Global geopolitical concerns keep markets on edge

World stock markets retreated this week against a backdrop of rising oil prices and fresh uncertainty about the outlook for US growth, inflation and interest rates.
A further blow to Wall Street came late on Friday as the US said it was imposing duties on coated paper imported from China, reversing its policy of not applying duties to subsidised goods from “non-market economies”. The news also sent the dollar lower against the euro and the yen.
But a continued wave of merger and acquisition activity helped limit the downside in share prices and analysts remained optimistic about the prospects for equities going into the second quarter of the year.
Oil prices reached their highest levels for six months this week as tensions in the Middle East heightened over Iran’s capture of 15 UK naval personnel. West Texas Intermediate gained more than 4 per cent over the week to $65.67. That is nearly a third up from an eight-month low of $49.90 recorded in January.
Edward Meir at MAN Financial Energy said WTI could near $70 if the UK/Iran situation drags unresolved into next week.
But he added: “By the same token, the market’s overwhelming fixation on this one issue could also set the stage for a substantial correction if and when the Iranians finally decide to throw in the towel.”
Geopolitical concerns also came to the fore on Friday as Treasury bond prices briefly surged on rumours that US business interests had been asked to leave Bahrain and that another US aircraft carrier was heading to the Persian Gulf. The White House said it had heard nothing about such a move.
Meanwhile, there were mixed signals about the outlook for the US economy from a raft of figures this week. Weak data on new home sales and durable goods orders heightened investor fears about a sharp slowdown in economic growth. And although there was an upward revision to fourth-quarter gross domestic product figures, analysts pointed out that US economic growth had been below trend in the last three quarters of 2006.
Even more unsettling, Federal Reserve chairman Ben Bernanke warned this week that uncertainties surrounding the US economic outlook “had increased somewhat in recent weeks” and that inflation remained “uncomfortably high”.
The latter point was emphasised on Friday as the February PCE price deflator – an inflation measure closely watched by the Fed – rose more than expected. Rob Carnell, economist at ING, said the data had dealt a blow to expectations for an early cut in US interest rates. “The Fed may still cut rates at some point, but it is going to take longer for easing to materialise, with core inflation likely to remain higher for longer,” he said.
Ian Harwood at Dresdner Kleinwort said the robustness of the US economy this year would be absolutely central to the global investment outlook.
“Our own view remains that the US economy will in coming months seriously underperform expectations, a development likely to relieve current inflation angst and generate a further improvement in interest rate expectations,” he said. Mike Lenhoff, chief strategist at Brewin Dolphin Securities, remained positive about the equity outlook, saying he felt the global economy was probably strong enough to withstand a US slowdown. “The background is not negative for equities. Valuations look very satisfactory and there is no reason to feel we are entering a bear market.”
On Wall Street, the S&P 500 was down 1.1 per cent over the week, while the Dow Jones Industrial Average fell 1 per cent In Europe, the FTSE Eurofirst 300 index fell 0.5 per cent while the Nikkei 225 Average in Tokyo shed 1.1 per cent. The weekly declines capped a turbulent first quarter for equity markets.
Equity indices endured sharp losses at the end of February as risk aversion increased sharply. But the re-emergence of M&A activity helped stocks recoup most of their losses. For the quarter as a whole, the S&P 500 was up just 0.18 per cent, while the Eurofirst 300 rose 2.2 per cent and the Nikkei edged up 0.4 per cent.