t is hard to imagine a more disappointing start to the New Year than the one we saw last week as equity markets across the world fell off a cliff, not so much Happy New Year, than a New Year hangover, as US equity markets posted their worst start to a year ever, amidst continuing concerns about the Chinese economy, a slowing global economy, weak oil prices and geopolitical risk all weighing on sentiment.
European markets didn’t fare that much better posting their worst week since August last year,
as investors on both sides of the Atlantic decided to shrug off what was probably one of the most encouraging US employment reports in quite some time.
Not only did we see December’s jobs number beat expectations, coming in at 292k, but upward revisions to October and November saw Q4 come out well ahead of previous quarters,
as the US economy added 851k jobs at the end of last year, in what is seasonally usually a very positive quarter anyway, due to Thanksgiving and Christmas. While the US economy added 851k new jobs at the end of 2015, the number was still well down on the same quarter of 2014, which saw 973k new jobs added.
In any other circumstances this sort of jobs report should have prompted a significant rally in the US dollar,
but given last month’s Fed rate rise, the focus of the market has now shifted, and the continued weakness in commodity prices remains a concern, as does the continued lack of wage growth, at a time when we continue to hear how wonderful everything is with the US economy.
There is also a rising suspicion that despite the positive headline numbers, some parts of the US economy, namely the manufacturing sector, are in significant difficulty
hence the disappointing ISM and PMI numbers seen in the past few months, which for some reason doesn’t appear to be filtering through into the official numbers.
We heard last week from several Fed officials that at the prospect of at least another four Fed rate rises remained within the ballpark of expectations for this year
. Putting to one side the fact that these remain the same Fed officials who continue to insist that the falls in commodity prices that we’ve seen over the last few years are “transitory”,
it is hard to imagine a situation where we could see more than two rate rises at the most, given the approach of this year’s US Presidential elections.
Over the weekend we’ve heard Chinese officials reassure markets that their financial system is stable and healthy
, and while they would hardly say anything else, their recent actions would appear to suggest otherwise with some of their recent ill-judged interventions last week.
Despite these entreaties it looks like markets are set to pick up where we left off at the end of last week
with European markets set to follow Asia lower when they re-open this morning..
Attention this week is likely to be on where the PBOC sets its reference rate after a 2.5% decline in the yuan
in the last two weeks alone.
Also on the agenda this week will be the start of US earnings season
as well as the post-Christmas reporting season, where retailers could well get judged on how well they have done over the Christmas and New Year period.
After a mixed reaction to last week’s disappointing UK retail updates this week we get to hear from Tesco, Morrison, Sainsbury’s, as well as Home Retail against backdrop of falling prices and fiercer competition. At the weekend Asda boss Andy Clarke announced another £500m worth of price cuts, as the food retail sector competes to lower the cost of weekly retail price basket in order to compete with Aldi and Lidl.
– last week’s inability to push lower has seen the euro recover back through 1.0820 and as such leaves open the prospect of a move to 1.0950, and potentially higher. Only a move back below 1.0800 argues for a retest towards the 1.0600 level where we have trend line support from the all-time lows posted in October 2000 at 0.8220. A break below 1.0600 could see a return to 1.0465 and last year’s low.
– the pound continues to look weak and remains at risk of a retest of the 2010 lows at 1.4230, after ten consecutive daily declines. We need to recover back through 1.4650 to stop the rot and stabilise for a rebound towards 1.4820.
– last weeks unexpected break above 0.7495 opens up the prospect of a move towards the February 2015 highs at 0.7595, and the highest levels since the ECB started its QE program. The October highs at 0.7490/95 should now act as support, as should the 0.7410 area with a break below arguing for a return to the 0.7280 area.
– after seven consecutive daily declines the US dollar looks set to return to the August lows down near the 116.00 area. We need to see a move back through the 118.30 area to stabilise a risk a move back towards the 120.00 area.
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