Financial Pacific: The Week in Review (third party) september 27,2010
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Financial Pacific: The Week in Review (third party) september 27,2010

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Financial Pacific: The Week in Review (third party) september 27,2010 Financial Pacific: The Week in Review (third party) september 27,2010 Document Transcript

  • Brian O'Reilly, strategist, UBS AG Caroline Winckles, CFA, analyst, UBS AG Mark Bulsing, strategist, UBS AG Wealth Management Research 27 September 2010 UK economics The week in review...the week ahead s Another strong week for equity markets: In London, the FTSE 100 gained 1.6%, closing just below the important 5,600 level. In the US, the S&P 500 is at 1,146, up 1.8% in Friday mid-day trading, buoyed by good durable-goods orders. s Government bonds moved higher on confirmation that both BoE and the Fed have left the door open for more quantitative easing (QE). UK 10-year Gilts ended the week at 3.04%, while 10-year US Treasury yields were back down to 2.59%. s The pound weakened against the euro, losing 2% following the more dovish BoE minutes. GBPEUR is now at 1.174. Sterling gained against the dollar, moving back up to 1.578. s Gold reached an all-time high of USD 1,295/oz, up 1.6%. Oil is at USD 76/bbl. Volatility as measured by the VIX index was flat at 22. Overview This week was dominated by both the MPC minutes and the outcome of the FOMC meeting. As expected, both UK and US central banks kept rates on hold, but somewhat surprisingly signaled that, if required, they were on hand to do additional QE. We had expected such a comment from the Fed, but were surprised to see such a dovish tone from the BoE. While the spending review due 20 October is a concern, we give a low probability of further QE actually occurring, in light of higher inflation and solid 2Q10 growth. Ireland's economy also remained in focus, with 2Q10 GDP coming in weaker than expected, dropping 1.2%. With the 3Q10 earnings season not fully underway, next week's attention will continue to focus on macroeconomic indicators. Fed Chairman Ben Bernanke testifies before the Senate Banking Committee on Thursday, and the market will be looking for further signals to determine if QE2 will be launched. On the data front, PMI is due on Friday from the UK, the US and China. We expect to see a further deterioration, continuing the recent trend, with only China likely to see an improvement on last month. This report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 4.
  • UBS Wealth Management Research 27 September 2010 UK economics The week in review... s Dovish tone from the MPC: The latest MPC minutes again showed members voting 8-1 to keep rates unchanged at 0.5% at the Septem- ber meeting, and to keep QE at GBP 200bn. Despite inflation remain- ing above 3%, only Andrew Sentence voted against the proposal. The one surprise from the meeting was the more dovish tone by some of the members stating that "the probability that further action would become necessary to stimulate the economy and keep inflation on track…had increased." With the government's spending review due to be published on 20 October, the BoE will continue to err on the side of caution, in our opinion, until the full impact of the fiscal aus- terity measures is evident, the focus of which will have increased since the public sector net borrowing was at GBP 15.3bn, worse than the expected GBP 12.5bn. s Don't fight the Fed: In the US, the FOMC also left rates unchanged at 0.25%, and did not extend quantitative easing. However, members acknowledged that "the recovery remains modest in the near term." It also stated that it is "prepared to provide additional accommodation if necessary." Some welcome positive news came from the housing sector, with housing starts beating expectations at 598,000 for the month, and existing homes sales up 7.6% m/m. However, labor mar- ket data was disappointing, with initial jobless claims rising to 465,000 from 450,000 the prior month. s Ireland: From prosperity to austerity: The state of Ireland's econ- omy continues to remain in the spotlight. 