Global Markets Weekly - 7 December 2009
- Calm returned to the markets as the Dubai crisis remained localised and US payrolls surprised.
Markets rallied this week, recovering losses that followed the announcement of a debt moratorium by Dubai for two government-owned companies. While the amount of debt is not insubstantial, with an estimated $26bn affected, it remains a regional crisis. As we reported last week, the potential global impact of the debt standstill was heightened by the lack of accurate details for investors given that many markets were closed for holidays. Markets rebounded, with investors favouring risks assets, including equities and commodities, while sovereign bonds retreated. Oil remained weak, as investors continued to expect local oil-producing governments to bail-out, if not Dubai, the local banks that are Dubai’s main creditors.
- China leads emerging markets higher on continued strong economic news.
The rally in equity markets saw many emerging markets hit new highs, especially in US dollar terms. In addition to the rebound in risk appetite, investors were encouraged by the continuing strong economic news. China’s PMI survey, at 55.2, remains well above the 50 level that indicates expansion. Indian economic growth accelerated to an annualised rate of 7.9% in the third quarter. Meanwhile, South Korea revised up its growth rate for the same period to 3.2%.
- The US labour market may be nearing the bottom.
November’s 11,000 decline in US employment was substantially smaller than the 125,000 the market had been expecting. It was sufficient to see the unemployment rate fall 0.2 percentage points from a near thirty year high of 10.2%. Both the current pace of decline of jobless claims and recent large gains in temporary hiring suggest that employment growth will be positive by the end of the first quarter of 2010. The post Lehman wave of job losses could soon be over. However, the legacy of high unemployment means that excess capacity will still exert downward pressure on core inflation for some time to come. By contrast, the US PMI survey of manufacturers slipped back to 53.6 and the same survey for services came in below market expectations at 48.7.
- Monetary policy decisions reflect the health of the local economies.
With demand from emerging economies continuing to recover strongly, the Reserve Bank of Australia raised interest rates again, by 0.25% to 3.75%, with the markets pricing further increases to 4.5% over the next six months. By contrast, we do not expect US interest rates to rise anytime soon. Even if employment does stabilise in the first quarter of 2010, history shows that there can be a lag of more than a year before the Federal Reserve starts to increase interest rates. However, we are seeing some signs that extraordinary measures are being unwound as the economic recovery progresses. The Bank of America has paid back $45bn of capital received under the Troubled Asset Relief Program. Similarly in the eurozone, the ECB announced that it would start winding down the size of its own liquidity measures in the new year. It will cut back on the extraordinary amount of securities that it holds under repurchase agreements with banks. We do not expect an increase in ECB interest rates in 2010.
- Japan plans new stimulus to sustain growth.
That the global economy as a whole is not yet back on a sustainable recovery path is illustrated by new measures being adopted by Japan. The Bank of Japan held an emergency meeting and agreed to provide new liquidity of ¥10 trillion at 0.1% interest to banks. Meanwhile, the new coalition government has been debating the scale of a new stimulus package. The scale of this package has dramatically increased from the initial plans for around ¥3trn. We continue to forecast economic recovery, but believe that the key risks remain deflation and a return to recession. As such, we anticipate that developed economies will continue fiscal and monetary stimulus measures during 2010.
Indices, Interest rates and Inflation
|
Close - 4 Dec 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,717 |
1.5 |
3.9 |
9.0 |
23.0 |
|
FTSE 100 |
5,322 |
1.5 |
4.2 |
9.7 |
20.0 |
|
S&P 500 |
1,106 |
1.3 |
5.7 |
8.8 |
22.4 |
|
Nasdaq Composite |
2,194 |
2.6 |
6.8 |
8.7 |
39.1 |
|
DJ Stoxx (Europe) |
271 |
2.8 |
4.5 |
6.4 |
21.7 |
|
Nikkei 225 |
10,023 |
10.4 |
1.8 |
-1.6 |
13.1 |
|
Hang Seng |
22,498 |
6.5 |
4.1 |
10.7 |
56.4 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Mar-10 Forecast |
Jun-10
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0.25 |
0.25 |
0.50 |
-0.2 |
16-Dec |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.5 |
10-Dec |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.1 |
07-Jan |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.5 |
18-Dec |
View the full Global Markets Weekly report (pdf).
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