Weekly wrap: Equities ride the rising tide of global recovery optimism
World stocks rode the rising tide of global recovery optimism in a week that saw the most money poured into equities in more than five years. It was kick-started by the preceding Friday’s data releases that pointed to a steady, albeit slow, recovery in the US economy, and news over the weekend from the Basel Committee of bank supervisors who agreed on the first ever global bank liquidity rules, which proved less onerous than expected. The latter helped European banking stocks advance over the week, while conversely in the US, reports out on Monday that several major US banks had agreed to pay more than $20bn to resolve claims arising from their residential mortgage businesses, dragged their shares down.
The fourth quarter reporting season started on a positive note in the US as the mining company Alcoa reported profits in line with expectations and gave a relatively upbeat outlook for global demand. Sentiment received another boost from Chinese trade data for December, which hinted at a solid rebound as exports grew more than expected by 14.1% year-on-year (y-o-y), the highest since May 2012, while imports rose 6.0%. Interestingly, details in the data revealed the US to have replaced Europe as China’s biggest export market.
In the UK, the Office for National Statistics (ONS) surprised the markets by announcing no change to the calculation of the Retail Price Index (RPI), cheering the inflation-protected government bond market where yields dropped (prices rose). Meanwhile, both the European Central Bank and the Bank of England kept interest rates unchanged. In other news, the government of Japan approved a substantial stimulus package (ca. $117bn), and consumer prices posted their biggest increase in seven months in China, rising 2.5% in December y-o-y, up from 2.0% in November.
Data-packed week of economic releases and earnings reports
In the US, 40 S&P 500 companies are to report earnings, equivalent to 12% of the index by market capitalisation. Federal Reserve Chairman Ben Bernanke’s speech at the University of Michigan will take centre stage on Monday. Important data releases include December’s retail sales data (Tuesday), where consensus is for a soft figure of 0.2% growth; industrial production (Wednesday), which should record a 0.2% gain in December month-on-month (m-o-m), and University of Michigan Consumer Sentiment Index for January (Friday), which may rebound to 75 after falling to 72.9 in December reflecting the positive press and market reaction to the US ‘fiscal cliff’ compromise.
Turning to Europe, eurozone industrial production released today has disappointed, falling 0.3% in November from October; factory production growth in Germany was unable to offset large declines in southern Europe. On Tuesday the UK consumer price index (CPI) figure is out (expected 0.5% m-o-m for December), while German Q4 gross domestic product (GDP) is likely to confirm growth at 0.8% y-o-y. The final reading of eurozone inflation is out on Wednesday (consensus 0.3% m-o-m in December, leaving the y-o-y figure unchanged at 2.2%) while on Friday UK retail sales are widely expected to record zero sales growth from a month ago. In government bond markets, Germany has an auction of 10-year bonds on Wednesday, which is followed by a Spanish auction on Thursday.
The highlight of the week in Asia will be China's monthly economic download on Friday – including Q4 GDP, December retail sales and industrial production. GDP growth is largely expected to be 7.8% in Q4 from 7.4% in Q3, while December’s industrial production may have edged up by more than 10% y-o-y.