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Market Bulletin
MONDAY 9 MAY 2011
Tel: 01437 766396
Website: www.burchwealthmanagement.co.uk
This weekly Briefing Note aims to pick out some of the key
financial and economic issues touched on in the press over
recent days and from time to time includes the views of some
of our independent fund managers.
Silver loses its shine
Taking a rare position on the front pages, silver proved the
catalyst for the commodities rout that dominated the week.
What started on Monday as a quiet reversal of silver‟s recent
rally turned into a rush for the door by investors on
Thursday, when commodities markets suffered one of their
largest ever one-day falls, tumbling 4.9% as a group. Silver
fell more than 30% over the week, dragging with it other
commodities such as oil and copper, whose prices are critical
to the global economy. Brent crude oil, the global
benchmark, was down more than $15 a barrel in two days –
the biggest two-day drop on record in absolute terms.
The slump was put down to a number of factors that raised
fears of the global recovery being choked off: weaker than
expected US economic data, worries about the impact of high
oil prices on consumer sentiment, tightening monetary policy
in emerging markets – both China and India raised interest
rates in the week – and a 1.6% rebound in the dollar. The
Sunday Telegraph suggested that the indiscriminate nature
of the correction pointed to a „generalised blowing away of
the froth‟ and that the structural case for commodities
remains strong. Reinforcing again the importance of the
developing economies to global growth, China‟s share of
world energy consumption is expected to rise from 10% a
decade ago to 25% in ten years‟ time. It was certainly the
view of Helen Henton, head of energy and environment at
Standard Chartered, that the fall in oil prices was a correction
rather than anything more fundamental. “The news has very
much been driven by macro sentiment. It started with the
death of Bin Laden, and then the European Central Bank‟s
indication that rates will not rise any time soon.”
The end result was that commodity prices had their worst
week for nearly two and a half years despite a rebound on
Friday as traders speculated that losses may have been
overdone. Global equity markets were similarly afflicted,
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with the „recovery-off, risk-off‟ trade culminating in the biggest
weekly losses for two
months. However, a surprisingly upbeat US jobs report at the
end of the week pulled investor sentiment from
the doldrums. The non-farm payroll figures from the Labor
Department showed that 244,000 jobs had been added last
month, ahead of the 185,000 expected by economists. As The
Daily Telegraph reported, job creation has been the Achilles‟
heel of America‟s recovery from its worst recession since the
Second World War – only 1.5m of the 8.5m jobs that were lost
during the downturn have been replaced and the figures were
not enough to prevent the unemployment rate climbing to 9%
from 8.8% in March. However, markets were largely prepared
to take encouragement from the report and the news provoked
a rebound on Friday for equities and the dollar and halted a slide
in Treasury yields. The S&P 500 Index ended the week down
0.75%, whilst the FTSE 100 Index posted a loss of 1.53% for
the week.
Commodities bubble or breather?
The sell-off in commodities markets coincided with
announcements from Glencore, the world‟s largest diversified
commodities trader, of its planned flotation later this month.
The $10bn (£6bn) initial public offering will be the biggest ever
seen in London and will catapult the company to the upper
reaches of the FTSE 100 Index. Index tracker funds will have to
buy into Glencore automatically, leaving millions of investors
more exposed to commodities than they may realise. As The
Sunday Times revealed, mining, oil and gas companies
already account for 34% of the FTSE 100 Index and the week‟s
events in volatile commodities markets highlighted the potential
dangers of over-exposure to the sector. Whilst comparisons are
inevitably being drawn with the dotcom bubble in 1999, the
article opined that the technology stocks crash was caused by
the overvaluation of the sector on unrealistic expectations of
earnings growth – many dotcom stocks had price/earnings
ratios of more than 50 at the turn of the century, whereas many
mining companies are currently trading at multiples of 7 to 8
times earnings, although admittedly with earnings at historic
highs.
Greek woes worsen
The danger of the crevices in the eurozone opening into
yawning chasms was highlighted amid rumours on Friday that
Greece will be forced to default on its debts – or even
abandon the euro. Speaking over the weekend, the Greek
prime minister, George Papandreou, reacted angrily to
reports that Greece was preparing to quit the eurozone, but
European Union (EU) finance ministers acknowledged that
the country needed bailout help, likely to result in a
restructuring of the €110bn (£95bn) rescue package it was
granted in May last year, when it was the first member of the
single currency block to fall. The Greek government is
struggling to reduce a €327bn sovereign debt pile, which
equates to 160% of national output, and is facing a general
strike this week as the popular revolt against austerity
measures intensifies. The reports sent the euro down 1%
against the dollar and the cost of insuring Greek debt against
default to a record high.
