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Broadgate: Weekly Briefing

2 December 2011

Global – Global stocks rallied and the dollar slid on Wednesday after the world’s leading central banks moved to ensure that financial markets rocked by the euro zone’s escalating debt crisis have sufficient funding.

Some of the world’s biggest central banks have announced a programme of co-ordinated action designed to support the global financial system.

The U.S. Federal Reserve, the European Central Bank (ECB), the Bank of England and the central banks of Canada, Japan and Switzerland are all involved.

They will make it cheaper for banks to buy U.S. dollars, which they hope will ultimately help businesses and households access finance more easily.

As well as cheaper U.S. dollars, the central banks will also provide easier access for banks to other major currencies as and when they need it, beginning 5 December.

Europe – Meanwhile, European finance ministers failed to deliver the broad outlines of a plan to shore up the euro on Wednesday, delaying action until their bosses meet in less than a week and a half.

Though the meetings since Tuesday have not yielded anything firm about what’s likely to come out of the E.U. leaders meeting on 9 December, there’s growing speculation that Europe is readying a plan to make the 17 countries that use the euro more unified and ruled by stricter budgetary rules. That, analysts said, could allow the ECB to take a more central role in the crisis, seen as crucial to stabilize the debt crisis that’s seen three countries already bailed out.

“The new mantra seems to be ‘Build it, and they will lend,’ in the sense if they promise the ECB that they will gradually move to a fiscal union, the central bank will buy sufficient amounts of government bonds to stabilise the market,” said Gary Jenkins, chief economist at Evolution Securities in London.

U.S. – Fitch Ratings has given the U.S. a negative outlook after the failure of the Congressional Joint Select Committee to arrive at a solution to the country’s USD15 trillion deficit issue.

Although the outlook has been revised down from stable to negative, the U.S. has held on to its AAA rating based on strong economic and credit fundamentals.

“Fitch’s current assessment is that the U.S. economic recovery will regain momentum in the latter half of next year and into 2013, and that a period of above trend growth will be subsequently followed by growth of at least 2.25percent over the long term,” said Fitch in a statement.

A negative outlook is a warning that the U.S. stands a 50percent chance of a downgrade over the next two years, says Fitch.

In a statement, Fitch described a loss of confidence in the U.S.’ ability to implement “fiscal measures necessary to place U.S. public finances on a sustainable path” after the committee failed to agree on USD1.2 trillion in cuts last week.

U.S. – U.S. private sector job growth accelerated in November as employers created the most jobs in nearly a year, prompting economists to raise their forecasts for Friday’s more comprehensive U.S. labour report.

The ADP National Employment Report on Wednesday showed private employers added 206,000 jobs this month, surpassing economists’ expectations for a gain of 130,000 jobs. It was the biggest gain since December 2010.

“The ADP news is very good news. The private sector is adding jobs,” said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.

China – China has said it will cut the limit on the amount of cash the country’s banks have to hold in reserve, a move designed to encourage more lending.

In an unexpected move, China’s central bank said it would reduce the reserve limit from its record high of 21.5percent to 21percent on 5 December. The bank had been increasing the rate to reduce lending by banks in order to dampen demand and tackle rising prices.

The cut therefore marks an important change in policy, analysts said.

“It’s a surprising move, the market was not expecting the central bank to cut the reserve rate so fast,” said Shi Chenyu at the Industrial and Commercial Bank of China. “The move sends a clear message that the central bank is ready to relax its policy stance.”

Emerging Asia – Emerging Asia’s economic growth is expected to have eased over 2011 but still remains well above the rates seen in the west, the Organisation for Economic Cooperation and Development (OECD) claims.

The latest OECD Southeast Asian Economic Outlook says the six states that make up the Association of Southeast Asian Nations (ASEAN), Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam saw an average growth rate of 5percent this year, down from the 7.6percent recorded in 2010.

ASEAN economic growth is expected to rise to 5.9percent by 2016, as emerging Asia shrugs off the effects of global uncertainties and natural disasters to encourage growth through domestic demand and infrastructure investment.

