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Global Markets Weekly - 6 April 2009

• Investors remain generally optimistic but bank woes continue to rankle.
  The rally in equity markets that started in early March continued for most of last week. However, there are still some areas of concern preying on investors’ minds, particularly relating to the health of the global financial sector. Comments from Tim Geithner, the US Treasury Secretary, that US banks may require further recapitalisation hit banks’ share prices earlier in the week , interrupting a market rally that was otherwise focusing on the positive.
• Markets have been lifted by a better tone to economic data…
  Lead indicators have been the chief factor supporting a return of investor risk appetite. Manufacturing purchasing manager indices (PMI) in the US and China improved again in March from the previous month . US factory orders also showed a surprise increase of 1.8% during February; compared to the monthly declines of 4-6% that were being recorded around the turn of the year.
• ...but they remain only silver linings to dark clouds.
  But optimism over growth should remain qualified. The extremely poor production data seen in most regions during late-2008 was partly the result of an inventory reduction by companies responding to lower levels of demand. The recent increase in the US manufacturing ISM (equivalent to PMI) survey has been driven predominantly by a rise in the new orders component, but only to around its September 2008 level. This remains consistent with steep declines in new orders, but above the ‘collapse’ levels of late-2008. Recent payroll data, showing 663,000 jobs being lost in the US in March should also serve to check enthusiasm .
• The current rally trumps the average 2008 bounce, as it's based on actual fundamentals.
  While the outlook for growth remains weak, there is an upswing in the inventory cycle that is benefiting producers around the world. So there are some fundamental, although possibly transitory, factors underpinning the ongoing rally in risk assets . This moderate improvement is one factor that means the current equity rally has already lasted longer than the average rebound in 2008.
• The ECB is following its own path over monetary policy…
  The stabilisation of growth expectations was also a factor driving the European Central Bank (ECB) to cut interest rates by just 0.25% last week, compared to the widely-anticipated 0.50%. In addition to this, the take-up of the ECB’s tender operations, that supply euro liquidity to banks within the euro system, has been declining. This effective ‘quantitative tightening’ is in direct contrast to the expansionary approach being taken by the central banks of the US, the UK, Japan and Switzerland, among others .
• …with some ill-desired consequences.
  Such a restrictive stance can be seen in the appreciation of the trade-weighted euro exchange rate. This is now 8% higher than its trough around the time of the failure of Lehman Brothers and is only slightly off its end-2008 highs. The German manufacturing PMI has so far failed to pick up in line with its US equivalent, suggesting that these FX moves are having an impact on the global distribution of new orders during the current inventory upswing.
• The economic picture should continue to improve…
  The improvement in growth expectations, relative to the unrealistically pessimistic outlook of early-2009, is likely to continue for a number of months. But the shadow that continues to hang over this improving picture is the health of the financial sector . The negative reaction to Tim Geithner’s comments on the topic last week partly explains why G20 leaders chose to ignore the potential for further write-downs and policy responses in their official communiqué.
• …but banking troubles may yet mar the landscape.
  If the global economy were a hospital patient, the last few weeks have demonstrated the best potential so far for an eventual recovery. A more detailed diagnosis, however, shows that the financial system, a critical internal organ of the patient, is still not functioning properly. This could yet provide some unpleasant surprises on the path to full health.

Indices, Interest rates and Inflation

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