Previous Page

Global Markets Weekly - 27 April 2009

• A happy combination of factors led to the recent bounce in risk assets.
  Most financial markets have been trading in a range over the past fortnight, following a strong recovery in equities and other risk assets in the preceding weeks. There has been a lot to support the risk rally: the much-vaunted “green shoots of recovery”; better-than expected bank earnings; and new quantitative monetary easing, particularly the Federal Reserve beginning to buy Treasuries . The US Treasury’s plans to remove “legacy assets” from banks’ balance sheets also received a positive reception.
• But equities have lost their way lately, as they struggle to find positive surprises…
  However, the bounce in risk assets is struggling to make further headway, with most major equity markets near their February highs. Emerging equities and credit markets are at their best levels since the failure of Lehman Brothers in mid-September 2008 and have lost some impetus recently. This lack of momentum suggests that it is now harder to find positive surprises to drive the rally from levels that are no longer extraordinarily cheap .
• …which remain a rather distant prospect, according to the IMF.
  Forecasts from the International Monetary Fund (IMF) suggest that significant upside surprises from economic data, rather than the manufacturing-focused good news of recent weeks, is still some way off. Its growth forecasts for 2009 and 2010 were reduced for almost every country and region. Its predictions also served to highlight the optimistic growth forecasts used by the UK government in its 2009 Budget: the IMF expects annual UK GDP growth of -4.1% in 2009 and -0.4% in 2010, compared to government forecasts of -3.5% and +1.25% . The £220 billion of announced gilt issuance was already surprisingly high, and a realisation of the IMF’s growth forecasts would add around £25 billion to annual gilt issuance this year and next.
• In the UK, tax hikes and spending cuts will be the legacy of this recession.
  Repairing the UK’s public finances will be left until after the next general election, which has to be held before June 2010. This will involve a combination of further tax rises and real spending cuts . Some annual real spending cuts did occur during the 1980s, although the full impact of these was masked by relatively high inflation. By contrast, annual RPI inflation in March was negative for the first time since 1960. Even if the next government sees political advantage in a higher inflation rate, this is difficult to generate with a dysfunctional banking system (this being the main lesson of Japan’s “lost decade”). Wages have also begun to decline in the UK. This is a concerning development, as it could mark the beginning of a debt deflation spiral, while also reducing tax revenues and so increasing gilt issuance.
• Banks are not out of the woods yet…
  The IMF also forecasts a sharp increase in capital writedowns to $4.1 trillion, around £2.5 trillion of which will be borne by banks. Up to the end of 2008, western banks had written down $844 billion and raised equity of $792 billion. So the IMF believes there is still some considerable work to be done in recapitalising the banking system . The US Treasury’s stress tests for the 19 largest US banks – the results of which are due on 4th May – will be an important contribution to this analysis.
• …with only around half of the hard work yet done.
  The view that we are currently somewhere around half-way through the overall process of balance sheet repair is supported by the change in the US household net savings rate from 0% to 4.2% , relative to its average level of 9.0% in the 1980s. Increasing net savings is the mechanism through which overall leverage in the economy is reduced; the side effect being a declining level of final demand, or a “recession”. However, as any gardener knows, the first “green shoots” are a signal that winter is about half way through – and a sign that there is now much work to be done before the halcyon days of summer.

Indices, Interest rates and Inflation

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