Global Markets Weekly 6 September 2010

• Investors strike a more optimistic note

  Headlines over the past week were all about market reaction to ‘good’ economic news, but equities had already started rallying before the unexpected rise in the US ISM manufacturing survey. Our own assessment of investor optimism was indicating that equities were oversold, as investors increasingly discounted a ‘double-dip’ recession, and a failure of the economic data to support an increasingly negative picture was sufficient to trigger a rally. Major developed equity markets all made strong gains, while industrial metals led commodities higher. Bonds sold off across the board, and other safe havens such as gold and the yen came under pressure. We foresee growth continuing, albeit weak, and believe equities can continue to rally as valuations are not stretched. Bonds may weaken more in the near-term, which we would see as a buying opportunity given our forecast for deflation in the US next year.

• News from the US remains weak, but still well short of signalling a double dip

  The economic news from the US remained mixed. While the rise in the ISM index to 56.3 from 55.5 contradicted consensus forecasts for a fall to 52.8, the components of the index showed a fall in new orders and growing inventories, suggesting growth will continue to moderate. US companies added 67,000 new jobs in August, more than expected, but the low level of job creation and a still-high 472,000 in jobless claims for the week remain consistent with below trend consumer and economic growth. Our statistical model of recent US data shows an increased, but still low, 30% chance of a return to recession in the next six months.

• Europe grows, but led by German exports not consumers

  The euro-zone economy grew 1.0% in the second quarter and the first quarter’s performance was revised up to 0.3%, leaving GDP up by 1.9% over the 12 months to the end of June. However, the outlook was dampened by the news that German retail sales had fallen for the second successive month in July, despite a strong economy and rising employment. The ECB raised its GDP forecasts for both this year and next, and while we see a recovery in German exports boosting growth this year, we see little growth for the euro-zone in 2011 as fiscal consolidation bites.

• Emerging equity markets rise 2.5%, putting them ahead for the year

  Emerging equities slightly lagged the rally in developed markets, but advanced into positive territory for the year to date, over which time they have outperformed by 5 percentage points. This was driven by good economic news, with China’s PMI unexpectedly stronger after three months of declines. While a single data point is not decisive, it comes as the government relaxes some of the measures enacted to cool the economy and may signal that growth is regaining momentum. With India reporting 8.8% annual GDP growth, we retain a positive stance on emerging equities on the basis of economic outperformance.

• UK house buyers go on holiday in August

  The Nationwide index of UK house prices fell 0.9% in August, registering two consecutive months of decline for the first time since February 2009. August is a time when many would-be buyers are out of the country on holiday, but interestingly the reason given for the fall was a rising number of houses coming onto the market. Perhaps sellers are more likely to have been having a 'staycation'. Mortgages are affordable, given very low interest rates, but high deposit requirements are a barrier for first-time buyers. This is reflected in the below-trend level of mortgage approvals, while the increasing level of supply points to further price falls.

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