Week ending 11th August 2006      

The main financial event of the week was the FOMC decision not to raise US interest rates for the first time since May 2004, despite their awareness of the upward pressure on US prices. Other economic data released were the June trade deficit number, which narrowed by 0.3% and that July retail sales rose by 1.4% versus an expected 0.8%. The Airline sector took a battering on the terrorist plot news, with AMR Corp, the parent company of American Airlines falling by 14% over the week whilst Continental plummeted by 17.5%. For the week, the Dow was lower by 1.4% with the S&P 500 index and the Nasdaq ending it -1% and -1.3% respectively.

Euro-land saw French GDP at 1.2% for Q2 ’06, boosted by consumer spending and buoyant industrial production and higher exports in June for Germany, Europe’s largest economy. The region’s 2nd largest economy, the UK, enjoyed stronger economic growth in the 3 months to July ’06 at 0.8%. The ECB monthly report for August and the Bank of England’s quarterly report do however suggest higher interest rates before the year has ended. European Airline stocks were also marked down after the aforementioned terrorist scare but not as much as the telecoms sector, after Deutsche Telecom warned on 2006/7 profits expectations. DT share price fell by 11.5% and France Telecom was marked lower by 4.8%. For the week the FTSE 100 index ended it 1.2% lower, whilst the French CAC and German Dax indices fell by 1.1% and 1.7% respectively.

Out East, there was a bright spot in that Japanese bank lending leapt by 2.9% in July, the strongest growth in a decade and machinery orders for June rose by 8.5%. The not so good news, however, is that the Bank of Japan is now under increased pressure to raise interest rates just as the Japanese economy is slowing once more as evidenced by the Q2 ’06 GDP figure which came in at 0.2%, almost ½ of that expected. Elsewhere, S. Korean interest rates rose by 0.25% to 4.5%, a 5 year high and China enjoyed a record trade surplus for the 3rd straight month in July. The region’s two largest stock indices, Japan’s Nikkei Dow 225 and Hong Kong’s Hang Seng, bucked the trend of their western counterparts by gaining 0.4% and 2.1% respectively.

On the currency front, the $US index rose by 1% despite the pause in rate increases, whilst Government Bond yields for the US, Europe and the UK rose over the week, spooked by inflation data. The US 5 and 10 year yield ended the week at 4.9% and 4.97%.

Within the commodities complex, the $Oil price jumped by 1.7% to $75 a barrel, having been as high as the $78 level and the $Gold price eased by 2.5% over the week, ending it at $632 oz.

Next week is all about official inflation data as the US, UK and the wider Euro-zone all release July CPI figures. We also get to see Q2 GDP for Europe and July department store sales for Japan.

“Fortune often knocks at the door, but the fool does not invite her in.”

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