For the moment attention is focused on the strength
of the German economy, and the beneficial effects that
will be felt elsewhere in the zone; and there has also
been a relaxation of tension about debt defaults, after
the rescue package agreed by the member countries,
and the intervention by the ECB to support the weaker
bond markets.
The German export performance depends of the
maintenance of strong growth in the global economy
that may not be sustained; and the odds still suggest
that one or more of the weaker countries will at least
be forced to defer interest payments on its sovereign
debt, and may even default. The latest improvement
in the markets therefore seems likely to need further
support from Wall Street if it is to be sustained.
The best performance amongst the major markets over
the past month had occurred in the UK market. The
measures announced by the new Coalition government
to reduce the size of the fiscal deficit have been well
received by the market, despite the fact that they will
slow down the pace of the economic recovery over the
coming months; and the latest estimate of a 1.1% growth
rate in the second quarter of the year suggests that the
effects of the fiscal retrenchment might even be less
than had been expected, and has removed most of the
fears about the possibility of a move into a “double-
dip” recession.
The improvement in sentiment amongst investors is
therefore easy to understand.
Even before the announcement of the estimate of
growth in the second quarter of the year, there had
been further evidence of an improving economic
situation.
The unemployment rate fell; retail sales volumes rose
by 1%, the strongest monthly increase in almost a year;
and the latest quarterly survey from the CBI reported
that manufacturing output increased at its strongest
rate since 1995.
The 1.1% estimated rate was well above most forecasts.
It was the result of expansion in both the manufacturing
and services sectors of the economy.
But the most surprising figure was the estimated 6.6%
rate of growth in the construction sector that accounted
for around one third of the overall growth in the period.
It has also produced considerable interest regarding
the reaction of the Bank of England to these figures.
The bank has previously been mainly concerned about
the risk of slower growth, and had even considered at
the last meeting of its Monetary Policy Committee
“arguments in favour of a modest easing in monetary
policy” because “prospects for gross domestic product
growth had probably deteriorated a little over the
month”.
The mood will have changed now; but the governor,
Mervyn King, has recently indicated that there will be
no early changes in policy as a result of one set of
figures.
The background factors affecting the market therefore
remain. Short-term interest rates will remain low, and
the economy is performing better than expected; but
the austerity measures that are to be introduced, and
especially the increase in VAT in January, will depress
demand over the coming months.
It therefore seems likely that the UK market, like the
markets in mainland Europe, will need further support
from Wall Street if the recent strength is to be sustained.
The Japanese market is lower over the past month.
There has been further evidence that the pace of the
recovery in the Japanese economy is weakening; and
the poor performance by the ruling Democratic Party
in the recent election seems likely to lead to a period
of political uncertainty that will make it difficult for
action to be taken to reverse the trend.
The earlier decision to introduce measures to reduce
the massive fiscal deficit was a major reason for the
government’s poor election performance in the
election, and may well be reversed; and the Bank of
Japan’s action to try to increase the rate of bank lending,
especially to smaller companies, also seems unlikely
to have much of an effect on the economic situation.
The background situation in Japan is therefore very
disappointing, and this is reflected in the performance
of the equity market. It seems unlikely that there will
be any early improvement in the situation, and so the
Japanese market weakness looks set to continue.
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
No comments:
Post a Comment