Chief Market Analyst James Hughes looks at the major announcements for today and this week as German ZEW survey disappoints, US markets return from the long weekend and the UK looks towards tomorrows unemployment.
[B]BoE minutes and UK unemployment in focus this morning[/B]
Today’s UK opening call provides an update on:
• BoE minutes, UK unemployment and earnings data in focus this morning;
• Forward guidance key for investors as unemployment approaches 7% threshold;
• Unemployment expected to hit 7% in November;
• Wage growth expected to pick up slightly as people’s incomes become less squeezed.
The focus will be on the UK this morning, as the Bank of England releases the minutes from its meeting earlier this month and a number of pieces of economic data are released. With all of this happening at 9.30am GMT, we’re likely to see a significant surge in volatility in all UK markets including the pound sterling, UK bond yields and, to a lesser extent, the FTSE.
Of all of these, the minutes have the potential to have the biggest impact on the markets, although I’m not convinced they will today. With the unemployment rate fast approaching 7%, the threshold that Governor Mark Carney previously claimed was the point at which an interest rate hike would first be considered, the central bank is going to have to do something to reassure households, businesses and the markets that an increase in rates will not happen in the coming months.
Recently the Fed opted to change to language slightly on its statement to reassure people that rates would not be hiked until the unemployment rate is “well below” 6.5%. This is the very least that Carney and the BoE will have to do in order for people to buy into its policy of forward guidance, something few have done so far. I imagine even this won’t be enough though and the BoE will eventually be forced to lower its threshold to 6.5%, in line with the Fed.
As I said earlier though, I don’t expect any of this in the minutes from this month’s meeting. This would more likely come in a statement alongside the rate decision, or during a press conference with Carney himself. What the minutes might tell us is whether this is currently being discussed and, if so, what kind of backing it has.
With this in mind, the unemployment rate, which is due to be released at the same time, will be followed very closely. It has already fallen at a much faster rate than the BoE expected when it announced its forward guidance last year and we’re expecting another small drop today, to 7.3%. This is very close to the 7% threshold, all the more reason why a change in the BoEs forward guidance may be necessary in the next couple of months.
Among the rest of the data being released, we have the change in jobless claims, which is expected to be -35,000 and the average earnings data. The latter is very important for the UK economy going forward. With inflation now at 2%, people’s real incomes are being squeezed significantly less than they have in recent years. However, people are still worse off every year as their incomes rise slower than inflation.
The next step, if the recovery is going to be sustained, is for wage growth to pick up. So far, the recovery has been built on consumers spending more but the only way this can continue is if wages rise or people get into more debt, which is not the situation we want to find ourselves in again. Average earnings growth for November is expected to rise to 1%, which is a good start, but we’re going to have to see more this year if we want the recovery to be sustainable.
Ahead of the open we expect to see the FTSE up 22 point, the CAC up 15 points and the DAX up 30 points.
[B]Corporate earnings to drive markets on Wednesday[/B]
Today’s US opening call provides an update on:
[ul]
[li]Corporate earnings the key driver of markets on Wednesday;
[/li][li]Earnings mixed so far with growth being driven by cost-cutting;
[/li][li]US economic calendar thin again, should pick up tomorrow;
[/li][li]Sterling flies as unemployment closes in on 7% threshold.
[/li][/ul]
Corporate earnings are going to be a key driver in the financial markets again on Wednesday, as investors continue to look for evidence that the economic recovery will continue this year.
So far the fourth quarter earnings season has been very similar to the last few, but with one key difference. The period of ultra low interest rates appears to be coming to an end as the Fed winds down its quantitative easing program and passes the baton to US companies to carry on the recovery.
We’re seeing little evidence of this so far, with companies continuing to report higher earnings driven largely by cost-cutting. While it is important for companies to improve productivity at times like these in order to ensure they remain profitable, we also need to see improvements to the top line in order for this earnings growth to be sustainable.
At the same time, we need to see companies investing in order to drive this future earnings growth, which is something we’re not seeing enough of at the moment. This doesn’t exactly fill me with hope, although we do know that companies are sitting on large cash piles so that offers some comfort. Surely it’s only a matter of time until some of that cash is invested in order to generate future earnings growth. Consumer sentiment is improving, along with other aspects of the economy and the economies of other nations. There’s no longer any reason to hold back.
In terms of US economic releases, it’s been a very slow week so far. Of course there was no data released on Monday as the markets closed for Martin Luther King Day, but yesterday and today hasn’t been much better. Things should pick up tomorrow though, with jobless claims, manufacturing and housing data all being released.
So far this morning the focus has been on the UK, where we had the release of the Bank of England minutes and the unemployment data for November. There was no real surprised in the minutes, with the MPC clearly reluctant to change the unemployment threshold linked to its forward guidance.
