Global Markets Weekly - 29th October 2007
Key global market developments
- Equity markets fall, on US housing and related risks.
Over the past two weeks, equity markets have suffered their third sharp pull-back this year. Mounting signs of a worsening in the US housing market and associated losses were enough to push developed equity markets down by almost 4% at one point. They have since recover around half of their losses. It is no coincidence that the previous two equity pullbacks this year also had housing and financial risks at their heart. After all, the unwinding of the US housing bubble and associated economic and financial risks pose the greatest threat to both growth and equity markets globally.
- We are watching for any contagion in money markets..
As with the earlier pull-backs, three factors are likely to determine what happens next. First is how far financial risks broaden from fresh damage to mortgage assets, to any reinfection of money markets. Fortunately, although money market spreads are still far from normal, we see few signs that money market stresses are intensifying again.
- …any broader growth concerns…
Second is how much the market starts to worry again about broader growth concerns. Certainly, the economic news outside housing has not changed much, but housing is deteriorating faster than expected, which may well feed concerns of broader economic pressures. We will be closely watching this week’s purchasing managers’ surveys, US payrolls data and third-quarter US GDP. We are also looking for signs that tightening of credit availability is having a marked impact on the outlook for Chinese growth.
- …and how authorities respond.
Third is how swiftly and effectively policy-makers respond. We expect the Federal Reserve (Fed) to cut rates by at least another quarter point on Wednesday. That would clearly provide reassurance, but it is widely forecast, so it will be hard for the Fed to surprise the market as it did in September.
- We still think equities can make progress this year…
Barring further spill-overs to the financial or economic side, and granted a responsive Fed, we think risk assets can probably recover ground over the rest of the year.However areas with exposure to housing and mortgages are likely to struggle. The market should continue to differentiate strongly between assets on the basis of their growth exposures. We therefore still prefer assets with exposure to emerging markets over those with exposure to US consumers and housing cycles.
As we warned late last year, the macro-economic and market environment has changed. Increased financial leverage and a maturing cycle have driven up volatility. Markets have continued to reach new highs, but the corrections have been both more frequent and, on average, deeper. Recurring mortgage lending-related financial issues, the reassessment of the housing market’s risks to growth, the seesaw between fresh signs of pressure and expectations of policy responses are all likely to fuel continued swings, even in a rising market. Investors will need to adjust to a bumpier ride.
Property cycles tend to be long-drawn-out affairs. So the first month of negative total returns from UK property values in 15 years – as recorded by the IPD index in September – is likely to mark a turning point. UK commercial property is still historically overvalued, and rental growth is already slowing even before the forecast deceleration of the economy next year. Hence, we forecast more falls for UK commercial property in 2008.
By contrast, each cut in US interest rates only makes more cash available to Asian property markets. This is particularly true for Hong Kong, where rates are directly linked to US levels, but other countries’ money supply will also be boosted through their management of their exchange rates against the weakening dollar.
Indices, Interest rates and Inflation
|
Close 26-Oct-07 |
1 Week% |
1 Month% |
3 Months% |
YTD | |
|
FTSE ALL Share |
3,421 |
2.0 |
3.8 |
6.0 |
6.2 |
|
FTSE 100 |
6,661 |
2.0 |
3.6 |
6.6 |
7.1 |
|
S&P 500 |
1,535 |
2.3 |
0.6 |
3.5 |
8.2 |
|
Nasdaq Composite |
2,804 |
2.9 |
3.9 |
7.9 |
16.1 |
|
DJ Stoxx (Europe) |
428 |
0.7 |
2.4 |
3.6 |
8.1 |
|
Nikkei 225 |
16,506 |
-1.8 |
0.4 |
-6.8 |
-4.2 |
|
Hang Seng |
30,405 |
3.2 |
15.0 |
31.0 |
52.3 |
| Official Rates (%) |
Inflation (%) |
Rate announcement | |||
|
Current |
Dec-07 Forecast |
Mar-08 |
Current |
Next Date | |
|
US (Fed Funds) |
4.75 |
4.50 |
4.50 |
2.8 |
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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