Global Markets Weekly - 8th October 2007

Key global market developments

• Equities bounce back.
  After a volatile August, September came as a relief for equity investors.
  Developed markets added 3% while emerging markets rallied 8.4%, making new all-time highs. For the year so far, developed markets are up 8% and emerging markets have gained a very healthy 30%. That is in line with our supportive medium-term view on equities.
• Yet one good month hasn't ended the volatility.
  However, September's rally pushed equity markets into overbought territory, with investor sentiment becoming very bullish. That could lead to some short-term consolidation and volatility. Furthermore, concerns persist over the US sub-prime market and slowing economy, and some challenging news could yet emerge in the coming weeks and months. It may be Christmas before investors discover whether their wishes have been granted.
  
• US data keep the Fed in play and equity markets in buoyant mood.
  We had highlighted the US Purchasing Managers Index and non-farm payrolls as the key data releases for last week. Monday's purchasing managers survey for September came in a little below expectations but was consistent with a slowdown in growth, rather than a recession. That, combined with a sharper-than-expected fall in the prices paid component, drove the US equity market to a new record high. The market then declined a little on the following days.

  On Friday, the payrolls release set equity markets rising again. Job creation (at 110,000) beat market expectations, and August's 4,000 fall was revised up to a rise of 89,000. Crucially for equity markets, the revised figures suggest that employment growth is soft enough to keep unemployment rising and the Federal Reserve in rate-cutting mode but not soft enough to signal a US recession.
  

• Emerging markets' growth to hold up...
  In recent weeks, economists have been busy revising down their 2008 growth forecasts for the developed economies, particularly the US. Yet they have largely left forecasts for emerging markets unchanged and with good reason.
• ...as they now look better able to weather a US slowdown.
  First, emerging economies have become less reliant on exports to the US. Last year, exports to the US accounted for 16.8% of Asia's total exports, down from 21.3% in 2000. Second, household balance sheets are generally in good shape, as are external balances. Significantly, consumers in Brazil, Russia, India and China now outweigh US consumers as drivers of global growth. In addition, the correlation between global housing markets is lower than for other financial assets, so the US housing slowdown can be regarded as largely country-specific.
• Investors have welcomed clarifications of the scale of the credit crunch's impact.
  Even when investment banks have announced write-downs from the past quarter events, their shares have rallied. Mostly, thats because they still made a profit and talked of a better final quarter in prospect. Yet, even without either of these supports, UBSs shares rallied simply because it had drawn a line under the potential cost. Thats further good news for investment banks, but it doesnt spell an end to the turmoil in global financial markets. On most estimates, still only the minority of losses from US sub-prime mortgages have been revealed. So the question remains: to whom have the investment banks passed the risk?.

Indices, Interest rates and Inflation

	Close 05-Oct-07	1 Week%	1 Month%	3 Months%	YTD %
FTSE ALL Share	3,387	2.1	4.3	-1.2	5.1
FTSE 100	6,596	2.0	5.2	-0.6	6.0
S&P 500	1,558	2.0	5.8	2.1	9.8
Nasdaq Composite	2,780	2.9	6.7	4.7	15.1
DJ Stoxx (Europe)	429	2.2	4.8	-1.5	8.5
Nikkei 225	17,065	1.7	5.6	-6.4	-0.9
Hang Seng	27,832	2.5	15.6	25.1	39.4

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-07 Forecast	Mar-08  Forecast	Current	Next Date
US (Fed Funds)	4.75	4.50	4.50	2.0	31-Oct
UK (Base rate)	5.75	5.50	5.25	1.8	08-Oct
Euro-zone (Repo Rate)	4.00	4.00	4.00	1.7	08-Oct
Japan (Call rate)	0.50	0.50	0.75	-0.2	11-Oct

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