It did highlight that it doesn’t need to raise interest rates if the threshold is hit soon, but with unemployment falling to 7.1% in November, that isn’t going to reassure anyone. The fact of the matter is, the forward guidance hasn’t worked because the BoE was wildly inaccurate with its unemployment forecasts and has since been very inflexible with the unemployment threshold. At the very least it should take a page out of the Fed’s book and say rates won’t be raised until well after the threshold is hit, especially given that inflation is currently in line with its 2% target.
If this doesn’t happen, sterling will continue to rally strongly against the other currencies, as traders price in an interest rate hike earlier than was previously expected. This could be damaging for UK exports at a time when the manufacturing industry is only just recovering.
Ahead of the open we expect to see the S&P down 1 point, Dow down 30 points and the NASDAQ up 1 point.
Markets selloff - 0:09
UK unemployment reaches 7.1% - 00:22
Average earnings disappoints as real wages continue to fall - 02:21
Australian CPI rises to uncomfortable levels and challenges RBA decision-making - 03:11
Research analyst Joshua Mahony discusses the UK unemployment fall which sees BoE forward guidance increasingly come into question. He also discusses the impact that the continued fall in real wages is likely to have upon consumer activity. Finally Joshua talks about the Australian inflation rate rise and what it means for the RBA decision-making going forward.
[B]Chinese data weighs on sentiment ahead of PMI readings[/B]
Today’s UK opening call provides an update on:
• Surprise contraction in Chinese manufacturing weighing on investor sentiment;
• Improvement expected in eurozone PMI data;
• France remains a concern, with the data expected to remain comfortably in contraction territory;
• Spanish unemployment finally stabilising at around 26%.
Chinese data is weighing on investor sentiment this morning, with European index futures trading slightly in the red after Asian indices recorded small losses over night.
The preliminary reading of this month’s HSBC manufacturing PMI posted its first contraction figure since July last year, which has knocked investor sentiment a little. The fact that we’re only seeing small losses suggests investors aren’t overly concerned about this reading. The general consensus appears to be that this should be seen as a potential warning of slowing activity this year in the world’s second largest economy, rather than confirmation of it.
Hopefully we’ll get better numbers out of the eurozone this morning, with manufacturing and services PMI data being released for Germany, France and the eurozone. The numbers coming out of Germany and the eurozone have been very encouraging over the last six months or so and have been very consistent with people’s expectations for the coming year, small amounts of growth in the euro area driven predominantly by accelerating growth in Germany.
The concern once again is France, which has seen its PMI reading deteriorate after showing signs of picking up in the third quarter of last year. Unfortunately, this highlights the problem with these PMI readings as this is the same quarter that the country posted a small contraction in GDP which could lead to it falling back into recession. The recent slide in the numbers looks like more than a bump in the road for the data and suggests it’s going to be another rough year for the euro area’s second largest economy.
The data is expected to show a slight improvement this morning, although the French numbers are expected to remain comfortably in contraction territory, marking a third consecutive month of negative growth in the services sector and a far more concerning 30 months without growth in the manufacturing sector.
Over in Spain things are far worse, although we are seeing signs that the country is turning a corner. Spain recently exited its bank bailout program after borrowing much less than the €100 billion figure that was initially being talked about. It’s also beginning to find its feet again in the debt markets, as seen yesterday by the success of its 10-year bond auction which saw yields fall to 3.845%.
Conditions in the country are still very bad though, but these are hopefully an early indication that it is turning a corner. The rapid increase that we’ve seen in the unemployment rate since the start of the crisis appears to have come to a halt, for now at least. In the third quarter we saw a larger than expected drop in the figure and in the fourth, we’re expected it to remain at 26%.
Later on the focus will be on the US, where we have jobless claims, manufacturing and housing data being released. Among all of these releases though we also have the January consumer confidence figure for the eurozone, which is expected to improve again to -13, although this is still deep in negative territory highlighting just how pessimistic consumers still are.
Ahead of the open we expect to see the FTSE down 15 point, the CAC down 6 points and the DAX down 22 points.
[B]US futures lower ahead of the opening bell on Wall Street[/B]
Today’s US opening call provides an update on:
[ul]
[li]US futures lower ahead of the opening bell on Wall Street;
[/li][li]Investor sentiment flat as positive eurozone PMIs offset disappointing Chinese data;
[/li][li]US earnings and economic data in focus.
[/li][/ul]
US futures are trading slightly lower as we approach the opening bell on Wall Street on Thursday.
A disappointing manufacturing PMI out of China earlier in the day appears to have offset the more encouraging figures from the eurozone this morning, leaving investors feeling a little flat as we approach the end of the week.
This hasn’t been helped by the mixed bag of fourth quarter earnings which have given investors little to cheer about. It’s all well and good announcing earnings growth but when this is continuing to be driven by cost-cutting measures, it’s not the kind of growth that investors want to see. Not those focused on the long term anyway.
It also doesn’t bode well for the economic recovery in 2014 if companies are continuing to focus on improving the bottom line through cost-cutting rather than revenue growth. This is expected to be the theme for the rest of the earnings season and could even continue over the next couple of quarters.
