Weekly wrap: Say what?! Fed minutes spark sell-off, Sterling gets pounded
After a promising start to the week on increased corporate deal activity, volatility returned to markets when the minutes of the US Federal Reserve (Fed)’s latest rate-setting meeting were released. Investors dwelled upon language highlighting divisions among US officials about the costs and risks of further quantitative easing (QE). In contrast, and also unexpectedly, the UK Monetary Policy Committee’s February meeting minutes showed three members (including governor Sir Mervyn King) had voted for more QE. The pound’s tumble from favour continued when, late into US trading on Friday, credit ratings agency Moody's downgraded UK government debt to Aa1 from Aaa, citing weakness in the nation's medium-term growth outlook. The MSCI World Index ended the week 0.4% lower (US$), oil slipped 2.7%, while the CBOE Volatility Index (the market’s so-called fear gauge) jumped 13.7%. Government bond yields in the ‘core’ countries of the UK, US, Japan and Germany all fell (prices rose).
Regionally, Asian equities suffered after Beijing’s decision to further cool real estate speculation by imposing price control targets and increasing property tax. In Europe, uncertainties were exacerbated by mixed macroeconomic data and the poll-blackout period in the final run-up to the weekend’s elections in Italy. While Germany’s ZEW Indicator of Economic Sentiment climbed to 48.2 in February, far exceeding forecasts, euro area purchasing managers’ indices (PMIs) disappointed, particularly in France. A number of economic indicator misses elsewhere also fuelled fears of a global growth set-back: US weekly initial claims for unemployment benefit were above analyst forecasts, while the Philadelphia Fed survey showed factory activity in the US mid-Atlantic region contracted to its lowest level in eight months in February.
Messy maths: counting votes in Italy, calculating the US sequester’s impact on GDP
As London reacts to the UK’s debt rating downgrade, in Italy the votes will start being counted in a general election that could potentially threaten the country’s reform agenda. In the run-up to today’s result, Silvio Berlusconi's resurgence has cast doubt on a convincing victory for Pier Luigi Bersani and the centre-left alliance. A hung parliament could reopen fears about eurozone stability. Investors are unlikely to be able to relax as the week continues: in the US only four days remain until $1.2bn of spending cuts are automatically triggered (‘sequestered’) in the absence of compromise between the major parties. The maths of the sequester are messy, particularly in calculating the impact to gross domestic product (GDP); the cuts are to take place over nine years, start part way through the fiscal year, with leftover monies from previous budgets complicating the equation. Also this week, investors are hoping that Fed Chairman Bernanke’s rhetoric will emphasise the need for continued stimulus when he delivers his Semi-annual Monetary Policy Testimony (Tuesday). In Japan, Prime Minister Abe will nominate his choice of governor for the Bank of Japan. His choice could prove the next catalyst for the yen’s move.
The macroeconomic calendar is also hectic. In the US fourth quarter (Q4) GDP is released on Thursday. Expectations are for an upwards revision to 0.5% (quarter-on-quarter, annualised) from the shock of the 0.1% of the first estimate. Friday will bring personal income and spending data, as well as the ISM manufacturing survey. The second estimate of UK Q4 GDP is released on Wednesday, where economists expect no improvement from the prior reading (-0.3% q-o-q). February’s manufacturing PMIs also figure heavily this week in the UK, Europe and China (Friday).