With
the earnings reporting season drawing to an end, economic
trends were the main influence on markets last week. The
news on that front was generally positive for equities,
although early indicators of a turn in the interest rate
cycle sounded a note of caution and sent bond markets
lower.
Increasingly, US economic
data have been pointing to a strong upturn in the economic
cycle and statistics released last week confirmed the
trend. On Friday, employment figures confirmed a rise
of 126,000 in non-farm payroll numbers in October and
an upward revision from 57,000 to 125,000 in the previous
month's figure. The rise was mainly attributable to service
sector employment, as manufacturing payroll numbers continued
to decline. The unemployment rate also fell from 6.1%
to 6% and initial jobless claims were less than expected,
all helping to dispel fears of a jobless, economic recovery.
Earlier in the week, the Institute of Supply Management
index of manufacturing activity in October confirmed a
significant upturn to 57, from 53.7 in September.
European economic news was also positive,
with a survey of eurozone business activity in the services
sector jumping in October to its highest level in three
years. This was followed on Thursday by an announcement
by the new ECB president, Jean-Claude Trichet, that eurozone
interest rates would remain on hold, notwithstanding some
stickiness in inflation, which hovers just above 2%. Nonetheless,
market watchers are becoming increasingly convinced that
the interest rate cycle is turning and decisions by the
monetary authorities in the UK and Australia to increase
interest rates by 0.25% to control frothy housing markets
only served to reinforce that view.
The
Table below shows the movements in the main markets since
last week's comment.
|
Market
|
Index
|
%
Return 31.10.2003
to 07.11.2003 |
| |
|
Local
Currency |
Euro |
| US |
S&P
500 |
0.2 |
0.9 |
| US |
NASDAQ |
2.0 |
2.6 |
| Europe |
FT/S&P
Europe Ex. UK |
2.4 |
2.4 |
| Ireland |
ISEQ |
0.1 |
0.1 |
| UK |
FTSE
100 |
2.1 |
1.3 |
| Japan |
Topix |
0.2 |
1.5 |
| Hong
Kong |
Hang
Seng |
0.2 |
0.8 |
| Australia |
S&P/ASX
200 |
-0.7 |
0.2 |
| Bonds |
Merrill
Lynch € over 5 yrs |
-1.1 |
-1.1 |
Expectations of a strong global economic
recovery further boosted equity market sentiment and most
markets made further gains on the week, although profit
taking left the advance fairly muted in some regions.
Technology stocks made the strongest gains, reflecting
their high sensitivity to economic growth. They also received
a boost from a positive earnings report and optimistic
outlook from Cisco Systems. Semiconductor stocks were
marked up significantly in response to an upbeat forecast
by the US Semiconductor Industry Association, which anticipated
earnings growth of almost 16% in 2003 and 19% in 2004.
European equities were particularly
strong on the week, helped by strengthening business confidence
and a "no-change" interest rate stance by the
ECB. Technology stocks also led the European advance,
with SAP, the German business software company, jumping
7% on the back of Cisco's strong results. The Dutch retailer,
Ahold, was one of the best performers of the week, rising
11% on the announcement of a rights issue and major restructuring
plans.
Eurozone
bonds fell back in response to the UK and Australian interest
rate decisions and to a weakening of the euro against
the dollar which will make it slightly more difficult
for Eurozone inflation to stay within the ECB target range.
Strong US economic growth has boosted the dollar somewhat
from earlier weaker levels and fuelled expectations that
the next interest rate moves in both the US and Europe,
while they may be some time away, will definitely be upward.
In this environment, it is not surprising that bond prices
have been under pressure.
