Global Markets Weekly - 3rd December 2007

Key global market developments

• The catalysts we had identified last week....
  Last week, we highlighted that sentiment and technical indicators were signalling equity markets were primed for a rally. All that was needed was a catalyst. We identified the most likely sources of a catalyst as good news from the banking sector or speeches by high-ranking officials from the US Federal Reserve (Fed).
  
• ...duly arrived, sparking a strong rally in equity markets.
  As it transpired, positive news came from both the banking sector and the Fed. The combined impact was to light a match under equity markets and push developed markets up by around 4%, with US equities experiencing their biggest two-day rise in 25 years. But, for equity markets to make new highs, a shift in the underlying macro-economic environment will be required from one in which growth is slowing but inflation is still rising to one in which inflation is slowing as well. That seems unlikely this side of the New Year.
  
  
• The banking sector was cheered by a major Middle Eastern investment...
  The key piece of good news out of the banking sector was the announcement that the Abu Dhabi Investment Authority is investing US$7.5 billion in the US’s biggest bank. Not only does this capital injection enable the bank to shore up its balance sheet after recent write-offs related to sub-prime debt, but it also highlights that some longer-term investors are starting to see value in equities at these levels. Indeed, analysis shows that, historically, buyers of US equities on the current forward price-earnings ratio of 15 times have seen returns of between 6% and 89% over the following two years, with an average return of 36%.
  
• ...while the Fed fuelled further speculation about rate cuts....
  The other major pieces of positive newsflow came in speeches on consecutive days from Fed Vice Chairman Donald Kohn and Fed Chairman Ben Bernanke. These speeches all but confirmed that the Fed will cut interest rates when it meets on 11th December and increased the chance that the cut will be half a percentage point, rather than a quarter. The speakers acknowledged that the deterioration in both the economic newsflow and the functioning of credit markets over recent weeks has been worse than was expected when the Fed met at the end of October and signalled that the Fed was probably done cutting rates .
  
• ...amid weakening housing and employment data.
  Last week’s US economic numbers showed why the Fed is worried that the downside risks to the US growth outlook are rising. Home sales came in below expectations and are now just two-thirds of the level seen at their peak in the summer of 2005. Prices also fell more than expected. New home prices are now 17% below their peak, as builders try to shift inventory, and existing home prices are 10% off their highs. With inventory high relative to demand, prices should keep falling. Jobless claims continued to trend higher and will rise further over the next few months. This is a clear signal of a further slowdown in employment growth and higher unemployment.
  
• This week’s focus is on US PMI and unemployment numbers..
  The combination of weakening housing and labour markets, along with the high price of petrol, meant that consumer confidence also proved surprisingly weak. The expectations component, which is a reasonable coincident indicator of consumer spending growth, fell to its lowest level since March 2003, during the invasion of Iraq. This week sees the release of November’s US purchasing managers’ index and unemployment data. Any disappointment will increase the chances of a half-point US rate cut this month.

Indices, Interest rates and Inflation

	Close 30-Nov-07	1 Week%	1 Month%	3 Months%	YTD %
FTSE ALL Share	3,281	2.6	-5.0	0.6	1.9
FTSE 100	6,432	2.7	-4.3	2.1	3.4
S&P 500	1,481	2.8	-4.4	0.5	4.4
Nasdaq Composite	2,661	2.5	-6.9	2.5	10.2
DJ Stoxx (Europe)	417	3.4	-3.4	0.7	5.5
Nikkei 225	15,681	5.3	-6.3	-5.4	-0.9
Hang Seng	28,644	7.9	-8.6	19.4	43.5

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-07 Forecast	Mar-08  Forecast	Current	Next Date
US (Fed Funds)	4.50	4.50	4.50	3.5	11-Dec
UK (Base rate)	5.75	5.75	5.50	2.1	06-Dec
Euro-zone (Repo Rate)	4.00	4.00	4.00	3.0	06-Dec
Japan (Call rate)	0.50	0.50	0.50	0.3	20-Dec

Disclaimer

Issued by Coutts & Co, which is authorised and regulated by the Financial Services Authority. The value of investments, and the income from them, can go down as well asup, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.

The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information shown is believed to be correct but cannot be guaranteed. Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Any Coutts company, or a connected company, its clients and officers may have a position or engage in transactions in any of the securities mentioned.

The analysis in this document has been procured, and may have been acted upon, by Coutts & Co and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law ad without being inconsistent with any applicable regulation, neither Coutts & Co nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.

Not all products and services offered by the individual Coutts companies are available in all jurisdictions, and some products and services may be available only through particular Coutts companies. Certain aspects of the service may be performed through, or with the support of, different members of The Royal Bank of Scotland Group, of which Coutts & Co is a member.

None of the overseas Coutts companies or offices is an Authorised Person subject to the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors and depositors, and compensation under the Financial Services Compensation Scheme will not be available in respect of business transacted with them.

Coutts (Cayman) Limited. Registered Office: Coutts House, 1446 West Bay Road, PO Box 707, Grand Cayman KY1-1107, Cayman Islands. Licensed under the Banks and Trust Companies Law (2007 Revision). Coutts (Cayman) Limited is not regulated by the Cayman Islands Monetary Authority in its conduct of securities investment business.

Coutts Offshore Europe Limited. Registered office: 23-25 Broad Street, St Helier, Jersey JE4 8ND. Regulated by the Jersey Financial Services Commission for carrying on investment and trust company business. Regulated by the Guernsey Financial Services Commission for carrying on investment business. Trading in Jersey as Coutts Channel Islands. Business address in Isle of Man: PO Box 59, Royal Bank House, 2 Victoria Street, Douglas, Isle of Man, IM99 1DU. Licensed by the Isle of Man Financial Supervision Commission for Investment and Corporate Service Provider business. Trading the in Isle of Man as Coutts Isle of Man.