Alastair Winter, Chief Economist at Daniel Stewart, comments on finance and politics over the last week and the week ahead.
- Limited short-term prospects for global growth and the approaching year-end point to profit-bagging as the most likely explanation for equities’ poor performance. The biggest hits came in the markets that performed best in the happier days of Q3 and Q1: Hong Kong, Milan, Madrid, Frankfurt and New York. Tokyo was also much lower as the clouds darken over the Japanese economy.
- Bond investors settled anew for safety on yields and repayments, leaving Ireland and Portugal in the cold and also exposing Spain.
- The dollar paradox (it often gains on investor fears, even if many of those fears are about the US itself) got another run as the euro’s fans in Asia sit on their hands….for now. As usual, the pound tagged along some way behind.
- In the search for quick returns, Gold and Oil, after the sell-off in recent weeks, were favourite punts but these latest rallies seem to lack conviction.
The outcome of the US elections was as expected but the decisiveness of the results and the stark future demographic implications for the Republicans were somewhat surprising and probably depressed many on Wall Street.
The plunge on Wall Street has been attributed to investors’ moving on from the uncertainty of the election to that of the fiscal cliff. It is true enough that both campaigns found it expedient not to talk about it but it has been obvious that the armed truce would end as soon as these elections were over. Mr Obama now has the moral and tactical advantage and it is inconceivable that a settlement will not be reached before default looms.
Whether they are acting in (secret) concert or trying out to outsmart each other (or a bit of both) Mr Samaras and Mrs Merkel are edging closer to another ‘fig-leaf’ deal for Greece to stay in the EMU. Meanwhile, Mr Rajoy, having secured Spain’s funding for the year, is risking again the wrath of bond investors.
It was another rather good week for the US with particular emphasis on Consumer Sentiment and Credit.
China data was strong all round but to such an extent that it must have been at least a little ‘massaged’ for the Communist Party Congress.
Europe data was as bad as expected: Services PMI surveys and Industrial Production were well into negative territory. No change came from the ECB, however, as it attempts to placate the Bundesbank.
UK data suggesting moderate growth was certainly not bad enough to sway the MPC into more QE for the time being. It seems that the emphasis is being switched to the Funding for Lending Scheme. The Treasury’s helping itself to the Bank of England’s profits of QE will certainly help the funding deficit in the short-term and may suggest that Lord Turner’s suggestion of the much bolder long-term cancellation of some of the Bank’s holding of gilts is being contemplated (along with his candidature for Governor?).
The week ahead
- Posturing over the US fiscal cliff is likely to hog the headlines and an early deal is unlikely, possibly not until the 13th hour. However, Mr Obama seems to have a plan that keeps his fellow Democrats on-side while offering something to the Republicans. It should be remembered that Mr Bernanke has put QE 3 in place to provide more time for the negotiations. Retail Sales (Wednesday) and Industry data (Thursday) should record further economic progress.
- In Europe, there may be some preliminary announcement over Greece but the next bailout instalment of â‚¬30bn will not be handed over in full. The Q3 GDP numbers (Thursday and Friday) are likely to be dreadful.
- In the UK, the favourable trends in Inflation (Tuesday) and Employment (Wednesday) are likely to have continued in October, probably reinforcing the Bank of England’s cautious (and notoriously inaccurate) forecasting approach to the latest Quarterly Inflation Report (Wednesday).
Overall, more profit-taking is likely to limit any bounce-back in equities. Mr Bernanke seems to have created a floor for stock prices while the prospect of higher taxes on dividends and capital gains may have created a ceiling for the time being. The euro’s fans may be tempted by any further falls towards $1.25 vs. the dollar and that should also help the pound.