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Economic Review and Outlook – October 2013

A combination of positive growth data from Asia and a surprise US Fed decision to maintain the pace of its bond buying programme – commonly known as Quantitative Easing or QE – initially drove global equity markets higher.

Robert Harley Robert Harley
07 October 2013

US budget gridlock changes investor sentiment

The rally was led by emerging market and Japanese equities, and US equities touched a new all-time high. Bond markets also rebounded. However the latter half of the month was marked by a change in investor sentiment as the focus shifted to the possibility of gridlock over US budget negotiations. Equity markets subsequently gave up some of their earlier gains, with western sovereign bonds yields continuing to fall given the more cautious market tone.

The US Fed’s decision to defer any change to its QE programme went against market expectations. One possible reason for this course of action may have been concern that any budget impasse could hurt the US economy and financial markets. The budget dispute is seen as a dress rehearsal for the more important debt ceiling negotiations. Failure to reach an agreement on this issue by mid-October could leave the US in technical default.

Japanese economy growing faster than expected

In Japan the recent reflationary policies continued to boost household expenditure and drive exports. The latest data showed the economy grew at an annualised rate of 3.8% in Q2 2013, faster than originally estimated and outpacing many G7 countries. Other local surveys revealed that Japanese manufacturers’ sentiment also improved sharply in the three months to the end of September to reach the highest level since December 2007.

Reports of further economic recovery in China and Europe also offered encouragement to investors. However, the about turn in China’s fortunes have coincided with a re-acceleration in credit growth, potentially exacerbating existing imbalances, and whilst the Eurozone is now officially out of recession, it is clear the recovery remains fragile.

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