Global Markets Weekly 1 November 2010

• With investors expecting the Fed to announce QE2 next week, markets stalled

  Equity markets were broadly flat as investors took stock ahead of a widely expected announcement of further quantitative easing (QE2) from the US Federal Reserve (Fed) on Wednesday. The dollar regained some ground, and we believe it is close to its near-term lows as QE2 is increasingly discounted. Bond yields backed up amid increased concerns that the inevitable consequence of QE2 will be inflation. The auction of inflation-linked five-year Treasuries produced a negative real yield, as investors bet that inflation would exceed the 1.2% nominal yield on Treasuries. Commodities were mixed, with industrial metals down.

• We expect $100 billion of QE a month until the Fed sees increased confidence in the economic outlook

  QE2 is overwhelmingly expected at the end of the Fed’s meeting Wednesday, the major question being the scale. We expect a more gradual and conditional injection of about $100 bn per month, as opposed to the ‘shock and awe’ of the first trillion-dollar-plus round of QE. This will allow the Fed to monitor the impact on markets and the economy, rather than provide the kind of open-ended guarantee of support that was needed in the worst of the downturn and avoid unnecessarily increasing concerns over asset bubbles. The number of weekly new unemployment claims fell to a three-month low and economic growth accelerated, with GDP rising by 2.0%, though inflation remained low, with the Fed’s measure of inflation used to calculate GDP showing a less-than-expected annualised rate of 0.8% in the third quarter.

• We expect policy responses from other countries to follow the Fed’s QE decision

  The Bank of Japan (BoJ), which is in the midst of its own smaller $60 bn QE programme, has brought forward its next meeting to immediately follow the Fed, clearly in order to be in a position to respond. Better-than-expected 0.8% third-quarter UK growth, helped by a one-off rebound in construction, may delay the Bank of England’s own decision on QE2. However, with one committee member having voted for £50bn of QE last meeting and given further weakness in the housing market, we believe QE will only be delayed until early next year, rather than cancelled, as fiscal austerity starts to bite. Some recent developments give hope for a coordinated global response, such as China forecasting a reduced trade surplus and the agreement to give emerging economies more say in the International Monetary Fund.

• Some better news on eurozone economic activity, but stresses remain

  German unemployment fell to its lowest level in 18 years, but retail sales fell back by 2.3% in September, contrasting with an 18-month high in consumer sentiment. Economic sentiment in the wider euro-zone also ticked up. However, the failure of the minority government to pass its austerity budget pushed Portuguese government bond yields higher, added to the widening in yields of other peripheral euro-zone bond yields versus the core as the EU agreed to proposals to reinforce punitive measures for breeching deficit limits.

• Corporate earnings continue to beat expectations and guidance suggests sales growth to continue

  With nearly half of the world’s publicly listed companies having reported, corporate earnings are beating expectations for the third consecutive quarter, and for the seventh in the US. Globally, net income has grown five percentage points (pp) more than forecast in the latest quarter, with sales also continuing to grow, although only one pp more than expected. Some of the more positive surprises have been in the travel & leisure and automobiles & parts sectors, with the latter boosted by growth in emerging markets, while personal & household goods and real estate have been among the more disappointing. Guidance for the current quarter and first three months of 2011 suggests most companies see sales continuing to grow.

Indices, Interest rates and Inflation

 

	Close 29 Oct 10	1 Week %	1 Month %	3 Months %	YTD %
FTSE ALL Share	2,936	-1.0	2.0	7.0	6.4
FTSE 100	5,675	-1.2	1.9	6.8	4.9
S&P 500	1,183	0.0	3.4	7.4	6.1
Nasdaq Composite	2,507	1.1	5.5	11.4	10.5
DJ Stoxx (Europe)	274	-0.8	3.6	4.4	-0.1
Nikkei 225	9,202	-2.4	-3.7	-5.1	-12.7
Hang Seng	23,096	-1.8	3.2	9.5	5.6

 

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-10 Forecast	Mar-11 Forecast	Current	Next Date
US (Fed Funds)	0.25	0.25	0.25	1.1	03 Nov
UK (Base rate)	0.50	0.50	0.50	3.1	04 Nov
Euro-zone (Repo Rate)	1.00	1.00	1.00	1.9	04 Nov
Japan (Call rate)	0.10	0.10	0.10	-0.6	04 Nov

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