Global Markets Weekly - 17th September 2007

Key global market developments

• Markets seesaw – equities rose on Thursday after encouraging news from the US…
  The recent market volatility continues, with investors’ views of how the current financial crisis will play out fluctuating with the latest news. On Thursday, markets soared, particularly in the US, after a Federal Reserve (Fed) report said the availability of short-term debt was stabilising, raising hopes that the worst of the financial crisis could be over. In addition, the US’s largest mortgage lender, Countrywide Financial, said it had secured $12 billion of financing.
  Meanwhile, US initial unemployment claims rose less than expected, easing concerns about a slowing job market. With investor sentiment at a very low level, the Dow Jones leapt by more than 100 points.
• …but plummeted on Friday, after bad news from Northern Rock
  However, European equity markets reversed those gains on Friday morning, after Northern Rock revealed it had sought emergency funding from the Bank of England. A joint statement from the Bank, the Treasury and the Financial Services Authority sought to allay investors’ fears, saying that Northern Rock, one of the UK’s five largest mortgage lenders, was ‘solvent…and has a good quality loan book.’ However, concerns persisted that the bank’s business model of funding long-term loans by borrowing in short-term debt markets is not viable in the current environment.
  Markets will be hoping for better news next week, when the major global investment banks make their announcements. Encouragingly, on Friday, Macquarie Bank, Australia’s largest securities firm, forecast record profits for the six months to the end of September.
• Focus on the Fed - how much will it cut?
  But the main focus of investors’ attention will undoubtedly be next Tuesday’s meeting of the Fed. A cut in interest rates appears an acknowledged fact, with the only question whether the 25 basis point reduction we are forecasting will prove an underestimate.
  The Fed has a reputation for decisive action and historically has not flinched from the risk of cutting too soon or too much, as it sees its most important task as to avert a recession. If it has misread the signals and overestimated the threat to growth, then the result would be a stronger economy with higher inflation. While an unwelcome outcome, it is perceived as the lesser of two evils. After all, the Fed could always raise rates again, in order to engineer a period of slower growth and thus bring inflation back down to its desired level.
  Meanwhile, we saw a further demonstration that the US and Asian economies are decoupling when China raised interest rates on Friday to 7.29%, the fifth rise in Chinese rates this year.
• Commodities surge again, as oil hits a new high
  As signalled by the renewed strength of the Baltic Freight index of shipping rates, commodity prices have performed well of late, with many hitting new highs. The most obvious is oil, which briefly touched $80 a barrel in the middle of last week. The oil price was pushed higher by a combination of the hurricane season and domestic terrorist attacks on Mexico’s energy industry. However, the underlying positive trend remains the strong growth in demand, particularly from the emerging economies, such as China. This trend is also supporting agricultural commodities, where drought-constrained supply has produced soaring prices. Finally, gold is back above $700 an ounce, as investors look for a hedge against inflation, the weak US dollar and the general rise in risk.

Indices, Interest rates and Inflation

	Close 14-Sep-07	1 Week%	1 Month%	3 Months%	YTD %
FTSE ALL Share	3,239	1.1	1.9	-5.7	0.5
FTSE 100	6,289	1.6	2.4	-5.4	1.1
S&P 500	1,484	2.1	4.0	-2.5	4.7
Nasdaq Composite	2,602	1.4	4.1	0.1	7.7
DJ Stoxx (Europe)	405	1.0	0.2	-6.8	2.4
Nikkei 225	16,127	0.0	-4.3	-9.6	-6.4
Hang Seng	24,898	3.8	13.1	19.3	24.7

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-07 Forecast	Mar-08  Forecast	Current	Next Date
US (Fed Funds)	5.25	5.00	5.00	2.4	18-Sep
UK (Base rate)	5.75	5.75	5.75	1.9	04-Oct
Euro-zone (Repo Rate)	4.00	4.00	4.00	1.9	04-Oct
Japan (Call rate)	0.50	0.50	0.75	0.0	19-Sep

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