MARKET COMMENT - February 2007
- Volatile week
There were mixed results for equity markets last week, in what was an extremely volatile trading period following an emergency rate cut
in the US, which initially boosted sentiment.
- Emergency rate cut
On Tuesday, the US Federal Reserve cut interest rates by 0.75% to 3.5%, a week prior to its scheduled meeting. This move was designed
to calm markets following heavy losses and the unexpected downgrading of one of the largest bond insurers Ambac, by rating agency
Fitch. Investors are expecting a further rate cut when the Fed holds its meeting this week.
- SociÉtÉ GÉnÉrale
Early in the week, the French investment bank, SocGen, discovered that unauthorised trading had taken place within the firm on the
European futures markets. This trading was linked back to a rogue trader who had apparently built up a position of ?50bn. SocGen
subsequently sold-off these holdings, resulting in a loss of almost ?5bn.
- Commodities
The price of gold rallied after the US rate cut, rising over 3% on the week and reaching an all-time high. The oil price rose slightly,
finishing the week at just under $91 per-barrel.
| Table 1 below shows the movements in the main markets 1 Week Return. |
| |
|
Local
Currency |
Euro |
| US |
S&P
500 |
0.4 |
0.1 |
| US |
NASDAQ |
-0.6 |
-0.9 |
| Europe |
FT/S&P
Europe Ex. UK |
-2.7 |
-2.7 |
| Ireland |
ISEQ |
3.5 |
3.5 |
| UK |
FTSE
100 |
0.6 |
0.3 |
| Japan |
Topix |
0.2 |
0.1 |
| Hong
Kong |
Hang
Seng |
-0.3 |
-0.6 |
| Australia |
S&P/ASX
200 |
2.0 |
1.7 |
| Bonds |
Merrill
Lynch € over 5 yrs |
-0.2 |
-0.2 |
| Table 2 below shows the movements in the main markets year to date. |
| |
|
Local Currency |
Euro |
| US |
S&P 500 |
-9.4 |
-9.9 |
| US |
NASDAQ |
-12.3 |
12.8 |
| Europe |
FT/S&P Europe Ex. UK |
-12.3 |
-12.3 |
| Ireland |
ISEQ |
-2.5 |
-2.5 |
| UK |
FTSE 100 |
-9.1 |
-9.9 |
| Japan |
Topix |
-8.9 |
-5.2 |
| Hong Kong |
Hang Seng |
-9.7 |
-10.3 |
| Australia |
S&P/ASX 200 |
-7.6 |
-7.9 |
| Bonds |
Merrill Lynch € over 5 yrs |
2.3 |
2.3 |
Global Equities
US equity markets experienced a turbulent week. The emergency rate-cut and the economic stimulus package, however,
helped markets pare some of their losses and finish the week relatively unchanged.
- Apple ? The tech giant reported a 57% rise in quarterly profit. Its share price fell, however, after it lowered its outlook for
the first quarter of 2008. The stock finished the week over 19% lower.
- Ambac ? The specialist bond-insurer had its rating cut from AAA to AA by credit rating agency Fitch, causing its shareprice
to fall heavily. It also wrote-down $5bn linked to credit derivates exposures. Talk that private investor, Wilbur Ross,
may be interesting buying the company, helped the share price rally and recover some of its losses.
- Financials ? Following the rate cut in the US, financial stocks rallied and the sector was the standout performer over the
week. JPMorgan, Citi and Bear Stearns all rose sharply.
European markets had one of their most volatile weeks over the past few years due to concerns over the US economy.
- Société Générale ? After the uncovering of fraud within the firm, which over shadowed its announcement of losses
related to the credit crisis, SocGen?s share price fell over 13% on the week.
- Volkswagen ? After posting double-digit growth in operating profit for 2007, the German car maker?s share price
rose by over 5% after it said it expected further progress in 2008.
The Irish market performed strongly after banking stocks rallied from their lows over the week.
- Banking stocks ? Irish banking stocks rose strongly following the rate-cut in the US. Bank of Ireland, Anglo Irish Bank
and AlB all rose around 8%.
Asian markets finished the week marginally lower despite experiencing one of their biggest ever one-day falls during the
week.
- Hong Kong ? On Tuesday, the Hang Seng index fell almost 9%, however, it recovered most of its losses in the following days as expectations increased that the US economy may avoid a recession.
- Eurozone bonds gained early last week as investors turned away from turbulent equity markets, but these gains were erased after the
President of the ECB, Jean-Claude Trichet, warned about the dangers of high inflation. The Merrill Lynch >5 year government bond index
was down 0.2% on the week.
- The central case for 2008 is for further moderation in global economic growth. While a 'soft landing' in the US remains the
consensus outcome of most economists, markets continue to focus on recession risks. Asian (ex-Japan) economies are likely to
perform reasonably well, although a slower global economy will impact.
- Slowing growth, housing market pressures and deteriorating financial conditions argue for further interest rate cuts in the US.
Despite last weeks dramatic 0.75% interest rate cut, investors expect a further reduction this week and more cuts to come after
that. Despite continued hawkish comments from the ECB, current eurozone rates are likely to be at their peak, although they may
not be cut until towards the end of the year.
- High food and energy prices continue to be a worry to policy-makers and provide a somewhat tricky environment for bond
investors, although bonds will continue to get safe-haven support during equity market falls.
- Lower interest rates offer valuation support to global equities, but this factor has been secondary to more pressing concerns about
the health of the banking sector and the overall earnings' outlook. Further volatility is highly likely.
- The US dollar remains the primary focus of currency markets. After last year's weakness, the US dollar now has valuation support
versus European currencies. The slow pace of Chinese currency appreciation is likely to persist.
- At the moment, the funds are neutral in bonds and slightly underweight in equities versus the manager average. Sector positions
are reasonably balanced although financials remain underweight. Geographically the funds have an underweight position in
Ireland and Japan, overweight in the US and more of a neutral stance in the Pacific Basin, UK and Europe.
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