WEEKLY GLOBAL MARKETS(06 – 10 August 2012)

Markets buoyed by hopes of more stimulus for struggling economies

Global financial markets traded mostly in positive territory last week with market participants comforted by the belief that world’s major central banks are ready to offer support if needed. The week started positively with German Chancellor Angel Merkel’s government corroborating the European Central Bank’s bond-buying plan to bring down borrowing costs in Spain and Italy. Furthermore, European and IMF inspectors claimed that Greece has made progress on its debt bailout program saying they would return in September to give their final verdict. In the US, the Fed Bank of Boston President Eric Rosengren claimed that the central bank should pursue an “open-ended” easing program of substantial magnitude amid lack of progress in reducing unemployment rate. Moreover, Chinese output and retail sales slowed in July but a weaker inflation rate of 1.8% gives room for the government to stimulate the economy. On Bloomberga macroeconomic note, data releases were mixed. US initial jobless claims fell by 6K to a seasonally adjusted 361K last week while US trade deficit shrank by 11% to $42.9bn in June from $48bn in May. The Bank of France forecast that the economy will contract by 0.1% in July to September and German industrial production declined by 0.9% in June from May, and exports fell by 1.5%, more than expected. On equities front, European shares ended higher. Shares of Nestlé, the world’s biggest food group by sales, rallied as net income in six months to June 30 came in at SFr 5.1bn. However, shares of Standard Chartered Plc lost 15% after the New York State Department of Financial Services alleged it processed $250 billion of deals with Iranian banks subject to sanctions. Asian equities ended in green last week. Shares of Toyota Motor rose after the company posted its highest quarterly net profit in four years. The S&P 500 Index clinched a weekly gain of 1.1%.

Gold Futures held above the $1,600/oz level last week, a weekly gain of 0.8%. Market participants remained bullish on hopes that central banks across the globe would soon announce additional stimulus measures. Looser monetary policy generally strengthens the case for gold as an alternative to currencies and fuels fears of currency debasement. China’s economy made a downbeat start to the second half of the year putting pressure on the government to step up policy stimulus. Furthermore, ECB governing council member Christian Noyer claimed last Thursday that the central bank is determined to bring down borrowing costs and is ready to intervene in bond markets very soon.

Crude Oil Futures hit a week high of US$94.12/bbl last Wednesday as the US Energy Information Administration reported a decline of 3.7 million barrels for crude inventories to 369.9 million barrels in the week ended August 3. However, the black gold retreated on Friday after the International Energy Agency (IEA) claimed that a faltering economic growth could keep annual oil demand growth down to 900,000 barrels a day in 2012 and 800,000 in 2013. Sugar Futures dropped to 20.74 cents a pound last Friday.

Graph – Dollar Index & Gold weekly price movements

The Euro currency finished a generally positive week below the $1.23 mark hit by lacklustre economic data from Europe. The outlook on Greece’s CCC rating, already eight levels below investment grade, was revised to negative from stable movementsby Standard & Poor’s increasing the likelihood that the country will need more support from EU lenders. Furthermore, Italy’s double-dip recession extended into the second quarter of 2012 as the economy shrank by 0.7%.

Sterling weakened versus the greenback as the Bank of England cut its growth forecast close to zero from about 0.8% predicted in May. The UK trade deficit widened to £28.3 billion in the second quarter from £25 billion in the first quarter. However, the UK’s currency trimmed losses after the governor of the Bank of England, Sir Mervyn King, claimed that further interest rate cuts in the UK could be counterproductive.