheless, one-third of credits given a negative outlook are ultimately downgraded. A downgrade would be highly controversial, and it’s unlikely that any credit agency would consider doing this before the next government outlines its plans to reduce the structural deficit. After all, a UK general election has to be held some time before June 2010.
• Japan's woes continue, with nominal GDP back to early- 1990s levels...
   In Japan, government indebtedness over the past two decades rose far more than is considered likely in the UK, with the associated ignominy of credit ratings agencies scrutinising Japan’s public finances. In addition, because the Japanese economy is so export oriented, its recent growth numbers have been some of the worst in the developed world. GDP declined by 2.9% in the first quarter of 2009 and is now down an annual 8.6%. After the past year’s declines, Japanese nominal GDP is now at the same level as it was in the early 1990s. Previously, commentators called the 1990s Japan’s lost decade of growth. Now, all Japanese growth during the upswing in global trade from 2002 onwards has been lost all over again.
• ...which highlights the urgent need for the unprecedented global policy action.
  The spectre of a Japanese perma-recession being repeated across the global economy has been one of the driving forces behind the monetary expansion of the past year, unprecedented in both method and scale. Thanks to near-zero interest rates and quantitative easing, excess money growth has been at roughly the same rate as at the start of the previous bull market in equities (see chart on next page). In 2003, the increase in liquidity stemmed from easier lending standards and a positive fundamental outlook for corporate earnings; by contrast, the 2009 gush of liquidity has been officially sponsored. Although it may not be as long-lasting as that from a self-sustaining recovery, it has already assisted the recent rally in equity and commodity prices.
• Yet liquidity alone cannot sustain the rally's momentum.
  With risk appetite now showing signs of declining, however, the force of liquidity is finding it hard to maintain momentum for riskier assets all by itself. As with most good plays, the second act of the economic and market recovery is likely to prove longer and more complex than the first.

Indices, Interest rates and Inflation

 

View the full Global Markets Weekly report (pdf).

Disclaimer

Issued by Coutts & Co, which is authorised and regulated by the Financial Services Authority. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information shown is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Any Coutts company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned.

The analysis in this document has been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law ad without being inconsistent with any applicable regulation, neither Coutts & Co nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.

Not all products and services offered by the individual Coutts companies are available in all jurisdictions, and some products and services may be available only through particular Coutts companies. Certain aspects of the service may be performed through, or with the support of, different members of The Royal Bank of Scotland Group, of which Coutts & Co is a member.

None of the overseas Coutts companies or offices is an Authorised Person subject to the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors and depositors, and compensation under the Financial Services Compensation Scheme will not be available in respect of business transacted with them.

• Important Information & FSCS
• Security
• Privacy & Cookies Policy
• Accessibility
• Sitemap