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US
US markets failed to maintain last weeks 4 month highs throughout the week, as soaring oil prices added to inflation concerns, and further weakness in the financial sector off-set gains elsewhere.
Ongoing supply concerns, improved demand expectations and continued weakness in the greenback all acted to send the price of oil higher for five consecutive sessions. By Thursday, the price of oil had cracked the US$124 / barrel mark, lifting all the way from US$110 / barrel seen the previous week.
The move had two important effects. Firstly, soaring energy costs rekindled inflation concerns which has lessened the chances that the Federal Reserve will act to further cut interest rates. Secondly, higher fuel costs had investors worried over the spending potential of US consumers. Considering at least two-thirds of US economic growth is driven by consumer spending, this was seen as a real impediment to the growth potential.
Investors did however receive some encouraging news on the economic front. Jobless claims sank by more than expected, with the four week average coming out at 367,000 claims – a level well below what is typically seen during a recession.
Many of the Retailers also delivered encouraging results, including Wal-Mart which saw a more than 3% rise in retail sales in April. In fact, of all the retailers that released sales figures, 68% came out above the forecast amount.
As mentioned, financial stocks were dragged lower by a couple of poor results. Fannie Mae dominated headlines earlier in the week after reporting a $2 billion quarterly loss. The result was impacted by a near five fold increase in credit and derivative losses.
AIG also reported a wider than expected loss, and said it was seeking to raise over $12 billion in capital. Sentiment was further hurt by talk that regulatory standards could be tightened for US investment banks.
Asia Pacific
The Australian market saw a relatively significant turn around this week. Weakness in the financial sector saw the market edge lower for the first half of the week following a weaker than expected result from St George Bank.
While ongoing strength in metals and oil prices helped support the resource sector, gains here were insufficient to off set losses from the major banks. However, the last two days of the trading week saw the market recover from these losses as buyers returned to the major lenders – particularly on Friday thanks to a better than expected half yearly result from NAB. The bank also offered some encouraging outlook and announced a much bigger than expected dividend which really acted to improve sentiment for the sector in general.
Home owners were relieved to see that the Reserve Bank left interest rates steady at 7.25% and said that if demand was seen to moderate, further rate hikes could be avoided.
Later on in the week, the central banks quarterly statement did however reveal higher inflation expectations and lower growth forecasts – which highlighted the difficult situation facing the RBA. Keep rates high and further impact growth, or soften monetary policy and further stimulate inflation? Needless to say, CPI and growth figures will be monitored very closely in the coming months.
UK
Europeans also saw official rates held steady, with the ECB leaving rates at 4%. The Bank of England also left rates steady, also due to concerns over rising inflation. Economists are predicting a cut next month, as homeowners and consumers continue to feel the pinch from the ongoing credit crisis.
The markets did find support in a series of upbeat corporate results, but financials did act to limit gains as investors in Europe also worried over the impact of a slowing US economy and the ongoing housing crisis.
End note
While we continue to see signs that the global economic picture is slowly improving, there is still a long way to go before the major world economies return to a more firm footing. The major economic challenge facing central banks is to somehow stimulate growth, without adding further inflationary pressure. And that is no easy task, especially considering the significant price pressures coming from fuel and food.
As for equity markets, it seems that the focus will remain on financials for the time being, as traders await for signs of improvement. It seems Australian investors got just that this week, with several of the major banks making encouraging comments. As always though, the proof will be in the numbers. Watch this space!
Good luck!
Andrew Page
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