If earnings continue to be the key driver in the markets in the coming weeks as they have been over the last couple, we could see more sideways trading in the equity markets. Until now investors have always had an excuse to buy the dip, whether it be the Fed’s asset purchase program, improving economic data or increased optimism surrounding company earnings. This doesn’t appear to be the case at the moment.
Maybe that can change today, with a lot more pieces of economic data being released and plenty of companies scheduled to report earnings. First up today we have US initial jobless claims, which is expected to be 326,000 for last week.
This will be followed by the preliminary reading of the January manufacturing PMI, which is expected to remain unchanged from December at 55. Finally today we have the existing home sales figure for December, which is expected to show a rise of 0.4%, following the surprising 4.3% drop the month before.
Ahead of the open we expect to see the S&P down 7 points, Dow down 72 points and the NASDAQ down 2 point.
Mixed economic data from China and Europe - 00:18
Corporate earnings driving financial markets - 01:20
US data and earnings in focus this afternoon - 04:56
Equity markets are struggling for upward momentum at the moment, as the Fed seeks to further scale back its asset purchases, companies continue to offer a mixed bag of earnings and economic releases are few and far between. Market Analyst Craig Erlam explains why markets are struggling for direction on Thursday and what could potentially move them as we near the opening bell on Wall Street.
[B]Investors down in the dumps as the week draws to a close[/B]
Today’s UK opening call provides an update on:
• Investors down in the dumps following yesterday’s Chinese data;
• Quiet day for economic data, focus remains on earnings;
• Carney and Draghi both scheduled to speak at the WEF in Davos.
Investor sentiment is continuing to decline as we approach the end of the week. US and Asian indices both posted losses across the board over night and that negativity is now flowing into Europe, with futures pointing to a lower open this morning.
There’s a number of reasons why investors are feeling a little down in the dumps at the moment. The Fed is no longer willing to support the economy on its own and has already starting to scale back its asset purchases, and another reduction will probably be announce next week.
Corporate earnings season has been mixed from an investor standpoint and disappointing from an economic one. Companies have continued to focus on bottom line growth driven by cost-cutting rather than investment and stronger revenues, which is what we’ll need to see if the recovery is going to gather pace this year.
The economic data has been relatively encouraging so far this year, there’s just been a real lack of it over the last couple of weeks. There was a significant increase in the number of releases yesterday but things got off to a bad start as the Chinese manufacturing PMI fell back into contraction territory. Markets never really recovered from this disappointing start, despite some encouraging data from both the eurozone and the US, and that even appears to be carrying over into today.
The only problem now is that there’s a real lack of economic data being released on Friday which means sentiment is going to be driven predominantly by earnings season, which doesn’t fill me with much hope. Once again there’s very few European companies reporting today, although we will get interim results from Royal Mail which I’m sure many will follow closely following its IPO last year.
The World Economic Forum in Davos will continue today so there’ll probably be a lot of noise coming from that which can sometimes have an impact on the markets. Especially when the noise is coming from central bankers, such as Mark Carney and Mario Draghi, both of whom are scheduled speak.
Ahead of the open we expect to see the FTSE up 6 point, the CAC down 3 points and the DAX up 2 points.
Lack of positive catalysts responsible for stocks sell-off - 00:58
Carney and Draghi speak in Davos - 01:59
Earnings continue to be key market driver - 04:35
Market Analyst Craig Erlam talks about why stocks are continuing to sell-off on Friday, what Bank of England Governor Mark Carney’s comments in Davos mean for UK interest rates and what’s going to be the key drivers in financial markets today and next week.
A real key week ahead for the markets, where the release of a raft of economic announcements is likely to bring substantial volatility following a somewhat quiet week gone. The US is likely to take most of the attention with the announcement from the FOMC with regards to whether the tapering will continue apace despite the poor jobs data released earlier in the month. In the UK, a somewhat quieter week means we are looking towards the preliminary GDP reading on Tuesday to follow on from the positive sentiment provided by falling unemployment. Meanwhile in the eurozone, the CPI flash estimate is likely to provide further clarity on the inflation scenario which is driving talk of negative interest rates.
In Asia, the Japanese retail sales is one of very few notable releases to look out for. Finally in New Zealand, the interest rate decision will be key following higher than expected inflation in December.
[B]US[/B]
A major week in the US, with the release of the FOMC monetary policy statement being accompanied by the first GDP estimate of Q4 2013. The most important of these is the [B]FOMC announcement[/B] on Wednesday with regards to their next decision on monetary policy. The decision from the Fed last month to trim their monthly purchases by $10 billion started a pathway to completely eliminating the trend of operating as a buyer in the bond market as a means of boosting stability and encouraging growth. Given that this has been previously dictated largely by the movements within the jobs market, many had seen a January taper as out of the question following the lowest rate of job creation in a year and a half. However, with most of that impact being driven by extraordinary weather conditions that affected almost every state in the US, it is likely that the FOMC will view it as an outlier and not indicative of anything more significant.
