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Global Markets Weekly

• Upbeat data convinced the OECD to upgrade its overall growth forecasts... The economic news was on balance positive again last week, and the OECD forecast an earlier recovery than envisaged a few months ago. The organisation now expects the combined economy of the G7 nations to shrink by 3.7% this year, less than the 4.1% projected in June. Of those economies, the US, Japan, Germany and France are expected to expand in the third quarter (Q3), while Italy and Canada contract. Though expected to be flat over the period, the UK is the only country where the outlook has worsened, with the forecast of a 4.7% contraction, down from 4.3%. Large emerging market economies in Asia were highlighted as gaining momentum, having already entered recovery.
• ...and the ISM also suggested the US is in recovery. The ISM Purchasing Managers’ survey also pointed to a Q3 recovery in the US. It posted the biggest two-month gain since 1983, up to 52.9, the first time in 19 months that it had risen above 50, indicating expansion. Interestingly, the new order sub-component made progress, while the inventory adjustment under way since January appears to have reached a point where it may no longer be a drag on growth and could boost it in the near term. In the UK, mortgage approvals rose to a 15-month high in July, but a Bank of England report showed that households paid off more than they borrowed - for the first time since records started back in 1993.
• Still, the recovery faces severe headwinds - witness the US jobs data... Yet the OECD also noted that 'numerous headwinds imply that the pace of recovery is likely to be modest for some time’, citing unemployment, labour income and bank lending. In the US, the situation is not as bad as six months ago when the economy was shedding around 700,000 jobs a month, but employers cut a further 216,000 jobs in August. The jobless rate rose to 9.7%, underscoring the threats to consumer spending.
• ...and concerns about the G20 meeting further muddied the waters... Despite the clear recovery trend in the news, investors have been unsettled by political uncertainties. The G20 will meet in Pittsburgh later this month to discuss how to roll back the coordinated stimulus plans. They will also debate the global financial system, where agreement seems to extend only as far as that action is needed. This all highlights the importance of state intervention at a time when growth is being propped up by budgetary measures, and government involvement has substantially increased in industries from banking to automobiles. With the tightly contested German election immediately after the meeting, politics will remain an unpredictable factor for investors. However, the Japanese elections show that some electorates are ready to contemplate reform as a positive response to crisis.
• ...benefiting gold but not the dollar, while equities paused for breath but were up for the month.   All this uncertainty and the breaking of important technical levels lifted gold, which approached its 2009 highs and $1,000 an ounce. Despite nervousness among investors during the week, the US dollar, usually seen as a safe haven, lost ground. Winners included sterling and the Australian dollar, as well as the Japanese yen, helped by the election result. Meanwhile, equity markets saw some profit-taking. However, even after July’s leap to new highs for the year, equities managed to post another strong rise for August as a whole, rounding off a strong summer holiday season for stock markets.

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