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Mike van Dulken, Head of Research at Accendo Markets, commented in his Weekly Roundup to clients,
While we might have thought the surprise of the week was the ECB cutting interest rates to help counter falling inflation in the single currency region, make that three surprises now after US GDP and US Non-Farm Payrolls (NFP) came in well above expectations. While the former was designed as a boost, it was overshadowed by US GDP beating consensus and, along with today’s significant NFP beat (204K v 120K est.; prior two months revised up), one could be forgiven for thinking this strong news from the world’s #1 economy is great for the markets. Yeah, we’re growing again! In fact if ECB president Draghi was looking to weaken the EUR to help exporters and promote growth, he’s probably happy with the additional boost of a stronger USD today.
The trouble is that good US news is still bad news in terms of US monetary stimulus, rekindling expectations of a December reduction in the market-prop that is the Fed’s QE3 programme and to which markets have become more than a little attached. The jobs data makes a mockery of concerns the US government shutdown had a pronounced effect on private sector hiring. However, a note of caution with a rise in the unemployment rate (to which QE3 is tied) to 7.3% and a drop in the participation rate to 62.8%. The GDP beat can also be attributed to stock-building in Q3 which, once stripped out, meant growth slowed in Q3 and will likely reverse in Q4 potentially meaning year-end weakness. So even with 3-month average 200K+ job creation matching levels at the beginning of 2013 which lead to taper-talk in May, all is not rosy in US macro data land and the Fed’s ultimate decision remains a difficult one.
We still don’t see enough ammo for the Fed to pull the taper trigger before Christmas. Hence we agree with markets ticking back up this afternoon. However, we still believe Bernanke & Co. will be forced to shape their rhetoric to make us think they might move early, which will see continued taper on/off moves and market volatility, because they still fear that explicitly loose wording, which would see equities push on from their near all-time highs in the US to bubble-like levels would only end up needing more assistance should they burst messily when tapering is ultimately delivered. Which it will. Not yet, but eventually. Sometime in H1 next year. Probably.
For now the FTSE100 is holding above the 3-week lows of 6640 overnight and, as we have written elsewhere, we would be looking for a break of this level before looking further south. After a 1/3 correction of the October 8.3% rally the uptrend is still alive – just – meaning potential for a resumption of the October climb towards the 6820 from whence we came last month and then the May close revisit to the near all-time highs of 6940 seen on the cusp of 1999/2000. The watch levels for now are 6460 and 6715. If I have only one other instrument to identify this week it’d be Gold which has fallen back below $1300 and remains under significant multi-month taper-fear induced pressure at $1350. There is potential for another revisit of $1250 if the USD strengthens (or indeed the EUR weakens) further.
A brief rundown of other major events and we had S&P downgrade France, affirming ECB worries, as did confounding/at odds French and German industrial data and improved PMI Eurozone Services (>50). UK PMI Services ticked up yet further (>60), important given the sector’s 78% contribution to GDP (who says we don’t make anything anymore?). We also had China’s trade balance beat expectations but this just went to show the importance and reliance on exports at a time when multi-decade growth is inevitably slowing and focus likely needs to move to fostering domestic growth in order to maintain the 7-8% we have got used.
Away from macro data, social media company Twitter’s (TWTR) market debut saw it start trading 73% higher than its twice-upwardly revised IPO price amid much debate about how a profitless virtual company can be worth $30bn. However, we would emphasise that, like the UK’s recent Royal Mail (RMG) and Foxtons (FOXT) listings, the allocation of shares was designed to create shareholder stability and with so many missing out the desire to own the shares was set to create significant demand and a strong market debut. Theme park and attraction owner, Merlin Entertainments (MERL) also got off to a positive start today opening +3% and now trading +8%. The IPO magic continues (after although many ask whether some might be set for a roller coaster ride as the hype dies down. Note Twitter trading below yesterday’s opening price. After IPOing in the $20s, opening in the $40s and testing the $50s, could might the $30s ‘gap need filling?
