Previous Page

Global Markets Weekly - 2 November 2009

• US equity market dips for the fourth time since its second half of the year rally began…
  Over the last couple of weeks, the US equity market has experienced a fourth correction since its second half of the year rally commenced. At its lowest point last week, the market was 5% beneath its year-to-date high. This sell-off partly reflects speculators taking less risk as we move towards year-end. However, more fundamental drivers are also at work. Firstly, the US Federal Reserve (Fed) forewarned the markets via the press that at its meeting next week, it might moderate the language used to signal that US interest rates will be kept exceptionally low for an 'extended period'. Secondly, prior to the release of last Thursday’s better-than-expected Q3 2009 US GDP data, the upward momentum in US economic data surprises had stalled.
• …despite the fact US Q3 2009 GDP surpassed consensus estimates by growing at an annualised rate of 3.5%.
  The US economy expanded for the first time in a year, after contracting by almost 4% peak-to-trough during this recession. As expected, the biggest single contribution to growth came from consumption, which increased by 3.4%, contributing 2.4%. About a third of the rise in consumption was due to a temporary boost from the US car scrappage scheme. Along with the temporary boost to house building from tax incentives, this raises some concern that Q4 GDP will not be as strong.
• The current US recession is severe but relatively mild judged from a regional and historical perspective.
  Although this has been the longest and deepest US recession since World War II, it bears no comparison with the great depression of the early 1930s when the US economy contracted by 27% over a four year period. The US’s aggressive monetary and fiscal policy response combined with the relatively closed and diverse nature of its economy, has also ensured that the economy has been hit less hard than other G7 countries. In contrast, given their greater exposure to world trade, Japan and Germany’s economies contracted by 8.4% and 6.7% respectively. The UK economy contracted by 6%, after the property bubble burst and the dominant financial sector was left teetering on the brink of collapse.
• US deflationary pressures currently prevail.
  The US GDP release also revealed a fall in the GDP deflator from 1.5% to a near sixty year low of 0.7%. With an output gap of -5%, excess capacity is containing domestic inflationary pressure to the extent that year-on-year household income growth will probably enter negative territory. Therefore, deflationary pressures remain more of a pressing near-term concern than fears that large budget deficits and quantitative easing may generate inflation.
• Given the fragility of the global economic recovery, the monetary tightening process is likely to remain relatively slow.
  We expect the Fed, the European Central Bank, and the Bank of England to keep interest rates unchanged at current record lows this week. Indeed, the Bank of England is even likely to extend its programme of quantitative easing by a further £25-50 billion, given the UK economy’s surprise Q3 contraction. With financial markets seeking reassurance about the US recovery, this week’s release of purchasing managers’ surveys and US payrolls will be closely watched. Elsewhere, Norway became the first western European country to raise interest rates since the financial crisis began. The Norges Bank lifted its main rate by 25 basis points to 1.5% and signalled further increases ahead. This decision follows rate increases in Israel and Australia in August and October respectively. Meanwhile, India’s central bank has also begun preparing for an interest rate rise early next year.

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.

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