Economic data emerging from the US has prompted some conflicting reactions in equity markets.

US equities have fallen for the first time in three days, led by oil and mining stocks, on concern that a slowing economy will reduce demand for energy and metals. The Dow Jones Industrial Average has fallen 0.2% to sit at 14,043.73.

According to a survey of economists by Bloomberg, the US economy expanded at an annual rate of 2.4% in the third quarter. This compares with 3.8% in the previous quarter. In addition, analysts reportedly estimate that third quarter profits of S&P 500 companies increased an average of 0.7% from a year earlier, less than the projected figure of 3.7% forecast at the beginning of September.

Meanwhile, Japanese equities have risen after positive employment data from the US supported a view that the world’s biggest economy – a major export market for Japan – will avoid a recession. A weakening yen against the dollar has also increased the value of exporters’ overseas sales helping the Nikkei 225 index to rise to 17,159.90.

Continuing with currencies, the pound has fallen against the dollar to USD2.0386 on speculation that slowing economic growth will be the catalyst that will prompt the Bank of England to reduce interest rates early in the New Year.

Futures prices indicate that the UK central bank will lower the base rate to 5.5% by March.

It is anticipated that the UK economy will grow less than the 2.5% to 3% that the UK government had projected for next year because of tightening global liquidity. The average forecast of economists polled by the UK Treasury is for growth of 2.2%.

The pound may also weaken against the euro if the Bank of England cuts rates and the European Central Bank continues its policy of keeping interest rates on hold. A strengthening euro and indications that the region’s economy may be slowing are hindering European policy makers from increasing borrowing costs from their six-year high of 4%.

Elsewhere, China’s yuan has weakened against the US dollar after reaching its highest level since the fixed exchange rate was scrapped in July 2005. The yuan stands at 7.5062 to the dollar and has gained 10.3% since the exchange rate fix was removed.

Turning to oil, the price of a barrel of crude for November delivery has fallen to USD78.82 on the back of speculation that US inventories have increased as refiners close refining units for pre-winter maintenance. With the hurricane season almost over, the threat to oil output in the Gulf of Mexico has also eased.

With markets continuing to react to short-term influences, make sure you speak to your Account Executive to find out how Hansard’s range of protected funds can help you structure client portfolios.

 

David Findlay

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