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Broadgate: Weekly Briefing 24/9

24 September 2013

Global – Global stocks jumped to a five-year high on Thursday, while bonds and metals rallied after the Federal Reserve unexpectedly refrained from reducing U.S. monetary stimulus. The Malaysian ringgit strengthened the most since 1998.

The MSCI All Country World Index climbed 1.2%, set for the highest close since May 2008, as Asia’s benchmark index gained 2.4% and the Stoxx Europe 600 rose 1%. Standard & Poor’s 500 Index futures added 0.2%.

Many investors had speculated that the Federal Reserve would begin reducing its $85bn bond-buying plan this month. But in a statement released after its two-day policy meeting, the Fed said there was no fixed timetable for it to begin scaling back, or “tapering”, its stimulus.

The central bank said it was taking a more cautious stance because of an “elevated” unemployment rate and concerns about the U.S. economic recovery. “The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” it said.

The Fed also cut its forecast for growth this year to between 2.0% and 2.3%. That compares to a June estimate of between 2.3% and 2.6%.

Japan – Japan’s exports rose the most since 2010 in August, boosting Prime Minister Shinzo Abe’s growth drive even as rising energy costs extended the streak of trade deficits to the longest since 1980.

Exports rose 14.7% from a year earlier, the sixth straight advance, a Finance Ministry report showed in Tokyo.

A surge in exports to the U.S., along with a rebound in shipments to China in the wake of bilateral tensions last year, are offering momentum to Japan as it prepares for the first sales-tax increase since 1997. Rising competitiveness from the yen’s 20% drop against the dollar in the past year also has helped manufacturers including Panasonic Corp. as they cope with higher energy costs with the nation’s nuclear industry shuttered.

“We are finally seeing a clear recovery in exports, led by a weak yen and a moderate global recovery,” said Takeshi Minami, chief economist at the Norinchukin Research Institute in Tokyo.

India – India has seen its growth forecast dramatically reduced to 5.3 % for the current fiscal year by the prime minister’s economic advisory panel, says Reuters.

GDP has been brought down to 5.3% from an original estimate of 6.4%. The lower estimate is closer to figures from India’s central bank and economists who have already predicted 5% GDP growth for the fiscal year.

The panel’s revised figure remains higher than GDP growth than the 5% witnessed over the fiscal year 2012/13.

India’s economy has battled decade-low growth along with a record current account deficit and a steep fiscal shortfall already this year, according to Reuters.

The prime minister’s economic advisory council has also warned that keeping India’s fiscal deficit within the budgeted target of 4.8% of GDP could prove difficult, while finance minister Palaniappan Chidambaram has stated that the target will not be exceeded.

Europe – The European Central Bank (ECB) is concerned that investors could be spooked by next year’s bank balance-sheet reviews and stress tests unless their results are carefully timed.

As the ECB prepares to take over supervision of all euro-area lenders in 2014, it will begin a three-phased analysis of the institutions coming under its umbrella. As laid out by Executive Board member Yves Mersch last month, the bank will start with a risk review before analyzing banks’ balance sheets and conducting stress tests in collaboration with the London-based European Banking Authority.

Now central bankers are wrestling with how to move through the exercise without releasing conflicting numbers at different times, particularly for banks that aren’t in good health.

Commodities – Gold fluctuated between gains and losses after jumping the most in 15 months following the Federal Reserves’ unexpected decision to reduce the pace of monthly bond purchases.

Gold for immediate delivery rose and fell as much as 0.4% before trading at $1,364.42 an ounce, taking this week’s gain to 2.8%. Prices added 4.1% on Wednesday, the most since June 1, 2012, rebounding after a drop below $1,300 for the first time in six weeks.

Spotlight on: Fund Manager confidence highest in almost 4 years

A net 72% of global investors expect the world economy to pick up over the next 12 months, according to August’s Bank of America Merrill Lynch Fund Manager Survey.

This number shows a “surge” from the 52% of respondents in July and is the highest amount in nearly four years.

More investors are bullish on the eurozone recovery than last month too, with 88% of European fund managers anticipating strengthening in the region by the end of 2013.

BofA Merrill Lynch European investment strategist John Bilton says: “The current earnings season shows global recovery reflected in European companies’ performance. With the eurozone the most undervalued major market by far, optimism on the region’s equities should be sustained.”

Specifically, sentiment towards China has improved within this time, with 32% of investors in August expecting China economic growth to be weaker, compared to the 65% from the previous month.

Sentiment to emerging markets continued to suffer in August, with EM equity exposure falling to its lowest level since November 2001 at 19% underweight.

BofA Merrill Lynch Global Research chief investment strategist Michael Hartnett says: “While global growth expectations have risen very rapidly, the good news is that cash levels remain high. Out-of-favour emerging markets offer some enticing opportunities to deploy these balances.”

In terms of portfolio weightings, the percentage of investors overweight equities crept up to a net 56% in August while those underweight to bonds increased to a net 57%.

In terms of regional weighting, there was a decrease in exposure to Japan equities from 27% in July to 19% in August.

August also saw the third largest overweighting to US equities in ten years, coinciding with 72% of investors favouring the US dollar over a 12-month horizon.

And stocks in the eurozone saw their highest allocation since January 2008, with 17% of asset allocators saying they are overweight to the region, a further 20% said they would overweight the market on a 12-month view.

The month also saw the highest exposure to UK stocks since December 2002, with this being the first overweight reading since February 2003.


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