Global Markets Weekly - 9 November 2009
- With the earnings season coming to an end…
The US Q3 earnings season that recently dominated the headlines has peaked. The overall picture for profits has been positive, with 84% of the S&P500 companies beating analysts’ expectations by 14.6% on average. However, top line revenues, critical for the sustainability of the recovery in profits, were marginally below expectations. With less than a fifth of the US companies still to report, investors are now reverting their full attention to the economic news flow and central bankers’ announcements. And last weeks agenda was packed with those.
- … investors are refocusing on the economic environment …
The economic news flow was mixed last week. Manufacturing surveys around the globe came in stronger-than-expected. The Chinese survey increased for the seventh consecutive month, reaching 54.3, while in the UK, the manufacturing Purchasing Managers’ Index (PMI) significantly beat the consensus estimate of 50. It jumped from 49.9 to 53.7, a level consistent with manufacturing growth in excess of 3% and the highest level since November 2007. The US ISM positively surprised the market at 55.7. The employment sub-component encouragingly leapt from 46.2 to 53.1, the highest level since May 2006. However, this was in stark contrast with the situation in services PMI, whose employment sub-component remains at a low point of 41.1. On Friday, non-farm payrolls confirmed that US employment remains under pressure. Even though they fell by less than last month with 190,000 job losses, unemployment rose to 10.2%, breaching the 10% level for the first time since 1983.
- … and central bankers' announcements.
As anticipated, central bankers in the US, UK and Europe left their interest rates unchanged at 0.25%, 0.5% and 1% respectively. The UK was the only one to modify its policy as the Bank of England decided to expand its quantitative easing by an extra £25bn to £200bn. Of significantly greater interest to the market were the accompanying statements. To investors’ relief, the Federal Reserve (Fed) reiterated its intention to keep interest rates "exceptionally low for an extended period", citing low rates of resource utilization (i.e. unemployment), subdued inflation trends, and stable inflation expectations.
- Markets proved jittery as investors absorbed mixed news flow ...
By expanding for the first time its rationale for keeping interest rates low, the Fed conveyed to the market a check list of the key factors that will eventually trigger its first rate hike. This is a critical development as markets have recently been nervous pondering the timing of the central banks’ exit strategy. Markets were very volatile ahead of the central banks’ announcements. Implied volatility, a gauge for investors’ fear, jumped from 20 to 30, and risk assets such as equities corrected. Negative news flow from the financial sector also weighed on markets. CIT group - the troubled US commercial lender - filed for bankruptcy and UBS revealed a bigger - than - expected loss in Q3. Gold was the main beneficiary of the increase in risk aversion, touching a new record high of $1,097 during the week. The rise in the price of gold was also fuelled by the Reserve Bank of India’s decision to buy 200 tons of gold to diversify 2% of its foreign exchange reserves away from the US dollar.
- … and volatility should persist in the short term.
Equity market momentum stabilised later in the week as investors’ concerns about an early withdrawal of liquidity by central banks were allayed and markets digested the mixed economic news flow. However, we believe markets will remain volatile in the coming weeks, as investors that have benefited from the very strong equity rally over the past seven months take profits as year end approaches. Meanwhile, investors sitting on cash, since they missed the rebound, should consider market corrections as re-entry opportunities.
Indices, Interest rates and Inflation
|
Close - 6 Nov 09 |
1 Week% |
1 Month% |
3 Months% |
YTD
% |
|
FTSE ALL Share |
2,634 |
1.9 |
-0.2 |
9.5 |
19.2 |
|
FTSE 100 |
5,143 |
2.0 |
0.1 |
9.6 |
16.0 |
|
S&P 500 |
1,069 |
3.2 |
1.4 |
7.2 |
18.4 |
|
Nasdaq Composite |
2,112 |
3.3 |
0.4 |
7.1 |
34.0 |
|
DJ Stoxx (Europe) |
262 |
2.1 |
-2.4 |
6.2 |
17.7 |
|
Nikkei 225 |
9,789 |
-2.5 |
1.0 |
-5.8 |
10.5 |
|
Hang Seng |
21,830 |
0.4 |
4.9 |
4.5 |
51.7 |
| Official Rates (%) |
Inflation (%) |
Rate announcement |
|
Current |
Dec-09 Forecast |
Mar-09
Forecast |
Current |
Next Date |
|
US (Fed Funds) |
0.25 |
0.25 |
0.25 |
-1.3 |
16-Dec |
|
UK (Base rate) |
0.50 |
0.50 |
0.50 |
1.1 |
03-Dec |
|
Euro-zone (Repo Rate) |
1.00 |
1.00 |
1.00 |
-0.3 |
03-Dec |
|
Japan (Call rate) |
0.10 |
0.10 |
0.10 |
-2.2 |
20-Nov |
View the full Global Markets Weekly report (pdf).
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