The impact to the markets following last month’s taper was surprisingly muted, with many saying it had been factored into prices already. However, with the likes of the S&P500 only 30 points off all-time highs at the time of the decision, I do not believe this to have been the case per se. It is more likely that this shows a success in the ability of the Fed to properly manage expectations in the markets. This likely had alot to do with the decision to not taper in September when many had expected them to. What will be interesting is how markets respond to the next taper as it will likely give an indication of just how aggressively the Fed will be pulling back on stimulus going forward.
Personally, I do expect to see another taper on Wednesday, owing to the raft of positive figures apart from that non-farm payroll release. The unemployment rate fell to 6.7% for the first time since December 2008, with the ADP non-farm payroll figure showing the highest number since this time last year. That being said, there are mixed views in the markets as to whether Yellen will play it safe and encourage members not to taper as a means to prove she is will be highly accomodative in her role as chairperson. This difficulty in gauging whether the taper will be resumed means that this release is going to be the major event of note which markets are looking towards as a key driver of volatility going forward.
On Thursday, the [B]US GDP figure[/B] will be released, following the recent announcement that the IMF has upgraded their 2014 US growth target to 2.7%. This month we are expecting to see a somewhat more muted figure of 3.3% following an rise of 4.1% on an annualized basis as measured from the Q3 figure. The annualized reading can sometimes confuse given that it provides a gauge of how the economy would grow if projected from that given quarter, taking into account seasonal factors and inflation. Nevertheless, the Q3 figure represented the strongest rate since Q4 2011.
The GDP figure is always absolutely critical for investors from a macro point of view as it measures the growth of the value of all the goods and services produced by the economy. Many see this as the strongest all-encompassing measure of how an economy is faring since it takes into account all sectors across the board. Bear in mind that this week’s release is the first estimate and thus provides the markets with the earliest indication of by how much the statisticians expect the US economy to have grown within Q4 2013. For this reason, the US GDP figure will be key as a potential market moving event in the week.
[B]UK[/B]
A similar story in the UK, where the main event of note is going to be the [B]preliminary GDP figure[/B] for Q4 2013. Given that this is the first release which indicates by how much the economy is expected to have grown, there is likely to be significant volatility surrounding this figure. Unlike the US figure, this number is not annualized and thus makes it harder to compare the two. The closest of the two figures being released which is comparable is the year on year figure, which is expected to rise moderately to 2.0%. Bear in mind that the IMF has recently cited the UK as the leading light in Europe, with expectations of 2.4% growth in 2014. Thus we are looking for a strong figure on Tuesday to follow on from the outstanding reductions in unemployment seen in the recent 6 months. Should this come true and the figures impress, this would provide yet another coup for the UK economy and could provide even further emphasis for the likes of the GBP and FTSE100 after recent rallies.
[B]Eurozone[/B]
A mixed week ahead for the eurozone, where the German business confidence, along with eurozone CPI and unemployment rates will be in focus. The first of these to be released is the [B]German IFO business climate survey[/B], which acts as a leading measure of both eurozone and German economic health as perceived by manufacturers, builders, wholesalers and retailers. The figure has a high degree of correlation with the manufacturing PMI, however it is the correlation with the German GDP figure which is more interesting. Often a significant shift higher or lower on this figure has preceded a substantial move in the GDP QoQ figure. This was highlighted most notably when the October 2012 business climate figure marked the start of the recovery for the region, which was confirmed by the GDP release seen in February 2013. Thus on that occasion, this provided a leading indicator of the recovery, months ahead of the headline figures. For this reason, it is key to watch this release, which is expected to rise marginally to 110.0 from 109.5.
Later in the week, the [B]eurozone CPI figure[/B] is released, which many will be keeping a look out for. The inflation environment in the eurozone has come back into the limelight over the second half of 2013, where Mario Draghi opted to reduce the headline interest rate by 25 basis points in response to the fall to 0.7% in inflation. The threat of deflation appears to be back on the scene following a brief boost, falling back to 0.8% earlier this month. This week’s measure is expected to show a push back to 0.9% for January on a year on year basis. However, should we see the figure fall short yet again, this could become a serious problem for Draghi who could begin to seriously consider negative interest rates or alike to avoid deflationary fears. Remember that price stability is the number one target for central banks and thus any notable shift lower will have to be addressed as a matter of urgency.
Finally, keep an eye out for the [B]eurozone unemployment rate[/B], due to be released on Friday. This has been somewhat of a sticking point within the eurozone, where the peripheral economies have found it extremely hard to generate sufficient employment. This obviously provides a drag upon their ability to grow given the loss of tax revenue and subsequent increase in welfare payments. The unemployment rate has remained around 12.1% for almost a year now and despite falling back from 12.2% in September, there has been little to suggest the single currency region is on any substantial path towards reducing this key measure. Expectations are that we will see yet another figure of 12.1% posted. However, should we see a fall back to 12.0% it would be highly notable and could point to the beginning of much needed improvements to the chronic unemployment seen throughout this crisis.
