Weekly global market review: 27 – 31 October 2008

27 – 31 October 2008

After witnessing substantial volatility through October, markets wrapped up the month with a strong performance in the last week. Global equities advanced on Friday, as investors chose to focus on improved conditions in credit markets due to the rate cuts implemented last week and largely shrugged off a spate of grim data on the US economy and a glut of profit warnings and dividend cuts on both sides of the Atlantic.

Oil firms, pharmaceutical manufacturers and banks boosted European shares, while financial stocks, especially JPMorgan Chase, fronted an advance in US stocks. Investors ignored weak US consumer data and a key measure of business activity that illustrated the extent of damage caused by the financial crisis, and took heart from JPMorgan Chase’s announcement that it would expand its programme to modify mortgages in an effort to avoid foreclosures on up to USD 70 billion in loans. Despite a fall in oil prices, most energy firms ended higher as leading firms reported strong profit growth last week.

Taking a cue from global equities, Asian stocks were also trading higher on Monday 3 November, extending last week’s rally. South Korean authorities pledged to pump USD 0.8 billion into its economy and India cut interest rates to alleviate the effects of the global credit crisis.

Fixed Income Markets
European government bonds ended lower despite speculation that the ECB would lower interest rates at a faster pace than expected to stave off a recession. Earlier, government paper gained following a fall in headline inflation. The difference in yields between two- and ten-year notes widened, as shorter-dated notes, more sensitive to expectations for rates, outperformed.

US ten-year Treasury notes ended unchanged even as slowing consumer spending added to fears that the US economy would continue to deteriorate. The difference in yields between two- and ten-year securities widened further to 2.40 percentage points.

Meanwhile, the cost of protecting corporate bonds against default rose following a decline in consumer spending and a fall in business activity. Japanese government debt was trading firm this morning after the Bank of Japan cut interest rates from 0.5 percent to 0.3 percent on Friday, to help bolster economic growth. Bonds also advanced because Japanese stocks declined and as a government report showed that inflation had slowed.

Looking Ahead
Tuesday’s US presidential election will set the tone for markets this week, as investors try to assess the possibility of quick fiscal stimulus after the election and the risk of protectionist measures or more regulation. Additionally, economic data series will be out this week, with the focus being on the October US employment report due on Friday.

Other key releases include the Institute for Supply Management’s data on manufacturing today and non-manufacturing, or service-sector, activity on Wednesday. Moreover, monetary policy decisions from the European Central Bank (ECB) and the Bank of England are also much awaited. Both the central banks are expected to cut rates now that falling commodity prices have allowed them to put the emphasis on lowering borrowing costs to cushion against the economic slowdown. Beyond this, we may see some unconventional measures as the authorities use the full range of tools within their monetary policy armoury to avoid deflation and stimulate the economy.

This is the last heavy week of the autumn results season in the US. Among the major companies set to report earnings this week are Anadarko Petroleum, MasterCard, Cisco Systems, Cognizant Technology Solutions, Sprint Nextel and Munich Re. Reuters noted that 59 percent of S&P 500 companies have reported results, and, on average, earnings for companies in the index are expected to fall by 23.8 percent for the quarter.

For further information, or to discuss how current global economic conditions are affecting your investments, please feel free to contact Craig Welsh at Spectrum IFA Group or visit www.expatfinance.nl.

This commentary was compiled with the assistance of Fidelity International one of the world’s leading investment management groups.