Global Markets Weekly - 22nd October 2007
Key global market developments
Last week, the chances increased of a quarter-point cut in US interest rates at the end of October, with the probability rising from 40% to 70%. The reason was further bleak data from the US housing market and disappointing third-quarter earnings from Citibank and Bank of America. As a result, the dollar weakened further. In recent weeks, it has slipped against virtually all major currencies except the yen.
Yet we don't expect a near-term bounce for the dollar. Various technical and sentiment measures indicate that dollar bearishness is still not at an extreme level. The risks remain to the downside until we see signs that the US economy is stabilising or that other major central banks will have to cut rates.
This week will see the release of Chinese data for third-quarter GDP and CPI for September. August’s figures suggest that GDP is growing at an annual pace of nearly 12% – the fastest in a decade and above China’s potential growth rate of around 10.5%. We think Beijing will keep tightening policy through various monetary and fiscal initiatives to prevent growth in credit and investment from accelerating in the coming months. However, with nonfood CPI still contained, the policy-makers probably won’t slam on the brakes: as well as controlling inflation, they need to create 10 million new jobs every year to absorb surplus rural labour.
Despite their improving economic fundamentals, emerging equity markets remain vulnerable to policy-makers' mistakes. Witness last week's reaction to the Indian Finance Ministry’s proposed restrictions on overseas investors’ use of one type of investment vehicle. The sell-off was painfully reminiscent of what happened when Thailand imposed similar restrictions last December. Although the Indian proposal was rapidly revised, the market ended the week down some 5%. Yet it’s still up more than 30% so far this year. The underlying issue of coping with short-term capital flows is a ‘problem of success’, but it will continue to occupy emerging economies – such as China – which are liberalising their monetary and exchange rate policies.
UK retail sales picked up yet again in September. However, this was largely driven by widespread discounting, as retailers sought to maintain volumes and clear inventories. Certainly, the recent rise in spending is unlikely to be sustained. Consumers face higher interest rate burdens, and credit standards have tightened. Moreover, history suggests that retail sales usually reflect swings in the housing market, which is now slowing.
Last Friday’s first estimate of UK third-quarter GDP also beat expectations, up 0.8% quarter on quarter. As the figures tend to be revised up, growth remains well above trend. Perhaps surprisingly, given this summer’s credit crunch, most of the growth still came from the business services and finance sector. The numbers make a November rate cut less likely, but cut expectations should still build as the economy weakens.
Given that it was as low as $50 a barrel early this year, the response to the oil price nearing $90 has been remarkably muted. International politics has played its part in the recent rise, with Turkey’s threat of attacks on terrorist bases in northern Iraq stoking regional tensions. But the market remains tight anyway. Supply has been constrained by fading production growth outside OPEC and shortfalls from OPEC members, notably Nigeria. Meanwhile, demand has remained robust so far, but the high price and our forecasts for slower growth in developed countries suggest that the short-term trend is likely to reverse. Hence, barring a geo-political deterioration, the oil price should correct over the winter.
Indices, Interest rates and Inflation
|
Close 19-Oct-07 |
1 Week% |
1 Month% |
3 Months% |
YTD | |
|
FTSE ALL Share |
3,355 |
-2.9 |
1.1 |
-2.3 |
4.2 |
|
FTSE 100 |
6,528 |
-3.0 |
1.1 |
-1.7 |
4.9 |
|
S&P 500 |
1,501 |
-3.9 |
-1.9 |
-3.4 |
5.8 |
|
Nasdaq Composite |
2,725 |
-2.9 |
2.2 |
0.2 |
12.8 |
|
DJ Stoxx (Europe) |
425 |
-1.7 |
1.4 |
-3.0 |
7.4 |
|
Nikkei 225 |
16,814 |
-3.0 |
2.6 |
-7.2 |
-2.4 |
|
Hang Seng |
29,465 |
2.2 |
15.3 |
28.0 |
47.6 |
| Official Rates (%) |
Inflation (%) |
Rate announcement | |||
|
Current |
Dec-07 Forecast |
Mar-08 |
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-Nov |
|
Euro-zone (Repo Rate) |
4.00 |
4.00 |
4.00 |
2.1 |
08-Nov |
|
Japan (Call rate) |
0.50 |
0.50 |
0.75 |
-0.2 |
31-Oct |
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