[B]Asian & Oceania[/B]
A quiet week in Asia, where the main event of note come out of [B]Japan[/B] in the form of the [B]retail sales[/B] figure due on Wednesday. The Japanese economy has seen a somewhat mixed 2013, where the promises from Shinzo Abe seems to be coming true following a move out of deflation, which also saw the yen devalue significantly and Nikkei225 reach record highs. However, with the highest debt to GDP ratio of all the major developed economies, standing above 220%, the need for a VAT hike is evident. However, coming at a time when the recovery and growth is somewhat fragile means that figures such as the retail sales number are absolutely crucial to understand the health of economic activity. Should we see a weakening of this figure, it would be difficult to see how the VAT rise in April will not have a negative impact on sales in the country. Market forecasts point towards a moderate fall from 4.1% to 3.9%, yet any larger tumble could be notable and draw attention.
Finally, in New Zealand, the [B]monetary policy decision[/B] from the RBNZ is due on Wednesday. This has become increasingly pertinent given that we saw a greater than expected inflation figure last week, bringing into account the possibility of an interest rate rise in the near future. Bearing in mind that most major economies are providing guidance of how long their rates will remain low, it would be highly notable should the RBNZ raise rates so soon. I do not expect to see a rise today, yet this announcement will become more and more crucial as 2014 goes on.
[B]Traders risk averse following Friday’s sharp sell-off[/B]
Today’s UK opening call provides an update on:
[ul]
[li]Traders risk averse following Friday’s sharp sell-off;
[/li][li]Emerging market risk may encourage the Fed to delay the next taper, expected on Wednesday;
[/li][li]Asian sell-off not helped by largest ever Japanese trade deficit;
[/li][li]Economic data and earnings in focus today
[/li][/ul]
Traders are heading into a very important week for the financial markets feeling extremely risk averse, as Friday’s sell-off in the US spills over into the Asian session over night and European futures this morning.
Attitudes appear to have changed dramatically in a very short period of time. Only a couple of months ago it seemed nothing was going to deter investors from buying the dips in the market to profit from the better entry points, regardless of what the Fed was doing and what the data told them. At one point we’d entered a new phase in the recovery where bad news was good news and good news was also good news. It was a win win from an investor standpoint.
How things have changed. Since the start of the year, the rose tinted glasses have come off and investors are seeing things a lot more clearly. Earnings season may have a lot to do with this as investors were looking to it for confirmation that the economic recovery is sustainable and is gathering pace, and the previous reliance on the Fed’s ultra-loose monetary policy was no longer there.
Instead all it has highlighted is that little has changed on this front. Companies are continuing to cut costs to drive earnings growth, which previously was enough to keep investors happy. However, that was when the Fed was flooding the markets with cash which meant that investors were looking for any opportunity to buy the dip. With the Fed now reducing its purchases and planning to wrap it up entirely later this year, that is no longer the case.
This brings us to another threat which created a lot of panic in the markets last week, initially triggered by the weak Chinese manufacturing PMI on Thursday. The sell-off in emerging market currencies created a fair amount of panic last week and is only likely to spur further panic going forward about the impact on Fed tapering on the emerging markets.
We always knew this was a threat as investors poured money into these markets in search of yield. The moment the Fed decided to start reducing its purchases, one of its most difficult tasks was going to be reducing the impact on these markets as much as possible. With that clearly not going to plan, the Fed could decide to hold off on further tapering on Wednesday in order to allow the markets to calm down a little and stop the recent panic turning into full blown chaos.
The sell-off in Asia over night wasn’t helped by the Japanese data, released on Sunday night, that showed Japan’s trade deficit grew to its highest ever level as a proportion of GDP. While the surprise jump is thought to be largely due to one-off factors, these higher deficits are expected to continue going forward.
This has all left investors feeling very risk averse right now and that is likely to continue as we head into a very important week. Not only do we have the Fed decision on Wednesday, we also have some key economic data being released, while corporate earnings season will get into full flow with a large number of S&P 500 and Dow components scheduled to report on the fourth quarter.
It’s going to be a relatively quiet start to the week in terms of economic data, with the only notable release this morning being the German Ifo business climate figure. This is expected to rise to 110 from 109.5 in January. This will be followed by the release of the US services PMI and new home sales later.
Ahead of the open we expect to see the FTSE down 61 point, the CAC down 22 points and the DAX down 64 points.
[B]Friday’s sell-off carries over to Asia and Europe[/B]
Today’s US opening call provides an update on:
[ul]
[li]Friday’s sell-off carries over to Asia and Europe this morning;
[/li][li]Traders unwillingness to buy the dips could prompt 10% pull back;
[/li][li]US economic data and earnings in focus on Monday
[/li][/ul]
The negativity that weighed heavily on markets towards the end of last week is still apparent on Monday, as European markets trade in the red across the board following a similarly negative session in Asia over night.
Over the last year or so, traders have found a way to find the positives in any news that justified them buying any dips in the market. When it comes to earnings season this has been earnings growth, despite the fact that this has been driven by cost-cutting rather than stronger sales, which would point to longer term growth potential.
