Euro zone rescue package triggers rebound across asset markets.
The dramatic Sunday night agreement by EU ministers to a huge €750bn rescue package drove a sharp rebound in asset markets from the opening last Monday. Practically every asset class in every market was up as markets breathed a huge sigh of relief. European equities were the prime beneficiary, but the action to avert a building market crisis benefited most risk assets. This rally put most developed markets back in positive territory for the year, although some of these gains have subsequently been surrendered. Emerging markets and commodities were also still lagging. Similarly, while oil and other industrial commodities rebounded, they had been on the slide since before the Greece crisis came to a head, reflecting more fundamental concerns over China’s policy response to rising inflation.
European policymakers get ahead of the curve.
After months of disappointing markets with their slow response European policymakers got ‘ahead of the curve’ last weekend. However, the medium- to long-term implications are less encouraging, at least for the euro-zone. The substantial fiscal consolidation now implied across the euro-zone increases deflationary risks for the region, as exemplified by Spain’s slip into negative inflation in April. In addition, the new policy transfers credit risk from peripheral to core euro-zone nations. Despite a sharp rally in the euro early Monday, the prospect of weak growth, low interest rates and an erosion of ECB independence all suggest the euro will be a less attractive currency going forward. The potential flood of new euros drove a new high for gold and, while gold may fall back from its new high in the short term, huge issuance of fiat currencies can only increase gold’s longer-term attractions as a hedge against devaluation and/or inflation.
New UK government formed by coalition of Conservative and Liberal Democrats.
The new UK coalition, covering 363 of the 650 MPs in the House of Commons, is potentially more stable than the alternatives following the indecisive election. A stable government is important for the UK because of the need for tough-to-swallow government spending cuts and tax increases in order to reduce the deficit. It will also reassure investors, who are being called upon to fund the deficits for years to come. The new government plans a budget by the end of June, which will be followed by a comprehensive spending review covering the rest of the five year parliament term.
The economic news continued to be positive – recovery has been stronger so far than we dared hope at the start of the year.
Despite the Greek crisis, the euro-zone managed to grow by 0.2% in the first quarter of 2010, for a gain of 0.5% over the previous year. Spain emerged from recession after almost two years of contraction, and the euro-zone as a whole overcame the drag from the 0.8% contraction of the Greek economy. Growth in Germany is showing signs of acceleration, after a better than expected GDP figure and a 4% surge in industrial production for March. This is likely to reflect the recent weakness of the euro and the continued strength of export demand to Asian economies. Indonesia reported a 5.7% growth rate in the first quarter, but was outstripped by Malaysia’s 10.1% pace. China also reported strong growth in trade, but also a further acceleration in inflation to 2.8% that reinforces investor concerns over a sharp tightening in monetary policy to fight rising prices. To complete the positive picture, US retail sales rose 0.4% and industrial production by 0.8% in April, while the UK saw a 2% jump in industrial production in March, indicating GDP growth was likely stronger than the initial 0.2% estimate and is accelerating.
Indices, Interest rates and Inflation
|
Close
|
1 Week %
|
1 Month %
|
3 Months %
|
YTD %
|
|
|
FTSE ALL Share
|
2,722
|
3.1
|
-8.5
|
3.4
|
-1.4
|
|
FTSE 100
|
5,263
|
2.7
|
-9.2
|
2.3
|
-2.8
|
|
S&P 500
|
1,136
|
2.2
|
-6.2
|
5.6
|
1.9
|
|
Nasdaq Composite
|
2,347
|
3.6
|
-6.3
|
7.5
|
3.4
|
|
DJ Stoxx (Europe)
|
253
|
5.2
|
-11.0
|
0.4
|
-7.9
|
|
Nikkei 225
|
10,463
|
-0.9
|
-6.6
|
3.7
|
-0.8
|
|
Hang Seng
|
20,145
|
1.1
|
-8.9
|
-0.6
|
-7.9
|
| Official Rates (%) |
Inflation (%)
|
Rate announcement
|
|||
|
Current
|
Jun-10 Forecast
|
Sep-10
|
Current
|
Next Date
|
|
|
US (Fed Funds)
|
0.25
|
0.25
|
0.75
|
2.3
|
23 Jun
|
|
UK (Base rate)
|
0.50
|
0.50
|
0.50
|
3.4
|
10 Jun
|
|
Euro-zone (Repo Rate)
|
1.00
|
1.00
|
1.00
|
1.5
|
10 Jun
|
|
Japan (Call rate)
|
0.10
|
0.10
|
0.10
|
-1.1
|
21 May
|
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