Market update 6th Apr 2010
Global economic recovery
Evidence of a global economic rebound leads the news of the past week. Reports showed a recovery in manufacturing in the U.S., China, Japan and Europe. February had experienced a correction in the market in general due to problems in Greece, stimulus exits and uncertainty over the extent of recovery.
U.S. Employment Data
Employment in March grew by the most in three years, representing a turning point for the labor market as U.S. market recovers from the deepest recession in seven decades. Payrolls rose by 162,000 workers, the third gain in the past five months and the most since March 2007. Unemployment was 9.7 percent for a third month. Jobs report makes it `pretty clear’ recession is over.
The US economy probably grew by 2.8 percent in the first quarter of 2010, according to the median estimate of a Bloomberg News survey of economists last month, after a 5.6 percent pace of expansion in the fourth quarter of 2009.
U.S. Federal Funds Rate
Federal Reserve said start of March that it will leave its benchmark interest rate near zero to safeguard the economic recovery. It is clear now that the Fed is going to keep rates very accommodative to stimulate the growth recovery. The question is the consumer’s ability to step up to support the economy.
Bank of Japan expanded a bank-loan program
The Bank of Japan doubled a lending program on March 17, aimed at stoking credit growth after the government stepped up calls to arrest deflation that’s hampering the economic recovery. It also held the overnight lending rate at 0.1 percent. Japanese lawmakers approved a record ¥92.3 trillion budget amid stubborn deflation. Japanese equity has profited from this. Overall, future growth will still be slow.
Raising interest rate
The Reserve Bank of India raised its benchmark interest rates on March 19, a surprise one month earlier than the next scheduled review, reflecting the need to tame the fastest inflation in more than a year. Further rate hikes are likely over coming months as the bank moves further to contain inflation.
Policy makers in Australia, New Zealand and Malaysia have also increased rates this year. We expect developed economies to hike interest rates over the coming months as the economies move towards recovery; hence the outlook for global bonds is negative in the short-term and long-term. There will also be small drops in equity each time a major economy increase interest rates.
China asset prices
China has so far this year twice ordered lenders to set aside more funds as reserves. China unveiled new measures to curb housing prices. State-owned firms, whose core business is not in property, were ordered to exit the sector. Lenders were also told to refuse new loans to these firms, as well as developers that have been hoarding land.
It is an encouraging sign that the Chinese government is keeping a very close eye on preventing an asset bubble.
Rich nations warned on debt
THE International Monetary Fund warned the world’s wealthiest nations on about their surging levels of government debt, saying it could drag down the growth needed to ensure continued economic recovery.
The IMF projects that gross general government debt in the G-7 advanced economies, except Germany and Canada, will rise from an average of about 75 per cent of GDP at the end of 2007 to about 110 per cent of GDP at end of 2014. This year, the average debt-to-GDP ratio in the wealthiest countries is projected to reach levels that prevailed in 1950 in the aftermath of World War II.
Greece Jitters
The month of February was volatile for a number of eurozone members, particularly Greece, facing fiscal challenges. The latest economic growth data showed that the recovery in Europe was less robust than that of the U.S.
European Union agrees with International Monetary Fund for financial aid for Greece at a meeting last week, calming the markets a little.
Potential Risks
• High US unemployment & consumer indebtedness continue to threaten delinquency and decline in US home values. Persistently high unemployment risks the economic recovery from recession.
• US housing situation may slide back into unfavourable situation, causing investors to lose confidence and cut back on spending. US existing homes sales fell in February for a third month. Purchases dropped 0.6% to an annual rate of 5.02 million, the lowest level in eight months. Supply is up to 3.59 million houses for sale, a 312,000 increase from January that marked the biggest gain since April 2008.
• Emerging markets suffer higher risks of inflation. India, Australia, New Zealand and Malaysia has hiked interest rate to combat its increasing inflation rate.
• Worries over Greece’s ability to service its fiscal deficit create hangover effect on the Euro and has contagion effect on peripheral European countries.
• Countries exiting the stimulus plans too quickly.
• Political risk persists in countries such as Thailand.
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