Shaw Capital Management Korea: Financial Markets

For most of the past month sentiment in the financial

markets continued to improve.



There was further evidence that the global economic

recovery was still on track, and short-term interest

rates remained very low.



But towards month-end the mood changed after the

decision to downgrade Greek debt to “junk” status, and

to reduce the credit ratings of both Portugal and Spain.

There was a fear that the contagion would spread still

further, and that the bond market pressures resulting

from the massive fiscal deficits around the world would

have serious financial consequences.

There was always the risk that some of the measures

that were introduced to counter the recession might

have adverse consequences, and this is now proving

to be the case.



Shaw Capital Management Korea: Major Equity Markets

After moving ahead for most of the month, most of the

major equity markets are ending the period unchanged

or slightly higher, and there have been sharp falls in

many of the minor markets.



Wall Street has been the exception, and is ending

higher, encouraged by some favourable corporate

results.



But markets in Europe, including the UK, are lower,

and there have been falls in the Chinese market, and

other Asian markets, after the measures by the

authorities to reduce the risk of over-heating in the

Chinese economy.



However views about longer-term prospect are still

fairly positive, and the markets seem to be simply

pausing until some of the uncertainties have been

resolved.



Bond markets; have produced a mixed performance,

with the major markets holdings fairly steady, despite

the worsening background situation, but with the minor

markets, especially in Europe, suffering very sharp

falls, and yield spreads between the stronger and weaker

markets opening up to record levels.



The threat of sovereign debt defaults has increased

and urgent action is needed, especially in Europe, if

they are to be avoided.

However there are also warnings that similar conditions

could develop in the UK and in Japan if there are no

early moves to reduce the level of fiscal deficits.

It is still expected that an aid package will be agreed

to avoid a default on Greek debt; but this may only

provide temporary relief.



Shaw Capital Management Korea: Currencies



Movements amongst the major currencies have been

relatively small over the past month.

However the weakness of the euro has enabled both

the dollar and sterling to improve as investors have

rushed to reduce their exposure to the European

currency.



There is a fear that the debt problems affecting Greece

and other countries in the euro-zone will make it

extremely difficult to restore the credibility of the euro,

and that it might make it necessary for some countries

to leave the single currency system, at least on a

temporary basis.



Shaw Capital Management Korea: Short-Term Interest Rates



There have been no changes in short-term interest

rates in the major financial centres over the month.

The Bank of Canada though has indicated that it is

considering pushing rates higher, and this has

encouraged speculation that other central banks may

be planning similar moves.