Global Markets Weekly – 9^th October 2006

Key Macro economic developments

• The European Central Bank’s (ECB) decision to raise interest rates once more - by a further 25bp to 3.25% - had long been anticipated and consequently prompted little response from the financial markets last week. While some were disappointed that ECB President Trichet did not signal a further, imminent rate increase, the path of interest rates remains on a rising trend and we remain comfortable with our long-held view that the ECB will continue to raise rates into the early months of 2007.
• The ongoing fall in Treasury yields, and the concomitant decline in mortgage interest rates, is often regarded as the US economy’s ‘natural stabiliser’, due to the impact this can have upon the balance sheets of households, either by reducing mortgage costs directly or by encouraging re-mortgaging and releasing housing equity in the process. The wave of mortgage refinancing that occurred during 2002 & 2003, for instance, was of crucial importance in shoring up household wealth, and in turn spending power, in the wake of the equity market slump. Data released last week suggested that this process may be gathering momentum once again, with applications for mortgage re-financing rising at the fastest rate for well over a year.
• But even so, the prospects of a return to the levels of mortgage activity experienced several years ago still appear highly unlikely. Following the slump in mortgage rates during 2002 & 2003, and the resulting surge in refinancing, both the level of mortgage interest rates required to typically induce re-mortgaging, and the level of housing equity available, have both reduced. Moreover, given the current uncertainty over the future level of house prices, mortgage providers may now approach mortgage refinancing in a more circumspect fashion - reducing the loan-to-value ratios on offer - further reducing the scope for equity extraction.
• Nevertheless, with Treasury yields leading mortgage interest rates lower, the significance of mortgage re-financing should continue to rise. The broad thrust of data, such as the ISM surveys released last week, undoubtedly points to a slowing of the US economy, and Fed Chairman Bernanke also declared that the US housing market is currently in the midst of a ‘substantial correction’. But there are nevertheless a number of positive developments, such as the recent decline in oil prices, that will help to mitigate the impact of the slowing housing market upon overall growth next year.

Key global market developments

• Equities made further solid progress last week as the Dow posted a new record high and the FTSE100 again tried to consolidate above the 6,000 level. While the rate of ascent is likely to slow as the market pauses for breath, we continue to believe that decent, additional gains can be made over the coming months. The market appears to be growing more comfortable with the prospect of a US slowdown, and with the economy still seen to operating at full employment and consumers increasingly benefiting from lower mortgage rates, a housing market collapse in the US still looks improbable.
• A further positive is provided by the very attractive level of valuations attached to markets such as the US, UK and continental Europe, which will provide a buffer against unanticipated setbacks on the economic front. Overall, we expect leadership to continue to rotate towards the more developed economy equity markets, due to the defensive qualities, high yields and greater visibility of earnings on offer.

Indices, Interest rates and Inflation

	Close 06-Oct-06	1 Week%	1 Month%	3 Months%	YTD %
FTSE all share	3076.39	0.85	1.78	2.77	8.06
FTSE 100	6001.19	0.68	1.21	1.89	6.81
S&P 500	1349.58	1.03	3.79	5.93	8.11
Nasdaq Composite	2299.99	1.84	6.10	6.72	4.29
DJ Stoxx (Europe)	371.41	0.95	4.40	8.10	12.92
Nikkei 225	16436.06	1.91	0.93	7.28	2.01
Hang Seng	17903.39	2.05	3.74	8.89	20.35

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-06 Forecast	Jun-07  Forecast	Current	Next Date
US (Fed Funds)	5.25	5.50	5.25	3.8	25-Oct
UK (Base rate)	4.75	5.00	5.00	2.5	09-Oct
Euro-zone (Repo Rate)	3.00	3.50	3.75	1.8	02-Nov
Japan (Call rate)	0.25	0.50	0.75	0.9	13-Oct

	Selected Global Indicators	Consensus Forecast	Previous Result		Date	Time
GE	Industrial Production (Aug)	0.3%	1.2%	mom	09-Oct	11:00
FR	Industrial Production (Aug)	-1.3%	0.7%	mom	10-Oct	07:45
UK	UK BRC sales momitor (Sep)				10-Oct	11:00
US	Minutes of Sep 20th FOMC meeting				11-Oct	19:00
US	Trade Balance (Aug)	-$66.5bn	-$68.1bn	month	12-Oct	13:30
JP	BoJ rate announcement	0.25%	0.25%		13-Oct
US	Retail Sales (Sep)	0.2%	0.2%	mom	13-Oct	13:30
US	Michigan Consumer Sentiment (Oct-prelim)	86.0	85.4%	month	13-Oct	14:45

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