Wrap up – last week ending 31st August 2012   

Fed’s ‘Grand Old Duke of York’ stance leaves markets deflated

The long-awaited speech by Ben Bernanke, the US Federal Reserve (Fed) chairman, on Friday at the Jackson Hole Symposium failed to offer definitive timing for a third round of quantitative easing (QE3). This was something of a setback after relatively dovish Fed Minutes earlier in August had raised speculation that more monetary accommodation was on the cards. Economic data globally was generally downbeat, although stronger US house price data was one of the reasons put forward for why the Fed may be playing a waiting game.

In Europe, the unemployment rate rose to 11.3% and German retail sales fell. The weak economic data emanating from the eurozone meant that markets were warming to the notion that the European Central Bank (ECB) might be edging closer to unveiling a bond-buying programme. Speculation of an announcement in September was also fuelled by a comment piece in a German paper, written by the ECB’s president Mario Draghi, which defended bond buying. Yields on Italian and Spanish government bonds rose over the week, however, suggesting that investors were not wholly convinced that a bond-buying programme would be announced or that it would be sufficiently effective. Equity markets generally ended lower as hopes of QE3 diminished. Over the weekend, China’s official August Purchasing Managers Index (PMI) fell below the 50 breakeven line to reach 49.2. Commodity prices generally retreated, although Hurricane Isaac in the Gulf of Mexico helped to keep crude oil prices elevated. Gold edged up slightly over the week to US$1,674/oz.

Shaping the markets — this week

Labor Day aptly starts a week rich in US labour data, but eyes will also be on ECB

US markets are shut on Monday for Labor Day but the rest of the week is rich in US economic data. On Tuesday, the ISM manufacturing survey is expected to remain below the 50 level: a figure below 50 indicates contraction, above 50 indicates expansion. On Thursday, the non-manufacturing version of the survey is expected to be broadly in line with July’s reading of 52.6. The most hotly-anticipated figure is the change in non-farm payrolls on Friday. The market is expecting net job gains of 115,000, which should nudge the unemployment figure lower to 8.2%. If the figure is above 150,000 then this is likely to push back expectations of QE3, a figure below 75,000 should bring forward further QE.

Elsewhere, the biggest excitement lies in the hands of the ECB, which meets on Thursday. There is growing speculation that the ECB will cut interest rates to 0.5%. There may also be further clues about a bond-buying programme for Italy and Spain, although full details are likely to have to wait until the German Constitutional Court’s decision on 12 September.

Otherwise, Wednesday sees the release of the HSBC Services Purchasing PMI for China covering August; the market will be hoping that the figure is similar to July’s level of 53.1. The UK also releases its Services PMI; the August figure may show a small increase on July’s level of 51. On Thursday, the Bank of England is expected to leave both Bank Rate and its asset purchase programme unchanged at its policy meeting. On Friday, UK manufacturing output is expected to bounce back 2.0% month-on-month (mom) in July, reflecting recovery from the Jubilee holiday in June. German industrial production figures are also released, investors will be hoping for an improvement on June’s 0.9% mom fall.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1406.58

-0.3

11.9

Dow Jones Industrials

13090.84

-0.5

7.2

NASDAQ Composite

3066.96

-0.1

17.7

FTSE 100

5711.48

-1.1

2.5

Euro STOXX 600

266.23

-0.7

8.9

Nikkei 225

8839.91

-2.6

4.6

Hang Seng

19482.57

-2.0

5.7

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.56

-11.6

-31.2

UK Gilt – 10 year

1.47

-6.4

-51.1

German Bund – 10 year

1.35

0.8

-47.5

Japanese JGB – 10 year

0.80

-1.1

-19.0

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.05

-1.9

-91.2

ITRAXX Crossover 5 Year (MID)*

585.98

-7.2

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

17.47

15.1

-25.3

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

116.30

-0.4

7.4

Gold Bullion $/ Troy Oz

1674.40

-0.3

6.3

Currencies

vs $

vs £

¥

78.30

124.4

$

1.59

Euro

1.260

1.261

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

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