Global Markets weekly - 3rd September 2007

Key global market developments

  • Any investor coming back on Friday from a month on a desert island could be forgiven for thinking nothing had happened in equity markets. After all, he left the S&P500 at 1,455 at the end of July and found it trading at 1,457 on 30 th August. But he would be sadly mistaken. Between those dates, the S&P 500 hit intra-day lows and highs of 1,370 and 1,503 respectively, a move of 10%. For further proof of how volatile equity markets were in August, the S&P 500 fell by more than 2% in a daily session on three occasions – versus just four times in the past four years. As we have been warning since the start of the year, volatility is back. Elsewhere, stock markets’ fortunes diverged. The Nikkei fell 4% and the FTSE and the EuroStoxx 1.5%. By contrast, Hong Kong rose 3.5% to a new all-time high just short of 24,000, as Chinese officials said they will let some mainland citizens buy Hong Kong stocks directly for the first time.
  • Financial markets are still being driven by shifting views on the prospects of a cut in US interest rates. The recently released minutes from its last meeting showed the Federal Reserve (Fed) had initially underestimated the credit markets’ problems. Subsequently, it addressed them by reducing its discount rate, which provides liquidity to the inter-bank market. The minutes also signalled that, though aware of the risks to the economy, the Fed remained focused on inflationary pressures. Markets at first fell as expectations for an immediate rate cut faded. But they recovered after the release of a letter from Fed Chairman Ben Bernanke to a member of the Senate, which said the Fed ‘is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.’ 
  • The current financial crisis has been a classic example of a liquidity crunch. The problems in the US sub-prime mortgage sector spread across global credit markets through being incorporated into highly rated asset-backed securities. As a result, a broad range of investors have been affected. Because of the prevalence of geared investing in bond markets, these bonds were then used as security for asset-backed borrowings. But now investors are reluctant to buy such securities, and banks are unwilling to lend against such assets, so holders have been unable to sell in order to repay their borrowings. The rescue of two small state-owned German banks highlighted the risks. That made banks unwilling to lend to each other, as the extent of their exposure remains uncertain. This liquidity crunch prompted central banks to step in with massive lending to banks to keep the inter-bank market operating. Yet central banks have not rushed to cut their official interest rates, as that would be seen as a bail out for imprudent investors, encouraging them to think they could get away with it again in the future – a danger known as moral hazard.
  • With investors anxious for evidence of the future path of growth, several data releases are due in the US this week. Particular attention will be paid to the ISM surveys, which are expected to slow a little. Towards the end of the week, the initial jobless claims and non-farm payrolls will have major implications for consumer spending and hence growth. On Thursday, the spotlight will be on the European Central Bank (ECB) and the Bank of England. In early August, ECB president Jean-Claude Trichet strongly signalled a rate rise, but he has been overtaken by events. Both banks are expected to keep rates on hold. Markets are likely to remain volatile, reacting strongly to any major surprises in the data or from central banks.
After all, he left the S&P500 at 1,455 at the end of July and found it trading at 1,457 on 30 August. But he would be sadly mistaken. Between those dates, the S&P 500 hit intra-day lows and highs of 1,370 and 1,503 respectively, a move of 10%. For further proof of how volatile equity markets were in August, the S&P 500 fell by more than 2% in a daily session on three occasions – versus just four times in the past four years. As we have been warning since the start of the year, volatility is back. Elsewhere, stock markets’ fortunes diverged. The Nikkei fell 4% and the FTSE and the EuroStoxx 1.5%. By contrast, Hong Kong rose 3.5% to a new all-time high just short of 24,000, as Chinese officials said they will let some mainland citizens buy Hong Kong stocks directly for the first time.

Indices, Interest rates and Inflation

Close 31-Aug-07

1 Week%

1 Month%

3 Months%

YTD
%

FTSE all share

3260

1.6

-0.9

-5.2

1.2

FTSE 100

6303

1.3

-0.9

-4.8

1.3

S&P 500

1474

-0.4

1.3

-3.7

3.9

Nasdaq Composite

2596

0.8

2.0

-0.3

7.5

DJ Stoxx (Europe)

414

1.5

-0.9

-5.7

4.7

Nikkei 225

16569

2.0

-3.9

-7.3

-3.8

Hang Seng

23984

4.6

3.5

16.2

20.1


Official Rates (%)

Inflation (%)

Rate announcement

Current

Dec-07 Forecast

Jun-08 
Forecast

Current

Next Date

US (Fed Funds)

5.25

5.25

5.25

2.4

18-Sep

UK (Base rate)

5.75         

6.00

6.00

1.9

06-Sep

Euro-zone (Repo Rate)                 

4.00

4.00

4.00

1.8

06-Sep

Japan (Call rate)

0.50

0.75

1.25

-0.2

19-Sep


Selected Global Indicators

Consensus Forecast

Previous Result

Date

Time

EC

Euro-Zone GDP

2.5%

2.5%

yoy

04 - Sep

10:00

US

ISM Manufacturing

53.0

53.8

month

04 - Sep

15:00

US

MBA Mortgage Applications

- -4.00%

month

05 - Sep

12:00

US

Fed's Beige Book

-

-

-

05 - Sep

19:00

JN

Machine Tool Orders

- 18.8% yoy

06 - Sep

07:00

UK

Industrial Production

1.0%

0.8%

yoy

06 - Sep

09:30

GE

Factory Orders

10.5%

15.9%

yoy

06 - Sep

11:00

UK

BOE Announces Interest Rates

5.75%

5.75%

-

06- Sep

12:00

EC

ECB Announces Interest Rates

4.00%

4.00%

 

06 - Sep

12:45

US

Unit Labor Costs

1.6%

2.1%

yoy

06 - Sep

13:30

US

Initial Jobless Claims

328K

334K

weekly

06 - Sep

13:30

US

ISM Non-Manufacturing

54.5

55.8

month

06 - Sep

15:00

WD

OECD Leading Indicators

-

-

month

07 - Sep

11:00 

US

Change in Nonfarm Payrolls

115K 

92K 

month

07 -Sep 

13:30 

US

Average Houry Earnings

-

3.9%

yoy

07 - Sep

13:30 


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