F&C strategy director says US economic data is not a disaster for equities Go compare with our comparison table

F&C strategy director says US economic data is not a disaster for equities

08 October 2010 / by Paul Dicken

Further data reinforcing the view that economic growth in the United States has stagnated should not prompt equities to ‘take fright’ over a return to a fall in earnings, F&C Asset Management has said.

Payroll data released on 8 October and news on the US unemployment rate are likely to reinforce expectations amongst investors that the US central bank, the Federal Reserve, will undertake further quantitative easing to stimulate the flagging economy.

Ted Scott, director of UK strategy at F&C Asset Management said: “Although the data was disappointing it was not a disaster and underpins the status of the US economy that is growing at a level that is well below trend and much slower than is normally the case at this time of a recovery.”

Scott said the prospects of a double dip recession had not been raised but the authorities were facing difficulties in stimulating the economy that appeared to be stagnating at a low level or growth.

The dollar fell sharply on 8 October and the yield on government bonds fell to the lowest level since January 2009, which Scott said was due to a belief that further stimulus to the economy was likely.

“The reaction of bonds suggests that QE [quantitative easing] is now priced into the markets and the upward move in equities in the last few weeks is also partly a response to expected further monetary stimulus.”

Quantitative easing involves a central bank buying high-quality assets in the market, such as government and corporate bonds, to boost the funds available in the financial system.

Scott said he expected most of the market action in coming weeks to take place in the currency markets because of increasing international friction over the relative strength and weakness of currencies.

The annual meetings of the International Monetary Fund and World Bank are taking place in Washington this weekend where the issue of currency strength is likely to resurface.

China came under renewed pressure this week to allow the value of its renminbi currency to rise. Following a summit with EU leaders, Chinese premier Wen Jiabao said the EU should treat the exchange rate issue ‘objectively and fairly’.

© Fair Investment Company Ltd

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