01.02.12 Wednesday Morning

European financial markets began the week in a positive manner, assisted by strength in most Asian markets and general bullishness with the US S&P500 index not too far from its all-time high. Stocks in the US edged higher with both the DJIA and S&P500 broadly supported by the risk-on tone, although in overbought territory with investors holding back from driving the market higher.

Interestingly, the euro stabilised against the dollar and core government bonds are higher, indicating that risk appetite may be waning somewhat.

As we edged towards the end of the first trading month, European and US stocks pared session gains to trade firmly in the red with traders using the tremendous risk-rally of January as an excuse to book profits ahead of the final trading of the month. DJIA and S&P500 together with the FTSE100 in the UK are trading at multi-year highs and technically speaking, appear exhausted and overbought.

February carries risk with now a deepening contraction in the Spanish economy sure to turn up the volume on bailout speculation, the looming Italian election and importantly, the looming budget battle in the US all scheduled for next month.
US stock markets were flying late afternoon in Europe with the DJIA hitting the 14,000 mark during the session and the S&P500 firmly above 1500, extending January’s phenomenal rally into the first trading day of February.

US nonfarm payrolls were broadly in line with expectations but encouragingly, strong revisions to November and December have provided markets strong support and more importantly soothed concerns about the US economy heading for a recession after this week’s damp GDP print.

At the same time, the payrolls reading is not strong enough to warrant any immediate fears about an end of QE by the Fed any time soon with the unemployment rate edging up to 7.9% from 7.8%, far off from the Fed’s target of 6.5%. On top of the US jobs report, US ISM manufacturing showed a modest increase in January, following on from yesterday’s healthy Chicago PMIs.

Finally, University of Michigan confidence data suggested that US consumers are feeling better about the economy and the outlook of the US. All three released are driving this risk-rally, propping up European share prices in the process. Stocks here were mildly positive thanks to an improving eurozone PMI report but were soon under pressure after banks paid less than expected to the ECB under the LTRO scheme.

Spanish banks were under pressure on the back of worries over troubled real estate loans while Italian banks were knocked on reports that Italian prosecutors are investigating 5 banks over suspect derivate operations. Despite that, the US data helps European stocks to end the first trading day of a particularly risky-month on a firmer note.

This month, we have the looming US budget battle showdown and Italian elections which will soon take our attention. Next week however, eyes will be on more European earnings and of course, BOE and ECB policy meetings. On the macro watch, Germany and the UK will print industrial production data and the UK will also print PMI services data.