As The Sunday Times reported, Greece‟s future in the
eurozone will be determined by a crucial International
Monetary Fund (IMF) report due next month. “It‟s quite
clear that Greece‟s debt position is unsustainable,” said one
senior European financier. “What‟s less clear is whether the
IMF is willing to state that at this point in time, while Europe
remains very fragile. After all, one of the IMF‟s roles is to aid
financial stability.”
Last week also saw Portugal become the third eurozone
country to secure aid, following Greece and Ireland, as it
accepted a €78bn bailout from the EU and IMF, about a
quarter of it to prop up its ailing banks. The terms of the
rescue deal will require Portugal to cut its budget deficit from
9.1% of gross domestic product last year to 3% in 2013. That
will cause the economy to shrink by 2% in both this year and
next, according to the country‟s finance minister, Fernando
Teixeira dos Santos, under the impact of spending cuts and
tax rises.
Whilst less worrying at the moment, the health of Spain and
its banks will inevitably come under scrutiny. Writing in The
Sunday Times, David Smith opined that if Spain had to be
helped out, not only would that use up most of what is left in
the rescue fund, but attention would then turn to the next
most vulnerable, perhaps Italy or Belgium. In the long term,
Smith went on to suggest, Europe will need a new currency
arrangement, as the assumption that economic convergence,
and importantly convergence of costs, would follow euro
membership has proved false.
Tighten your belts
At their meeting on Thursday, the Bank of England‟s
Monetary Policy Committee (MPC) voted to keep interest
rates at 0.5% – the 27th consecutive month that the UK‟s base
rate has been held at a historic low. Only a few weeks ago,
some analysts had predicted rates would rise in May, but
market expectations are now that it will be December at the
earliest before any move is likely and it could even be delayed
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The St. James‟s Place Partnership and the title „Partner‟ are the marketing terms used to describe St. James‟s Place representatives.
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Registered in England Number 262806
until 2012. The Bank fears that raising rates too soon could halt
growth and make it even more difficult for the government to
cut the budget deficit. The Sunday Telegraph reported
expectations that the Bank of England (BoE) will revise down its
economic growth forecast when it publishes its quarterly
Inflation Report on Wednesday – the second quarter running
that it has been obliged to do so. Whilst at odds with those who
see the record oil price fall as a temporary blip and expect
prices to be back near all-time highs within a year, Mervyn
King, governor of the BoE, is expected to say that the rise in
prices caused by higher energy prices is a short-term
phenomenon, supporting his view on inflation and hence the
MPC‟s strategy of keeping rates on hold. However, the
downgrade is likely to be accompanied by a slight rise in the
BoE‟s inflation forecast. As The Sunday Times observed, the
combined impact of higher prices and the government‟s
austerity measures has tightened the worse peacetime squeeze
on disposable incomes since the 1920s.
The Financial Times picked up this theme and highlighted
again the plight of savers who, tired of waiting for interest rates
to rise and seeing the effect of inflation eroding the value of
their savings, are turning to more adventurous assets in the
search for income. According to figures from Defaqto, the
average interest rate for instant access accounts is 0.96%. This
rate has risen by just 0.07% in the past two years. The reality is
that increased income requires additional risk to be taken and
the paper highlighted the importance of diversification across
income-producing assets. The average yields available in sectors
such as UK equity income, and corporate and strategic bonds
are over 4%, which is unmatched by any cash account except
for five-year fixed rate bonds. Bill O‟Neill of Merrill Lynch
echoed the view that high-quality, reliable, dividend-paying
companies “are set to move into the limelight” and highlighted
in particular stocks in the energy, tobacco and telecoms sectors.
Kiss of life
As the tasteful bunting was packed away following the royal
wedding, The Daily Telegraph questioned whether investors
in home-grown companies could benefit from global interest in
this latest wave of „Cool Britannia‟. The consumer goods sector
appears an example of the so-called two-speed economy, with
sales in the luxury market continuing to surge ahead while the
mainstream market remains depressed. The royal wedding
certainly did no harm to the profile of these luxury brands
overseas. The article reminded investors that British companies
rely heavily on overseas demand to drive profits – more than
half of the earnings generated by FTSE-listed companies come
from overseas. Whilst emerging markets may provide the long-
term growth story, ‟there are many great British companies
making things that the parts of the world with stronger growth
need‟, and the UK market, particularly larger blue chips,
remains attractive for those seeking less volatile investments and
wanting a secure dividend income.