Global Markets – week ending 7th October 2011
credit: Michael Duxbury
After a gloomy start, equity markets got a lift from signs that Europe was finally moving to support its flailing financial sector. Risk appetites improved as European leaders said they are considering further steps to shore up the banking system. The plethora of downgrades from Fitch and Moody’s had less of an impact on equities than on the euro. On the week, most equity indexes were positive.
There was a geographic divide in central bank actions last week. While the Reserve Bank of Australia and the Bank of Japan maintained their policies, the Bank of England and the European Central Bank eased to help their beleaguered banks. The Bank of England’s decision to expand its quantitative easing program (bigger and earlier than expected) and the European Central Bank’s decision to aggressively provide liquidity to euro system banks were positive steps forward. Positive economic data — including an upside surprise on U.S. jobs — also helped.
US Equities were up last week in what can be characterized as nervous trading. Stocks veered between gains and losses in intraday trading as investors focused on the rhetoric from Europe regarding the sovereign debt crisis. As the week, ended, equities posted gains for the second consecutive week. A relatively upbeat U.S. jobs report helped to preserve buying interest ahead of the weekend. I
European stocks ended a second straight positive week with modest gains on Friday supported by hopes that political leaders are getting serious about containing the region’s sovereign debt problems. Over the course of the week, markets became increasingly convinced that Germany and others will build a firewall around the banking sector to be used in the event that a Greek default sparks wider contagion. Investors were relieved to find that both the Bank of England and European Central Bank managed to find their separate ways of easing some financial market concerns
The Bank of England pulled the trigger on additional quantitative easing ahead of most expectations by announcing an extra £75 billion worth of asset sales. This lifts the target to £275 billion. The planned increase in purchases, the first since the previous £200 billion ceiling was announced in November 2009, will again be financed with central bank reserves and executed through the Asset Purchase Facility (APF) over the course of the next four months. The Monetary Policy Committee left the bank rate unchanged at 0.5 percent where it has been since March 2009. The increase in the Quantative Easing ceiling reflects the Bank’s increasing concerns about the outlook for the domestic economy amid mounting evidence of slowing global growth.
The announcement means that, since unilaterally breaking ranks in October 2010, Adam Posen’s longstanding call for extra Quantative Easing has finally been answered. Speculation about more Quantative Easing had been centered on the November Monetary Policy Committee meeting as this would have tied in with the release of the Bank of England’s quarterly Inflation Report so the move is not a complete surprise. How effective the new measures are remains to be seen but at least the initial response of the yield curve was to flatten around 10 basis points between 2-year and 30-year maturities. However, the decision initially sent the pound sterling sharply lower.
Despite rallies on Thursday and Friday, most Asia Pacific indexes were lower last week. The notable exceptions were the All Ordinaries and Hang Seng which were up 3.8 percent and 0.7 percent respectively. The change in attitude from negative at the beginning of the week to positive was the result of fresh optimism that Europe is ramping up efforts to shore up its financial system and prevent another global banking crisis.
Investment views in this document are taken from various sources and are intended to provide a general review of certain topics. The purpose is to inform but not recommend or support any specific investment course of action.
