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Financial Pacific - How Slow is Slow (third party)
 

Financial Pacific - How Slow is Slow (third party)

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    Financial Pacific - How Slow is Slow (third party) Financial Pacific - How Slow is Slow (third party) Document Transcript

    • Wealth Management Research 22 August 2011UK economics the UK. These included consumer price index (CPI) inflation Caroline Winckles, y/y, a change ofCFA, analyst, UBS AG stance in the Monetary Policy CommitteHow slow is slow? minutes, and a rise in unemployment. Mark Bulsing, strategist, UBS AG The main data points next week include revisions to UK second-quarter GDP, and purchasing managers index (PM • Equity markets moved sharply lower this week on fears from the Eurozone. Additionally, Fed Chairman Ben Ber of slower global growth, bank stresses, and further speech at Jackson Hole will take place on Friday. developments in the Eurozone crisis. • The Bank of England minutes showed the Monetary Policy Committee has now lost its hawkish bias, as last month it voted 9-0 to keep rates on hold. One member continues to vote for more quantitative easing. • UK inflation moved back up to 4.4% y/y for the consumer price index, and stayed at 5% for the retail price index. Unemployment moved higher to 7.9%, based on a slightly expanded workforce. Source: UBSMarket overview Performance dataIt was a week where markets grappled with questions such as: Just Capital return performance, in %how slow is slow growth? Is it slow enough to tip us back into Equity Markets Level % Week % YTDrecession? Is interbank lending coming under stress? What next forthe Eurozone? FTSE 100 5041 -5.2 -14.6 FTSE 250 9759 -6.5 -15.6Equity markets sold off heavily as a result, particularly on Thursday, S&P 500 1143 -3.1 -9.1led lower by banks on fears of a transaction tax, and miners on fearsof lower global growth. The FTSE 100 fell 5.2% this week, briefly Euro Stoxx 50 2159 -6.4 -22.7dipping below 5000, before closing at 5041. In the US, the S&P 500 CAC 40 3017 -6.1 -20.7fell 3.1% , and was at 1143 in Friday mid-day trading. Volatility, DAX 5480 -8.6 -20.7as measured by the VIX index, shot back up to 42, from 36 just aweek ago. SMI 5094 -3.0 -20.9 Nikkei 225 8719 -2.7 -14.8Bond yields moved sharply lower again on renewed fears we are Commoditiesheading for a double-dip recession. Yields on UK 10-year Gilts now Gold (USD/Oz) 1851 6.4 30.5stand at an astonishing 2.39%, and the US 10-year treasury yields Oil (USD/bbl) 82.9 -3.0 -12.22.10%. Foreign ExchangeCommensurate with growth concerns, we saw gold move higher, GBPUSD 1.654 1.7 6.1by 6.4%, to USD 1,851/oz, and oil (WTI) move 2.8% lower, to USD GBPEUR 1.150 0.6 -1.583/bbl. Fixed IncomeCurrency markets also stayed volatile, and the pound gained against UK 10 yr Gilt 2.39% - -both the dollar, to 1.654, and the euro to 1.150. US 10 yr Treasury 2.10% - -In addition to a strategically important meeting between GermanChancellor Angela Merkel and French President Nicolas Sarkozy, Source: Bloomberg, UBS WMRthere were lots of economic data points this week, particularly inThis report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 5.
    • UK economicsThe week in review...There was a big political focus this week, as Merkel and Sarkozymet, and Germany and France announced that they will proposea financial transaction tax, and will go ahead with more coordina-tion and harmonisation of financial and fiscal policy. The idea of aeurobond was rejected for the time being.There were also lots of economic data points this week, particularlyin the UK. These included CPI inflation at 4.4% y/y, a change ofstance in the MPC minutes, and a rise in unemployment. • Inflation picks up: UK inflation went back up this month, with CPI coming in at 4.4% y/y, up from 4.2% in June and above market expectations for 4.3%. M/m CPI was flat at 0%. The retail price index (RPI) stayed flat at 5% y/y. We continue to expect CPI to reach 5% in coming months. • Hawks retreat : The MPC minutes of the last rate meeting showed a shift to dovishness. The two prior hawks, Spencer Dale and Martin Weale, gave up their push for interest rate ris- es. The MPC therefore voted 9-0 to keep interest rates on hold at 0.5%. Adam Posen remains the one voter for more asset pur- chases of GBP 50bn. However, the minutes stated that "some members considered whether there was a case for increasing the degree of monetary stimulus by undertaking a further pro- gramme of asset purchases". Clearly the members are looking hard at how to balance high inflation and the risk of slower growth, particularly in the Eurozone. We think rates will stay on hold for quite some time, and QE would only be brought in as a last resort. • UK labour market disappointed: Jobless claims increased by 37.1K, more than the 20K anticipated by the markets. Whilst some of the increase was due to changes in benefit eligibili- ty rules, the Office for National Statistics state there is also an underlying weakness in the labour market. The International Labour Organization unemployment rate (3months) increased to 7.9%, from 7.7% previously. The only good news is that employment expanded by 25,000 in the three months to June. Meanwhile, average weekly earnings for the 3m y/y grew at 2.6%, higher than the 2.3% the market was looking for but for now still below long-term averages. • Consumer struggles on: ONS retail sales excluding auto fuel were also slightly weaker than expected at 0.2% m/m, versus 0.8% in June; and -0.2% y/y, versus 0.2% in June. Retail sales with auto fuel were 0.2% m/m and 0% y/y, which compares with 0.7% and 0.4%, respectively, for June. The market had been anticipating 0.3% m/m and 0.3% y/y. • US mixed: The Philadelphia Fed index of business outlook dis- appointed on Thursday, coming in at -30.7, versus consensus expectations of 2, and a reading of 3.2 in July. This is the lowest it has been since March 2009. Industrial Production, however, grew more than anticipated in July, with a reading of 0.9%, ver- sus expectations of 0.5%, and a reading of 0.2% last month. Inflation, meanwhile, continues to rise, with CPI in the US now running at 3.6% y/y. Wealth Management Research 22 August 2011 2
