Global Markets Weekly – 27^th November 2006

Key Macro economic developments

• With the Thanksgiving holidays bringing an early end to the trading week in the US, the markets had to look elsewhere for excitement and the Euro-zone thankfully stepped into the breach. A series of events provided plenty of food for thought regarding the outlook for the region over the coming months. Indeed, the week started with a bang as European Central Bank (ECB) President Trichet, warning of the need to exercise ‘strong vigilance’ over the current inflationary environment, gave a strong hint of a rate hike at next month’s meeting of the bank’s Governing Council.
• Over the past year, this ‘strong vigilance’ term has been consistently used to signal an imminent monetary tightening. Other ECB officials were also quick to highlight the still low level of interest rates, solid growth situation and the longer-term risks posed to price stability by the sustained, robust pace of monetary expansion. Indeed, Trichet’s comments over the ‘very dynamic’ outlook for global growth in 2007 suggest that the ECB still regard their tightening process as having some way to run. The International Monetary Fund (IMF) appear to share such sentiments, declaring in a report (leaked to a news agency) last week that some further withdrawal of monetary stimulus by the ECB appears warranted over the coming months, while the risks to their 2% 2007growth estimate are skewed to the upside.
• Much debate still surrounds the ability of the Euro-zone economy to withstand a slowdown in US growth, and in turn the likelihood of the respective paths of interest rates within the two regions actually diverging next year. For much of the past five years, scepticism on this issue has been rewarded, but the balance of the recent data has suggested that the Euro-zone recovery can remain intact next year, even if the overall rate of growth moderates slightly. The November IFO survey was certainly encouraging, as were the details of the German and French Q3 GDP data, which highlighted a strong showing from the German consumer and pointed to a bounce-back in French growth during the final quarter of the year. Meanwhile, indicators which Euro-zone rate setters are believed to pay particular attention to, such as the European Commission’s industrial confidence indicators and the ECB’s own quarterly bank lending survey, point to a confident corporate sector intent on expanding capacity, and one that should continue to drive overall growth in 2007.

Key global market developments

• A sell-off in the dollar proved to be the major market development last week, but suspicions remained over the validity of the move, with sceptics pointing to the Thanksgiving holidays as a distorting factor. Trading volumes would undoubtedly have been reduced, possibly exaggerating the market’s reaction to the stronger German data at the end of the week, and position-squaring ahead of the holiday period may also have been a factor.
• But the move should not be dismissed out of hand, particularly as the available market positioning data argues against the need for any forced selling of dollars. Policymaker comments on the issue of global imbalances, for instance, may have been a more fundamental influence. The euro-dollar exchange rate – regardless of the source of the latest upturn – is now trading at a 2006 high after passing through earlier resistance levels. As trading resumes in earnest this week, the initial movements in the dollar could speak volumes of the true, underlying market sentiment towards the greenback, and will be well worth watching.

Indices, Interest rates and Inflation

	Close 24-Nov-06	1 Week%	1 Month%	3 Months%	YTD %
FTSE all share	3148.68	-1.14	-0.49	5.50	10.60
FTSE 100	6122.07	-1.13	-0.98	4.31	8.96
S&P 500	1400.95	-0.02	1.71	8.09	12.23
Nasdaq Composite	2460.26	0.59	4.92	15.12	11.56
DJ Stoxx (Europe)	385.60	-0.43	1.49	8.78	17.23
Nikkei 225	15734.60	-2.22	-6.23	-1.42	-2.34
Hang Seng	19260.30	0.40	6.10	14.08	29.47

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