A growing belief that the US
economy will achieve a soft landing helped stock markets make strong gains in
the third quarter and took the Dow Jones Industrial Average to within a whisker
of its all-time high this week. The rally has been driven by the Federal
Reserve’s decision in August to stop raising rates and a sharp decline in oil
and commodity prices that has tempered inflation expectations. Equity markets
have so far shrugged aside worries that the slowing US housing
market could lead to a sharp fall in consumer spending. Alan Ruskin, chief
international strategist at RBS Greenwich Capital, said: “Lower bond yields,
stronger equities and lower energy prices, will cushion the near-term slowdown.”
Sentiment has swung markedly since the volatile markets of May and June when
equities and risky assets were buffeted by concerns that rising inflation and
commodity prices would provoke global central bank tightening. The rebound began
in late July and “pretty much reflects one long Fed pause,” said Joseph Di
Censo, global fixed income strategist at Lehman Brothers. “The rally in global
markets has been predicated upon prospects of a soft landing in the
US.” The Dow closed in on its
all-time record high of 11,750.28, achieved in 2000. The blue chip benchmark has
gained 5 per cent this quarter, its best run since the third quarter of 1995.
The Dow has risen 9.3 per cent this year.
European fixed income markets
were nearly unchanged as PMI fell in line with expectations pulling 10-year
German bunds down slightly to 102.200 and lifting yields 2bps to
3.723%.
