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Prospects daily: Markets extend rally, Consumer confidence down in the U.S. and up in Germany

Global Macroeconomics Team's picture

Important developments today:

1.  Global markets extend rally as investor confidence further improves

2.  Stocks in Asia and Europe added gains on Tuesday

3.  Home prices in the U.S. rise in May compared to a year ago



Global markets extend rally as investor confidence further improves. World markets remain robust on Tuesday as a series of positive economic news and strong corporate earnings helped to improve investors’ risk appetite. Investor confidence was boosted by better-than-expected U.S. home sales and earnings reports that set the tone for a broad-based rally. Banking stocks led the rally, helped by the Basel Committee’s plan to soften its proposals to raise bank capital and liquidity rules. At the same time, the euro gained further against the dollar, while oil price remained strong. But government bond market continued their downward trend.

Stocks in Asia and Europe added gains on Tuesday, hitting their highest levels since early May, as robust earnings and positive economic data helped to ease worries of a double-dip recession. Notably, European banking sector posted the strongest gains following earnings from Switzerland’s UBS AG and Germany’s Deutsche Bank AG that best estimates. Emerging-market stocks advanced for sixth day, with benchmark MSCI-EM index adding 0.6%, adding a five-day gain of 4.3%. U.S. equities also opened higher, erasing this year’s loss for the S&P 500 index.


Meanwhile, the euro continued to rise, hitting an 11-week high against the dollar on Tuesday, as strong bank earnings boosted equities and lifted risk appetite. The single currency hit $1.3036 in Tuesday morning, extending gains that followed Europe’s bank stress tests. Meanwhile, oil prices rose as well, trading near 11-week high in New York, as storm threat fades.


In contrast, government bonds declined as rising risk appetite drove investors to riskier assets. The yield on the U.S. 2-year Treasury note slid 4 basis points (bps) to 0.63% before the government’s sale of $38 billion more of 2-year notes. Investors are poised to demand higher yields for new securities amid signs global economic growth is holding up.


Source:  Thomson/Datastream


Home prices in the U.S. rise in May compared to a year ago. The S&P/Case-Shiller Home prices indices, recorded a rise in May, compared to a year earlier. The 10-city composite and 20-City composite indices rose by 5.4% and 4.6% respectively in May. While these two indices have remained positive on a year-on-year basis, they have remained somewhat flat over the past couple of months. Since the Indices hit a trough in April 2009, they have climbed up by 5 and 6% by October 2009. Since then they have essentially remained flat. Housing demand has been propped up in recent months by the government tax incentive program, which expired in April. However, there may be some residual effect since it affects any purchases that closed through June 30th. With mounting foreclosures augmenting the supply of housing, constrained consumer lending environment and weak jobs market, housing prices are expected to bounce along a lower equilibrium for the foreseeable future, in spite of record low mortgage rates.


Consumer confidence falls in the U.S. The Conference Board’s index of consumer confidence in the U.S. fell in July to 50.4 from 54.3 in June. This is the lowest level in the past five months. With almost 8.5 million jobs lost in 2008 and 2009, the slow pace of job creation continues to weigh on consumer confidence. In May, for instance, consumer borrowing dropped by $9.1bn. With consumer spending accounting for some 70% of the U.S. economy, a recovery of consumer confidence and spending is needed to spur economic activity.


Consumer confidence rises in Germany. In contrast with the decline in consumer confidence in the U.S., consumer confidence in Germany, Europe’s largest economy, soared to the highest level since November 2009 (3.9 points), according to Germany’s GfK’s forward-looking consumer sentiment index. “The good performance of the German team at the world cup, as well as the sunny weather have put people in a good mood”, GfK said. “Combined with unexpectedly positive news from the labor market, consumers not only expect the recovery of the German economy to continue, they expect it to gain further momentum”.


Among emerging markets:

In South Asia, India’s Central Bank increased its repo rate from 5.5% to 5.75% and its reserve repo rate from 4% to 4.5% as released in the bank’s first quarter review of monetary policy 2010-2011 press release. The main cause for the rate hike is inflation due to the fast pace of its post-crisis recovery.

India also increased its projection for real GDP growth from 8.0% to 8.5% for the period 2010-11 based on favorable industrial production expectations.

In Central and Eastern Europe and the CIS, Turkey’s Central Bank committee meeting resulted in the reduction of the country’s year-end inflation forecast to 7.5% from 8.4%.

In Sub-Saharan Africa, South Africa’s unemployment remains high at 25.3% in Q2, where only 12.7 million people were reported employed by Statistics South Africa. The industries with the highest job losses were manufacturing, transport and agriculture.

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