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Weekly Financial Focus: 10th January 2011

Optimism about the state of the world economy lifted stocks last week. Monday’s US, Chinese and European Purchase Managers Index (PMI) manufacturing data continued to boost risk sentiment across financial markets along with the “January effect” that occurs as fund managers dispense with the need to settle end-of-year balances. Some investors were also looking ahead to Friday’s US jobs data, expecting to see the world’s largest economy in an improving state of health. “People are starting to recognize there is some improvement in the employment picture in the US. You would expect to see some of the confidence of the (manufacturing) PMI to be reflected in the non-farm payrolls,” said Philip Isherwood, European equities strategist at Evolution Securities.

China will let the yuan rise about 5% against the dollar in 2011 to combat inflation, the China Securities Journal said on Wednesday. However, a Commerce Ministry official warned that any appreciation would do little to narrow China’s trade surplus with the US, a constant irritant in the relationship between the world’s two largest economies. “Yuan appreciation will make imports cheaper to reduce the impact of rising commodity prices in the international market, providing relief from inflationary pressure,” said the journal. China’s central bank will examine lending and capital levels at domestic banks each month to determine reserve requirements for individual lenders, the China Securities Journal reported. Banks may face higher requirements if their capital adequacy ratios fall below mandated levels, the newspaper said. China is grappling with the fastest inflation in more than two years and excess liquidity after record credit growth fuelled the nation’s rebound from the global financial crisis. Lending is likely to have topped the government’s 2010 target maximum of CNY7.5tn (USD1.1tn) after banks extended 99% of that amount in the first 11 months of last year.

Russia’s inflation rate rose to the highest in 13 months in December as higher food costs and increasing consumer demand spurred price growth, putting pressure on the central bank to raise borrowing costs. Inflation accelerated to 8.7%, compared with 8.1% in November, the Federal Statistics Service said on Thursday. The inflation rate rose
for a fifth month after the worst drought in at least 50 years drove up food prices. While inflationary risks “determined by monetary conditions” remain “moderate,” they “deserve greater attention” from policy makers, the central bank said on December 24th as it kept its refinancing rate at a record low 7.75% for a seventh month.

Federal Reserve officials signalled that they would probably push ahead with unprecedented stimulus until the recovery strengthens and many of the 15 million unemployed Americans find work. While growth has picked up since the Federal Reserve announced plans on November 3rd to buy USD600bn of bonds, policy makers remain focused on their failure to achieve their goals of full employment and an inflation rate of about 2%, according to the minutes of their December 14th meeting released on Wednesday. The recovery’s pace is likely to “remain modest, with unemployment and inflation deviating from the committee’s objectives for some time,” the minutes said.

The worst flooding in half a century in Australia’s northern state of Queensland may have a “significant impact” on the nation’s economy as exports are interrupted, said central bank board member Donald McGauchie. “On what can be seen at the moment, there’s very substantial damage to infrastructure,” McGauchie said on Wednesday. “The consequences to export income could be quite substantial.” Record rainfall triggered flooding across an area of Queensland the size of France and Germany, forcing towns to be evacuated, closing mines and spoiling crops. The state is Australia’s largest coal exporter and accounts for about 20% of the nation’s AUD1.28tn (USD1.29tn) economy.

Commodity prices fell for a second day in a row on Wednesday, hurt by profit taking and a stronger dollar, putting pressure on world equity markets. Oil, which had only a few days ago looked to be heading to USD100 a barrel again, hovered below USD89 a barrel. A number of market moves were put down to investors adjusting positions following end-of-year balancing of portfolios. Prices of both commodities and equities remained around at multi- year highs.

The euro fell for a third day against the dollar on Wednesday amid concern that Europe’s debt crisis will persist, making it difficult for governments to raise funds. “The debt concerns are something that will come back repeatedly and periodically through the course of the year,” said Adam Cole, head of global currency strategy at RBC Capital Markets in London. “It will be a recurring theme for the euro. The market does still show some sensitivity to supply and the appetite for supply.”

Spotlight on: What’s in store for 2011?
By Gareth Maguire, the Hansard Group

The start of the year serves as a natural point at which many investors reassess their investment portfolios, with one eye on the outlook for the coming 12 months. Last year (some might say ‘surprisingly’) provided opportunities for impressive returns for those that were allocated to the year’s growth stories, against a backdrop of inflation, deflation and currency wars. The outlook for 2011 will vary from one expert to the next, such is the uncertainty that continues to hang over global markets. Here we take in the views of Bob Doll, the Global Chief Investment Officer at BlackRock – one of the world’s largest fund management companies.

Stocks could post double-digit returns in 2011 for the third straight year and outdo global markets, according to Doll. He suggest that the S&P 500 index should rise to at least 1,350 by the end of 2011, implying a 7.4% move in the US index, calling that figure “a floor” for their target. He forecasts improved growth, bolstered by falling unemployment and strong earnings for more gains in stocks.

Doll, a senior Managing Director at BlackRock who oversees more than USD300bn as part of BlackRock’s USD3.45tn in assets under management, said the US will outperform the MSCI World Index, as it did in 2010. The US should benefit from more fiscal and monetary stimulus, a more innovative economy and better earnings growth prospects, all of which should help US stock market performance, Doll said recently.

The strength of the market should accelerate a developing shift once again to equity funds by retail investors and away from fixed income. “Equities are likely to take over from fixed income as the preferred asset class,” he said. Doll believes that the energy sector could be the top industry pick, followed by technology stocks, while financials were his least favourite sector. “My concern is where the revenue is going to come from for financial sector companies”, he said. Doll also said earnings should rise to an all-time high, surpassing the USD91.47 per-share record for the S&P reached in 2007.

Credit problems remain a concern though, and high commodities prices could pressure profit margins, he said. “What does the dark side look like? Credit is still an issue,” particularly in the US housing market, sovereign debt markets in Europe and US state and local municipalities, he said. Commodity price increases and inflation fears also could derail a slow US recovery, he said. “The removal of the Bush tax cut uncertainties and the fears of a double-dip recession as well as improved confidence will lead to more hiring,” Doll said.

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