MARKET COMMENT - 9th October 2006
- There were interest rate decisions in two important areas last week.The European Central Bank raised eurozone rates to 3.25%, an
increase of 0.25%, while the Bank of England left UK rates unchanged at 4.75%.
- US employment figures released on Friday weighed down the equity market, sent bond yields sharply upwards and gave the
dollar a boost.There was a strong upward revision in job creation numbers, showing the economy to be stronger than supposed
and, therefore, lowering the possibility of an interest rate cut.
- Oil prices continued their fall, losing approximately 5% on the week.This was despite planned production cuts from some OPEC
members. Oil prices are now down about 25% from their peak in early August.
- Despite an interest rate rise in the eurozone, the euro lost ground against the dollar, closing at $1.26.The US employment figures,
mentioned above,were seen as strongly dollar-positive.
| Table 1 below shows the movements in the main markets 1 Week Return. |
| |
|
Local
Currency |
Euro |
| US |
S&P
500 |
1.0 |
1.6 |
| US |
NASDAQ |
1.8 |
2.5 |
| Europe |
FT/S&P
Europe Ex. UK |
1.0 |
1.0 |
| Ireland |
ISEQ |
0.6 |
0.6 |
| UK |
FTSE
100 |
0.7 |
1.3 |
| Japan |
Topix |
1.5 |
1.3 |
| Hong
Kong |
Hang
Seng |
2.1 |
2.8 |
| Australia |
S&P/ASX
200 |
1.3 |
1.4 |
| Bonds |
Merrill
Lynch € over 5 yrs |
-0.3 |
-0.3 |
| Table 2 below shows the movements in the main markets year to date. |
| |
|
Local Currency |
Euro |
| US |
S&P 500 |
8.1 |
1.5 |
| US |
NASDAQ |
4.3 |
-2.1 |
| Europe |
FT/S&P Europe Ex. UK |
12.0 |
12.0 |
| Ireland |
ISEQ |
12.4 |
12.4 |
| UK |
FTSE 100 |
6.8 |
9.2 |
| Japan |
Topix |
-0.9 |
-7.7 |
| Hong Kong |
Hang Seng |
20.4 |
12.5 |
| Australia |
S&P/ASX 200 |
9.6 |
4.1 |
| Bonds |
Merrill Lynch € over 5 yrs |
-1.1 |
-1.1 |
Global Equities
US equities enjoyed another strong week, with the Dow Jones Industrial Average reaching an all-time high, up
nearly 60% from its bear market low in early 2003. While the Dow is not as important as the S&P 500, the feat
was still being hailed as a psychological boost.
- Boeing – The Seattle-based aircraft manufacturer gained nearly 6% on the week as EADS, the parent company
of its main rival Airbus, issued a profit warning and said delivery of its A380 superjumbo would be delayed a
further year
- Starbucks – The coffee-shop chain jumped 13%, its best week in six years, after it said September same-store
sales had risen 6%, almost doubling estimates.
- Wal-Mart – The world’s largest retailer had a poor week after it said that same-store sales for September grew
only 1.3%, less than the 1.8% it had predicted only days earlier.
European stocks had a good week amid a flurry of merger & acquisition activity and strong markets
internationally.
-
Corus – The Anglo-Dutch steelmaker jumped nearly 16% on Thursday after India’s Tata Steel said it might
bid for the company.
-
EADS – As mentioned above, the European aerospace group’s shares fell 10% on the news of further delays
in its A380 superjumbo project.
-
Airlines – No doubting the story of the week as Ryanair launched an audacious €1.48bn bid for newly-floated
Aer Lingus, offering €2.80 a share. Aer Lingus ended the week up 35% from its flotation price of €2.20, while
Ryanair was up 4.3%.
-
Viridian – Shares in the Northern Ireland electricity supplier gained 25% on the week as it received, and
recommended, an offer from Bahrain-based investment group Arcapita.
- Hong Kong – The Hang Seng Index scaled a new six-year peak as banking and property stocks drew
support from optimism that the next move in US rates would be downwards.
- Others – Japan and Australia both had a good week, the former helped by a strong reading from the Bank
of Japan’s Tankan survey of business confidence, which rose to a two-year high in September.
-
Eurozone bonds fell on the week, as the European Central Bank raised interest rates by 0.25% to 3.25%.This was widely expected and
the tone of the accompanying statement left little room for doubt that at least one further increase will be forthcoming in the coming
months.The Merrill Lynch > 5 year Index fell 0.3% on the week.
-
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 continue to focus on cyclical inflation pressures stemming from
strong growth and high oil prices.
-
As expected, the Fed left rates unchanged at 5.25% at its meeting last month. Investors now believe that interest rates have peaked
for this cycle.However, this expectation remains dependent on a slowing in the growth rate and no further acceleration in inflation.
-
As expected, the ECB raised rates last week to 3.25% and confirmed market expectations of a further rise to 3.5% before year end. It
gave little indication of its plans for 2007 although the tone of ECB rhetoric continues to be hawkish overall. Bonds have performed
well in the past couple of months as investors reacted to some better inflation data and some indications that global growth might
peak this year.
-
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.
-
Currently, the funds are slightly overweight in bonds and 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.
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