Market update – August 2012

July’s UK economic data was the usual mixture of good and bad news for investors. The latest set of GDP figures saw the UK economy contract by 0.5% for the second quarter, although the wet weather and the Jubilee weekend were mitigating factors. Average UK house prices also fell for another month.

Many economists believe the UK economy will receive a boost from the Olympics – although not G4S, who lost £50million over the security shambles. The Bank of England started its Funding for Lending scheme on 1st August, which is hoped to deliver much-needed long-term growth by subsidising loans to homeowners and businesses.

Another possible boost to the economy may come from the billions of pounds of PPI claims being paid out by the banks, the theory being that individuals are much more likely to put the money back into the economy than the banks are. The UK’s five largest banks have had to set aside £9billion to cover claims, of which £5billion had been paid out to affected customers by the end of May.

And despite the continued recession, the UK created 201,000 new jobs between April and June. This may be due to wages not keeping pace with inflation, which now stands at 2.6% (CPI). The expectation remains that inflation will drop below the Bank of England’s 2% target within the next few months.

As far as the eurozone is concerned, there seems increased faith that the single currency can hold together. Mario Draghi, the President of the European Central Bank, has pledged to do “whatever it takes” to save the euro, while German Chancellor Angela Merkel stated “we are in a very decisive phase in combating the euro debt crisis”.

In the US, house prices have posted their first annual gain in almost two years, raising hopes that the troubled housing market can begin to contribute to the economic recovery. The focus this week will be on the chairman of the Federal Reserve, Ben Bernanke’s speech on Friday, in which he is expected to clarify the timing of the next round of quantitative easing.

In China, policy chiefs have about two weeks left to decide about giving the economy a proper stimulative prod, or risk parading a new Communist Party leadership to the world just as growth falls below target for the first time in nearly four years. Factory activity is already at a nine-month low, according to the latest manufacturing sector survey from HSBC, signalling that the official August numbers for industrial production and trade published in a fortnight will foreshadow third quarter economic growth falling below the government’s 7.5% goal.

That is a deeply unappealing prospect for the Party’s top brass as GDP data is likely to be unveiled at roughly the same time as the new leadership in a once-a-decade power transition. Other cynics believe that strategy may be at play in allowing the new leadership to improve the economy next year and prove their worth.

Against this backdrop equities continue their gains of the past 3 months, with the FTSE100 now up 3.5% since the start of the year. In the same period, the FTSEurofirst 300 is up 8.7% while confidence in the US economy has lead to a gain of nearly 12% in the S&P500.

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