Mario Pezzini, the director of the OECD Development Centre, says: “A new type of economic growth is needed in southeast Asia. Every cloud has a silver lining. The global uncertainty is an opportunity to re-invent growth.”

India – India’s business leaders sounded the alarm on Wednesday about their fast-weakening economy after its growth rate dipped below 7percent and the rupee suffered the worst monthly fall for 14 years.

India’s economy grew at the slowest rate for more than two years in the second quarter, confirming the shift of Asia’s third largest economy to lower growth rates of about 7percent after a failed push to reach double-digit growth.

Chandrajit Banerjee, director-general of the Confederation of Indian Industry, said corporate India was “extremely concerned” about the country’s economic growth trajectory.

He warned that a pullback in investments and high borrowing costs threatened to curb India’s fast-growing economy further in coming months. “There are very few developments in the country, which can be termed as confidence boosters,” Mr Banerjee said.

Commodities – Goldman Sachs Group Inc. (GS) forecast that commodities may rally 15percent in the next 12 months, sticking with an “overweight” recommendation on raw materials and predicting oil may surge to highest level since 2008.

Commodities may gain as the global economy avoids recession next year and in 2013, analysts led by London-based Jeffrey Currie said in a report.

“The European debt crisis remains a significant downside risk in 2012,” Goldman said. “However, as long as the risks manifest themselves in economic weakness and not in financial stress that would likely precipitate a global recession, it is unlikely to severely impact commodity markets.”

Spotlight on: investor sentiment

Many mass affluent investors in the U.S. have not seen their financial situations improve in the past year, and list not saving more toward their retirement plans and children’s college funds as top regrets, according to a new report released by Bank of America.

More than half (52percent) of the mass affluent investors with between USD50,000 and USD250,000 in investable assets surveyed said their financial situation is the same as it was a year ago. At the same time, 23percent said they have seen an improvement in their financial conditions in the past year, but only because they’ve changed their behaviours.

“They don’t consider themselves wealthy or ahead of the game,” Dean Athanasia, a Bank of America small business segment executive, said of the mass affluent crowd. “Twenty-three percent say it’s better, only because they’ve reduced their expenses and costs overall.”

The report comes from Bank of America’s Merrill Edge business, which includes both advisory centres providing advice and brokerage services and an online investing platform.

The report’s results come from a phone survey of 1,004 individuals with USD50,000 to USD249,999 in investable assets from July 20 to Aug. 4 of this year. All of the respondents were based in the U.S., while 300 were over-sampled in Los Angeles, San Francisco and Washington, D.C.

Of the respondents surveyed, 35percent said they are not wealthy, 25percent said they will never be wealthy, 14percent said they are wealthy and another 14percent said they will be wealthy one day. Thirty-two percent of the respondents cited “not earning enough” as a reason they will not be wealthy, while 23percent pointed to the impact the recession has had on their finances.

The Merrill Edge report, which is conducted semi-annually, also showed that top concerns for the mass affluent investors include planning for retirement and their children’s education. That comes as more mass affluent investors see themselves retiring later than they planned, now up to 47% from 42% in January.

Passing on financially responsible behaviour to the survey respondents’ children ranked as their top priority, while choosing the right spouse came in second.

“It has become important to these folks that their kids don’t repeat the mistakes that they perceive they’ve made,” John Thiel, head of U.S. wealth management for Merrill Lynch, said.

When it comes to retirement, regrets include not contributing more to retirement plans (17percent), making high-risk investments (15percent) and carrying credit card debt (13percent). Almost half (49percent) of the respondents said they planned to increase their retirement savings in the next six months.

With college education savings, 41percent said that daily expenses have interfered with saving for their children’s education, while 25% said they underestimated how long it would take to save for that goal. Thirty-two percent said they plan to focus on college savings in the next six months.

When it comes to making those plans, mass affluent investors said they turn to a financial advisor most (63%); followed by friends and family (55percent); news outlets (44percent); banks (41percent) and brokerages (37percent).

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