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In a strong week for US equities, the S&P 500 reached its highest level for five and a half years.
- Intel – The technology giant rose 9% as the courts dismissed a legal challenge from rival Advanced Micro
Devices.
- General Motors – The carmaker jumped 9% on the week on the back of a possible alliance with Nissan and
Renault.
- Tobacco stocks – In New York, courts granted class action status to smokers of low tar cigarette exposing
tobacco companies to $200 billion worth of damages. Altria fell 7% on the news.
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Spanish stocks were the star performers on European markets last week due to merger and acquisitions
activity in the utilities sector.
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Spanish utilities – Endesa and Iberdrola rose 14% and 9% respectively last week. Iberdrola rose on news
that construction group ACS is now the biggest shareholder in the company and may look to foster a
merger with another utility company. Endesa rose after Spanish conglomerate Acciona bought 10%
potentially foiling a bid from Germany’s Eon.
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European truck makers – German carmaker Volkswagen announced it would not sell it’s shares in Sweden’s
Scania to Germany’s MAN. VW said it favoured a three way merger between MAN, Scania and Volkswagen.
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Growth expectations remain at high levels with global GDP forecast to expand robustly again in 2006, although leading indicators
suggest some growth moderation in 2007.The major central banks have been focused all year on cyclical inflation pressures and
strong commodity prices and short rates globally have risen further.
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As expected, the Fed left rates unchanged at 5.25% at its recent meeting. Investors now believe that interest rates have peaked for
this cycle.This expectation remains dependent on a slowing in the growth rate and no further acceleration in inflation.
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The ECB increased rates to 3% in August, as fully expected by the market. Expectations of future hikes have not changed much since
then, despite continued hawkish comments from ECB officials. Investors still expect rates to end this year close to 3.5% with a 0.25%
like fully priced in for this week. Bond prices have taken some comfort of late from well-behaved underlying inflation data and the
thought that growth might peak in 2006.
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Equity markets still remain reasonably supported by a strong earnings’ background and favourable valuations relative to bonds;
tighter liquidity conditions from higher interest rates continue to be a concern and periods of volatility are likely.The gradual ending
of super-easy money policies in Japan deserves attention because of its potential negative impact on various asset classes.
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Currently, the funds are neutral in bonds and slightly overweight equities versus the manager average. Sectorwise, positions are pretty balanced at the moment.Geographically, the funds are overweight in Europe, underweight Ireland and the US and more
neutral in the other regions.
