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Global Markets Weekly - 3 August 2009

• Stock markets made new highs for the year, boosted by earnings results.
  The US earnings season for the second quarter (Q2) has passed the half-way mark, with 315 S&P 500 companies having reported. Roughly three-quarters of them have posted stronger-than-expected earnings, exceeding analysts’ forecasts by 9.5% on average – the highest rate since the series began, in 1994. That helped the S&P 500 to its highest close for eight months on Friday, as other stock markets also made highs for 2009.
• Despite contracting less than expected in Q2, the US recession has been more severe than originally thought.
  The US economy contracted at an annualised pace of 1.0% in Q2. This was better than the market’s expectation of a 1.5% fall, but Q1’s contraction was revised up from -5.5% to - 6.4%, and the decline during 2008 was also revised up, from -0.8% to -1.9%. So, on balance, this release left the level of economic activity lower than expected. Since the recession started early in 2008, the US economy has contracted by almost 4%, making this recession worse than those in the 1990s, 1980s and the 1970s. The main areas of weakness were consumer spending, investment in property, and companies running down inventories. These were enough to offset boosts from government spending (due to the stimulus package) and exports (the weak dollar).
• We expect the US to return to growth in Q3 as drags from consumer spending and real estate fade.
  We still expect Q2 to mark the low point for the US economy. Q3 should see modest growth, as boosts from fiscal spending and trade are augmented by restocking and by smaller drags from consumer spending and property investment. Although US consumer confidence slipped back again in July, the current level of confidence is consistent with consumer spending holding steady in Q3. Last week’s data also suggested that the US housing market is starting to stabilise at the very least in volume terms. US purchases of new homes jumped 11% in June, the biggest gain in eight years, and house prices showed their first monthly rise in three years, up 0.5% in May. That was mirrored in the UK by the Land Registry’s price index, up for the first time in 18 months, while the Nationwide’s index rose in the three months to June. In continental Europe, demand for home loans has turned positive for the first time since early 2006, according to the European Central Bank. The tightening in credit standards for mortgages is also lessening, suggesting that monetary policy is gaining traction.
• The Chinese authorities are worried about possible US moves to inflate away its debt...
  Top-level US and Chinese officials met last week for their six-monthly Strategic and Economic Dialogue. Chinese concerns that the US will inflate away its public-sector debt – a quarter of which is owned by the Chinese – and devalue the dollar will have been on the agenda. As they hold $800 billion of US Treasuries, Chinese concerns are understandable. But they are in a catch-22 situation: if they sold their holding, they would push prices down. There is no sign of the Chinese selling yet – in fact, quite the opposite. So far this year, they have been net purchasers of $5.8 billion of Treasuries per month, almost double the pace of accumulation over the previous five years. As J. Paul Getty once said: ‘If you owe the bank $100 that’s your problem. If you owe the bank $100 million that’s the bank’s problem.’
• ...and are moving to restrain growth at home, which could raise fears of a global double-dip.
  The Chinese authorities have domestic concerns, too. After the second quarter’s astonishing 14.9% annualised GDP growth, they are worried that fiscal stimulus and a 24% rise in bank lending this year may be overheating the economy and could lead to bubbles in property and equity markets. Hence, Chinese regulators have ordered banks to ensure new loans are channelled into the real economy, not into equities or real estate. In addition, Chinese officials have hinted that Beijing could soon tighten monetary policy by raising the amount of money banks must hold on deposit with the central bank. With the developed economies still struggling to climb out of recession, a sharp tightening of policy by the Chinese would be a major shock for equity markets, as it could push the global economy back into a dreaded double-dip recession.

Indices, Interest rates and Inflation

 

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