WEEKLY ECONOMIC BRIEF – 12 October 2012 Chief ... - LGsuper

Financial Market Update
• Global equity markets fell in the last week as global growth projections from both the IMF and World Bank were revised lower,
Spain’s credit rating was downgraded by Standard and Poor’s to just above junk status, and the US earnings reporting season
kicked off on a poor note. Japanese equities underperformed, with falling machinery orders seen as evidence that territorial
disputes with China are beginning to have a real impact on the economy. The MSCI World Index fell by 1.4 per cent during the
week, but remains largely unchanged so far this month and is 10 per cent higher than the start of the year.
• In the US, the S&P500 fell by 2.0 per cent this week, while the tech-heavy NASDAQ fell by 3.2 per cent as the technology
sector underperformed. The key earnings report so far this week was from aluminium producer Alcoa, which reported a loss
from continuing operations, and reduced its estimates for global aluminium demand due to weakness in China in the second half
of the year. Oil company Chevron reported a fall in Q3 earnings driven by output losses from Hurricane Isaac and falling prices.
Consumer stocks have fared better, however, with retailer Wal-Mart commenting that back-to-school sales were very strong,
while Costco beat expectations with strong volume growth induced by discounting. Bloomberg reports that analyst
expectations for Q3 are quite downbeat, with earnings-per-share of S&P500 companies expected to fall 1.7 per cent in the third
quarter and sales falling by 0.6 per cent.
• Ten-year government bond yields were unchanged in the US this week, but rose in Europe as hard economic data suggested
that the European economy is not as weak as suggested by recent survey measures. In the US, non-farm payroll data for
September were stronger than expected (after allowing for revisions to the last two months) and the unemployment rate fell
from 8.1 per cent to 7.8 per cent. This helped offset the negative impact from IMF/World Bank growth projections.
• In currency markets, the US dollar strengthened against the Euro and Sterling, but weakened slightly against the Yen and $A.
The Euro was weighed down by an IMF report that estimated European banks may need to sell an additional $4.5 trillion of
assets to restructure their balance sheets in a downside global growth scenario, up 18 per cent on their April estimate.
Table 1. Financial market movements, 4 - 11 October 2012
Equity markets Level Change
MSCI World Index (local currency) 914.1 -1.4%
US - S&P 500 1,432.8 -2.0%
Japan - Nikkei 8,546.8 -3.1%
UK - FTSE 100 5,829.8 0.0%
Germany - DAX 7,281.7 -0.3%
France - CAC 3,413.7 0.4%
Australia - S&P/ASX 200 4,483.5 0.7%
Fixed interest (10 yr sovereign yields) Yield Change
US 1.67% -0.3 bps
Japan 0.76% -1.6 bps
UK 1.78% 8.0 bps
Germany 1.50% 5.6 bps
Australia 3.03% 4.8 bps
Foreign exchange Rate Change
USD-JPY 78.340 -0.2%
EUR-USD 1.293 -0.7%
GBP-USD 1.605 -0.9%
AUD-USD 1.026 0.2%
Commodity markets Level Change
WTI oil price (US$/barrel) 92.07 0.4%
CRB index 308.87 -0.5%
Other Level Change
VIX 15.59 7.1%
Source: Bloomberg
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