Global Markets Weekly

15 November 2010

• Risk on or off – the investment world poses a more complex set of questions for investors
  
  Equity and bond markets and most commodities pared recent gains, while the dollar rallied. A sharp escalation in perceived credit risks of debt-burdened euro-zone members, brewing in the bond markets for some time, spilled over into equities and highlighted our long-standing concerns over the euro. Markets are vulnerable to profit taking into year end, though our investor sentiment indicator is not in ‘overbought’ territory, while better US data suggested fading risks of a global double-dip recession. Hence we remain cautiously optimistic and broad-based weakness on euro-zone credit risks, a long-standing concern of ours, represents a buying opportunity for assets in other regions and the export sector in the euro-zone.
  
• G20 meeting describes rather than solves problems. Stresses remain, but gradual rebalancing is happening
  
  The G20 meeting ended with more of a descriptive statement of imbalances in the global economy than a prescription for solutions, but at least that was better than the confrontational stance adopted by several participants before hand. Before the meeting, data showed the US trade deficit falling back slightly, but China’s surplus rebounding. However, a rise in Chinese inflation to 4.4% gave a potential domestic justification for the renminbi appreciation coveted by China’s trade partners, and it is noteworthy that it rose against the dollar while most other currencies were falling. We see further renminbi appreciation, though its likely to be restricted to no more than the 7% annual pace seen in the 2005-08 period.
  
• Good jobs news suggests US recovery gaining momentum
  
  US weekly unemployment claims fell to 435,000, one of the lowest figures over the past year. The NFIB survey of small businesses, which have lagged the overall recovery, provided further evidence of improvement in the job market with a more upbeat outlook and a net positive switch in hiring intentions. The Federal Reserve’s loan officer survey showed lending terms easing while commercial and industrial loans increased.
  
• Ireland’s problems hit equity, bond and even commodity markets as investors worry about contagion
  
  The yield on Irish sovereign bonds surged above 8%, a new record since joining the euro and the highest premium among member states over the benchmark German bund. Irish solvency concerns also sent Irish equities 2.0% lower over the week towards the lows for the year, but only hit the euro later in the week, pushing it back 2.3% to a one-month low against the dollar. Ireland’s financial problems are well known – huge and rising costs from bailing out the banking system and a loss of competitiveness over the past economic boom - all requiring incredibly painful adjustments in asset prices and living standards. Three years into an austerity program with many years to come and voters rapidly becoming disillusioned, the government is expected to lose a 25th November by-election, trimming its coalition majority to just two ahead of the budget vote on 7th December.
  
• Sterling rallies as Bank of England signals inflation risks – but report also highlights threat of deflation
  
  Sterling rallied as the Bank of England (BoE) highlighted inflation "tailwinds" and expectations of a further round of quantitative easing (QE2) were scaled back. While the Quarterly Inflation Report represented a change of emphasis, it also reflected stronger-than-expected GDP and inflation in the third quarter. However, the report still showed a risk of undershooting the 2% inflation target in two-year’s time. This was underpinned by news of only 0.4% third-quarter growth in the euro-zone, which accounts for 60% of UK exports, and we still expect the BoE to embark on QE2 by mid-2011 as government spending cuts start to bite.

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