Global Markets Weekly - 30 August 2010

• Risk assets remained under pressure and safehaven bond yields fell on softening US outlook
  Equity markets remained under pressure most of the past week, after further evidence of softness in the US economy. Risk aversion, the expectation of lower rates for longer and the possibility of further quantitative easing also pushed US bond yields lower (yields move inversely to prices), with the yield on 10-year treasuries hitting a19-month low of 2.42% mid-week. German bund yields also fell, but a downgrade of Irish debt led to an increase in euro-zone periphery countries' bond yields. In an uncertain environment, gold retained its function as an ultimate store of value, reaching 1240 USD/ounce, close to its all-time high.
• Revision of GDP growth rate to 1.6% caps another poor weak for US economic news
  The revision of second-quarter (Q2) US GDP, from 2.4% to just 1.6% (annualised quarter-on-quarter), rounded off another poor week for economic releases. However, this backward-looking piece of news was mainly related to higher imports and less restocking of inventories than previously estimated, not to weakness of demand. Also grabbing the headlines was the shocking collapse in house sales in the US. New single-family home sales fell 12% in July, to the lowest level since the series started, while sales of existing homes fell 27% to a 15-year low. While there will have been some impact from the ending of special mortgage incentives, it is clear that the temporary support has not managed to break the previous downward spiral. While we do not forecast a double-dip, we see US growth continuing at around current levels, with considerable volatility.
• Bonds soar, with yields hitting new lows
  Lower global growth and inflation forecasts supported the most creditworthy sovereign lenders and corporate issuers, with the yield on 10-year Treasuries falling to below 2.5%. Gold, the Swiss franc and yen also benefited from safe-haven demand. These developments support our view that the US will embark on a second round of quantitative easing. Indeed, in his speech at the annual meeting of central bankers at Jackson Hole, Federal Reserve (Fed) Chairman Bernanke said that the Fed would 'do all that it can to ensure continuation of the economic recovery' and expressed confidence that 'additional purchases of longer-term securities' would be an effective tool if needed. The other major G4 developed economies are also likely to consider such means of supporting faltering growth.
• German growth puts some shine on euro-zone economy, but divergence continues
  Germany drove a better-than-expected euro-zone Purchasing Managers’ Index, while the Ifo survey showed optimism over the German economic outlook at its highest since June 2007. Germany’s Q2 GDP growth was helped by an increasing contribution from consumer spending, which was also reflected in an increase in the GfK consumer confidence survey. But the two-speed nature of the euro-zone was highlighted by Standard & Poor’s downgrade of Irish sovereign debt from AA to AA-, on the back of an increase to €90bn in the estimate of the government’s cost for bailing out the banking industry. With Greek bond yields and credit default swaps also up, we would continue to reduce exposure to the euro.
• Emerging markets continue to outperform on better economic news
  Thailand raised interest rates by a quarter point to 1.75% after a consensus-beating 9.1% annual increase in Q2 GDP. A boost to exports supported a positive 0.4% quarterly growth rate, against expectations that political unrest during the period would hamper consumer spending and derail growth. We continue to predict superior returns from emerging equity markets and currencies, compared with those of the G4 economies.

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