Markets show upward bias, strong start to second half

As many expected, the US Federal Open Market Committee announced no change to the short-term rate, leaving it at 1%, the lowest it has been in 45 years. They noted that the rises in productivity was encouraging and that low interest rates had helped to boost economic momentum.

More important however, was the suggestion by the US Federal Reserve that low interest rates would probably be sustained for an extended period. Over two thirds of the panellists believe the Fed funds rate is about right and see the rate holding for the next six months. As a result, every major global equity market rallied on the news, with the Nikkei logging the greatest gain, 6.4%. Most markets saw a pretty solid 3% growth for the week. Coupled with some better than expected earnings reports, the economy and by extension the markets are set for a strong second half of the year. After strong trading on Monday, leaving the DOW over 9400, the year end targets of DOW at 10,000 and S&P at 1150 seem very achievable. In economic news, the United States weekly unemployment report from the Labor Department showed new claims for unemployment benefit remained below 400,000 for the fourth straight week.

The Consumer Price index increased 0.2 in July indicating a pretty stable pricing, supporting the US Fed view that the economy is well positioned. Neither an upward spiral in inflation nor a downward spiral to deflation are of concern now. The government’s producer price index expanded by 0.1% in July, slowing from a 0.5% rise a month earlier. The deceleration was attributed to a significantly smaller increase in the cost of energy and capital equipment. The United Kingdom markets moved forward over the week, helped by a positive performance from some of the largest sectors. Telecommunication service prov-iders and pharmaceutical companies featured prominently in the list of the biggest movers for the week. Forestry & paper, health and steel were the worst performing sectors. Inflation rose in July to 2.9% as a result of higher clothes prices. The Bank of England, however, lowered its inflation forecast for next year for the first time since November 2001. It now predicts inflation will peak at 3% next April but will then drop below the government’s target of 2.5%. The number of people claiming unemployment benefits in July fell for a second month in a row. Claims fell by 8,800 from June figures, but the overall rate of unemployment remained steady at 3.1% for the 19th consecutive month. 

Despite generally negative economic data, European stocks moved forward based in part on the United States momentum. The eurozone economy slowed to a standstill in the second quarter as Germany and Italy slid into recession. German GDP shrank by 0.1% over the period; this followed a 0.2% contraction in the first quarter. French industrial production rose by a monthly 1.2% in June, the biggest jump in two years, as the economy rebounded from widespread strikes the previous month and consumer spending picked up. However, the spike followed a fall of 1.3% in May. France’s July inflation figure was unchanged from June, rising by 1.9% from a year earlier. We note that the financial sector continues to do well with UBS of Switzerland announcing its highest quarterly earnings since 2000 for the second quarter of the calendar year. Net income rose over the period by 23% with revenues rising at all the group’s main businesses. Over the intermediate term, the market has an upward bias as long as the US lead global recovery sees continued economic stimulus from government and it should for many months, the economy continues to show signs of gaining strength like it did this past week, and there are no derailing shocks (always a risk). That said, we are positive towards the future and increasing weighting in ownership positions.

E-mail : darcy@investments-intl.com