Market Update July – Comment by Robert Parker

2010-07-23

The US: return to recession unlikely

There have been a number of concerns over weakening indicators and recent US data shows a moderation in growth to around 3% during the second half of the year, with the growth outlook moderating further in 2011 to closer to 2.5%.  However, the probability of a return to recession is unlikely.

Europe: major divergences

Eurozone growth continues to show major divergence and growth in 2010 is unlikely to exceed 2.5%.  Although German and French growth may achieve this level, the drag of the weaker economies could result in growth of nearer 2% for the region as a whole.

Japan: still on track

After annualised real GDP growth approaching 5% during the first quarter of 2010, Japanese growth is strongly supported by exports and production, although with some softness in consumption, growth may moderate to 3% during the second half of the year.

Market implications

Equities

The early July equity market recovery should continue given low money market and bond yields, the argument that investor fears on the US, eurozone banks and China are overdone, that P/B and P/E valuations are attractive, that investor cash levels are high and assuming better than reasonable second quarter earnings results.

Bonds

G3 government bonds clearly reflect the investor flight to safety and particularly the concerns of a US slowdown, a deceleration in China and worries over eurozone banking risk.  However, assuming that macro concerns are too pessimistic, then yields should start to reverse back to normal levels.

Commodities

Oil should trade back above US$80 per barrel by the fourth quarter, assuming the maintenance of strong Chinese demand and relatively low inventories.  In food/soft markets, supply/demand should remain tight, while, assuming that investor risk is slowly re-instated, then downside risk persists in the gold market.

Currencies

Assuming that the Chinese growth slowdown is minor as expected and that other emerging economy Central Banks continue to tighten policy, then upward pressure on the emerging currencies will persist with strong investor flows into the higher yielding currencies.

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