The debate rages on between those that believe the global economy is heading back into recession, the so called double-dip, and those that believe the recovery remains on track, albeit at a slow and protracted pace. Our current belief is that the latter scenario is more likely. Recent rises in equity markets suggest that this view is gaining wider support.
Equity markets enjoyed a good month in July. Confidence in the European banking sector was restored following the gentle stress testing that took place at the start of the month and equity markets continued to push on, fuelled by good earnings statements coming out of the current corporate earnings season. Equity markets had previously appeared to be pricing in a worst case scenario of recession but current prices reflect a more positive outlook. The slowly rising price of oil, at $82 a barrel as we write, also signifies increasing confidence in the global economic recovery story. There have been plenty of other encouraging signs from leading economic indicators including business confidence indices, and a series of positive announcements coming out of the current corporate earnings season. However, conflicting signals are emanating from the US and there are still concerns that the US recovery is stalling. The US Dollar is weakening on the back of fears that further fiscal intervention by the US Treasury might be required.
In the UK, the Prime Minister received an endorsement from both President Obama and leaders of the G20 for the austerity measures outlined within the emergency budget. From the outside at least, the UK is perceived to be making all the right noises with regards to tackling its national debt. The FTSE All-Share index was up over 9% through July, possibly a reflection of greater faith in the global recovery than the UK economy. Earnings announcements from UK companies have been good, with strong profit announcements particularly prevalent in the banking sector, from HSBC Hldgs (LON:HSBA) , Standard Chartered (LON:STAN) and Lloyds Banking Group (LON:LLOY)
So, most indicators reveal a more positive outlook. However, fear among investors remains and this sentiment is likely to continue to sway markets. Low market trading volumes throughout the traditional holiday period will likely accentuate any swings in sentiment over the coming months and so we expect to see a few short-term ups and downs in the markets. We suspect…
