Investment Markets Overview – w/e 27 January 2012

As the US media focussed their attention on Mitt Romney’s 14% tax rate on his 2010 earnings of $21.6m, the US senate quietly voted by 52-44 to end the Congressional debt stand off of last summer, increasing the treasury debt “limit” by a further $1.2Trillion, a three stage increase of $2.1Trillion in just 6 months and bringing the debt ceiling to a staggering $16.39Trillion, up by 55% in 3 years. Meanwhile, President Obama’s 2012 “State of the Union” address mentioned nothing about austerity, choosing instead to announce three real “winners” to help stimulate a moribund economy. First up was a suggestion to increase the school leaving age to 18 from the current 16, presumably to lesson the youth unemployment rate, and secondly to create yet another bureaucratic regulatory body, this one called the “Financial Fraud Enforcement Task Force,” allegedly to be chock full of highly trained investigators into mortgage fraud. The third winner, this time for global trade, is to be the creation of, “The Trade Enforcement Agency,”   charged with investigating unfair trade practices in countries like China.

US economic statistics announced this week included December existing, new and pending home sales, which came in below forecasts, at 5%, -2.2% and -3.5% respectively and December durable goods orders, which beat expectations, at 3%, thanks to aircraft orders. The advance Q411 GDP figure was at a dismal 0.4% against the 1.9% consensus expectation and prior quarter’s 2.6%, which probably explained the FOMC’s statement to keep interest rates at the all time low until 2014. The Dow fell by 0.5% whilst the S&P 500 was even and the NASDAQ gained 1%.

Euro-Zone January advance consumer confidence “improved” to -20.6 from December’s -21.3, whilst the advance PMI manufacturing and service indicators for January exceeded forecasts at 48.7 and 50.5. Spain’s unemployment rate rose to 22.9% in Q411, the highest in 15 years and is home to a third of the euro-region unemployed. Furthermore, it is estimated that half of young Spaniards are out of work. UK Q411 GDP was also below expectations, at -0.2% and versus the 0.6% seen in Q3. At least the government’s borrowing requirement in December, at £10.8BN, was lower than the forecast £12.1BN and November’s £15.1Bn December retail sales came in at the forecast 0.6%. The FTSE 100 ended level, as did the French CAC, whilst the German DAX rose by 1.7%.

Out East, Japan posted its first annual trade deficit in 31 years in December and deflation continued, as evidenced by the January CPI data, showing -0.3% and -0.4% annualised. Elsewhere, Hong Kong CPI in December remained at 5.7% annualised, whilst exports for the same month jumped to 7.4%, against November’s 2%. The Nikkei gained 0.9% whilst the Hang Seng rose by 1.95% in a holiday shortened trading week.

The $US index ended the week lower by 1.65%, at 78.9, with few other fallers of note. Gainers included the $Kiwi and the Swiss franc, up by 2.3%, and 2.4% respectively. Sovereign debt yields were mainly lower, with the UK gilt yield down by 5bps to 2.07%, Japan’s JGB yield lower by 2bps to 0.965% and the German 10 year declined by 7bps to 1.86%. Meanwhile, Portugal’s 10 year yield jumped by 76bps to 14.65%, whilst Irish yields fell by 16bps at 7.16%. Spanish yields dipped by 52bps at 4.93% whilst Italian yields ended the week down by 35bps at 5.88%.  The Greek 2 year yield fell by 690bps to 158.16%, after briefly touching the 200% mark, whilst the 10 year inched higher by 13bps, ending the week at 30.99%.US Treasury 5 and 10 year yields fell by 15.6% and 6.4% respectively, ending the week at 0.75% and 1.9%.

Within the commodities complex, the $crude oil price gained 1.3%, ending the week at $99.8 a barrel, whilst In the precious metals space, the price of $Gold jumped by over 4% at $1734oz, with the gold mine indices joining in this week The $Silver price jumped by 5.8% to $33.9oz.

Next week sees the latest on housing for the US, Japan and for the UK, plus the latest on consumer confidence for the US and for the Euro-Zone. January vehicle sales are due out for Japan and for the US, as are the latest on employment for the two countries, whilst for the UK we see December consumer credit and for the Euro-Zone, retail sales.

Asian markets revert to normal this week, after the celebrations to welcome in the Chinese New Year, this year being, “the year of the dragon.” Dragon years have been relatively strong with solid economic activity, low unemployment rates and mild inflation, according to a Bloomberg article. Whether this means a good election year for Obama, without further QE, has yet to be seen, but casual research suggests that Dragon years are also unpredictable with unexpected events.

 “The root of superstition is that men observe it when it hits, but not when it misses.” 

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