Global Markets Weekly - 27 July 2009
- It was another strong week for riskier assets, especially BRIC equities.
Last week proved very much like the previous one, with pro-cyclical assets, such as equities, advancing to new highs for 2009. Developed markets added around 4%, and the Nasdaq even managed a 12th consecutive session of gains, which never even happened during the tech bubble. Emerging markets did still better, with Brazil, Russia, India, and China (BRIC) up over 5%. The BRICs could now be seen as in a new bull market, according to technical analysts, as their 150-day moving averages are clearly in an up-trend. Other cyclical assets rebounded, especially commodities. Oil rose 7%, and copper hit a new high for 2009, up 75% since 1st January.
- Equity markets were boosted by upbeat news from corporate America...
The US second-quarter earnings season is in full swing, with companies reporting improving outlooks and stronger-than-expected profits (some admittedly from very depressed expectations). Caterpillar, DuPont, Apple, Merck and Coca Cola all beat Wall Street’s forecasts. Of the 175 S&P 500 companies reporting since 8th July, 130 have surprised on the upside, exceeding analysts’ forecasts by 11% on average. With economic news flow also supportive (see below), it’s no surprise that equity investor sentiment is improving. It has been given a further boost by investment banks revising up their year-end price targets for the S&P 500 – Goldman Sachs and Credit Suisse now expect 1060 and 1020, respectively. Credit risk appetite is also improving, with the iTraxx – the main European index for credit default swaps – below 100 basis points for the first time since Lehman Brothers collapsed last September.
- ...and by positive economic news from around the globe...
The US index of leading indicators rose for a third month running (for the first time since 2004), reinforcing signs that the economy may be emerging from the worst recession in five decades. Also posting a third consecutive rise were US sales of existing homes, up 3.6% in June. That may signal an end to the four-year slump, the start of which foreshadowed the financial crisis. In Europe, manufacturing and services confidence improved, with the German IFO business climate index recovering from March’s 26-year low and Spanish business confidence up for the first time since 2006.
- ...but especially from Asia, where China is leading the recovery.
In the UK, the good news is still only that economic activity is falling more slowly. While GDP fell 5.6% over the year, the drop in the second quarter was only 0.8%, versus the first quarter’s 2.4%. Similarly the number of new mortgages approved by banks in June, at 35,000, is the highest for 15 months, but this is still short of the level associated with rising house prices, suggesting further, modest declines ahead. But it is in Asia that things seems to be brightening most. After good credit data last week, China released strong leading indicators, demonstrating that its recovery is well ahead of developed markets.
- That is focusing minds on when and how QE will be reversed.
The recent batch of positive economic news shows that quantitative easing (QE) is finally gaining traction. The experiment has proved successful, with the Chairman of the Federal Reserve (Fed), Ben Bernanke, taking some of the credit for averting the collapse of the global financial system in his testimony to Congress. Bernanke also took the opportunity to explain how the Fed would operationally go about reversing QE and made clear that the timing of doing so would depend heavily on the state of the labour market. Consequently, rates may not rise until as late as 2011. Despite Bernanke's assurances, the added dimension of QE adds to the potential for a policy error, and we believe that an inflation overshoot is, though not the most likely outcome, at least the most likely alternative to the emerging consensus of a low growth, low-inflation recovery.
Indices, Interest rates and Inflation
|
Close - 24 Jul 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,336 |
4.2 |
7.1 |
9.8 |
5.8 |
|
FTSE 100 |
4,577 |
4.3 |
6.9 |
10.01 |
3.2 |
|
S&P 500 |
979 |
4.1 |
8.7 |
13.1 |
8.4 |
|
Nasdaq Composite |
1,966 |
4.2 |
9.7 |
16.0 |
24.7 |
|
DJ Stoxx (Europe) |
238 |
4.3 |
6.8 |
10.5 |
7.0 |
|
Nikkei 225 |
9,945 |
5.9 |
3.7 |
14.2 |
12.3 |
|
Hang Seng |
19,983 |
6.3 |
11.7 |
31.0 |
38.9 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Mar-09 Forecast |
Jun-09
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0-0.25 |
0-0.25 |
0.25 |
-1.4 |
11-Aug |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.8 |
06-Aug |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.1 |
06-Aug |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-1.1 |
11-Aug |
View the full Global Markets Weekly report (pdf).
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