Weekly Global Wrap up – last week

The battle of wills: optimism for a US recovery or pessimism for the Eurozone?

The first trading week of 2012 began on an optimistic note, which soon evaporated as concerns for the sovereign debt crisis in the Eurozone won the upper hand. Completely at odds with the latter were a plethora of positive data in the US reaffirming that economic recovery was gaining traction, culminating with the all important US non-farm payrolls figure on Friday. Payrolls increased by 200,000, which beat general consensus by a wide margin. The unemployment rate dropped to 8.5%, manufacturing and service sector data also improved.

The US was not alone; encouraging manufacturing data out of China and India, signs of an expanding service sector in the UK and a drop in German unemployment raised hopes for a global economic recovery. However, lacklustre German and French government bond auctions yet again reminded of the nervousness in the region, while record use of the European Central Bank’s deposit and marginal lending facilities simply reaffirmed the difficult liquidity conditions faced by banks. To add to the woes, Hungary was downgraded to junk by the Fitch rating agency; benchmark Hungarian bond yields soared (prices dropped) and the forint sank to a record low versus the euro. The euro itself fell significantly versus the US dollar, sterling and the yen. Oil prices were elevated on tensions between Iran and the US.

Shaping the markets – this week

Central bank meetings in focus and will Europe sink into recession?

Monday sees yet another meeting between the leaders of Germany and France to discuss fiscal coordination and ways to boost growth in the region. However, the puzzle of whether the Eurozone will sink into recession should be revealed on Wednesday when gross domestic product (GDP) figures are released for various parts of the region. Germany managed a 3.6% rise in the previous year and the new figure will be watched closely to see if it could match that performance. On Thursday markets get a glimpse of Eurozone industrial production, widely believed to reflect stalling demand. 

Both the Bank of England (BoE) and the European Central Bank (ECB) are to meet to set interest rates this Thursday. No change is expected, while the BoE is generally thought to leave any further quantitative easing decisions to February.

In the US, the Federal Reserve’s (Fed’s) Beige Book survey of economic conditions (released on Wednesday) should point to brighter conditions. December retail sales announced on Thursday are expected to show a modest rise and, finally, the University of Michigan Consumer Sentiment release (Friday) is expected to be relatively flat.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1277.81

1.6

1.6

Dow Jones Industrials

12359.92

1.2

6.8

NASDAQ Composite

2674.22

2.7

0.8

FTSE 100

5649.68

1.4

-4.2

Euro STOXX 600

247.53

1.2

-10.3

Nikkei 225

8390.35

-0.8

-18.0

Hang Seng

18593.06

0.9

-19.3

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.96

8.7

-134.7

UK Gilt – 10 year

2.03

5.1

-147.5

German Bund – 10 year

1.86

3.6

-102.4

Japanese JGB – 10 year

0.99

-0.1

-13.4

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.94

-2.4

-34.7

ITRAXX Crossover 5 Year (MID)*

750.81

0.4

N/A

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

20.63

-11.8

16.2

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

112.39

3.8

21.1

Gold Bullion $/ Troy Oz

1621.20

3.0

14.4

Currencies

vs $

vs £

 

¥

77.11

118.8

$

1.54

Euro

1.271

1.213

Source: Datastream. * Spread in basis points. Past performance is not a guide to future performance.

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