The most obvious example has been markets rallying in response to poor economic data, with the justification here being that it meant the Fed would continue to inject $85 billion every month into the financial markets. The problem now is that the Fed has started tapering and intends to end the asset purchase program later this year, leaving investors unwilling to celebrate poor data and accept short term boosts to earnings.
Add to this the recent concern over the capital outflows in the emerging markets, highlighted last week by the huge sell-off in the currencies, and traders no longer appear willing to buy into those dips. We’ve already seen more than a 3% sell-off in the S&P and more than 4% in the Dow, and the sell-off could continue in the coming weeks/months until we’ve seen around a 10% sell-off making equities attractive again to bargain hunters.
US futures suggest we’re going to see a temporary halt in the sell-off this morning but it’s interesting that they’re only marginally higher which really highlights the lack of appetite for risk despite the huge sell-off. This could change as the day goes on with plenty of earnings and economic releases scheduled that could provide a temporary boost for investors.
Ahead of the open we expect to see the S&P up 5 point, Dow up 19 points and the NASDAQ up 5 points.
Chief Market Analyst James Hughes looks at the major stories moving financial markets today, including the huge falls seen on US markets on Friday, the fallout over the Argentina crisis and the issues facing emerging markets as a result of the US taper. James also looks at the major economic data for this week.
[B]Indices recover following sharp sell-off in recent days[/B]
Today’s US opening call provides an update on:
[ul]
[li]Apple earnings weigh heavily on Nasdaq futures;
[/li][li]Apple expected to open more than 7% lower despite highest ever iPhone sales;
[/li][li]Minor gains this morning may reflect a small pullback in the sell-off, rather than a change in sentiment;
[/li][li]Focus turns to economic data and earnings on Tuesday
[/li][/ul]
The S&P and Dow are expected to track Europe higher on Tuesday, while the Nasdaq is currently seen opening lower with Apple losses seriously weighing on the index.
Investors were far from impressed with Apple’s earnings after the close on Monday, despite the tech giant announcing higher than expected earnings. The disappointment came from the number of iPhone sales in the fourth quarter, which despite rising to 51 million, the highest ever, fell well short of expectations of 55 million.
On top of this, guidance for the current quarter was disappointing, which didn’t help matters. However, with all this in mind, the more than 7% sell-off in after hours trading seems to be quite an overreaction. This isn’t uncommon during earnings season, but what it means is we’ll have to wait a couple more days to see what investors really think of the numbers.
This is likely to weigh slightly on the S&P as well, although the weighting on this index is far smaller than on the Nasdaq, so the impact is significantly less. The S&P and Dow are both seen opening higher this morning, reflecting the improvement in investor sentiment on Tuesday, which has also been seen in European markets.
That said, the size of the rally in equity markets today may suggest this is just the markets taking a breather from the recent sell-off. Unless the rally picks up more in the next 24 hours or so, I wouldn’t be surprised to see more selling later on in the week.
There’s some economic data being released during the US session today, which could help improve investor sentiment further. First up we have core durable goods orders before the opening bell on Wall Street, which are expected to rise 0.5% in December, following an even bigger increase the month before.
Following this we have the January consumer confidence figure which is expected to remain unchanged from a month earlier at 78.1. It is important for the economic recovery in the US that consumer confidence remains at these higher levels so this figure could get a reaction in the markets today. Especially if we see something significantly above or below expectations.
Another focus today will be corporate earnings, with many large companies due to report, including Pfizer, AT&T and Yahoo. A relatively disappointing earnings season so far has been one of the main reasons why we haven’t seen a continuation of the rally in equity markets in January. If we continue to see the same today, it could weigh further on equity markets as we head into the second half of the week.
Ahead of the open we expect to see the S&P up 7 point, Dow up 86 points and the NASDAQ down 11 points.
Markets stabilise following sell-off - 00:09
Turkish central bank will hold extraordinary meeting today - 00:29
2013 UK GDP grows at strongest level since 2007 - 01:28
Tomorrow FOMC statement and RBNZ statement - 02:49
Research analyst Joshua Mahony discusses the market rise following a strong sell-off spurred on by Emerging Markets fears. Along the same loines, Joshua discusses the Turkish lira selloff and how their central bank could stem EM fears later today. In UK affairs, he notes the strength of the UK GDP figure in what has been a very bullish period for the UK economy. Finally, Joshua previews tomorrows FOMC and RBNZ meetings.
[B]Turkish rate hike eases EM concerns ahead of Fed decision[/B]
Today’s UK opening call provides an update on:
• Markets boosted by aggressive rate hike from the Turkish central bank;
• Fed expected to taper again this evening despite concerns in emerging markets;
• Quiet European session expected ahead of Fed decision.
The Turkish central bank’s bold decision to raise interest rates to 12% yesterday evening appears to have given the markets a significant boost over night.
