Global Markets Weekly – 2^nd October 2006

Key Macro economic developments

• No rate rise expected, as latest UK data reveals inflation pressures were overstated.  The Monetary Policy Committee of the Bank of England is forecast to make no change to interest rates at its Thursday meeting.  Pressure for immediate action has been reduced by the restatement of Q2 national accounts, which showed inflation was not 3.4%, but only 2.2%, while consumer spending was a more modest contributor to growth.  However, Coutts believes that UK interest rates are still set to rise a further quarter point to 5% by the end of the year as the economy continues to recover.
• The US consumer remains resilient.  While the stalling house market has led to fears of a collapse in US consumer spending, economic indicators continue to point to a more robust consumer.  A key factor in recent consumer surveys has been strong employment prospects.  The key pay-rolls figure on Friday, could easily exceed the previous month’s figure of 128,000 new jobs considering the continuing strength of the economy and mirrored in the ISM business confidence surveys which are forecast to remain above the key 50 level. 
• Japanese economic recovery continues.  The quarterly Tankan business survey is a key report on the health of the Japanese economy.  If the manufacturers’ index remains at last quarter’s 21 level, it will underpin a sequence of encouraging news.  While Japanese economic growth has been slower than last year, it has been sustained and the latest figures show continuing inflation (as opposed to deflation), retail sales +1.3% and industrial output +6% in the year to August. 
• A robust economy underpins a further interest rate hike by the European Central Bank.  With the decline of the oil price from its July record, inflation pressures are easing.  However the ECB is intent on pushing interest rates back to more ‘normal’ levels.  Therefore with the euro-zone economy still outperforming Coutts forecasts a quarter point hike on Thursday to 3.25% and another, similar, move before the year is out. 

Key global market developments

• US equity market hits new highs.  It might seem odd that amid the gloomy headlines on everything from the housing market to international terrorism that the Dow Jones set a new intra-day high on Thursday, breaking its previous peak on 14 January, 2000.  However over four years of consecutive quarters of double-digit earnings growth mean that valuations do not resemble those associated with the previous market peak.  On the contrary with the Price-Earnings Ratio on broader market indices showing that US equity market valuations are barely above their ten-year lows, Coutts continues to believe that the outlook is positive. 
• The decline of both oil and gold prices from the new record levels set during the Summer has had a favourable impact on both bond and equity markets.  Higher oil prices have a direct impact on both economic growth and inflation and therefore any decline is a corresponding positive.  While gold has no direct impact, it is a closely watched barometer of investor sentiment on the outlook for inflation.  However there are signs that both oil and gold prices may have bottomed, at least in the short-term, bouncing from their 200-day trend line and with the winter and gold buying season ahead, Coutts sees scope for both commodities to recoup some of their recent losses over the next six months. 
• Bond market may have peaked in the short-time.  The strong rally from the mid-year lows has seen good returns for bond investors, but pushed yields down.  Resilient economic growth figures, a rebound in commodity prices and an inverted yield curve could all prompt a short-term correction in the bond market. 

Indices, Interest rates and Inflation

	Close 29-Sep-06	1 Week%	1 Month%	3 Months%	YTD %
FTSE all share	3050.44	2.32	1.81	3.64	7.15
FTSE 100	5960.81	2.38	1.23	2.92	6.09
S&P 500	1335.85	1.60	2.42	4.95	7.01
Nasdaq Composite	2258.43	1.78	3.96	3.87	2.41
DJ Stoxx (Europe)	367.92	2.31	3.02	9.29	11.86
Nikkei 225	16127.58	3.15	1.49	6.66	0.10
Hang Seng	17543.05	-0.33	2.69	10.58	17.93

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