13.12.13 Friday Morning

After global equities rallied into the close last Friday, shares began the week trading reasonably near to the all-time highs enjoyed over the last month. However, heading into Friday this week and after 4 consecutive days of losses on both the Dow and FTSE, we could be entering a period of consolidation. It has become clear that debate surrounding the timing and savagery of tapering unprecedented bond buying in the U.S. is more or less the sole focus of the markets. Economic data is now being scrutinised for clues that could have an effect on the tapering process.

In a rather dramatic shift in sentiment, market participants are starting to see that the possibility of the Federal Reserve tapering stimulus at next Wednesday’s FOMC meeting is gaining in credibility. Both U.S. & European indices are feeling the impact of this with the FTSE 100 on course for a sixth consecutive weekly drop for the first time since summer 2008. Whilst weakness has been seen across the board, the FTSE is being outperformed by many of its major European peers with sterling strength eating into the revenues of British exporters.

Importantly, with the tapering issue now rumbling on for many months, we are starting to see investors develop a sense of risk aversion. The MSCI Emerging Markets Index has lost 4.6 percent this year while the S&P 500 is up 26 percent in 2013, set for the biggest annual advance since 1998, as the outlook for an end to Fed stimulus reversed a flow of funds into developing nations. This emphasizes how far gold has fallen since being viewed as an ultimate safe haven investment, with the precious metal losing over 25.5 percent of its value this year.

On a more positive note, the British Chamber of Commerce expect the British economy to expand at its fastest rate in 7 years in 2014, with strengthening household consumption a major contributor. However, high household debt could slow growth in 2015. The business group forecast economic growth to rise to 2.7 percent in 2014, an upgrade from the forecasts of 2.2 percent it made as recently as August. Output should pass its pre-recession peak in the second half of the year, more than six years after the financial crisis began.

With legislation now heading to senate, the U.S. House passed the first bipartisan federal budget in four years, which would ease $63 billion in automatic spending cuts and avert another government shutdown. With President Obama already confirming his wish to sign the final measure, the House voted 332-94 for the $1.01 trillion compromise budget crafted by Senator Patty Murray and Representative Paul Ryan.

Next Wednesday, Federal Reserve policy makers meet to discuss forward guidance with the spotlight being on tapering. Regardless of whether the Fed decides to taper at this meeting - or leave it for a future date - we expect to see significant levels of volatility. If the Fed refrains from tapering, many expect equities to return to bullish ways; however, any major reduction could take us even lower.

Stock of the Week: Peugeot
Shares in PSA Peugeot Citroen have fallen more than 11% after General Motors sold the 7% stake in the French carmaker that it bought last year. However, the US carmaker insisted that its industrial partnership with Peugeot was strong. Peugeot, hit hard during the global downturn, is pursuing a tie-up with China's Dongfeng Motor Group. On Thursday, Peugeot took a £0.9bn write-down on its struggling overseas operations.

Next Week’s Notable Economic Data:

Monday –

• CNY – HSBC Flash Manufacturing PMI @ 01:45
• EUR – French Flash Manufacturing PMI @ 08:00
• EUR – ECB President Draghi Speaks

Tuesday –

• AUD – Monetary Policy Meeting Minutes @ 00:30
• GBP – CPI y/y @ 09:30
• EUR – German ZEW Economic Sentiment @10:00
• CAD – Manufacturing Sales m/m @13:30
• USD – Core CPI m/m @ 13:30

Wednesday –

• EUR – German Ifo Business Climate @ 09:00
• GBP – Claimant Count Change @ 09:30
• GBP – MPC Asset Purchase Facility Votes @ 09:30
• GBP – MPC Official Bank Rate Votes @ 09:30
• GBP – Unemployment Rate @ 09:30
• USD – Building Permits @ 13:30
• USD – FOMC Economic Projections @ 19:00
• USD – FOMC Statement @ 19:00
• USD – FOMC Press Conference @ 19:30

Thursday –

• GBP – Retail Sales m/m @ 09:30
• USD – Unemployment Claims @ 13:30
• USD – Existing Homes Sales @ 15:00
• USD – Philly Fed Manufacturing Index @ 15:00

Friday –

• GBP – Current Account @ 09:30
• CAD – Core CPI m/m @ 13:30
• CAD – Core Retail Sales m/m @ 13:30

Next Week’s Notable FTSE Earnings:

Monday –

Polar Capital Global Healthcare – Preliminary 2013 Earnings Release