Asian indices ended higher across the board over night, while European indices are expected to open almost an entire percentage point higher on Wednesday. We’ve seen a huge amount of concern in the markets since the end of last week in response to the across the board selling in emerging market currencies.
This was always going to be a risk when the Federal Reserve started reducing its asset purchase program, with the markets no longer being flooded with liquidity and investors being offered higher rates closer to home. However, the action taken by the Turkish central bank should significantly reduce the capital outflows and even draw some money back into the country. If other countries follow suit, this should re-stabilise the markets at a time when further Fed tapering is widely expected.
The interest rate hike could not have come at a much better time for the markets, with the Fed expected to announce its next round of tapering this evening. Questions had been raised over whether the Fed would risk another taper at a time of such volatility in the emerging markets, with some suggesting they should hold off until the next meeting in March and allow the markets to calm a little.
That said, volatile financial markets have not stopped the Fed in the past, so there’s no reason to suggest they would now. The timing of the rate hike from the Turkish central bank suggests this is the case. I would say at the very least, the Fed will announce a $5 billion taper that will both calm the markets and show that it is committed to ending the quantitative easing program this year.
With the Fed’s announcement expected later on this evening and the economic and earnings calendars offering little in terms of catalysts, it could be a relatively quiet morning in the markets. This should allow the events of the last week to completely sink in and create a little more stability in the markets, before the Fed potentially shakes things up again.
Ahead of the open we expect to see the FTSE up 40 point, the CAC up 38 points and the DAX up 92 points.
Markets mixed following Emerging Markets comedown - 0:09
Turkey raises overnight rate yet questions remain - 00:30
FOMC taper uncertain as markets seek direction - 02:14
RBNZ meeting could bring notable rise in interest rates - 04:11
Research analyst Joshua Mahony discusses the overnight decision from the Turkish Central bank to raise rates and what this means for the wider emerging markets going forward. He also discusses the FOMC decision whether to taper asset purchases later today, along with the possibility of the RBNZ to raise their interest rates for the first time since 2010.
[B]Fed taper and Chinese data weigh on European futures[/B]
Today’s UK opening call provides an update on:
• Turkish rate hike boost doesn’t last long as investor pessimism takes over once again;
• Fed reduces its asset purchases by another $10 billion as expected;
• Downward revision to Chinese HSBC manufacturing further weighs on markets;
• Economic data may distract from emerging market turmoil on Thursday.
The downbeat tone in the markets is once again expected to carry into the European session on Thursday, with indices seen opening slightly lower across the board.
You would never guess that only a month ago we were celebrating the fact that many indices in the US and Europe were about to end the year at, or near, record highs. Not even the Fed’s first taper in December stopped bargain hunters from buying the dips and riding the rally into year end. What a difference a month can make.
The bizarre thing is that very little has actually changed, the Fed is still tapering, companies are still relying on cost-cutting for earnings growth, Chinese growth is still slowing and we’re seeing some capital flight in emerging economies which was both expected and occurred in the middle of last year. The biggest change has been people’s perception of these events, which I guess is all that counts.
Yesterday’s relief rally following the huge rate hike in Turkey was extremely short-lived, which clearly highlights just how pessimistic investors are right now. On top of that we saw selling in the US following the Fed’s decision to reduce asset purchases by another $10 billion even though this is exactly what people were expecting.
In other words, there’s very little difference in data, earnings and expectations this month. However, rather than buying the dips, traders are instead jumping at any opportunity to short the market. Now, the chances are this is just that long awaited correction that has been talked about for so long and the uptrend will continue soon enough. The only question is, how big a correction are we going to see? Already we’re closing in on 5% and I still think there’s probably another 5% to come.
In terms of what’s going to move markets today, already we’re seeing the Fed’s decision to taper last night and the disappointing Chinese data weighing on European futures. The HSBC manufacturing PMI for January was revised slightly lower to 49.5, further adding to the negativity in the markets. It was this preliminary reading last week that set off the concerns about the emerging economies. I can’t imagine this revision will help matters.
There’s plenty of European data being released this morning which could act as a distraction to what’s going on in the emerging markets and the US. First up we have the flash fourth quarter GDP reading for Spain, which is expected to show the country growing by 0.3%. This isn’t much but it is a huge positive for a country that prior to the third quarter was stuck in an almost two year recession and even now boasts near record high unemployment above 26%.
To further highlight how depressing the unemployment situation is in Spain, compare it to Germany, the strongest economy in the eurozone, where unemployment currently stands at 6.9%. This is expected to remain unchanged in January, with the number of unemployed actually falling by 5,000.
Finally we have a number of confidence surveys being released for the eurozone, most of which are expected to post further improvements in January. This is a positive for the euro area, but we have to be a little concerned that the majority of these improvements are being driven by the stronger economies, such as Germany, which is somewhat papering over the cracks of the region as a whole. While we shouldn’t grumble as Germany’s success, we also shouldn’t be distracted by numbers that don’t necessarily reflect the sentiment in many of the countries in the euro area.
