Global Markets Weekly - 28 September 2009
- Riskier assets faded late last week amid mixed data, after a strong rally over the quarter.
Equity markets including the S&P 500 made new highs for the year early last week before encountering some volatility. The economic numbers were more mixed than in recent weeks. For example, in the US, jobless claims and consumer confidence came in ahead of market expectations, but home sales and durable good orders were weaker. Moreover, although the US Federal Reserve (Fed) pledged to keep interest rates at record lows for an extended period, several central banks signalled their intention to reduce emergency lending programmes. That triggered some profit-taking towards the end of a quarter when most stock markets have risen by 15-20%. Other cyclical assets, such as commodities, retreated too, with crude oil falling to around $66 a barrel. As investor sentiment remains at elevated levels, equities could consolidate further in the coming weeks. But investors are likely to see any pullback – which could be as large as 7% – as a buying opportunity.
- The Fed still expects a moderate recovery with subdued inflation...
In another light week for data, the focus was on central bankers expounding on their latest thinking. Despite the V-shaped rise in many leading indicators, the Fed is sticking to its view that the incipient economic recovery will be tempered and inflation will be subdued, which would justify keeping rates at exceptionally low levels for some time to come. Loose monetary policy is providing underlying support for riskier assets. Unless growth in the second half of 2010 proves stronger than we expect, it will be tough to wean markets off ultra-loose monetary policy without an upset.
- ...as does the Bank of England, suggesting a long period of low rates.
The release of the latest minutes of the UK’s rate-setting committee revealed that they, like the Fed, remain sceptical about the longer-term outlook. The minutes highlighted both the amount of economic slack the recession has opened and the headwind the economy faces from tight credit conditions. Both the Fed and the Bank are signalling that they currently don’t intend to raise rates until well into 2010 at the earliest.
- Despite their rally, equity markets don’t appear to be in bubble territory.
As they ponder the ruinous cost of letting a credit-fuelled housing market bubble build and then burst in recent years, central bankers have come to feel that it's better to ‘lean against’ bubbles than clean up after them. Last week, the Bank of England’s chief economist said he fears that increasing quantitative easing further could lead to asset price bubbles. With the FTSE up 45% from its March low, this raises the question of whether he may start leaning against the equity market rally. We don’t think so. A Fed study suggests that equity markets would have to rise much higher before central bankers view them as in a bubble. For now, central bankers are far more likely to see the rally as a welcome sign that monetary policy is restoring risk appetite to more normal levels and rebuilding household savings.
- Sterling is set to stay under pressure until fiscal concerns are addressed.
Credit rating agency Fitch said last week that it wants the UK government to make a firm commitment on tough measures to restore the UK public finances to health, ideally in this autumn’s Pre-Budget Report. If it doesn’t, Fitch will probably cut gilts’ AAA rating. Until there is a credible plan to rein in the deficit, sterling will remain under pressure and heading for new trade-weighted lows – something the Bank of England would welcome as a way of rebalancing the economy and boosting exports.
Indices, Interest rates and Inflation
|
Close - 25 Sep 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,608 |
-1.9 |
3.3 |
20.2 |
18.1 |
|
FTSE 100 |
5,082 |
-1.8 |
3.4 |
19.5 |
14.6 |
|
S&P 500 |
1,044 |
-2.2 |
1.6 |
13.5 |
15.6 |
|
Nasdaq Composite |
2,091 |
-2.0 |
3.3 |
14.3 |
32.6 |
|
DJ Stoxx (Europe) |
265 |
-1.9 |
2.0 |
19.3 |
19.0 |
|
Nikkei 225 |
10,266 |
-1.0 |
-2.2 |
4.8 |
15.9 |
|
Hang Seng |
21,024 |
-2.8 |
2.9 |
15.0 |
46.1 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Dec-09 Forecast |
Mar-10
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0.25 |
0.25 |
0.25 |
-1.5 |
04-Nov |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.6 |
08-Nov |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.2 |
08-Oct |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.2 |
14-Oct |
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.
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.
