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Economic Insights-Global markets: already looking beyond Libya

Published: 07:00 01 Mar 2011 GMT

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Global Markets

It's always gratifying if one's reading of markets turns out correct and we still think the Libyan situation need not lead to a crash and that equity markets have been looking for an excuse to take a breather after charging ahead in the last three months. However, it did seem rather too brief (and shallow) a breather last week to be convincing and the second shoe may drop this week. The market has already moved on from Libya itself and so any outbreak of jitters will need a new cause: trouble in Saudi Arabia is an obvious candidate but analysts and the Press are finding it very difficult to find evidence for an early explosion of unrest there.  There have been angry protests in Oman over the weekend and it produces enough oil to keep minds concentrated. Interest rate increases, more or less everywhere, are becoming more talked about as a dampener on growth with Asian Central Banks already started. Then there will be the latest twists in the EMU soap opera. Ireland has elected to the Dáil parties vying with each other to sound belligerent on the bailout just as Mrs Merkel’s room for manoeuvre is disappearing. Portugal continues to creak and protest innocence at the same time. Alarmed by the very real prospect of failure to agree a Grand Bargain, Messrs Barroso and Van Rompuy are this week trying to broker a deal that can somehow be ratified at the two Summits in March.

Equities
European markets plunged on Monday after Asia had closed and while the US was on holiday and then it was catch-up for them on Tuesday. By Friday the mood had improved and all the markets, including London (glitch and all), pulled back some of the week's losses. Across the various boards the weekly losses were generally confined to the 1.5-3% range but Toronto did best with -0.5% (energy and materials stocks represent about half of total market valuation) and Frankfort worst at -3.3% (too many industrials, for once!).. The FTSE 100 managed to slip by only 1.3% having clawed its way back to 6000, which is quite impressive considering all the talk of interest rate rises and the disappointing Q4 GDP number but the energy and materials components have helped. Asian markets have kicked off the week on a brightish note with Shanghai and Tokyo wrapping up the month well ahead but Bombay is still behind. Europe has also started more perkily with Frankfurt in the van. The FTSE 100 is continuing to fight hard to stay above 6000 while the Cac 40 and Dax have not really looked like dropping below their psychological levels of 4000 and 7000. It would seem too much to expect anything more while oil prices stay in three figures.

Bonds/Interest Rates
The great bond sell-off has taken a breather too and yields actually fell by 10bps or more after many weeks of increasing. The exception was the yield on 2 year bunds, which reacted to all the 'electioneering' of the ECB candidates’ sounding firm. Euro Money market rates firmed a touch too but this all seems premature. It does make sense, however, that bond yields settle for a while.

Gold and: Currencies
Gold made it back above $1400 and all the clever professionals are once again sitting on serious gains that they will want to defend. On the other hand, it will need another major shock to hurry the price on to $1500. The dollar got the usual safe haven gut-reaction earlier in the week but then fell foul of a combination of oil producers flush with petrodollars and others worried about the US budget deficit. Somewhat surprisingly in view of all the argy bargy inside EMU, the euro (and its sidekick sterling) bounced back by 3 cents and has kept going today. This may be month end flows and €1.40 could be just too big a step (and much above $1.63 for sterling). The Swiss franc seems to be the 'new Aussie dollar' (i.e. potentially offering 10-20% gains) for some punters but unlike the Aussie there are not many good reasons to hold francs. The Canadian loonie continues to consolidate below parity and looks more solid than the franc. Overall, FX markets are very dull at the moment as a case can be made against most of the major currencies while the second tier (mainly Asian currencies still look rather exposed to central bank selling.

Coming up
This week sees the Reserve Bank of Australia, Bank of Canada and ECB meeting to set rates and the focus will be on the resulting statements rather than any move this time round. There will also be the usual building of positions in the run-up to the US Non-Farm Payrolls on Friday: over 150K new jobs may have been filled in February, maybe even more, as some sort of catch-up with the ADP private sector numbers (next out on Wednesday)  and the weekly jobless claims (every Thursday) is overdue. Helpfully accompanying the interest rate decisions in Australia and Canada, there is important data due out in both countries.

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