Markets gain on the back of better economic data but euro concerns persist
There were gains across risk assets for the first week of the year, with equities and commodity markets up. Gains were driven by better-than-forecast economic news, led by the US. However, these gains were tempered by continued concern over the costs and risks of the ongoing euro crisis, with its impact on credit availability across the world. The euro hit its lowest level for 15 months against the US dollar at $1.28. While Treasury and Gilt prices fell back, 10-year yields are still around 2%. Coutts has a cautious investment stance for 2012, seeing these opening trends as mirroring the outlook for the year, with attractive asset pricing and continuing growth led by emerging markets, but returns likely to be volatile at best in the face of looming risks, especially in the euro-zone.
New sanctions against Iran drive oil price up as tensions in the Gulf increase
New US financial sanctions against Iran constrain its ability to use the US dollar banking system for transacting oil sales. The European Union is also considering sanctions following November’s censure from the International Atomic Energy Agency over alleged “military dimensions” to Iran’s nuclear programme. These sanctions could cut EU imports of Iranian crude oil and prohibit euro transactions by the Iranian central bank. Iran has denounced the sanctions and responded with a series of military manoeuvres and threats from various members of the political and military establishment to block the Straits of Hormuz completely, if Iran’s oil exports are blocked. A fifth of all oil exports, including Iran’s, pass through the Straits of Hormuz at the narrowest point of the Gulf. As a consequence, the oil price, as measured by the Brent benchmark, has risen by $5 this year to over $113/bbl.
China’s growth set to slow further, but policy-makers take steps to support economy in 2012
China’s purchasing managers’ index (PMI) for manufacturing showed a surprise improvement, rallying back above the key 50 neutral level for the first time in three months. However, signs of deceleration are clear in the Chinese economy and, indeed, encouraged by policymakers who remain focused on deflating the overheated residential property market. This means that policy-makers will be reluctant to cut interest rates aggressively, though bank lending restrictions will be gradually relaxed. To counterbalance this fall in the property market and more general weakness in many export markets, policy-makers have boosted the development of ‘affordable’ housing and, at the start of the year, signalled further initiatives to spur spending on tourism, on energy-saving products and online. This should underpin GDP growth of around 8% over the course of the year, supporting our positive longer-term view on Chinese and, more generally, emerging market equities.
Stronger momentum for the US economy as it enters 2012
The US equivalent of the PMI showed a consensus-beating pick-up in manufacturing activity to 53.9, though the services side lagged at 52.6. This has supported a recovery in employment with payrolls rising by 200,000. This clearly eliminates the risk of a recession in the near term, but we would remain cautious on the strength of this recovery, especially as excessive levels of government and consumer debt remain a burden on the economy, thus making it more susceptible to external (euro-zone) or internal (political gridlock) shocks.
German economy’s continued outperformance exacerbates divergence in euro-zone
There was also some better-than-expected news from Europe, but this was concentrated on Germany, where unemployment fell to a new low. This outperformance only exacerbates the dilemma facing policy-makers. Efforts to support Spain and Italy, where unemployment is increasing, government spending cuts are rising and manufacturing PMIs signal recession (at 43.7 and 44.3 respectively), are complicated by the disparity in economic performance across Europe. Elsewhere, the UK saw its manufacturing PMI unexpectedly recover to 49.6, but that is still broadly flat in terms of growth and thus makes the UK extremely vulnerable to a further deterioration of its main trading partners in the euro-zone.
| Close 5-Jan 12 |
1 Week % | 1 Month % | 3 Months % | YTD % | |
| FTSE ALL Share | 2,882 | 1.0 | 0.6 |
9.5 | -5.9 |
| FTSE 100 | 5,624 | 1.0 | 1.0 |
10.2 | -4.7 |
| S&P 500 | 1,281 | 1.4 | 1.9 | 12.0 | 1.9 |
| Nasdaq Composite | 2,670 | 2.2 |
0.5 |
8.5 | 0.6 |
| DJ Stoxx (Europe) | 226 | 1.2 |
-1.6 | 6.2 | -17.5 |
| Nikkei 225 | 8,489 | 1.1 | -2.4 | 1.3 | -17.0 |
| Hang Seng | 18,813 | 2.3 | -1.9 | -15.8 | -18.3 |
| Official Rates (%) | Inflation (%) | Rate announcement | |||
| Current | Dec-11 Forecast | Mar-12 Forecast | Current | Next Date | |
| US (Fed Funds) | 0.25 | 0.25 | 0.25 | 3.4 | 02 Nov |
| UK (Base rate) | 0.50 | 0.50 | 0.50 | 4.8 | 06 Oct |
| Euro-zone (Repo Rate) | 1.00 | 0.50 | 0.50 | 3.0 | 06 Oct |
| Japan (Call rate) | 0.10 | 0.10 | 0.10 | -0.6 | 07 Oct |
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