2Q10 GDP fell 1.2% q/q, significantly below the market's expectations of 0.4% gain, signaling that the economy remains in recession. The true extent of capital re- quired by the banking sector compounds the already significant chal- lenges Ireland faces. Encouragingly, on 20 September, the National Treasury Management Agency managed to sell EUR 500mn in four- year bonds at 4.76%, and a further EUR 1bn in eight-year bonds. We believe the government will have to do more than the EUR 3bn-4bn austerity measures planned for this year's budget to appease market concerns. s Germany disappoints on manufacturing: September PMI data from Germany was much weaker than anticipated, with manufactur- ing coming in at 55.3, down from 58.2 in August, and services record- ing 54.6, down from 57.2. A rolling-over of the data is to be expected at this point in the cycle, and the reading remains well above the cut- off to contraction. The Ifo Business Climate Index, however, improved on the prior month and slightly beat expectations. UK economics - 2
  • UBS Wealth Management Research 27 September 2010 UK economics The week ahead… In the coming week, the market will have to digest a busy economic calen- dar. In the UK, housing and PMI data will dominate the agenda, and we expect to see a deterioration in both indicators. In the US, Bernanke testifies before the Senate Banking Committee on Thursday. In China, September PMI data is due for release on Friday. s UK PMI expected to slow: Second-quarter GDP revision is due on Monday and is expected to confirm that the economy grew 1.2% q/ q and 1.7% y/y, much better than previously anticipated. On Friday, manufacturing PMI data is due, with consensus expecting a slowdown to 53.8 from 54.3 last month. BoE mortgage approvals and nationwide house prices will be released on Wednesday and Thursday, respectively. Both are expected to post a small decline versus the prior reading, and remain well below historical levels. Correspondingly, we expect consumer confidence to remain weak on Thursday. s US: Will QE2 set sail? Bernanke testifies before the Senate Banking Committee on Thursday. Markets will be looking for further explana- tion of the changes to last week's FOMC policy statement, and for further clues if the Fed will do more QE in the coming months. ISM Manufacturing PMI is due on Friday, and as with other regions, is ex- pected to be weaker than August, but still in expansionary territory. The market is looking for 54.5 versus 56.3 last month, and a large miss in either direction could cause a large sell-off or rally depending on which direction. Consumer confidence indicators from both the Uni- versity of Michigan and the Conference Board are expected to show broadly unchanged confidence at 67 and 53, respectively. 2Q10 GDP revision is expected to show that the economy grew 1.6% q/q annu- alized between April and June. s China PMI expected to improve: China is expected to be the only region to increase its PMI indicator this month, rising from 51.7 to 52.8. Efforts to moderate the pace of growth in China appear to have been successful. We still expect a GDP growth of 10% for this year. Key Data and Events Dat e Time Region Event Survey Prior 28/09/2010 09:30 UK GDP (QoQ) 1.2% 1.2% 28/09/2010 09:30 UK GDP (YoY) 1.7% 1.7% 28/09/2010 15:00 US Conf. Board Consumer Confidence 52.5 53.5 29/09/2010 09:30 UK Mortgage Approvals 47.0K 48.7K 30/09/2010 00:01 UK GfK Consumer Confidence Survey -19 -18 30/09/2010 07:00 UK Nat’wide House prices sa (MoM) -0.20% -0.90% 30/09/2010 07:00 UK Nat’wide House prices nsa(YoY) 2.70% 3.90% 30/09/2010 08:55 Germany Unemployment Rate (s.a) 7.60% 7.60% 30/09/2010 10:00 Eurozone Euro-Zone CPI Estimate (YoY) 1.80% 1.60% 30/09/2010 13:30 US GDP QoQ (Annualized) 1.6% 1.6% 30/09/2010 13:30 US Initial Jobless Claims 458K 465K 01/10/2010 02:00 China PMI Manufacturing 52.8 51.7 01/10/2010 09:30 UK PMI Manufacturing 53.8 54.3 01/10/2010 10:00 Eurozone Euro-Zone Unemployment Rate 10.00% 10.00% 01/10/2010 14:55 US U. of Michigan Confidence 67 66.6 01/10/2010 15:00 US ISM Manufacturing 54.5 56.3 Source: Bloomberg UK economics - 3
  • UBS Wealth Management Research 27 September 2010 UK economics Appendix Global Disclaimer Wealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Certain services and products are 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 no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well as any prices indicated are current as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected with an issuer. 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UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate.Version as per January 2010. © UBS 2010.The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. UK economics - 4