    • UK economicsThe week ahead...The main data points next week include revisions to UK and USsecond-quarter GDP, and PMI data from the Eurozone. Additionally,Fed Chairman Ben Bernankes speech at Jackson Hole will take placeon Friday.• How slow is slow? Eurozone PMI is due on Tuesday. With concerns about the rate of slowdown in growth, particularly after Germanys weaker 2Q GDP growth last week (0.1% q/q vs 1.3% in Q1), all eyes will focus on forward-looking surveys. The PMI composite is expected to have dropped to 50, from 51.1 last month, led lower by Manufacturing to 49.5, and Services to 51. The German Ifo index on Wednesday will also get some attention with the consensus looking for a Business Climate reading of 111, versus 112.9 prior.• How bad was Q2? The UK second-quarter GDP first revision is due on Friday, with the market looking for growth to be left unchanged at 0.2% q/q. Whilst over history, the majority of re- visions tend to be upwards, the risks this time probably lie to the downside. UK consumer confidence from the Nationwide is due out on Thursday, and is expected to have shown a drop in confidence to 45, from 51. No doubt this is fuelled by the stag- nant housing data we have seen, and expect to keep seeing, combined with the recent rise in inflation and unemployment announced this past week.• Adjusting expectations for the US: The US GDP revisions are also due on Friday, with the market expecting a downward change to 1.10% q/q annualised, from a reading of 1.30% at the preliminary release. The University of Michigan confidence index, also due on Friday, is expected to rise slightly to 56, but the Richmond Fed Manufacturing Index due Monday is expect- ed to have declined from -1 to -8. Meanwhile, on Friday Fed Chairman Ben Bernanke makes his speech at Jackson Hole. We believe he will leave the door open for more quantitative easing if conditions deteriorate further, just as he did last year.Key data and events this week Wealth Management Research 22 August 2011 3
    • UK economicsDate Time Event Survey Prior08/23/2011 09:00 Eurozone PMI Composite 50 51.108/23/2011 09:00 Eurozone PMI Manufacturing 49.5 50.408/23/2011 09:00 Eurozone PMI Services 51 51.608/23/2011 10:00 Eurozone ZEW Survey (Econ. Sentiment) -- -708/23/2011 15:00 US Richmond Fed Manufact. Index -8 -108/24/2011 09:00 Germany IFO - Business Climate 111 112.908/25/2011 00:01 UK Nationwide Consumer Confidence 45 5108/26/2011 09:30 UK GDP (QoQ) 0.20% 0.20%08/26/2011 09:30 UK GDP (YoY) 0.70% 0.70%08/26/2011 13:30 US GDP QoQ (Annualized) 1.10% 1.30%08/26/2011 14:55 US U. of Michigan Confidence 56 54.925-31 AUG UK Natwide House prices sa (MoM) -- 0.20%25-31 AUG UK Natwide House prices nsa(YoY) -- -0.40%Source: Bloomberg, UBS WMR Wealth Management Research 22 August 2011 4
    • UK economicsAppendixGlobal DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisionsof UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information onlyand is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis containedherein is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and productsare subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors.All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but norepresentation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and itsaffiliates). All information and opinions as well as any prices indicated are currently only as of the date of this report, and are subject tochange without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions ofUBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employeesthereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to theissuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market inthe securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify.UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units,divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for itsfuture performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back lessthan you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income ofan investment. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of ourindividual clients and we would recommend that you take financial and/or tax advice as to the implications (including tax) of investingin any of the products mentioned herein. This document may not be reproduced or copies circulated without prior authority of UBS or asubsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties for any reason. UBS will not beliable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This report is for distributiononly under such circumstances as may be permitted by applicable law.Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and anaffiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-USaffiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should beeffected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report havenot been and will not be approved by any securities or investment authority in the United States or elsewhere.Version as per June 2011.© 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved Wealth Management Research 22 August 2011 5