Global Markets weekly – 10th September 2007

Key global market developments

· Labour pains – a nasty surprise from the US jobs market In last week’s Global Markets Weekly, we said it was going to be a big week for data and that investors would be looking out for any major surprises. They got one: the US figure for August’s non-farm payrolls showed a drop of 4,000, the first outright fall since August 2003 – and way down on expectations for a gain of around 100,000. So the credit crunch is already having a painful impact on the real economy. That plays to the bears in the market. It also increases the odds of a cut in interest rates from the Federal Reserve (Fed) at its next meeting – or possibly even before.

Although this is clearly not good news, the payrolls numbers are notoriously volatile. In addition, the survey of household employment produced an unchanged figure. In the past, it has often proved a better indicator of the underlying economy.However, they did not comment on emerging economies.

· A Chinese remedy – forecasts for growth in the US and Europe are being revised dow. It used to be said that, when the US sneezed, the rest of the world caught a cold. But this time could be different. Despite a slowdown in the US, many parts of the world – particularly emerging markets and China – have been growing strongly. That is one of the arguments for suggesting the global economy should avoid a recession. Last Wednesday, the OECD lowered its forecast for economic growth in both the US (to 1.9%, from 2.1%) and the eurozone (to 2.6%, from 2.7%), saying growth prospects ‘are now less buoyant and more uncertain’. However, they did not comment on emerging economies.

· ...but Asian growth still seems strong, as indicated by the Baltic Dry Index. Certainly, emerging economies are hard to assess, as the reliability of their data is often questionable. But one indicator that has historically given a good insight into those economies is the Baltic Dry Index, which captures the price of moving major raw materials by sea. As these materials – such as cement, coal and iron ore – are used to make goods, the index is seen as a reliable indicator of future production and economic growth. Encouragingly, the index touched an all-time high this week.

· Changing to no change – the ECB and BoE keep rates on hold. This week, both the European Central Bank (ECB) and the Bank of England kept interest rates on hold. Both cited the current turmoil in global financial markets as a reason for not raising interest rates. Instead, they have focused on providing additional funds to markets in order to avoid a liquidity crunch. As a result, we have changed our forecasts and now expect only the ECB to raise rates this year, though not until greater stability has returned to financial markets.

In any event, the liquidity crunch may have done much of central bankers’ work for them. The premium for overnight lending between banks has risen by 50 basis points or more, so borrowers are already facing the equivalent of much tighter monetary policy.

· Waiting for the banks. Investors are eagerly awaiting the Fed’s announcement on interest rates on 18th September. But almost as significant will be the reports of third-quarter figures from the major US investment banks. Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley are all announcing within two days of the Fed’s decision. The extent of losses incurred, scale of provisions against anticipated bad debts and the accompanying statement on the outlook will be used to draw wider conclusions for global financial markets.

Indices, Interest rates and Inflation

	Close 07-Sep-07	1 Week%	1 Month%	3 Months%	YTD %
FTSE all share	3204	-1.7	-1.8	-4.8	-0.6
FTSE 100	6191	-1.8	-1.9	-4.8	-0.5
S&P 500	1454	-1.4	-1.6	-2.5	2.5
Nasdaq Composite	2566	-1.2	0.2	1.0	6.2
DJ Stoxx (Europe)	401	-3.1	-2.5	-5.6	1.4
Nikkei 225	16122	-2.7	-4.7	-10.7	-6.4
Hang Seng	23983	0.0	9.5	15.3	20.1

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-07 Forecast	Mar-08  Forecast	Current	Next Date
US (Fed Funds)	5.25	5.25	5.25	2.4	18-Sep
UK (Base rate)	5.75	5.75	5.75	1.9	04-Oct
Euro-zone (Repo Rate)	4.00	4.25	4.25	1.9	04-Oct
Japan (Call rate)	0.50	0.75	1.25	0.0	19-Sep

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