[Mb-civic] The Short View: Mind the clouds from the US - Ftimes

[Michael Butler]

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The Short View: Mind the clouds from the US
>By Philip Coggan, Investment Editor
>Published: July 6 2005 17:27 | Last updated: July 6 2005 17:27
>>

Confidence seems to be returning to the financial markets. An improved set
of purchasing managers indices last week has assuaged doubts about the
outlook for the global economy.

Despite another surge in the price of oil, European stock markets were
hitting another three-year high on Wednesday. UBS¹s risk index shows that
investors are currently risk-seeking. The index is based on a range of data;
most significantly, the spread between high yield and emerging market debt
and US Treasury bonds has been narrowing.

The US equity market continues to get a boost from the strength of corporate
buying, with Trimtabs, an investment research group, calculating that the
³float² of outstanding equity has been shrinking by $1.5bn a day over the
past month. ³Massive cash hoards at public companies and leveraged buyout
shops suggests this trend will continue² Trimtabs says.

Rather than slowing down, Trevor Greetham, the asset allocation strategist
at Merrill Lynch thinks the US economy is still in an overheating phase.
³The current downtrend in the US unemployment rate suggests continued above
trend growth in the economy² he says. ³We are overweight commodities and
emerging markets and underweight bonds.²

But there are still a couple of clouds on the horizon. The first is that US
profits growth may be losing momentum. Joseph Quinlan, chief market
strategist at the Bank of America, says that global foreign affiliate income
fell nearly 8 per cent in the first quarter of 2005 from the previous
quarter. The annual growth rate has slowed sharply from 22 per cent to 2.4
per cent. US companies are facing two headwinds; global growth has slowed
from 2004¹s robust pace while the dollar has rallied significantly.

The second problem is that the US Federal Reserve is likely to keep raising
interest rates in response to the economy¹s strength. Stephen Jen, the
currency analyst at Morgan Stanley, says that ³the prospect of 4-4.5 per
cent on Fed funds a year from now is not as low as some may think.² One of
the oldest market mottos is ³Don¹t fight the Fed². But if the equity market
is to do well in the second half of 2005, investors may have to ignore it.
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