Wrap up – last week

Fresh leadership for Greece and Italy, Italian benchmark bond yields reach 7%, China inflation falls

Italy hogged the limelight last week as fears that it would be the next domino to fall in the eurozone brought a return to global market volatility. Italy’s parliament voted for final approval to a package of economic reforms and the embattled Italian prime minister Silvio Berlusconi duly resigned as promised. In Greece, Lucas Papademos was sworn in as the new Greek prime minister and vowed to push through badly needed economic reforms.

Equity markets were heartened by the more positive actions and developments in Europe and most major indices managed to end the week higher. The S&P 500 closed the week up 0.9%, the Euro STOXX 600 gained 0.5% and the FTSE 100 rose 0.3%. Despite news that China’s inflation slowed for the third month running, Asian markets were lower. In the bond markets Italian 10-year debt soared above 7%, the level that Portugal, Ireland and Greece reached before they were bailed out. The euro fell to its weakest level against the greenback for a month.

Shaping the markets – this week

Monti selects a new Italian cabinet, European and US third quarter GDP and inflation

The focus will be on Italian interim prime minister Mario Monti’s new cabinet line-up, which is expected to be chosen from outside parliament. Across the Euro area, industrial production is likely to have fallen in September, largely from a weaker Italy. On Tuesday we are likely to see the Euro area economy grew by 0.2% quarter-on-quarter (q-o-q) in the third quarter, thanks to a boost in production activity post the Japanese earthquake. A rebound in consumption is likely to result in stronger third quarter German and French GDP. On Wednesday higher inflation in Italy is likely to confirm Euro area inflation in October of 3% year-on-year, unchanged from the previous period.

At the time of writing on Monday, Japan’s gross domestic product (GDP) has shown its first quarter of growth since the March earthquake. Third quarter growth was a robust 1.5% q-o-q following restoration of post-earthquake supply chains. On Wednesday the Bank of Japan is expected to make no changes to its monetary policy following last month’s decision to pump in ¥5 trillion into the economy. The Bank’s target rate is widely anticipated to remain at 0.1%.

Stateside, the focal point will be headline inflation. On Wednesday the October consumer price index is expected to show no monthly growth as commodity prices appear to have peaked. The consensus is for October industrial production to show a solid 0.4% gain, mainly from stronger manufacturing and mining output. Meanwhile third quarter economic growth is likely to be revised down slightly to 2.4% annualised.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1263.85

0.9

0.5

Dow Jones Industrials

12153.68

1.4

5.0

NASDAQ Composite

2678.75

-0.3

1.0

FTSE 100

5545.38

0.3

-6.0

Euro STOXX 600

240.99

0.5

-12.6

Nikkei 225

8514.47

-3.3

-16.8

Hang Seng

19137.17

-3.6

-16.9

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

2.07

2.1

-124.1

UK Gilt – 10 year

2.29

-2.6

-121.5

German Bund – 10 year

1.83

-3.4

-105.4

Japanese JGB – 10 year

0.97

-1.8

-15.1

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.96

2.4

-32.5

ITRAXX Crossover 5 Year (MID)*

743.02

69.4

N/A

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

30.04

-0.4

69.2

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

114.50

0.5

23.4

Gold Bullion $/ Troy Oz

1775.72

1.2

25.3

Currencies

vs $

vs £

 

¥

77.07

123.9

$

1.61

Euro

1.374

1.169

Source: Datastream. * Spread in basis points. Past performance is not a guide to future performance.

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