Global Markets Weekly - 01 March 2010

• Investors had little appetite for risk in a week when there was little certainty, apart from assurances of low US rates.
  Investors don’t like uncertainty, but this past week we had uncertainty in spades. Economic data raised concerns over the health of the US labour market, the strength of the recovery in the advanced economies in general and the ability of Greece to bring down its budget deficit and stave off further ratings downgrades. This uncertainty led to some volatility in equity markets, but with little change over the week. In currency markets, reduced appetite for risk led investors to seek the traditional safe havens of the dollar and yen.
• UK and US central bankers were dovish, while weak UK data and political uncertainty also weighed on sterling…
  Comments from central bank chiefs on both sides of the pond (Mervyn King and Ben Bernanke) emphasised that the recovery remains soft. As a result, policymakers are prepared to keep rates low for a long time. Bank of England Governor Mervyn King’s dovish comments, combined with weak business investment data and the latest polls suggesting a significant chance of a hung parliament, led to sterling weakness. On Thursday the UK currency fell to its lowest level in almost a year against the yen, and hit $1.52 against the dollar.
• …but Friday’s revised UK GDP figures suggested recovery got off to a faster start than previously thought.
  However, the UK government got a welcome pre-election boost from Friday’s second estimate of UK fourth-quarter (Q4) GDP, which showed 0.3% quarter-on-quarter (q/q) growth, stronger than the preliminary estimate of 0.1%. The upward revision brought the official data more in line with recent survey evidence, with the main drivers being reduced de-stocking and consumer and government spending. Indeed, government spending surged by 1.2% q/q. A better trade position also suggested sterling weakness may be boosting exports more than generally thought. Still, the increase in consumer spending may have been flattered by purchases being brought forward ahead of the VAT hike. The recovery remains fragile.
• US consumer confidence was weighed down by poor job prospects and stagnant incomes.
  Indeed, US consumer confidence, as measured by the Conference Board survey, fell sharply in February to the lowest level in 10 months. The news led to a sell-off on Tuesday, with the S&P 500 down 1.2%. The detail of the report showed that consumers were worried by poor job prospects and weak income growth. This was underscored by worse-than-expected weekly jobless claims figures later in the week, raising investor concerns that the US labour market is not stabilising as quickly as some had hoped. An upward revision to US Q4 GDP growth to an annualised 5.9% q/q pace was encouraging, but two thirds of the growth was accounted for by inventories.
• Threats of ratings downgrades kept the negative spotlight on Greece.
  Greece’s troubles continue, with the ratings agencies threatening further downgrades to government debt in the months ahead. Standard & Poor’s said that ‘a further downgrade of Greece of one to two notches is possible within a month.’ Greece is preparing additional measures to bring the budget deficit down, but it remains to be seen whether these will be enough to reassure markets and the rating agencies. More generally, Greece’s problems are an example of the return of country and sovereign risk to investors’ attention.
• News from Asia was more encouraging.
  On a more positive note, we did have encouraging data from Asia. Taiwan recorded GDP growth of 9.2% year-on-year (y/y) in Q4, as exports of items such as semiconductors recovered. Japanese exports in January were up 40% y/y – the fastest pace in 30 years, led by a rebound in demand from China and the US.

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