02.08.13 Friday Morning

With four straight days of gains, the risk appetite in the markets has certainly picked up. Investors have really showed their confidence this week, diving into equities and leaving safe haven investments behind. 

European stocks started the week in the green with investors focusing their attention to monetary-policy decision from the US, UK and the Eurozone central banks scheduled to begin later in the week. Asian markets however were dragged lower by Chinese equities after industrial companies reported slower profit growth and as China began a nationwide audit of government debt. Comments from Bank of Japan governor Haruhiko Huroda indicated little concern that a planned sales-tax rise would derail an economic rebound. This comes a week before Prime Minister Shinzo Abe’s administration decides whether to go ahead with the first step tax increase, raising it to 8 percent in April from the current 5 percent.

US pending home sales exceeded expectations of a -1.1% pullback in June. Figures showed a lower than expected decrease of only -0.4%, retreating from a more than six-year high and suggesting rising mortgage rates were starting to dampen home sales.

Financials was in the spotlight on Tuesday after UBS, Deutsche Bank and Barclays reported earnings. Deutsche Bank unexpectedly reported a fall in profit after they had to fork out legal costs to help defend against interbank lending rigging charges. UBS was somewhat brighter, posting higher net profit and announced plans to buy back assets from the Swedish National Bank. Meanwhile Barclays, whose shares were hit hard on Monday after they announced a £5.8 billion rights issue, posted a 17 percent fall in pre-tax profit during the second quarter. They will offer shareholders one new share for every four owned at 185 pence to help boost its capital strength and meet another £2 billion miss-selling charge. Barclay’s shares dropped 5% on the news of a rights issue who are trying to raise money to plug a £7 billion shortfall in capital.

Latest economic sentiment data from the Eurozone showed that recovery is on the right track with morale reaching a 15 month high. The latest reading will give Mario Draghi some ammunition for his speech on Thursday during the European Central Bank press conference.

By midweek, the final day of the month, stocks remained bullish, heading for a third straight day of gains. Chinese stocks overnight extended monthly gains helped by property shares which rallied on speculation the government may loosen property curbs. However, German retail sales failed to meet expectations, with a contraction of -1.5%, far from the 0.1% projected growth. The negative retail sales were soon brushed under the carpet after a reading from the US showed ADP non-farm employment change surged by 21,000 to 200,000, the highest level since the beginning of the year.

The FOMC meeting minutes helped finish the month on a high after the Federal Reserve suggested that stimulus measures would continue until the labour markets showed significant improvement. As expected, the Federal Reserve chairman Ben Bernanke refused to provide a timetable for winding down stimulus measures. At the end of the speech, the Dow Jones remained back where it was before the speech after initially jumping 60 points.

The first trading day of August saw another positive session as investors digested the comments from the Federal Reserve and better than expected manufacturing data from China. The PMI Manufacturing gauge in China helped spur on mining stocks after it showed an unexpected expansion. Financials were also in the spotlight after Societe Generale and Lloyds Banking group posted better than expected earnings with Lloyds trading at its highest price since October 2010.

Bullish comments from Mario Draghi during the ECB press conference also added to investor’s appetite for risk after he mentioned that economic indicators signalled the euro region is past the worst of its longest ever recession. Draghi also reiterated that interest rates will stay low for the foreseeable future, trying to ensure investors the ECB will not tighten policy too soon as it did in 2011.

The final day of what has been a positive week saw investors taking to the side-lines ahead of the all-important non-farm payroll figures later this afternoon. So far this week, both unemployment claims and ADP non-farm have beaten estimates with many betting the non-farms will follow suit. However, this was not the case with employers adding fewer workers than anticipated in July and the US jobless rate dropping to 7.4 percent, indicating uneven progress in the labour market. The data showed an increase of 162,000 payrolls last month which was the smallest in four months, following a revised 188,000 in June. Markets took the news as a negative sign, with the Wall Street dropping 50 points. However, the unfavourable data could be seen as a positive for investors, contributing towards a stronger case to keeping the Feds bond buying program unchanged.

Stock of the week – Barclays
Barclay shares were targeted on Monday after a rumour circulated they could undergo a rights issue. These rumours soon materialised on Tuesday when Barclays announced their results and mentioned they are seeking a £5.8 billion right issue. The Bank of England’s Prudential Regulation Authority said on Tuesday Barclay’s needed an extra £12.8 billion to strengthen its capital reserves against potential market shocks due mainly to tougher European rules on the way banks measure risk. Barclays has been given a year to fill the gap, requiring it to speed up a plan to rebuild capital and turn to shareholders.

Economic Diary

Monday:

-          AUD Retail Sales

-          GBP Services PMI

-          USD ISM Non-Manufacturing PMI

Tuesday:

-          AUD Cash Rate

-          ADU Trade Balance

-          GBP Manufacturing Production

-          USD Trade Balance

Wednesday:

-          GBP BOE Carney Speaks

Thursday:

-          AUD Employment Change

-          AUD Unemployment Rate

-          CNY Trade Balance

-          JPY Monetary Policy Statement

-          JPY BOJ Press Conference

-          USD Unemployment Claims

Friday:

-          CNY CPI

-          GBP Trade Balance

Earnings diary

 

Monday:

-          HSBC - earnings release

 

Tuesday:

-          Greggs – earning release

-          InterContinental Hotels - earnings release

-          Standard Chartered – earnings release

-          SABMiller – trading update

 

Wednesday:

-          TUI travel – interim management statement and earnings release

 

Thursday:

-          Rio Tinto – earnings release

-          Aviva – earnings release

-          Standard life - earnings release

-          Pennon group – interim management statement

-          Savills – earnings release

-          Bellway – trading update