| US: “Obama bounce” fizzles as investors focus on economy |
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Wall Street stocks ended the week lower after the so-called “Obama bounce” sputtered out on renewed fears over the outlook for the global economy. The Dow Jones fell 4.1%, while the broader S&P 500 fell 3.9%. |
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Voters went to the polls on Tuesday to elect the 44th president of the United States. Equities rallied sharply ahead of the result, as investors hoped a decisive win would provide the next president with a mandate to take action on the financial and economic crisis, ending months of uncertainty. |
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However, stocks erased their gains in the aftermath of Barack Obama’s victory as poor economic data underlined the difficulty of the task he faces. |
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The Institute for Supply Management’s index of non-manufacturing activity showed service industries contracted by the most on record in September, while the Commerce Department said factory orders continued to slide, falling 2.5% in September after a 4.3% drop in August. |
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The unemployment rate rose to 6.5% in October – the highest level since 1994 – as companies slashed 240,000 jobs. The International Monetary Fund warned that developed economies combined faced their first annual economic contraction since the Second World War. |
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In his first press conference since the election, Barack Obama said he would push through an economic stimulus package “immediately after” he takes office on 20 January if the Bush administration does not take action before then. Mr Obama said assistance for the stricken auto industry would be a top priority. |
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| EUROPE: Bank of England surprises markets with 1.5% UK interest rate cut |
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European equities ended the week lower as early gains driven by hopes for a decisive US election result were reversed by renewed fears for the global economy. The MSCI Europe Index ended the week 0.2% lower. |
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Among the major European stock markets, the Swiss SPI fell 2.0%, the German DAX was down 1.0%, the French CAC 40 dropped 0.5% and the UK’s FTSE 100 was 0.3% lower. |
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Automakers had a tough week as data showed weak car sales in the US, France, Germany and Spain, while financial stocks came under pressure again as Commerzbank became the first German commercial bank to tap government funding, accepting an EUR 8.2 billion capital injection following the report of a EUR 285m third-quarter loss. |
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The big news of the week came Thursday lunchtime, however, when the Bank of England took markets by surprise by cutting UK interest rates by a full 1.5% to a 54-year low of just 3.0%. |
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The International Monetary Fund certainly didn’t pull its punches with its latest economic report, downgrading Europe’s economic outlook for next year, predicting a recession across the continent and a particularly difficult time for the UK. |
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Against this backdrop, the rate cuts announced last week should be seen as a welcome stimulus for companies with high levels of borrowing, and for sectors such as housing and retailing. Also, given the deterioration in recent economic data, further rate cuts are expected in the coming months. |
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| ASIA: China announces a RMB 4 trillion economic stimulus package |
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Most Pacific stock markets ended the week higher, with the MSCI Asia Pacific ex Japan Index rising 1.6% in USD and 1.2% in local currency terms, as hopes for a US economic rebound next year following Barack Obama’s victory in the US presidential election boosted confidence. Regional economic stimulus packages also helped support sentiment. |
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Korea’s KOSPI gained 1.9% as the Bank of Korea cut its policy interest rate by 0.25% to 4%, the lowest since 2006, adding to 1% of cuts in October. With inflation pressures easing and export growth slowing to its slowest level in 13 months in October, the central bank signalled it was prepared to act again to avert a recession. |
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The Korean government announced that it would pump USD10.8 billion into its economy, mainly through infrastructure projects and tax breaks, to help support growth. |
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Hong Kong’s Hang Seng rose 2.0% and Singapore’s Straits Times jumped 3.9%. India’s BSE National returned 3.0%. The Reserve Bank of India cut interest rates for the second time in two weeks, from 8% to 7.5%, and reduced the amount of deposits lenders need to set aside as reserves. |
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China’s A Shares rose 1.1% and the MSCI China Index rose 0.9%. China’s central bank removed temporary controls on loans in a bid to shore up growth. Manufacturing in China contracted by the most on record in October as the global slowdown cut demand for exports. |
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Over the weekend, Beijing announced a RMB4trn (USD586bn) stimulus plan to bolster economic activity as the world heads toward a recession. The funds, equivalent to almost 1/5 of China’s USD3.3trn GDP last year, will be used by the end of 2010 and cover areas such as low-rent housing, infrastructure in rural areas, as well as roads, railways and airports. Analysts expect the package may boost China’s economic growth by 2% in 2009. |
