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Market update: 2010 review/2011 outlook

Market update: 2010 review/2011 outlook

Old Jan 5th 2011, 3:02 pm
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Default Market update: 2010 review/2011 outlook

As we begin the new year, we leave behind it a year that was not without its dramas, despite the height of the financial crises being back in 2008. Britain saw its first coalition government formed since 1945, the Euro Zone suffered a sovereign debt crisis that has so far lead to Greece & Ireland needing to be lent money by its neighbours and the IMF, the Federal Reserve deemed it necessary to support markets further through a second round of Dollar printing (QE2), and China took several steps to prevent its real estate market from overheating as their economy continues to grow at a fantastic pace. There was also talk of ‘currency wars’ as emerging economies saw their currencies strengthen as investors sought higher returns with many major economies central banks keeping interest rates close to zero. Though there is now a much more positive economic picture globally, it is still very mixed.

So what will be the key themes for 2011?
That largely depends on what part of the world you look at. Our major focus is the UK, so let’s start there.

The early battleground for Sterling will be what the Bank of England do with monetary policy. Inflation has been above the bank’s target for several months now and with commodity prices continuing to rise they may be forced into increasing interest rates at a time when the economy is still recovering. Whilst this would boost Sterling, it could have a negative impact on growth. The other possibility is that the bank could print more money to support the recovery which would weaken the Pound and they haven’t ruled out this option.
With the government cutting spending by more than £20bn this year (assuming it doesn’t delay the cuts) can the economy continue to grow at a healthy pace? The economy beat most forecasts last year which is encouraging but the employment situation still remains relatively weak.
What impact will the recent VAT increase have on consumer demand, which picked up quite strongly through 2010? Though the impact on lower value items will be difficult to notice, could the combined effect of rising costs through higher inflation, government spending cuts and certain income bands losing some tax benefits dampen the mood?
Will UK house prices resume the new year as they ended last year, with prices in reverse? There was a very strong bounce back in UK house prices through 2010, though they probably ended flat on the year due to large declines towards the later half. As a nation of homeowners, the value of our homes can strongly influence confidence generally and that also affects people’s spending decisions.

For Europe it is no doubt that the key emphasis is the weakness in the peripheral countries’ economies and the market’s debt concerns over how they will reduce their deficits. Some of the countries in focus such as Portugal, Spain and Italy need to raise huge amounts of debt this year at a time when their borrowing costs have soared. Whilst the Euro Zone leaders have committed to supporting each other and the Euro, further pressures could prove too much and the Euro will likely suffer. There is also the issue of very high unemployment which across the EZ remains at 10% and difficulties faced by some European banks accessing capital financial markets.

For the U.S. they face a jobless recovery and the risk of deflation. The Federal Reserve has already announced an additional $600bn of Quantitative Easing (printing money) to keep borrowing costs low and support the recovery. President Obama has also recently agreed to extend the tax cuts introduced under Bush. Could there be further measures announced and with the Republicans now taking back control of the house of representatives, could there be political turmoil over the burgeoning current account deficit? Despite expectations that the U.S. economy will grow at a faster pace than many of the G10 economies, the continued government and central bank support could lead to a weaker US Dollar as other countries take measures to reduce deficits and financial support mechanisms.
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