03.05.13 Friday Morning

Global indices have been sent through the roof after today’s surprisingly strong U.S non-farm data. Analysts expected 146k jobs to be added, however, the figure came out at a much better than expected 165k. 

The unemployment rate, obtained by a separate survey of U.S. households, fell one-tenth of a percentage point to 7.5% as more people found work. That was the lowest rate unemployment rate since December 2008.

European indices started the week in an encouraging fashion with markets welcoming the news that, after 2 months, Italy has finally sworn in a new government in the form of a coalition. Additionally, investors’ speculation that the ECB will be forced to cut interest rates fuelled the early gains.

The main talking points this week, as we have become quite accustomed to, is central bank activism. Both the Fed and the European Central Bank have been pressured this week to continue providing as much liquidity as is needed to support their ailing economies.

Disappointing eurozone business confidence data raised expectations of a rate cut. Any move not to cut interest rates would have most likely sparked an aggressive sell-off with indices trading near multi-year highs.

In a move that will provide short-term respite, ECB president Mario Draghi did indeed cut eurozone interest rates by 25 basis points to 0.5%. This is the first rate cut in 10 months showing the pressure that the ECB is under.

With the eurozone manufacturing sector still in contraction, unemployment levels at record highs and a drop in inflation, policymakers have been forced to respond. Draghi also highlighted a need to focus attentions on smaller companies and help in providing access to credit.

The possibility of the ECB cutting deposit rates from 0 into negative territory seems more likely than ever after Draghi discussed this at length. This will mean that banks will be charged to hold money overnight, in a move that’s supposed to encourage banks to lend money.

The Federal Reserve confirmed on Wednesday what most expected. There are to be no immediate changes to quantitative easing, however, they are fully prepared to react to the labour market and inflation changes.

The FOMC statement was seen as a bit of a non-event with the main sentiment indicator being today’s non-farm payrolls data. However, with a batch of poor data, most prominently the disappointing GDP figure last week, many are confident that QE will not be withdrawn before 2014 earliest.

The FTSE 100 has had a reasonable week, underpinned by strong earnings from several large British companies. BP posted surprisingly strong results gaining over 9p to 466.5p, ASOS confirmed that both revenue and profits are up and Rolls-Royce also saw growth in underlying profit and revenue.

The long awaited merger between Glencore and Xstrata was finally completed this week with the new share “Glencore Xstrata” opening this morning for the first time at 334p, valuing the commodities trader and miner at more than £44.5B. Glencore Xstrata has also promised to return excess capital to shareholders in the form of dividends.

Looking ahead, investors will keep a keen eye on developments regarding central bank activism. We also have the latest G7 meeting scheduled in for next Friday. Whilst it’s not an institution, the G7 is an influential global policy-making body operating at the highest level, and their initiatives and policies can have a substantial impact on currency markets.

Stock of the Week:

Facebook – Reported on a jump in mobile advertising revenue, easing investor concerns over future growth. There have been doubts over Facebook's ability to sell adverts on mobile devices, not least due to their small screen size. Investors had feared that its growth may be hurt as a result.

However, Facebook said 30% of its $1.25bn (£803m) advertising revenue in the first quarter came from mobile. It reported a net profit of $219m for the January to March quarter. "We've made a lot of progress in the first few months of the year," said Facebook's founder Mark Zuckerberg. But increased spending on infrastructure, together with the fact the firm now employs more people than it did a year ago, contributed to a 60% jump in costs and expenses to $1.1bn in the quarter.

Next Week’s Notable Economic Events

Monday:

• ECB President Draghi Speaks

Tuesday:

• Australian Trade Balance

Wednesday:

• Chinese Trade Balance

Thursday:

• British Manufacturing Production
• Spanish 10-yr Bond Auction
• British Official Bank Rate
• British MPC Rate Statement
• U.S Unemployment Claims

Friday:

• Japanese Current Account
• G7 Meetings
• Canadian Unemployment Change & Rate
• Fed chairman Bernanke Speaks

Next Week’s Notable UK Earnings

Monday:

• Dechra Pharmaceuticals PLC Interim Management Statement

Tuesday:

• HSBC Holdings plc Q1 2013 Interim Management Statement
• National Express Group Q1 Interim Management Statement
• Betfair Group PLC Post-Close Trading Update

Wednesday:

• Standard Chartered PLC Q1 Interim Management Statement
• Intercontinental Hotels Group Q1 2013 Earnings Release
• J Sainsbury’s Preliminary  2012/13 Earnings Release
• Next PLC Q1 Interim Management Statement
• J D Wetherspoon PLC Q3 Interim Management Statement

Thursday:

• Provident Financial plc Interim Management Statement
• IMI PLC Interim Management Statement
• Tullett Prebon PLC Q1 Interim Management Statement