Ashburton's Weekly Comment

Bond & Equity Comment - 15/08/2008

Global Currencies & Interest rates

While the upward pressure on the US dollar had been building over the past few weeks, its move beyond important technical levels at the end of last week was the trigger for what has been the most dramatic rally in the US dollar in several years. Euro /US dollar now looks set to test the 1.45 level. In the UK, the August Inflation Report published by the Bank of England this week was very dovish relative to expectations. Prospects for the UK have clearly deteriorated to the extent that the MPC is now likely to cut interest rates as early as the next few months. The Australian dollar has unsurprisingly been among the biggest losers from the market's reassessment of the risks to global growth. The decline in Australian dollar /US dollar has been driven by both a liquidation of long positions, as well as a shift in fundamentals - both relative interest rates and commodity prices - against the Australian dollar.

Asian Markets

Asian stock markets posted a mixed week. Japan’s Topix index closed 1% lower over worries about bank earnings following a crisis in the Japanese real estate sector, whilst the tech heavy Nikkei rose 0.6% inline with gains in the Nasdaq in the US. Worries over rising interest rates hit Chinese related stocks, even though inflation data came in better-than-expected and heavy falls in both index heavyweight financial and commodity related counters dented sentiment.

American Markets

With the US markets having recovered 8.0% from their lows, it was time for a consolidation period. However there was plenty going on. Most prominent of which was the continued strength in the dollar and the continued weakness in commodities. The consumer price index for July didn't bring good inflation news. Both headline and core-CPI were higher than expected. Year on year CPI was up 5.6%, while core CPI was up 2.5%, which is outside the Fed's comfort zone. The market though, managed to digest the CPI report rather well on the presumption that lower commodity prices and a stronger dollar will lead to improved inflation readings in coming months.

European Markets

European equities changed little over the week, falling slightly as concern deepened that banks will report more losses and the economic slowdown will drag down earnings, offsetting earlier gains as rapidly falling commodity and energy costs eased pressure on reliant industries. In the UK the CPI accelerated 4.4% Year on year for July. In the Euro zone, GDP contracted 0.2% in Quarter 2, whilst July inflation remained stable. In Germany, the economy slowed less than expected in the second quarter at 0.5% quarter on quarter. The dollar continued to strengthen remarkably against sterling and the euro lifting exporters.

 

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