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Weekly Market View (Part 2) (28 July - 1 August 2008)
Weekly Market View (28 July – 1 August 2008) - US bond yields have climbed but an early Fed rate hike remains unlikely. Bond prices are down on Fed inflation concerns (albeit voiced by governor Plosser, a perennial hawk), and the higher price pressures just about everywhere cited in the Beige Book of regional economic activity. US stocks have stayed volatile but (apart from early today) have generally been up on lower oil prices (see chart), with banks leading the way on less-bad-than-expected Q2 results and reduced Fannie Mae/Freddie Mac worries (support legislation set to be approved soon). Generally high stocks, in turn, have helped the USD, especially against the yen. Next week is the big week for US data - consumer confidence/house prices (Tuesday), Q2 GDP (Thursday), and the July employment report (Friday). We continue to expect the economy to weaken again - housing starts have still to bottom, especially given the recent climb in mortgage rates, whilst the leading indicator statistic is still depressed. This should mean that headline inflation slows, bond yields fall, and the Fed stays on prolonged hold into 2009. - We expect that sterling and the New Zealand dollar will fall further, whilst the risks to the Australian dollar are rising. In the UK, the BoE July meeting minutes revealed one vote to lift rates but activity data has stayed poor (a big drop in June retail sales), and Q2 GDP (Friday) should show a further major slowdown. In New Zealand, the RBNZ cut rates to 8.00% but, more surprisingly, indicated that they intend a major easing, barring a NZD collapse. We currently forecast RBNZ rates will only drop to 7.75% by mid-2009, but this may now be too conservative. NZD/USD is forecast to drop to 0.73 by end-08, and to 0.65 by mid-09. The AUD continues to hold up relatively well but the risks to AUD/USD in particular are rising – given our view that the US dollar is bottoming out against the majors, commodity price pressures, and Australia’s slowing economy - which suggests that the next RBA move will be to cut rates. - We expect emerging equities to rally on a 12 month time horizon but the next few weeks will remain difficult and aggressive investors need to be selective. Lower commodity prices and higher risk appetite have lifted equities in most of the key countries over the last seven days. As well as US market trends, what happens next will depend on commodity prices, and how far the inflation fight has progressed. Overall we expect that commodity prices, rather than crash, will just peak out and remain historically high. Economic growth in the key emerging markets driving commodities demand, although continuing to slow into 2009, will likely not in the end collapse. This should mean that corporate profits growth also slows rather than collapses - although we still have further to go in the earnings downgrade cycle, and in the period of more negative corporate news flow. Country specifics will dominate on the inflation fight. Brazilian equities have struggled given this week’s bigger-than-expected central bank rate hike but the aggressive move is positive for the long run, as inflation expectations are more likely to come down sooner. Mexico has also reacted well. - With real interest rates still very low or negative, Asian central banks still have the most heavy-lifting to do to tackle inflation. Nevertheless, in general, inflation and interest rates should peak out in Q3, with rates then eventually falling again (helping equities) from early 2009. By country, Indonesia, the Philippines, Taiwan, Singapore, and China look closest to the end of monetary tightening - China’s year-on-year inflation slowed in May and June, and we now expect no more rate hikes. India’s policy response to inflation, which has been too slow, is also stepping up - rupee stability is now favoured (with only the large external deficit stalling sustained appreciation), rates are also likely to move up next week (Tuesday), whilst political events (the government has survived a no-confidence vote) are also a positive, albeit at the margin - new reforms may be more likely. |
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