Financial Markets: Sentiment in the financial markets
improved considerably over the past month. There was
less concern about the possibility of a move into a
“double-dip” recession; and fears about sovereign debt
defaults also eased.
The improvement in conditions intensified the debate
about the relative merits of austerity measures and
further stimulus in the current situation, and revealed
a significant difference in the approach of the Fed and
the European Central Bank.
Equity Markets: Most of the equity markets recovered
strongly from the falls that had occurred at the end of
June, helped by some encouraging corporate results in
the US, and the relaxation of tension about debt defaults
in Europe.
Wall Street led the rally, and markets in Europe were
able to follow the upward trend, with the strength of
the German economy providing significant support.
The best performance amongst the major markets
occurred in the UK, as investors continued to react
favourably to the proposed measures announced by
the new UK government to reduce the huge fiscal
deficit. The worst performance amongst the majors
occurred in the Japanese market as economic and
financial conditions in Japan continued to deteriorate.
Government bond markets received some support
during the past month from the easing of tensions in
the sovereign debt markets in Europe. The recent
“shock and awe” support operation agreed by member
of the euro-zone, and the decision by the European
Central Bank to buy the bonds of some of the weaker
countries, has provided some reassurance for investors;
but considerable uncertainties remain about prospects
for the bond market.
The Fed is suggesting that further stimulatory measures
might be necessary, whilst at the same time the ECB is
warning that reductions in spending programmes and
increases in taxes were now necessary, in Europe, but
also elsewhere in the industrialised world. Movements
in bond markets have therefore been fairly limited
over the month.
Currency Markets: The feature of the currency markets
has been the swing in sentiment. This has allowed the
euro to rally strongly, helped also by the improving
sentiment about sovereign debt defaults; and sterling
has also moved higher after the announcement of
measures to reduce the fiscal deficit in the UK and the
more favourable economic news on the UK economy.
The best performance; has been achieved by the yen,
as its “safe haven” status has been further enhanced
by the more serious problems elsewhere in the currency
markets.
Short-Term Interest Rates: There have been no changes
in short-term interest rates in the major financial
markets over the past month.
Commodity markets have benefited from the general
improvement in financial markets over the past month.
Significant gains have occurred in base metal prices,
and in the prices of wheat and coffee amongst the soft
commodities.
Precious metal prices have fallen back, and oil prices
are basically unchanged over the month after rallying
strongly from recent lows.
