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Global Markets Weekly - 13 September 2010

• Markets rally as investor fears of imminent recession continue to recede
  With few important economic data announcements to disrupt the trend, global equity markets and other risk assets continued to rally. The OECD published new forecasts which predicted that economic growth would slow to 1.5% for the seven largest developed (G7) countries in the second half of the year. However, the overall prognosis was of a slow, but continuing, recovery. Most equity markets delivered further gains over the week, with the S&P 500 rising towards its 200-day moving average, a key technical level. But such technical levels may prove impediments to a rally driven largely by the unwinding of excessively negative positions.
• Obama proposals point to no early fiscal tightening in US
  Obama set out a new stimulus package to create jobs and proposed a compromise on the expiry of the Bush tax cuts that would extend them for all but the top 2% of tax-payers. While these plans have a limited chance of becoming law ahead of the 2 November mid-term elections, they suggest the political agenda is against tax increases, while stimulative government spending will be defended. In our view this suggests little or no fiscal consolidation in the US over the coming year, which removes a potential negative for the economy. Incidentally, the targeting of spending proposals on infrastructure and tax breaks for corporate capital expenditure highlights two key themes that we believe will drive relative equity performance. Elsewhere the Bank of England made no change to interest rates, but we continue to believe that all the G4 central banks are preparing a further round of quantitative easing (QE 2) to support growth if their domestic economies falter.
• New corporate regulation and strikes highlight the importance of political risks
  Events of the week highlight the less welcome aspects of government intervention in the economy. For example, Deutsche Bank shares fell 5% ahead of its announcement of a rights issue on Monday, amid stories that it and other German banks were lobbying to delay tough new capital adequacy regulations, which could crimp domestic lending growth. The Irish government announced that it would be winding down the nationalised Anglo Irish Bank, though it did not detail the potential cost or a timetable. Meanwhile more than a million demonstrated in France against government proposals to raise the retirement age, while London’s tube network was closed by a one-day strike against redundancies. The desire for new regulation to address identified failings as well as the need to restore finances means that governments have a packed agenda of legislation and policy measures at a time when they are still struggling with the fiscal and political fall-out from the recession. This means the threat of policy error is at elevated levels and remains a key risk for developed economies where the problems are most extensive and economic growth most fragile.
• China boosts global demand as imports rise 35%
  The surprise narrowing of China’s trade surplus was driven by a surge of imports in August, rising by 35% over the previous year and outstripping the 34% growth of exports over the same period. This trend had already been visible in the pick-up in industrial metal prices since June, driven by robust Chinese demand that has boosted economic growth for commodity-exporting countries. While the Reserve Bank of Australia held rates at 4.5% at its Tuesday meeting, the Bank of Canada announced a third successive quarter-point increase to 1% the next day. Both the Canadian and Australian dollar made further gains and we continue to favour these currencies with their increasingly attractive yields.

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