Business

Monday August 10, 2009

What is the next hurdle for global markets?


In this context, the outcome of this week’s Federal Reserve’s monetary policy meeting will be crucial.

LONDON: Having largely passed the second-quarter corporate earnings test without major shocks, the next hurdle for global financial markets is likely to be the eventual withdrawal of extra cash injected by central banks.

In this context, the outcome of this week’s Federal Reserve’s monetary policy meeting will be crucial.

While the Bank of England expanded its quantitative easing plan to £175bil on Thursday, comments from Fed officials suggest the US central bank’s US$300bil programme to buy longer-dated Treasuries is likely to expire on schedule in September.

Investors are already pricing in a chance of an interest rate hike as early as December with some arguing that the Fed’s efforts to mend credit markets have sown seeds for inflation.

World stocks, measured by MSCI, hit their highest level in nearly 10 months this week, helped by positive earnings. According to Thomson Reuters data, of 414 S&P 500 index companies which have already reported results, 73% have beaten estimates.

The quarterly earnings contraction rate for the second quarter stands at 28.4%, compared with 35.5% in the first three months.

“The Q2 test has been passed and exceeded. But positive surprises have been down to cost cutting and it’s filtering through. I think in the third and fourth quarter we will see improvement in the revenue stream,” said James Thomson, investment director at Rathbones.

“Equity markets globally will be bumpy. There will be a very sharp move upwards of 10 percent, followed by correction. Fund managers love a nice gently move upwards but we are not going to get that.”

Thomson’s Global Opportunities Fund currently has 14% in cash, down from 38% at the end of 2008.

“It reflects continued uncertainties,” he said of high cash allocation.

Thomson has a watchlist of around 30 companies, which he intends to buy when they meet the criteria – which include earnings and improvement in fundamentals, as well as specific factors such as contract wins or higher capital spending.

“The most important decision is to buy right companies. They will be more volatile, high beta. It’s the price to pay for getting higher returns,” he said.

The Federal Reserve meets tomorrow and on Wednesday to review the outlook for growth. – Reuters

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