Later on it’s over to the US where we have a number of other pieces of data being released, including the first estimate of the fourth quarter GDP figure. Also being released is the weekly jobless claims data, pending home sales and personal consumption expenditure prices, a measure of inflation that the Fed is believed to follow quite closely.
Ahead of the open we expect to see the FTSE down 11 point, the CAC down 5 points and the DAX down 15 points.
[B]Is US taper justified as markets look towards GDP figure[/B]
Today’s US opening call provides an update on:
[ul]
[li]US tapering shows that the Fed is serious about ending QE;
[/li][li]HSBC Chinese manufacturing PMI revised further into contraction;
[/li][li]German employment outlook improves following positive data;
[/li][li]US GDP expected to post strong figure despite slowdown;
[/li][/ul]
European stock markets have started the day in a positive manner, following a decision from the US to continue apace with the tapering of asset purchases in yesterday’s FOMC meeting conclusion. The decision to reduce bond buying to $65 billion in February is notable for a number of reasons. Firstly, as a parting gift to Ben Bernanke, this is the first unanimous monetary policy vote since June 2011, with all 10 voting members believing that a further reduction is appropriate. The decision to reduce what has been seen by many as a form of steroids was expected to have a significantly bearish effect, yet given the willingness of the markets to shrug off both tapers so far are a testament to the strength that remains within this current bull market.
Now that we have seen the first two tapers, I believe we are now likely to see less risk for future decisions as it is less of an unknown going forward. The Fed are clearly serious about reducing the rate of purchases at a steady and constant rate, where a poor payrolls figure failed to stand in the way. It has been evident that there are a number of positives coming out of the US, with the ADP and unemployment rate in particular portraying a healthy jobs market despite the effect of the adverse weather conditions upon the headline payrolls figure. Thus the fact that the FOMC is able to look beyond such a shock figure is an indication that we are likely to need something more substantial to refrain from more future cuts to the asset purchase facility. Next month will see a Yellen chaired Fed and despite Bernanke saying there will be consistency across both Fed’s, we will be watching for any shifts in emphasis given that she is perceived to be more of a dove than the outgoing Bernanke.
China received a rather unwelcome Chinese new year’s present this morning, when the HSBC manufacturing PMI figure was revised further lower for January. The fall into contractionary territory last week was one of the key factors which brought about heightened pressure upon the emerging market economies. Thus the further reduction from 49.6 to 49.5 is somewhat of a kick in the teeth and shows that this be could be the beginning of a more drawn out slowdown in the Asian powerhouse. This will of course need to be proven as currently there is the possibility of this representing a one off month. It is also worth noting that this survey is focused upon smaller and medium sized businesses, rather than the larger state influenced firms being measured in the official figure. Thus while a poor HSBC manufacturing PMI may show a weakening of some smaller companies, this is somewhat expected as the Chinese economy shifts towards reducing the excess capacity that has been a dominant feature throughout 2013 by reducing some of the incentives previously in place.
German employment received a significant boost in January, with the unemployment rate falling to 6.8%, with December’s figure also being revised lower to 6.8%. This was driven by the significant fall in the unemployment change figure, which saw the largest monthly fall in jobless since March 2011. The Eurozone unemployment conditions are one of the most worrying factors which have persisted throughout this crises despite improvements across the likes of the banking sectors and debt market. Thus for many, the ability to bring employment back into check remains the most difficult and final hurdle to pass in the pathway back towards normality. Of course, of all Eurozone nations, it is the German economy which has typically fared best and led the way for some of the weaker economies in the single currency region. However, given the high degree of labour mobility within the Eurozone, improvements in the German employment market will prove beneficial all-round. One thing to note is that whilst the unemployment rate did fall back to 6.8%, this figure has provided a constant stumbling block which the German economy has failed to surpass on 14 occasions within the past two years. Thus I believe the shift to 6.7% would be much more notable as an indicator of whether the German economy is on positive path lower of if we are going to continue to see the unemployment rate stall at 6.8%.
Looking ahead, the US GDP figure is due to be released this afternoon, with market expectations pointing towards a fall back to 1.3% for Q4 2013, following a hugely impressive 2.0% achieved back in Q3. Given the strength of that Q3 figure, the markets are not expecting to see such a strong figure for every quarter and thus a reduction was always expected. The effect of the nationwide arctic freeze seen in December is sure to have had a notable impact upon the Q4 figure and thus a fall is not likely to be treated with too much trepidation at a time when the markets are looking positively upon the US economy.
US markets are expected to open higher, with the S&P500 +7 and DJIA +47 points.
Federal Reserve tapers despite flare up in emerging markets - 00:17
Chinese manufacturing contracts faster than previously thought - 02:59
Mixed data in Europe this morning - 04:25
Focus on US unemployment, inflation and housing - 06:05
We’re seeing more risk aversion in European markets this morning, following the Fed’s decision last night to reduce its asset purchase program by another $10 billion. Market Analyst Craig Erlam talks about the Fed’s decision to taper, what else is weighing on investor sentiment and what we should look out for in the markets on Thursday.