Markets gain on liquidity-boosted recovery
Markets made further gains on the back of an improving outlook for business activity, as reflected in country purchasing managers’ index (PMI) surveys. However, disappointing profit reports from individual companies dampened developed equity markets, leaving emerging equities to lead the gainers. The S&P 500 Index ended up 4% in January, while emerging markets gained 7%. Despite further dollar weakness, commodities fell back from recent highs as oil prices came under pressure in the US and the Chinese New Year holiday affected demand for industrial metals. Meanwhile, gold rallied to a new two-month high, with other ‘safe havens’ also in demand. Yields on ten-year Treasuries and German bunds remained around 1.8% on anticipation of further injections of liquidity from central banks. However, the combination of better liquidity and economic news meant that corporate bonds outperformed.
Euro-zone sees continued bickering over the allocation of slices from a shrinking cake
The “Treaty on stability, coordination and governance in the Economic and Monetary Union”, which binds countries to deliver ‘balanced’ budgets, was finally signed at the end of January. However, even signatories referred to it as a “decorative songbird” with crucial decisions on the funding and use of the European Financial Stability Facility delayed until March. In the meantime, Greece continues to haggle with debt-holders over private–sector involvement in writedowns, amid doubts that even a 70% reduction in value would be sufficient given Greece’s economic contraction. The key problem is recession, with recent figures showing that it has spread to Belgium. While manufacturing PMI surveys showed some improvement in January, this was mainly in Germany, and a banking survey showed that there has been a major tightening of bank credit availability. We believe that this will necessitate further action by the European Central Bank.
Japanese economy shows signs of life
The recent stagnation of the Japanese economy has seen it drift off the radar screen of many investors. The tragic destruction of last year’s tsunami and further disruption to electronic-component manufacturers from the flooding in Thailand has cast a long shadow over the Japanese economy, made worse by the failure of the government to support a recovery. However, the Japanese economy is too big to ignore and is still a major player in global trade, which is picking up. Consequently, we are seeing signs of a stronger trend in output, with an uptick in industrial production in December – even though this is still down on the year. One problem is the strength of the yen, which remains close to record levels against the dollar. If competitiveness deteriorates further, then we would expect Japanese intervention in the currency markets, representing a further boost to global liquidity.
China maintains steady growth path
China’s manufacturing PMI picked up to 50.5 in January from the previous reading of 50.3, just above the 50 level that demarks acceleration from deceleration. Such consistency is remarkable given the background of disruption to trade from the euro debt crisis and the impact of domestic monetary policy tightening to deflate the property market. However, the details of the survey suggest that there is indeed a slowdown in orders, which should feed through into lower growth. Nevertheless, we still forecast growth around the trend 8% rate this year, on the assumption that monetary policy would be relaxed if growth falters. However, policy is unlikely to be loosened early, as this would risk reigniting both the property market and inflation. These considerations underpin the longer-term outlook for Chinese and emerging equities in general.
US economy continues to recover
The US economy continues to outperform, with the manufacturing PMI rising to 54.1, signalling a healthy recovery. That has translated into a significant fall-off in weekly initial jobless claims at 367,000 and a healthy increase of 243,000 in monthly payrolls. Conversely, house prices continue to drift lower and the latest figures suggest that consumers are saving more despite rising incomes and better employment prospects. Hence Ben Bernanke, Chairman of the Federal Reserve, has repeated statements that the Fed is ready to provide further stimulus – presumably in the form of a new programme of quantitative easing (QE3) – should the recovery falter.
| Close 2-Feb 12 |
1 Week % | 1 Month % | 3 Months % | YTD % | |
| FTSE ALL Share | 2,996 | 0.3 | 4.8 |
6.0 | 4.8 |
| FTSE 100 | 5,796 | 0.0 | 4.0 |
5.7 | 4.0 |
| S&P 500 | 1,326 | 0.5 | 5.4 | 7.1 | 5.4 |
| Nasdaq Composite | 2,860 | 1.9 |
9.8 |
8.3 | 9.8 |
| DJ Stoxx (Europe) | 244 | 1.0 |
5.8 | 8.8 | 8.1 |
| Nikkei 225 | 8,877 | 0.3 | 5.0 | 2.7 | 5.0 |
| Hang Seng | 20,739 | 1.5 | 12.5 | 5.1 | 12.5 |
| Official Rates (%) | Inflation (%) | Rate announcement | |||
| Current | Mar-12 Forecast | Jun-12 Forecast | Current | Next Date | |
| US (Fed Funds) | 0.25 | 0.25 | 0.25 | 3.0 | 13 Mar |
| UK (Base rate) | 0.50 | 0.50 | 0.50 | 4.2 | 09 Feb |
| Euro-zone (Repo Rate) | 1.00 | 0.75 | 0.50 | 2.7 | 09 Feb |
| Japan (Call rate) | 0.10 | 0.10 | 0.10 | -0.2 | 14 Feb |
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