Global Markets Weekly - 20th October 2008

• Market volatility remained high, amid further forced selling.
  Financial markets remained extremely volatile last week as the ebb and flow of the forced selling dynamic discussed in the previous Global Markets Weekly continued to dominate asset price moves.
• Now the various government plans need to be implemented.
  Government policies announced both in Europe and the US have so far done little to restore liquidity to inter-bank lending and so, ultimately, to other financial asset markets. Cash markets appear to have reached a level of seizure that means investors are no longer willing or, because of the shortage of term liquidity, able to anticipate the effect of government-sponsored liquidity schemes; their actual implementation is required if it is to have the desired effect. Consequently, both inter-bank spreads and equity market volatility remain at heightened levels and showed only marginal signs of improving towards the end of the week.
• Data continued to worsen, notably US retail sales…
  Amid the turbulence caused by the continuing liquidity crisis, economic data releases have pointed to an intensification of the slowdown in activity. US retail sales for September provided the largest downside surprise of the week, falling 1.2% on the month. Along with a decline in lead indicators of growth, this suggests that the weak outturn of the third quarter continued into the final quarter of the year. 
• …which face further headwinds in the fourth quarter.
  As well as Hurricane Ike’s negative impact on retail sales during the early part of the fourth quarter, consumer spending growth will have to contend with the negative base effects of the dropping out of the boost to spending from tax rebates earlier in the year and a sharp tightening of lending conditions. With this combination of factors adding further downside to already strained household spending, the fourth quarter of 2008 is likely to be negative and to represent the trough of quarter-on-quarter growth in the US during this recession. Though recovering slightly, growth rates are likely to remain negative in the first half of 2009. That would keep firm downward pressure on inflation through the coming year.
• The UK labour market weakened, which should help to contain inflation.
  In the UK, unemployment data for September, though no worse than the market expected, revealed a large rise in the jobless rate to 5.7% - its highest since April 2000. This is also indicative of a widening output gap and growing disinflationary pressures. 
• In the UK, unemployment data for September, though no worse than the market expected, revealed a large rise in the jobless rate to 5.7% - its highest since April 2000. This is also indicative of a widening output gap and growing disinflationary pressures.
  With growth slowing and inflationary pressures apparently contained, the short ends of yield curves in most developed countries are pricing further interest rate cuts by central banks to follow the coordinated 50 basis point cut earlier in the month. Federal Reserve interest rates in the US are now expected to reach 1% by the end of 2008, with rates troughing at around 3.00-3.25% during the middle of 2009 in both the UK and Europe. Rate expectations now appear more reasonable, relative to our own expectations. With growth data likely to continue to disappoint, however, the short ends of yield curves may still represent some moderate value for the most risk-averse investors.
• The focus is on policy intervention, but data can still surprise.
  Over the coming week, price action in all asset markets is likely to be driven by the perceived success, or otherwise, of government intervention in money markets. In this environment, economic data releases are not central to market behaviour but, as was seen last week, they retain the potential to surprise.

Indices, Interest rates and Inflation

	Close 16-Oct-08	1 Week%	1 Month%	3 Months%	YTD %
FTSE ALL Share	1,965	-10.5	-23.3	-24.9	-40.2
FTSE 100	3,861	-10.5	-23.3	-25.0	-40.2
S&P 500	946	4.0	-22.0	-24.0	-35.5
Nasdaq Composite	1,718	4.4	-22.2	-24.8	-35.2
DJ Stoxx (Europe)	225	-7.0	-23.0	-24.9	-45.7
Nikkei 225	8,458	-7.6	-27.1	-33.7	-44.7
Hang Seng	15,231	-4.5	-16.8	-28.2	-45.2

Official Rates (%)				Inflation (%)	Rate announcement
	Current	Dec-08 Forecast	Mar-09 Forecast	Current	Next Date
US (Fed Funds)	1.50	1.50	1.25	4.9	29-Oct
UK (Base rate)	4.50	4.00	3.50	5.2	06-Nov
Euro-zone (Repo Rate)	3.75	3.25	2.75	3.6	06-Nov
Japan (Call rate)	0.50	0.50	0.50	2.1	06-Nov

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