07.09.12 Friday Morning

Overnight news out of China where HSBC’s China manufacturing index dropped further confirmed that the slowdown in growth is deepening. This however did not cause much damage to share prices as bad news seemed to have reached a level where traders are becoming increasingly convinced that the Chinese government doesn’t have any other choice left but to aggressively intervene into the economy with further rate cuts and additional stimulus measures. Overall trading activity therefore stayed on the light side with the highlight of the week being the ECB meeting that took place on Thursday.

In Europe, mining shares started off the week by reacting bullishly to the China stimulus hopes, while peripheral bonds eased with Spain’s 10-year down around 4.5 basis points to 6.8%. Oil giant BP saw its shares slump responding to news that the US DOJ has filed a brief accusing the company of gross negligence and wilful misconduct over the Gulf of Mexico Macondo incident. UK & Euro-zone PMI manufacturing data further helped resource stocks but did not change the overall picture of the dire situation the region faced. The PMI data did however play into the hands of the bulls that are looking to the ECB to announce bold measures this week to put an arrest to rising borrowing costs and spur growth for the region as a whole.

In the US, Monday’s Labor day holiday contributed to low trading volumes with the effects still being felt from this on Tuesday. US economic data started the week in poor fashion with the ISM manufacturing data showing a contraction versus calls for a slight increase. The data was however not bad enough to warrant further QE by the Federal Reserve. Today’s Non-farm payrolls have given a better idea of QE prospects, with a less than expected 96,000 jobs (123,000 expected) added in August versus July’s 141,000 increase leaving unemployment at a rate of 8.1%. This would suggest that the prospect of QE has strengthened whereas a figure above 200,000 would justify that signs of growth had been picking up possibly denying the possibility of QE3.  Thursday’s US ADP data smashed expectations with 201k jobs added in the last month. With the ECB helping the global economy with its latest measures and the US elections coming up in November, It is unlikely that the Fed will pump more liquidity next week.

As the week progressed European stock indices were on the back foot with investors cutting exposure to risk ahead of the ECB’s monthly meeting on Thursday. By Wednesday Chinese stock markets had reached a new 3 year low with tumbling corporate profits and sharply slowing economic growth being the main culprits for losses incurred. The poor showing on the Euro-zone data front plays into the hands of the bulls who will feel that the ECB has no choice but to respond with stimulus as only bold measures such as buying distressed government bonds appear to be the most likely way to ease the tensions in the debt market.

Thursday’s ECB press conference delivered a bond buying plan like we haven’t seen before. The ECB will help reduce borrowing costs of indebted Euro-zone members by buying their bonds. Draghi says bond-buying will be dependent on political conditionality and countries that need help must be fiscally responsible. With Spain selling a large number of bonds next month, pressure will mount on them to seek help from the ECB if it wants their borrowing costs to fall.

European equity markets are trading moderately higher on Friday morning as a result of Thursday’s announcement by the ECB and also due to very firm Asian markets overnight after China announced further stimulus measures in the important construction sector. Poor US Non-farm Payroll data has shown that fewer jobs have been added in August, a sign of a slack recovery that could mute President Barack Obama’s post-convention momentum and spur the Federal Reserve towards another round of stimulus.