Matthew Bennett, Head of International Equities at insurance, pensions and investments specialist NFU Mutual, reviews the markets and economic announcements for the week commencing 15 August 2011.
US economy pulls rug from under stock markets.
The FTSE 100 index fell by 5.25% to end the week at 5,040.76 while the mid-cap FTSE 250 also saw a fall of 6.45%.
US business confidence hurts global markets
After an encouraging first half of the week investors were given a nasty shock by a string of economic disappointments from the US that gave encouragement to the concerns that the economy is heading back into recession.
Thursday's Philly Fed's business activity index triggered sharp falls in world markets. It fell from +3.2 in July to -30.7 in August - its lowest level since March 2009.
As a result of this shock (together with a 3.5% drop in sales of existing homes and the biggest rise in US consumer price inflation since March (+0.5%)) stock markets suffered losses of 3-5% on the day followed by more on Friday. Gold hit a new record high above $1850 and the yield on 10-year US Treasuries dipped below 2% for the first time in 60 years.
Economic and stock market update
As the saying goes "When America sniffs, the world catches a cold" and, sure enough, the economic fears in the US were transferred to Europe, the UK and Asia.
As if Europe doesn't have enough to worry about with its debt crisis, economic news from Germany and France did nothing to lighten the mood. Germany reported meagre 0.1% GDP growth for the second quarter while French GDP stagnated completely, and the Markit/BME purchasing managers' index for the German manufacturing sector fell to 52 points in July - its lowest level since October 2009.
The UK economy fared little better. Retail sales only grew 0.2% in July, down from 0.8% in June. The unemployment rate rose from 7.7% to 7.9%. And consumer price inflation remained high, rising from 4.2% in June to an annual rate of 4.4% in July.
The market has reacted aggressively to these events, with the banks sector being hit particularly hard. Barclays, Lloyds Banking Group and RBS have all suffered falls of more than 50% over the past six months.
Setting aside the market turmoil, the stock market was encouraged by three enormous takeovers, two of them involving UK-listed companies. UK software maker Autonomy received an $11.7 billion bid from Hewlett Packard and its shares surged 76% on the news.
Meanwhile, having failed to win over the company's board, London-listed brewer SABMiller approached shareholders directly to launch a £6 billion hostile bid for Foster's Group. Biggest of all was the announcement that Google would pay $12.5 billion to take over Motorola Mobility, an American producer of smart phones and set-top boxes.
Also in the UK this week, accountancy-software firm Sage confirmed it is considering the potential acquisition of Australian financial-software firm MYOB. Meanwhile, Thomas Cook, whose shares fell sharply, the Co-operative and the Midlands Co-operative agreed to merge their travel-agent networks.
The week ahead
The US economy is likely to remain the main focal point next week. Important reports to watch out for include the University of Michigan consumer sentiment survey and durable goods report. Europe too will be in focus with purchasing managers' indices in Germany and France, as well as Germany's ZEW investor confidence survey. In the UK we will be keeping an eye on mortgage approvals data for signs of life in the housing market.
|
