Global Markets Weekly - 15 March 2010

• Markets grind higher as investors become more convinced of sustained upturn.
  Equity markets continued to grind higher last week, with the S&P 500 eking out a new high for the year, as investors’ worries about the sustainability of the global recovery gradually dissipated. The VIX index, a measure of expected volatility, also known as the investor ‘fear gauge,’ hit its lowest level since May 2008, although some would see this as a sign of investor complacency rather than optimism. Oil remained above the $80 per barrel mark.
• Chinese data reflects strong growth in the region, with inflation also accelerating.
  A raft of data from China underscored the strength of the recovery in the region. Chinese exports rose 46% year-on-year in February. Base effects were part of the reason, with February 2009 being the low point of the crisis. The figures may have also been distorted by the late timing of the Chinese New Year holiday, which meant manufacturers rushed to meet orders before halting production. But even taking these factors into consideration, the figures were robust. Consumer inflation rose to 2.7% in February, from 1.5% in January, while producer price inflation also accelerated.
• Slowdown in Chinese bank lending is on target, but more policy tightening is likely.
  Data from China on new bank credit showed a decline to 700 bn yuan in February, from January's 1,400 bn yuan, roughly in line with expectations. New loans during the first two months of the year typically account for 20-25% of the annual total, suggesting new lending is on track to reach the 7,500bn yuan official target in 2010, compared to last year's 9,500bn yuan of lending. Nonetheless, officials will likely remain cautious about the potential for lending to surge again. Overall, the data suggests further gradual policy tightening in the months ahead by the Chinese authorities. This is likely to take the form of higher bank reserve requirement ratios, increased interest rates and, eventually, appreciation of China’s currency. Markets have already priced in an appreciation of about 3% in the yuan against the dollar over the next 12 months.
• Data in some advanced economies was disappointing, although still consistent with modest growth.
  In the advanced economies, industrial production in the UK and Germany was weaker than expected in January. The UK trade deficit also widened unexpectedly to an 18-month high, with extreme winter weather possibly having played a part. Nevertheless, the weaker-than-expected UK data so far this year has increased the chance of disappointing first-quarter GDP growth when the Office for National Statistics releases its first estimate on the 23rd April. This is likely to be just before the general election.
• The UK housing market continues to recover, but the pace appears to have slowed.
  The UK housing recovery may also be losing a little steam. The Royal Institution of Chartered Surveyors (RICS) survey showed that the percentage balance of real-estate agents and surveyors saying prices rose exceeded those reporting declines by 17 percentage points in February, down from 31 percentage points in January. However, this is still consistent with modest house-price appreciation.
• US retail sales were robust, despite blizzards.
  In the US, retail sales rose at a healthy clip in February, despite harsh snowstorms in a number of regions that many economists thought would keep shoppers at home. Although auto sales fell 2.0% month-on-month (m/m), core components of the report rose, with general merchandise gaining 1.0% m/m and home electronics sales surging 3.7% m/m.

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