Weekly wrap: Can the equities rally continue? – US jobs and manufacturing in focus
Psychological warfare? QE infinity (BoJ-style), Cameron’s European tour, S&P breaks 1,500 barrier
The Bank of Japan (BoJ) arrived late to the ‘QE infinity’ party last week, when it announced it had doubled its inflation target to 2% and would be making unlimited asset purchases from 2014 in order to meet it. Currency effects leading up to the release have not gone unnoticed. The yen has declined more than 10% against both the dollar and euro since November on expectations that Shinzo Abe’s new government would exert pressure on the BoJ to ease. The decision triggered concerns among some of Japan’s trading partners. Bank of England Governor Mervyn King warned about potential "competitive devaluations" (currency wars) that could occur between major global economies.
In the US the battle lines remain drawn between Congress and the White House over spending cuts. On Wednesday, the House of Representatives passed legislation to suspend the US debt ceiling (borrowing limit) until 18 May, but a budget must be agreed by mid-April. Causing a stir in Europe, Prime Minister David Cameron made a landmark speech calling for a UK ‘in/out’ referendum on European Union membership to be held by 2018, drawing a divided response from business leaders concerned about future growth and investment.
The latest earnings season saw strong results from Google and IBM, although Apple upset investors, reporting iPhone sales at the low end of analyst predictions. As the S&P 500 eyed the psychological 1,500 barrier – one it must conquer to return to pre-Global Financial Crisis levels – an announcement from the European Central Bank (ECB) helped it climb to 1,502.96. The ECB revealed some 278 banks are to repay €137bn which they received as cheap three-year loans under the first longer-term refinancing operations (LTROs) programme. Investors are reading this as a further sign that the financial system is returning to better health. In macroeconomic news, HSBC flash Chinese manufacturing hit a two-year high in January, as did Markit’s flash reading for US factory activity, but the UK economy shrank 0.3% (quarter-on-quarter, q-o-q) in the last three months of 2012.
Working hard for the money: Can the equities rally continue? – US jobs and manufacturing in focus
After an encouraging run for equities this week investors will be looking for signs that the rally can continue. The US should provide an action-packed week: the first estimate of fourth quarter US gross domestic product (GDP) is due on Wednesday, where consensus predicts a slowdown to 1.2% (q-o-q annualised), with a contraction in inventories and the widening of the trade deficit. Employment trends will hold the market’s attention for much of the week, however, with ADP private payrolls data (Wednesday), weekly initial jobless claims (Thursday), and the January employment report (Friday). Expectations are for the unemployment rate to stay at 7.8%, and that non-farm payrolls will show 155,000 jobs added in January. No major deviation from policy is expected at the Federal Open Market Committee’s rates-setting meeting.
Major energy firms will be in focus, with Exxon Mobil, Chevron, and Royal Dutch Shell all providing trading updates this week. Friday sees a number of manufacturing purchasing managers’ index (PMI) releases: euro area PMI, the latest US ISM gauge, and Chinese PMI (official and HSBC final, January). In the UK, Markit/CIPS manufacturing PMI (January) will be available on Monday (previously 51.4), while monthly mortgage approvals and data on net lending to individuals (December) is out on Wednesday.