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Inflation & Deflation

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Equity Themes

Political Economics
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Europe
Emerging Markets

Fixed Income

A perfect storm?

Last week the markets experienced a mini-perfect storm of economic data, which went on to trigger an equities rally. The US mid-term elections, along with the much anticipated announcement from the Fed that they would relaunch their quantitative easing plan - ‘QE2’ – were the two weather systems that combined to drive this. In the UK, the FTSE 100 enjoyed the warm glow of the US sun as the index hit a two-year high of 5,862.79 points.

The general hope now is that the fragile recovery in the developed markets will stabilise into something stronger.  Many will be curious to see which other economic policymakers choose to follow suit.

It was not just the equity markets that rallied on the back of the good news; commodities also saw their prices strengthened by the Fed’s decision.  In particular, gold and silver hit new highs, as fears grew that the Fed’s intervention could fan the flames of inflation.  Inflation is the major concern for policymakers thinking about their QE2 policies. Many investors consider precious metals a way to hedge against inflation and it appears that the markets share this view.

Currencies were also on the move last week. Sterling hit its highest level against the US$ since the beginning of the year.  The Bank of England decided against jumping on the Fed’s coat tails as far as a fresh injection of capital was concerned, instead remaining averse to fiscal tightening and keeping interest rates stable at 0.5%.  No change is anticipated until 2011.

Is the latest surge in equity values built on solid foundations and set to continue, or could it just be a tentative step along the road of this fragile economic recovery?  The UK government announced an austere Spending Review package in October, and although some would say this has been priced in to the markets, there remain concerns that the balance is still too delicate.  The bears say there will be lean times ahead. However the bulls will be pointing to last week’s strong UK growth data and surveys indicating that manufacturing and service sector activity is still growing, saying that the UK economy is robust enough to tough it out.

Compass

In the November/December issue of Barclays Wealth’s Compass publication, Aaron Gurwitz, Barclays Wealth’s Chief Investment Officer, considers last week’s events and offers his outlook on the markets.  Login and read Compass to find out more.

Overall, Compass continues to hold the view that the emerging economies will still provide the most attractive risk adjusted-returns. Investors who share this view and are looking for exposure to the emerging markets economies might be interested to find out more about the latest Structured Product available through Barclays Stockbrokers. 

The new Emerging Markets Autocall Accelerator from RBS offers a possible 20% fixed return after two years if the MSCI Emerging Markets Index is then above its starting level or, if not, a return based on any rise in that index after the full term of five years.  Investors considering this product should be aware that their capital is at risk and they could lose some or all of their investment.

Remember that you can Login and use our online Research Centre to keep pace with market movements or have a look at our top 10 equity buy and sell lists to see what stocks your fellow clients are trading.