The Global Month Ahead – An insight into October 2012

Financial News

7IM The Global Month Ahead - An insight from Seven Investment ManagementIn our regular feature Seven Investment Management (7IM) look forward and assess what the month ahead might hold for the world’s largest economies.

Whether you are invested in the UK or overseas, in stocks and shares or fixed interest assets, read on to discover the latest insights from one of the UK’s most respected investment managers.

We’d love to hear your thoughts, why not leave your comments at the end of the blog?

United Kingdom

Issues Outlook
The Monetary Policy Committee meets early in October, in order to assess the state of the UK economy and take policy action if deemed necessary. Economic indicators have remained largely unchanged since September’s meeting. With the UK economy seemingly in stasis, action seems unlikely as the MPC waits for current measures to feed through. However, November may well be the meeting to pay attention to. This is when the current round of purchases (begun in July) finishes, the quarterly Inflation report is released and Chancellor George Osborne finalises his Budget – all potential catalysts.
Monday 8 October is the deadline for applications to become the new Governor of the Bank of England, and according to Business Secretary Vince Cable, not one banker has applied for the position. The favourite to replace Sir Mervyn King is still current MPC member Paul Tucker despite his alleged knowledge regarding the LIBOR scandal. Other likely candidates are Gus O’Donnell and FSA chairman Adair Turner. Ex-Tottenham Hotspur manager Harry Redknapp is, sadly, probably out of the running at odds of 1000/1.

North America

Issues Outlook
In the September meeting, the Federal Reserve made two unprecedented moves. The first was the announcement of $40bn of asset purchases a month for an unlimited period of time. The second was the extension of its commitment to “exceptionally low” interest rates, from mid-2014 out to mid-2015. It would be a huge surprise if the Federal Reserve were to announce any further policy measures this month without giving time to assess the impact of current policies. It will be interesting to see how good the economic data has to be (or how much of a threat inflation is) before the Fed begins discussing the withdrawal of easing measures.
Economic indicators have been mixed, but house prices look to be moving upwards slightly. A more sustained increase could lead to a rejuvenated period of consumer spending as people slowly begin to feel wealthier – but this is probably only going to come through over the next 6 months or so.
Presidential election update – polls in swing states Florida, Ohio and Pennsylvania seem to be favouring Obama.

Mr Romney’s recent media blunders have played very poorly – but as live debates begin this month, there is potential to make up some ground.

Europe ex UK

Issues Outlook
The constant reassurance from the European Central Bank (“the ECB”) and Mario Draghi ensured that markets remained relatively quiet. An interest rate cut in July, strong statements from Draghi, and then Outright Monetary Transactions (bond-buying) announced in September all need time to sink in, hence no action from the ECB is expected. However, looking further ahead, the next step could well be raising the maturity constraint (currently 1-3 years) or removing it completely.
Despite the relatively calm summer, Europe is unlikely to continue untroubled – the sovereign debt crisis may have been tackled to market satisfaction (although it is almost certain to rear its head again before too long), but the Eurozone now faces the long, slow challenge of sustainable economic growth. With austerity plans in place in order to secure emergency financing, the peripheral countries are all facing years of low, if not negative growth. Yet the core nations (France, Germany) are also seeing their non-EU export markets contract as the rest of the world slows. Expect growth fears to hit headlines soon.

Other markets

Issues Outlook
Last month the Month Ahead mentioned that Australia was due to come under some scrutiny at some point in the next year. It seems that the scrutiny has begun internally, with the Australian central bank cutting interest rates by 0.25% to try and mitigate the impact of a Chinese slowdown. The Reserve Bank of Australia took markets by surprise with its cut in the interest rate coming sooner than expected. However, it bodes well for Australia that it has a central bank prepared to do what is necessary without regard for the markets. Further policy movements would seem likely as Australia prepares to slow.
Japan could be welcoming its seventh change of leadership in six years, although at least the man at the top will be familiar – Shinzo Abe, elected leader of the LDP last month, was Prime Minister in 2006-2007. In Japan, the Liberal Democratic Party, currently in opposition, look as if they may win the general election (to be held sometime in the next couple of months). LDP policies have proved popular – they emphasise the elimination of deflation and promotion of growth, possibly by reforming the mandate of the Bank of Japan.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 3 & 4 October No action until November, once the current round of asset purchases finishes. Click here
US Federal Reserve 0% – 0.25% 23 & 24 October No action following drastic September actions. Click here
European Central Bank 1.5% 4 & 18 October No action following progressive summer announcements. Click here

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