06.07.12 Friday Morning

Independence Day foreshortened the week as the S&P flattened ahead of the all-important Non-Farm figure. After the previous dismal figure the markets looked for a strong number after a week of disappointing manufacturing data. However this was not forthcoming as only 80,000 jobs were added, expected 97,000. Of more concern though is that for the first time in 3 years the US reported a month of contraction. The view of a global slowdown was confounded with the UK producing a second month of shrinking activity whilst Japan’s Tankan index reported worsening conditions. UK Manufacturing PMI for June of 48.6 was not as bad as analysts had feared and signalled that activity was shrinking at a slower pace than in May. The biggest positive was a reduction in costs during the period with oil dropping below the $80 a barrel mark for the first time since mid-2010. The US figure of 49.7 will be of more concern with equities selling off heavily as a repercussion.

The resultant effect of the these figures led to widespread rate cuts as gold rallied off the prospect of QE3. The BoE kept rates at the low level of 0.5% but boosted its asset purchase facility to £375 billion due to the pace at which economic conditions had worsened. The ECB went one step further and as expected lowered their bid rate to 0.75% causing a further detrimental effect to the euro as what little confidence remaining diminishes. China cut its key lending rate for a second time in a month to prevent a further slump in manufacturing and a collapse in property values following a decade-long house price bubble. Interest on a one-year loan will be reduced by 0.31 percentage points to 6% from today, the central bank announced. Denmark's central bank cut interest rates by a quarter point on Thursday, mirroring the European Central Bank's action earlier in the day, putting one of its secondary rates below zero for the first time in history. It will be of interest to see if the Fed join the party and get their printing presses to work the next time they meet.

Libor rate fixing was the latest epidemic to hit the city with Barclays appearing the centre of the problem. The market capitalisation of the bank stands at £20 billion after the 15% sell off last Thursday whilst Bob Diamond faced the politicians Wednesday and did little to clear the mist as he appeared to deny all associated blame. However, on the grander scale will Barclays appear the scapegoat in the whole process and will any of the other 17 banks involved in the process come out of the woodwork to feel the wrath of politicians and media? It seems this problem will not be dissipating at any speed as the culture of banks and their employees once again come under intense scrutiny.

Aside from the headline story Linde (LIN.DE) offered to buy the American healthcare equipment company Lincare for $4.6 bln valuing the company at $41.50 a share. GlaxoSmthKline were fined $3 billion for criminal and civil violations involving 10 drugs, the largest health care fraud settlement in U.S. history. Heritage Oil announced a proposed $850 million acquisition of a major interest in OML30 in Nigeria. GKN acquired Volvo Aero for £633 million with the stock price jumping 11% whilst both Gulf Keystone and Bowleven have seen significant gains off the back of rumour.

Next week’s key figures are Trade Balance data from the UK and US and quarterly GDP data from China. Companies reporting include M&S, Burberry, Barratt Developments and Associated British Foods.

See our Economic Diary here.