Global Markets Weekly – 23^rd July 2007

Key global market developments

• There has been much debate this year over global decoupling – the possibility that a weak showing from the US economy is outweighed by strong performance from other economies which are traditionally more dependent on the US and hence have tended to slow down with it, the result being that global activity remains strong overall. So far, the evidence suggests that some divergence has indeed occurred, with growth expectations outside the US generally rising, global trade staying strong and commodity prices standing at multi-year highs. Yet there were indications last week that the US’s woes – hitherto centred on the sub-prime mortgage market – might be starting to have an impact elsewhere.
• For instance, the more forward-looking elements of Germany’s ZEW survey for July fell more than expected. As a survey of investor sentiment, the ZEW is naturally vulnerable to such shifts, possibly replicating volatility in financial markets that may or may not be of significance to the broader economic outlook. But any decline in July’s IFO survey in Germany, due on Thursday, would add credence to the view that the impact of the sub-prime mortgage problems will not be confined to the US. Indeed, evidence mounted last week that effects of the sub-prime meltdown are being felt across a broad range of sectors unrelated to housing. Hedge funds’ losses are becoming more visible, and credit default swaps – a gauge of the cost of protecting against credit losses – moved higher on both sides of the Atlantic.
• So far, however, none of this appears sufficiently worrisome to be influencing the thinking of the Federal Reserve (Fed). Fed Chairman Ben Bernanke’s semi-annual testimony to Congress was practically unchanged from the Fed’s recent communications, giving no indication that a change in monetary policy is even under consideration. The growth forecasts for both this year and next were reduced by a marginal 0.25%. Yet inflation was still described as the ‘predominant policy concern’, and the Fed is still looking for a gentle strengthening of economic activity as the downturn in the housing market moderates.
• Overall, it seems central bankers won’t be too concerned if the sub-prime issue leads to a slight tightening of lending conditions, with liquidity becoming less freely available in financial markets. But the US housing market should remain the key risk to the Fed’s outlook. It will come under the microscope once again this week with the release of June’s data for new and existing home sales. The figures are likely to receive intense attention. Yet any analysis should take into account the significant differences between the two series, and the possibility that they could well offer contrasting views on conditions at these separate points in the US housing market. The figures for new home sales are based more on reservations and so can provide a more contemporaneous insight into housing demand than the series for existing (completed transactions) home sales.
• However, the differing incentives facing the various vendors also have to be acknowledged. Confidence remains under extreme pressure within the US home-building industry, as highlighted by the further decline in the NAHB survey released last week. And the need to reduce inventories of unsold new homes (and thus repair balance sheets) has resulted in significant price discounting. By contrast, existing home sales are generally free from such pressures, particularly as the enduring strength of the labour market has helped to limit the number of distressed sellers. Overall, therefore, it would not be too surprising if we saw a growing divergence between the level of sales – and the average selling prices – for new and existing homes over the coming months.

Indices, Interest rates and Inflation

	Close 20-Jul-07	1 Week%	1 Month%	3 Months%	YTD %
FTSE all share	3407.79	-1.73	0.79	1.13	5.79
FTSE 100	6585.23	-1.96	-0.96	1.52	5.86
S&P 500	1534.10	-1.19	1.41	3.35	8.16
Nasdaq Composite	2687.60	-0.72	3.37	6.38	11.27
DJ Stoxx (Europe)	431.55	-1.96	-1.90	0.71	9.08
Nikkei 225	18157.93	-0.44	-0.30	4.04	5.41
Hang Seng	23291.90	0.83	7.41	13.25	16.67

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-07 Forecast	Jun-08  Forecast	Current	Next Date
US (Fed Funds)	5.25	5.25	5.50	2.7	07-Aug
UK (Base rate)	5.75	6.00	6.00	2.4	02-Aug
Euro-zone (Repo Rate)	4.00	4.50	4.50	1.9	02-Aug
Japan (Call rate)	0.50	0.75	1.25	0.0	23-Aug

	Selected Global Indicators	Consensus Forecast	Previous Result		Date	Time
FR	Consumer Spending (Jun)	1.8%	1.7%	mom	24 - Jul	07:45
EZ	PMI composite survey (Jul, flash)	57.5	57.8	month	24 - Jul	09:00
UK	CBI Industrial Trends (Jul)			quarter	24 - Jul	11:00
US	Exisiting Home Sales (Jun)	5.88mn	5.99mn	saar	25 - Jul	15:00
US	Fed's Beige Book				25 - Jul	19:00
GE	IFO survey (Jul)	106.5	107.0	month	26 - Jul	09:00
EZ	M3 (Jun)	10.8%	10.7%	yoy	26 - Jul	09:00
US	Durable Goods Orders (Jun)	1.8%	-2.4%	mom	26 - Jul	13:30
US	New Home Sales (Jun)	900k	915k	saar	26 - Jul	15:00
JP	CPI (Jun)	-0.2%	0.0%	yoy	27 - Jul	00:30
US	GDP (Q2-adv)	3.2%	0.7%	saar	27 - Jul	13:30
US	Michigan Sentiment (Jul, final)	91.0	92.4	month	27 - Jul	15:00

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 is not necessarily 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 research and analysis in this document have 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.  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 research and 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.  Investment services for US residents are provided by Coutts & Co Investment Management Limited, an Investment Advisor registered with the Securities and Exchange Commission under the Investment Advisors Act 1940 and authorised and regulated by the Financial Services Authority in the UK.

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.

Coutts (Cayman) Limited. Registered Office: Coutts House, 1446 West Bay Road, PO Box 707, Grand Cayman KY1-1107, Cayman Islands.  Licensed under the Banks and Trust Companies Law (2003 Revision). Coutts (Cayman) Limited is not regulated by the Cayman Islands Monetary Authority in its conduct of securities investment business.

Coutts Offshore Europe Limited.  Registered office: 23-25 Broad Street, St Helier, Jersey JE4 8ND.  Regulated by the Jersey Financial Services Commission for carrying on investment and trust company business. Regulated by the Guernsey Financial Services Commission for carrying on investment business.  Trading in Jersey as Coutts Channel Islands.  Business address in Isle of Man: PO Box 59, Royal Bank House, 2 Victoria Street, Douglas, Isle of Man, IM99 1DU.  Licensed by the Isle of Man Financial Supervision Commission for Investment and Corporate Service Provider business.  Trading the in Isle of Man as Coutts Isle of Man.