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Global Markets Weekly - 20 September 2010

• Equities breach August high on the back of strong corporate results
  While economic news remained mixed, especially from the major developed economies, equities pushed higher. This took the global market average through its August peak to the highest level since May and through the 200-day moving average, a key positive technical indicator. Contrasting with the mixed news on developed economies was a further swathe of good corporate results and stronger data from emerging markets, which have led the recent market advance and have delivered positive returns this year. We expect superior growth prospects to drive continued outperformance, with the potential for emerging equities to trade at a premium to their peers in the developed markets.
• Yen intervention grabs headlines, but don’t overlook renminbi appreciation
  With the victory of Prime Minister Naoto Kan in the DPJ leadership vote providing a further boost the yen traded below 83 to the US dollar, within a whisker of its all-time high. The Bank of Japan then intervened in FX markets for the first time in more than six years, selling an estimated two trillion yen ($23 billion). This pushed the yen back to over 85 to the dollar, but also lifted the local equity market through the specific help to exporters and the broader benefit of the quantitative easing (QE) from ‘printing’ the yen it sold. As a consequence the Japanese equity market was among the best performing over the week. The Swiss franc, the other ‘safe haven’ currency, also fell, but gold rose, hitting a new high as investors worried about the impact of further QE. This largely overshadowed the Chinese renminbi’s move to a new high, appreciating by 1% since the start of September, which has helped push other Asian currencies higher.
• Euro rallies, but euro-zone structural risks increase
  Euro strength was overshadowed by further widening of spreads on bonds of member states with debt troubles, with Irish bonds exceeding last year’s crisis peaks. This prompted both a denial by the IMF that they were about to intervene and also a modest purchase of Irish debt by the ECB as part of their continuing market support operation. We retain a negative view on the euro given these structural issues.
• Emerging equity and currency outperformance adds to gains for the year amid strong economic performance
  Chinese industrial production rose 13.9% in August from a year earlier, beating consensus expectations and supporting our optimism that growth is showing signs of reaccelerating. Indian industrial production figures for July also surpassed expectations with a 13.8% gain. Emerging market currencies have also made gains, as investment flows in search of growth, and we take it as a vote of confidence that governments are willing to allow their currencies to appreciate. While this will be negative for export sectors, it will reduce imported inflation and thus the need for tighter monetary policy, while boosting consumer purchasing power.
• Miserable end to the summer adds to gloom over UK
  A sharp decline in UK monthly retail sales and the RICS house price survey can’t just be blamed on the coldest August in 17 years. With headline inflation remaining stubbornly high at 3.1%, consumers are being squeezed with the latest unemployment figures showing only a modest decline of 8,000 to 2.47m and wage inflation ticking up to just 1.5%. As a consequence we remain cautious on the outlook for the economy, with further government expenditure cuts due to be detailed in next month’s Spending Review. This means that we see few inflation risks. While weak sterling and Value Add Tax hikes have pushed up prices, the underlying trend remains weak, as shown by the 1.4% rise of the CPIY, which excludes taxes.

Indices, Interest rates and Inflation

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