Financial Markets: Sentiment in the financial markets improved considerably over the past month. There was less concern about the possibility of a move into a “double-dip” recession; and fears about sovereign debt defaults also eased.
The improvement in conditions intensified the debate about the relative merits of austerity measures and further stimulus in the current situation, and revealed a significant difference in the approach of the Fed and the European Central Bank.
Equity Markets: Most of the equity markets recovered strongly from the falls that had occurred at the end of June, helped by some encouraging corporate results in the US, and the relaxation of tension about debt defaults in Europe.
Wall Street led the rally, and markets in Europe were able to follow the upward trend, with the strength of the German economy providing significant support. The best performance amongst the major markets occurred in the UK, as investors continued to react favourably to the proposed measures announced by the new UK government to reduce the huge fiscal deficit. The worst performance amongst the majors occurred in the Japanese market as economic and financial conditions in Japan continued to deteriorate. Government bond markets received some support during the past month from the easing of tensions in the sovereign debt markets in Europe. The recent “shock and awe” support operation agreed by member of the euro-zone, and the decision by the European Central Bank to buy the bonds of some of the weaker countries, has provided some reassurance for investors; but considerable uncertainties remain about prospects for the bond market.
The Fed is suggesting that further stimulatory measures might be necessary, whilst at the same time the ECB is warning that reductions in spending programmes and increases in taxes were now necessary, in Europe, but also elsewhere in the industrialised world. Movements in bond markets have therefore been fairly limited over the month.
Currency Markets: The feature of the currency markets has been the swing in sentiment. This has allowed the euro to rally strongly, helped also by the improving sentiment about sovereign debt defaults; and sterling has also moved higher after the announcement of measures to reduce the fiscal deficit in the UK and the more favourable economic news on the UK economy. The best performance; has been achieved by the yen, as its “safe haven” status has been further enhanced by the more serious problems elsewhere in the currency markets.
Short-Term Interest Rates: There have been no changes in short-term interest rates in the major financial markets over the past month.
Commodity markets have benefited from the general improvement in financial markets over the past month. Significant gains have occurred in base metal prices, and in the prices of wheat and coffee amongst the soft commodities.
Precious metal prices have fallen back, and oil prices are basically unchanged over the month after rallying strongly from recent lows.
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