US equities on strong gains, bond yields stabilised

Release of positive economic data in the United States this past week continues to show a growing and improving economy with corporate earnings on the same trend. Equities followed by making gains once again. We continue to note that the recent employment figures in the US and Canada remain negative and not consistent with the current growing trend. However, the figures may not be significant given the bigger picture of individual attitude towards spending and maintaining their current lifestyles.

Although stocks throughout the world improved, as shown in the table above, US equities led with strong gains reflective partially in the continued strengthening of the US Dollar. Bond yields stabilised and oil prices eased as a result of the stronger greenback as well. According to data released by the US based Institute of Supply Management (ISM), US manufacturing expanded in August at the fastest rate in almost a year. The ISM factory index increased from 51.8 in July to 54.7, as production in factories rose. As would be expected, the Mortgage Bankers Association of America’s index of mortgage applications declined for the fourth consecutive week, to its lowest level in over a year. The recent rise in borrowing rates, up from 4.99% in June to 6.25% for the 30-year fixed rate, has discouraged householders from refinancing and economists warned that housing activity could slow.

President Bush spoke to the nation on Thursday September 4th to address concerns over the nations security and the economy. Bush stated that in most downturns, an economy would only be impacted and need to recover from one major shock. The US President noted that there were three major shocks to the US economy in the past bear market. Firstly, the market correction based in over capacity and pricing which started in 2000. Secondly, the direct terrorist act of 9/11 cost the US economy an estimated 80 Billion USD, shut down the stock markets for a week, and left long term effects in the travel and security industries. The economic impact was far reaching as decision makers weighted the new realizations of American at War with terrorism.

And thirdly, Bush pointed to the corporate malfeasance which lost massive savings, cost untold jobs and undermined the confidence of investors to buy into equities and support economic growth. Bush put pressure on congress to pass a series of economic measures focused to letting people keep their money and thereby spend it into the economy to stimulate further growth. He raised the child allowance to 1,000 per child. Most important is that many strong steps have been taken to address these matters and put them behind us. The performance of the economy recently, such as improved manufacturing output, high levels of productivity growth, firming prices and expansion in the services sectors, all are very positive and indicates that we are in recovery.

In the UK, August retail sales slowed according to a survey by the Confederation of British Industry; of the retailers surveyed, 41% said sales rose while 29% reported a decline. The service industry expanded at its fastest rate since 2001, according to a survey by the Chartered Institute of Purchasing and Supply (CIPS). Their index of service sector activity rose from 56.6 in July to 57 in August. CIPS reported that manufacturing and construction had also experienced more buoyant conditions.

Building activity was at its highest level since April 2002 and exports rose for the first time in two years. The Bank of England left its benchmark interest rate unchanged at 3.5%, although it did not detail the exact thoughts of the committee. Finally, house prices rose by 1.3% in August, according to a survey from HBOS Mortgage lending increased by a record ?8.4 billion in July according to the Bank of England. In Europe, the decline in the value of the euro against the dollar continued to aid European manufacturers. A survey released by Reuters which measured activity levels at 3,000 European companies rose to 49.1 in August from 48 in July. Although the overall survey remained below a reading of 50, which indicates contraction, the survey’s measure of new order volumes rose to 50.1. In addition, a separate Reuters survey of Europe’s service sector revealed a strengthening environment for growth. Its index, which is based on the responses of 2,000 purchasing managers, rose to 52 in August, from a reading of 50.1 in July.

darcy@investments-intl.com