Global Markets Weekly 

8 November 2010

• Fed delivers QE as expected and markets continue to rise
  
  The US Federal Reserve (Fed) announced a further round of quantitative easing (QE2), committing $600bn over eight months, largely to purchase Treasuries. While this was broadly in line with our forecast of a $100bn-a-month package, most assets apart from the dollar rallied. With our forecast for QE2 having recently become widely anticipated, these moves contradict the market adage "buy on the rumour, sell on the news", suggesting that many investors are still very cautious and have remained on the sidelines of the recent rally.
  
• US and emerging equities rose strongly, while oil hit a high for the year
  
  The S&P 500 and FTSE All Share made respective 3.6% and 3.3% weekly gains, but euro-zone markets lagged with a 0.9% gain. Emerging equity markets rose 3.5%, underlining our positive stance as cheap dollars flow in and growth prospects are better. Bond yields fell in the US, UK and Germany, but not in Japan or troubled peripheral euro-zone states. The dollar fell across the board, but only lost by 0.2% against the renminbi. Commodities rallied, with oil hitting a high for the year and gold reaching a new all-time high.
  
• Fed action prompts reaction from financial authorities around the world
  
  In the run-up to the Fed’s launch of QE2, India and, unexpectedly, Australia raised interest rates, with further increases anticipated. QE2 has weakened the dollar, boosted commodity prices and triggered a flood of cheap dollars into higher-yielding assets across the globe. This poses a threat to the domestic economic policy of many countries and has exacerbated existing currency and trade tensions. With these economies already growing strongly, the further boost from the Fed’s QE2 threatens to ignite an inflation boom. Policy makers will be forced to counteract this threat by choking off domestic demand with interest rate hikes and/or curbing external demand by allowing exchange rate appreciation. Hence we have seen subsequent reactions from more countries, with South Korea and Brazil considering "retaliatory measures" while China demanded an explanation of QE2 at next week’s meeting of the G20 in Seoul. By comparison there was no move by the central banks of the struggling economies of the UK, euro-zone and Japan, where inflation is not a current issue.
  
• US data confirms recovery, albeit sluggish and still anaemic jobs market
  
  The US ISM manufacturing survey rose to 56.9 in October, from 54.4 and compared with consensus expectations of a decline. This surprise increase was repeated for the non-manufacturing survey, confirming that the US economy is set to continue growing. Although October payrolls were a larger-than-expected 151,000, the unemployment rate remained stuck at 9.6%, and the week’s new unemployment claims climbed back up to 457,000, indicating that the pace and extent of the recovery is insufficient to trigger a pick-up in the jobs market.
  
• Euro-zone political, economic and market divergence continues
  
  Italy’s displeasure with "pre-cooked decisions" by France and Germany on changing euro-zone financial rules highlighted rising political tensions as economic data shows a continued divergence between member states. PMI surveys point to Germany continuing to boom, while the outlook worsens for most other members, with increasing risk of a return to recession for the likes of Spain. Similarly, the latest figures show German unemployment falling to a 7.5% rate, while the rate for the wider euro-zone rose to a record 10.1%. With investors avoiding troubled member states’ debt markets, yields have risen sharply. Upbeat UK manufacturing and services PMIs reinforced recent strong GDP, ruling out QE2 in the UK for now.
  

Indices, Interest rates and Inflation

	Close     5 Nov 10	1 Week %	1 Month %	3 Months %	YTD %
FTSE ALL Share	3,033	3.3	4.1	9.4	9.8
FTSE 100	5,875	3.5	4.3	9.5	8.5
S&P 500	1,226	3.6	5.6	8.9	9.9
Nasdaq Composite	2,579	2.9	7.5	12.5	13.7
DJ Stoxx (Europe)	277	0.9	4.3	3.1	0.8
Nikkei 225	9,626	4.6	1.1	-0.3	-8.7
Hang Seng	24,877	7.7	9.9	15.4	13.7




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	14 Dec
UK (Base rate)	0.50	0.50	0.50	3.1	09 Dec
Euro-zone (Repo Rate)	1.00	1.00	1.00	1.9	02 Dec
Japan (Call rate)	0.10	0.10	0.10	-0.6	21 Dec

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