Global Markets Weekly 7 May 2010

• Volatility came back with a vengeance on Greek doubts and US technical problems.
  
  Volatility surged on both sides of the Atlantic this week, as investors remained unconvinced by a rescue plan for Greece. A US technical glitch worsened the jitters, sending the Dow Jones tumbling 1000 points for a brief moment on Thursday, its largest one-day point drop ever, though it subsequently recovered most of the decline. The VIX Index of implied volatility in the S&P 500 Index rose 60% in one day as a result. By Thursday’s close, the S&P 500 had trimmed its gain for the year to 1%.
• Greek bond yields reach for the sky and take other euro-zone bonds with them.
  
  Greek bond yields moved higher once again this week, reflecting doubts that the joint eurozone/ IMF package to help Greece will prevent an eventual default/restructuring. Greek two year bond yields rose around 600 basis points (bp) by Friday to 18.5%, dragging other eurozone periphery bond markets along for the ride. Portuguese 2-year yields were up around 200 bp and Irish and Spanish 2-year yields up 140 bp and 100 bp respectively. Investors fled to safe havens such as German bunds and US Treasuries. German two-year yields dropped 35 basis points (bp) during the week, and 10-year US treasury yields hit their lowest levels this year. Gold also fulfilled its traditional function as a safe haven, rising past the $1,200 per ounce mark for the first time this year and within sight of the record $1,216 level reached in the final month of 2009.
• A bad year for euro-zone and some emerging equities just got worse.
   
  The Euro Stoxx index of 50 blue-chip eurozone stocks was down around 9% on the week, and is down around 15% year-to-date. Emerging markets were not immune to contagion either, with the Shanghai Composite Index down around 7% on the week and down 18% year to date. Last weekend’s move by the People’s Bank of China to raise bank reserve requirements also weighed on Chinese stocks during the week. In currency markets, the euro’s rout continued, hitting its lowest level against the dollar since last March on Thursday. Sterling fell below $1.50 on the back of electoral uncertainty.
   
• UK electoral uncertainty weighs on sterling.
   
  A hung parliament following the UK general election suggests more uncertainty. Several more days of political horse-trading will probably weigh on sterling, especially against the dollar, until a government can be formed. Bond investors and rating agencies will be focused on what policies are announced to cut the deficit once a government is eventually formed, and the example of Greece means the pressure will be on to act quickly.
   
• Market jitters distracted attention from good economic data.
   
  Market volatility overshadowed a week of positive macro-economic data. German manufacturing orders surged in March, rounding off a very strong quarter. April surveys of UK manufacturing and service-sector activity suggested strong growth in the second quarter, while the US April employment report showed a second month of solid gains. However, the danger is that renewed volatility will eventually affect business confidence, especially willingness to keep hiring and investing.
   
• Time is running out for central bankers to restore confidence.
   
  There is still time for policymakers to get ahead of the curve by announcing more liquidity measures. However, the window of opportunity is rapidly diminishing. The Bank of Japan announced extra liquidity measures for its banking system on Friday, but investors appeared disappointed on Thursday that ECB President Jean-Claude Trichet said the governing council had not discussed what is now being commonly referred to as the ‘nuclear option’ of outright purchases of euro-zone government bonds. If contagion and financial market volatility increase, the ECB may have to change its principled position.

Indices, Interest rates and Inflation

Disclaimer Issued by Coutts & Co, which is authorised and regulated by the Financial Services Authority.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information shown is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Any Coutts company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned.

The analysis in this document has been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law ad without being inconsistent with any applicable regulation, neither Coutts & Co nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.

Not all products and services offered by the individual Coutts companies are available in all jurisdictions, and some products and services may be available only through particular Coutts companies.

None of the overseas Coutts companies or offices is an Authorised Person subject to the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors and depositors, and compensation under the Financial Services Compensation Scheme will not be available in respect of business transacted with them.

• Important Information & FSCS
• Security
• Privacy
• Accessibility
• Sitemap