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| JAPAN : Auto makers lower their profit forecasts |
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The Topix rose 1.4% as banking stocks gained from the continued decline in interbank lending rates. Investors also hoped that the US election result would help boost demand for Japanese exporters, although car makers suffered last week as Honda gave a poor sales forecast, Nissan cut its profit forecast and Toyota forecast its biggest drop in profits for 18 years. |
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The headline JPY 27 trillion stimulus package is one of Japan’s largest ever packages, yet the real financial expenditure is just around JPY 5 trillion. The package will start to stimulate consumption from 2Q’09 and is estimated to contribute 0.2%-0.3% to annualised GDP growth. |
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The measures should provide welcome support for the SMEs and the economy, although the impact on the equity market was muted by the reminder that Prime Minister Aso intends to raise the consumption tax by 2011. Mr. Aso has all but ruled out a snap election, but an election will have to be called within the next year. |
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Despite the recent market lows, we are not getting incrementally more bearish. We do recognise that the top-down environment, particularly the earnings and economic cycles, are looking increasingly bleak over the short-term. |
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The underlying valuation support is compelling and authorities in Japan and around the world are responding to the problem in an increasingly proactive and coordinated manner. The market rallied strongly from the price to book multiple of 0.8x which was touched during the last stage of the market falls in October. |
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This earnings season includes the business trends experienced at the worst period of the post-Lehman bankruptcy credit shock and it is reasonable to expect earnings guidance to be particularly bad at this point in the cycle. |
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| EMERGING MARKETS: US Fed and IMF offer credit support to emerging economies |
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Emerging markets enjoyed mixed fortunes as governments and policy makers acted to support growth. The MSCI Emerging Markets Index ended the week 0.4% lower, versus a 1.9% decline for the MSCI World Index. |
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In Emerging Europe, Hungary’s BUX fell 3.8%. The International Monetary Fund (IMF) approved a EUR 12.3 billion loan to Hungary, in exchange for a government pledge to cut spending. The loan will be made available in instalments, with the first portion used to recapitalise banks and refinance debt. |
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Poor US employment data weighed on Latin American stocks on concerns a US recession will hurt demand for the region’s exports. Mexico’s BOLSA fell 2.8%, while Brazil’s BOVESPA fell 1.6%. |
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Brazil’s banks bucked the downward trend after Banco Itau announced a takeover of Unibanco – a deal that will make it the biggest Latin American bank by assets – raising hopes of further consolidation in the sector. |
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| BONDS & CURRENCY: Moving into global recession |
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Markets were very volatile last week, with the recovery at the start of the week giving way to renewed turbulence. Global bonds rallied (except for the 10-year JGB with its yield up 4bps) with the 10-year US Treasury yield down 17bps, the 10-year Eurozone government bonds falling 22bps and the 10-year UK gilt yield falling 33bps. |
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In Fx-land and in currency trade-weighted term, the US dollar fell 0.9%, sterling was down 1.9%, the Japanese yen was almost flat (-0.1%) and the euro was up 1.6%. |
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One common theme last week was a slew of shocking economic data: the worst Ifo survey in its history was joined by poor global PMI data and weak US ISM surveys. Friday’s Non-Farm Payrolls fell 237k taking the US unemployment rate up to 6.5%, the highest rate since 1994. |
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Meanwhile, the Baltic Dry index is now down by 93% from its mid-May peak and has suffered the largest six-month decline in its history. When shipping rates are down by this magnitude, it suggests that world trade is set to plummet. |
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In short, the world economy is heading into recession and this was reaffirmed last week when the IMF published an update to its World Economic Outlook (which was only released in October!). The Fund revised down its forecast for global real GDP growth from 3% to 2.2% in 2009 – which effectively counts as a global recession. |
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Last week the Bank of England surprised with an aggressive 1.5% cut in official rates, taking the base rate down to 3%). This was well above the 0.5% reduction expected by the consensus. Meanwhile, the ECB delivered an expected 0.5% cut in interest rates to take them down to 3.25%, leaving Eurozone official rates above the UK base rate for the first time in the existence of the ECB. |
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| Informational sources are considered reliable but you should conduct your own verification of information contained herein. Investment involves risk. Please refer to the respective offering document(s). |
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