Weekly Comment on the Markets, Politics and Economics by Alastair Winter Chief Economist at Daniel Stewart.

The week ahead

Markets

  • The key for equities will be how far the day trading punters feel they can push on.  If there was any doubt that they are in charge it was dispelled by the 13% (yes, thirteen per cent) plunge in Aviva’s share price when it announced its dividend cut. The huge daily swings in bank shares tell the same story.
  • Saturday’s data from China suggests all is not plain-sailing over there and could be the catalyst for a wider correction later this week, even if only temporarily.
  • US equities are better supported by fundamentals but fretting over the timing of withdrawal of QE is on the increase now that the employment numbers are improving so strongly.
  • Europe provides plenty of things to worry about and Fitch’s downgrade of Italy from A- to BBB+ (outlook negative) should unsettle bond markets.  Moody’s have already downgraded to Baa2 and Italy may soon have to fight to keep its investment grade.
  • The punters must surely be lining up another attack on the pound, yen and euro now that it seems the dollar is benefitting from strong US data as well as from bad data elsewhere. It is almost a case of heads the dollar wins and tails other currencies lose.

Politics

  • It is Summit time again in Europe and Mr Hollande is likely to use the Italian election result to push for a collective switch from austerity to growth. Ironically, he may not get any support from Italy itself, which will be represented by Mr Monti in his caretaking capacity. Some sort of fudge will be required to appease Germany and other northern countries if a major row is to be avoided. Cyprus’s problems are just about modest enough to be fudged too but alarm bells over Greece are starting to ring again.
  • Meanwhile in Italy, the options are narrowing down to a new technocratic government or fresh elections but the latter cannot take place until after a new President is elected by the current grid-locked parliament. Italian bank shares, anyone?

Economics

  • It is a relatively light week for data but the US should provide another encouraging snapshot of its economy with Retail Sales, Industrial Production and the flash March Reuters/University of Michigan survey of consumer sentiment.
  • In the UK, the Office for National Statistics may confound yet again with better Industrial/ Manufacturing and Trade numbers while the National Institute of Economic and Social Research’s authoritative rolling estimate of GDP in the three months December to February should kill off arguments about a triple dip.
  • More poor data is likely from Europe and Japan but the latest news from Australia may add to its increasingly optimistic outlook.

Last Week

Markets

  • It was after all very easy for equities with a symbolic record high for the Dow and big gains elsewhere. The punters piled into Tokyo (+5.8%) and Mumbai (+4.0%) and only Shanghai ended lower, perhaps because of a leak of the disappointing official economic data.
  • The punters were also piling into European equities with all the major markets up 3% or more (IBEX did best at +5.1%). This made the FTSE 100’s +1.5% seem almost pedestrian until year-to-date performances are compared.
  • With equities surging, bonds were almost bound to fall back and yields on Treasuries, gilts and bunds ended 10-20 basis points higher.  In contrast, the punters were out in force buying, believe it or not, Spanish, Italian and even Portuguese bonds.
  • The dollar may not have lost its status as the ultimate safe haven but the punters are increasingly using good US fundamentals as an excuse to sell off the euro and yen and also the pound (which got a modest reprieve from the MPC’s inaction). Better US news, nevertheless, still seems to stimulate flows into emerging markets.
US dollars-one hundred banknotes (PD)

US dollars-one hundred banknotes (PD)

Politics

  • ‘Gunpowder and treason’ seems to be in vogue in the UK’s Tory and Lib Dem parties against their coalition and their respective leaders. The expression ‘death wish’ springs to mind here. A potentially more sinister development is Rupert Murdoch’s ‘interest’ in UKIP, which could yet turn out to be his terrible revenge on Mr Cameron for the Leveson Enquiry.
  • In Italy, Mr Bersani has, probably wisely, ruled out any deal with Mr Berlusconi. He has, entirely predictably, abandoned his commitment to austerity and has been trying to woo Mr Grillo and, failing him, some of his supporters but has so far been scorned with contempt.  All of this is, of course, being cheerfully ignored by most investors.
  • A possibly significant development in Germany is the formation of a Eurosceptic party with a platform to wind up the ESM bailout fund and to resist any other transfers. Breaking up the EMU is to be considered but may not be necessary if the weaker links leave of their own accord. It has no populist policies and its leaders are eminent lawyers, economists and academics. Very interesting!
  • In Washington, Mr Obama  has taken to schmoozing some ‘moderates’ in the GOP, which confirms that he is having as much trouble over the budget with his own Democrats as with Republic leaders.
  • Hugo Chavez will be much missed by the regimes in Iran, North Korea and Russia but not by the US, which can now hope to make progress in Pan-American economic co-operation.
  • The latest antics by the North Koreans seem to be pushing China’s patience to the limit. It looks like posturing but could end up much bloodier.

Economics

  • As expected, the four major central banks made no changes but it looks as if the ECB is no longer planning an early rate cut, the RBA is still contemplating one and the BoC’s next move, when it comes, will be up.  The Central Bank of Brasil also held rates but those of Mexico and Poland did cut.
  • The MPC’s decision was probably very close unless its members really have decided to ignore (outswerve?) Sir Merv in his last few months. The Services PMI and British Retail Consortium’s latest numbers may have been just good enough to justify putting off any new measures. Alternatively, there may wider plans afoot than a mere £25bn addition to the QE programme.  More will be revealed when the minutes are published on March 20th.
  • Elsewhere, US data (employment, ISM non-Manufacturing survey) were very strong while the numbers from Europe were awful, except those from Germany, which were mixed. Higher inflation and lower retail sales, industrial production, exports and imports in China in February throw in doubt the more aggressive forecasts for global growth and China’s equity markets.

Image By Milad Mosapoor (Own work) [Public domain], via Wikimedia Commons

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