Equity markets gained virtually all of the previous week’s losses back, in truth for no real apparent explanation. The recovery in global equities this week means that the Ftse Global Index is up just under 1% year to date in sterling terms, however it remains just over 1.4% lower based in US dollars. During the past week several Federal Reserve Committee members spoke, and appear to remain committed to moving in December, however they continue to give themselves a little wriggle room.
The newspapers in the UK devoted a lot of print ink over the weekend to the announcement that the budget deficit exceeded expectations for the month of October, making it harder for George Osbourne to meet the year-end target of 70 billion pounds. The bulk of government receipts come from income tax, Capital Gains and National Insurance. As a percentage of GDP this has been falling, mainly due to an increase in the pension allowance above the rate of inflation and a reduction in economic activity. The recent Lords decision to not support the removal of tax credits, will not have helped Mr Osbourne meet his desired target. This miss will make Wednesday’s autumn budget statement of even more interest. How does George Osbourne introduce further austerity measures in an attempt to reduce the deficit without in turn denting a fragile economic recovery?
In our opinion economic recovery cannot be based entirely on monetary policy it needs fiscal help as well. Increasing taxes does not necessarily result in increased revenues for the government. The increase in stamp duty on housing is a point in case.
The Vix index fell as equities rose this week from a peak of 20, to close just above 15. A long way from the peak in mid-summer of 55.
Looking to the week ahead, as we mentioned the UK will be dominated by Autumn Budget statement, on Friday we get the latest estimate for q3 GDP. Expectations are for a small pick up from 0.5% to 0.7%. In the US there is a constant flow of economic data during the week, ranging from purchasing manager’s surveys, housing, Q3 GDP estimates, durable goods, employment and corporate profits. Pretty much the whole spectrum of economic indicators. The bond and equity markets will probably respond best to reports coming in line with expectations which in turn is likely to reinforce rate expectations in December. It is also Thanksgiving this week in the US, this may mean a slightly quieter week for trading volumes.
For Europe, the meeting on Monday of the Euro group may make some headlines. Greece is once again on the agenda as the Greek Parliament look to unlock another 2bn euros in aid. Released on Friday will be the November business confidence, industrial and economic sentiment surveys as well as the final consumer confidence indicator.