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US
US markets saw another volatile week. Though somewhat buoyed by strong retail sales, markets fell in the wake of sobering comments by Federal Reserve chairman Ben Bernanke.
Retail sales figures for January managed to surprise on the upside. The market was expecting a drop of 0.3% after a 0.4% drop in December. The numbers came in at a rise of 0.3%. This set the market rallying before Bernanke indicated that the downturn could well persist for longer than initially expected. More than 70% of the US economy is based on consumption.
Warren Buffett helped ease concerns on the market by offering to take on $800 million of municipal bond risk from the top three bond insurers in the US.
On the company news front, Yahoo remained in focus. A report in the Wall Street Journal stated that Yahoo may reject Microsoft’s $31B offer, with Yahoo unlikely to consider an offer below $40B. Reports that Yahoo is talking to News Corp saw its shares trading higher.
Asia Pacific
This week marked the start of the New Year on the Lunar calendar and it kicked off with some market moving pieces of information. In China, money supply in January grew at the fastest pace in 20 months, as the central bank injected cash into the financial system ahead of the New Year’s holidays that began on 6th February.
In Australia, the Reserve Bank issued its bluntest warning yet that more rate hikes are expected in 2008. It has increased its inflation forecasts for the current financial year from 3.25% to 3.75%. The RBA tries to keep inflation within 2-3%. At this rate, it won’t get near its inflation target until 2010. Futures went from pricing in a 30% chance of a hike in March to a 60% chance of a hike after the statement was released.
Japanese financial markets were closed Monday for National Foundation Day. Japanese markets have failed to post any weekly gains this year, though GDP numbers were stronger than expected. Japan’s economy grew at 3.7% in the last quarter. The main reason behind the increase was 2.9% on-quarter growth in business investment.
UK
UBS AG, Europe’s largest bank by assets, disclosed $26.6 billion of additional positions in US mortgages at the end of 2007. They also cut forecasts, which sent its stock tumbling.
Rio Tinto announced a record second-half profit result, due in large part to record iron ore production. This reaffirmed Rio Tinto’s status as a successful stand-alone company.
End note
There’s no light at the end of the tunnel yet. A number of brokerage houses have been revising their global growth forecasts downwards and stock markets have also followed that path this week. Until it becomes clearer how big the US sub-prime problem is, the volatility in financial stocks and the market is set to continue. For contrarian investors, it’s an opportunity to look for bargains.
Happy Investing!
Julia Lee
Head of Fundamental Analysis
HUBB Financial Group
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