July 2010
Equity indices struggled over June as risk appetite waned with most sectors in the US racking
up losses. Treasuries took a back seat to events elsewhere. Sentiment in Europe continued to
deteriorate and oil credits affected by the oil spill in the Gulf of Mexico continued to weaken.
The Federal Open Market Committee statement confirmed that the committee sees little
inflation and appear unlikely to tighten policy until 2011 at the earliest. The US Senate agreed
to a diluted version of the financial reform bill, where banks are allowed to invest up to 3% of
their Tier 1 capital in private equity and hedge funds, yet prop trading is banned.
Data wise non farm payrolls rose in May, unemployment fell and retail sales were weaker than
expected. May new home sales delivered the poorest month on record, reflecting the cessation
of tax incentives.
In Europe the ECB announced 3 month fixed rate tenders at full collateral until 1 year end,
ensuring that liquidity will be ample over the next 6 months. Updated ECB forecasts on 2011
growth were unsurprisingly weaker than previous estimates and heavily reliant on external
demand.
Spain became the latest peripheral country to come under pressure as rumours surfaced that
the Government was about to seek financial support from the EU and IMF. The Spanish move
to a more transparent method of bank recapitalisation was welcomed by the market and is
likely to be adopted by other countries going forward.
The data reflects growing divergences in IP across the region with Germany and Italy up
strongly while Greece, Portugal and Ireland remain in decline. Further evidence of a divergence
between the Euro area economies was seen as unemployment fell in Germany but increased in
most other economies.
The emergency budget was well received by the market. The main focus of the tightening
concentrated on reining in public sector finances with additional tightening measures in the
form of a hike in VAT to 20% from 17.5% and various tax reforms. The BoE have made it
clear that they are content to keep rates low provided debt levels are addressed and inflation
continues to tail off.
In terms of data, industrial production fell in April following two strong monthly gains and
headline CPI fell. The overall PMI index was static. House price data also softened as the
Nationwide house price index fell.