Weekly Comment on the Markets, Politics and Economics by Alastair Winter by Chief Economist at Daniel Stewart
- Without wishing to sound dramatic, this week could be a moment of truth for equities. Markets could charge on again now that a new month has started but more likely is a bit of a pause, especially in Europe. The same goes for bonds.
- In contrast, FX and commodity traders are likely to test each other’s nerve and push on selling the yen and pound and buying oil. They may not be quite so gung-ho about the euro and silver.
- An EU Summit takes place on Thursday and Friday. Mr Cameron, following his Big Speech, might have expected to be given the cold shoulder but the new Napoleon, FranÃ§ois Hollande, is probably grateful for UK military support in Africa, Mr Monti is struggling in the election campaign, Mr Rajoy is mired in unexpectedly explicit bribery accusations and Mrs Merkel, of course, is quite emollient if not openly sympathetic to Our Dave.
- In Washington, President Obama is clearly taking the initiative on the Iran vs. Israel confrontation. Mr Biden has offered direct talks with Tehran, which they are probably smart enough to accept. John Kerry has been sworn in as Secretary of State and Chuck Hagel is close to confirmation as Defense Secretary. Mr Netanyahu will not be pleased by any of these developments.
- Mr Cameron is due to get another kick in the teeth from his malcontent backbenchers over gay marriage and possibly over the EU referendum. He has, however, his gaze firmly fixed on moderate opinion and the election in 2015.
- With the US taking a back seat, the focus will be on those other locomotives China and Germany, especially Trade for the former and Industrial Production for the latter. The numbers could well disappoint.
- The UK also reports on Industrial Production/Manufacturing Output in December while the British Retail Consortium publishes sales and prices data for January. They should show modest improvement.
- Australia and Japan numbers are unlikely to provide much cheer.
- The MPC, ECB and RBA each have their policy meetings but changes are most unlikely this month (as usual). On Thursday, Governor-elect meets Carney meets for the first time on Thursday the increasing critical Commons Treasury Select Committee and we shall get to watch
- Most equity markets experienced moderate profit-taking but not Tokyo (still the Abe-effect) or Shanghai (opening up for more foreign investment). Some more skeletons emerged from bank cupboards around Europe: Deutsche and Santander are big enough to cope but the Netherlands’ SNS and Italy’s Monti dei Paschi di Siena need government bailouts. The latest own goals by the UK banks did not help either but the FTSE 100 itself kept going.
- Yields on Italian and Spanish government bonds rose partly because of the news on the banks and partly because of the latest adverse domestic political developments.
- As trends continued to be their friends, traders were able to keep thrashing the yen and pound and buying the euro, some exotics, oil and silver. As a result, the dollar was a net loser.
- Julie Gillard has kicked off the longest election In Australian history (voting is due on September 14th unless the government loses a vote of confidence before then) by losing two senior ministers. She is a great survivor but looks in deep trouble this time, especially as the economy is faltering.
- Mr Berlusconi is thoroughly enjoying himself, signing up star footballers while taunting Messrs Monti, Bersani and even the saintly Mario Draghi over the Monti dei Pachi debacle. He is narrowing the gap in the opinion polls and his latest move to abolish the hated property tax and make refunds will be very popular. This is not, however, an election anyone would want to win unless they were at risk of going to jail.
- It was a huge week for US data. There was initial shock over negative GDP growth in Q4 but this could be explained away quite easily: abnormal cuts in defence spending and running down of inventories. The January Non-Farm Payrolls were solid and the revised numbers for December and November together with the ADP private sector payrolls were very encouraging. A somewhat 0.1% increase in the headline unemployment rate reassured investors that QE will go on for a good while yet, especially as inflation fell again. The ISM and PMI numbers for January completed a very positive week overall.
- In Europe, German surveys signalled better times ahead and unemployment actually fell for the first time for the first time in ten months. The surveys from elsewhere painted a quite different picture.
- From Asia came another dismal set of numbers from Japan and the PMIs from China, India, Indonesia and South Korea were somewhat disappointing.
- The UK PMI Markit/CIPS Manufacturing PMI remained positive (just) in January and consumers borrowed more in December on mortgages, personal loans and credit cards, which is better than nothing.
Image by Andy Wright from Sheffield, UK (Flickr) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons