14.06.13 Friday Afternoon

Global equities struggled this week as fear intensifies on concern that central banks around the globe will reduce their stimulus programs imminently. A mix of good and bad economic data has increased volatility with an improving US economy adding to fear the Fed will unwind stimulus.

Worse than expected Chinese CPI data on Sunday showed Chinese inflation came in 0.4% worse than analysts’ expectations, hitting UK mining stocks on the Monday open. With markets trading on thin volume, equities continued to flip between gains and losses. US equities got a boost in the afternoon after S&P raised the US credit rating outlook to stable from negative, showing they are now more optimistic on the US economy.

Comments from the Bank of Japan Tuesday sent Asian markets spiralling with the Nikkei falling 1.4% during trading. BOJ governor Haruhiko Kuroda disappointed markets after opting against increasing their stimulus program but would consider fresh steps if borrowing costs spike in the future. A two-day court hearing started on Tuesday at Germany’s top court after many officials argued the ECB’s Outright Monetary Transactions and the European Stability Mechanism violate European laws. Although a conclusion is not expected until later this year, European investors kept a close eye on any leaked comments. Former ECB President Jean-Claude Trichet stated the transactions were conducted in a “perfectly legal” manner and the German Constitutional Court should recognise this.

Uncertainty remained mid-week on a combination of fears the Federal Reserve will reduce stimulus that the Bank of Japan will hold steady with their stimulus program. Markets continued to feel uncomfortable with European shares tracking a second day of declines. Encouraging UK job data gave Sterling a lift and helped the FTSE rebound from intraday lows after a report showed fewer Britons claimed unemployment benefits in May than at any time in the last two years. The FTSE failed to end the day positive, slipping towards the close as confidence weakened.

A report from the World Bank in Washington stated the world economy will expand 2.2 percent, less than the 2.4 percent initially forecasted in January. They also see the euro region's gross domestic product shrinking 0.6 percent. However, forecasts were raised for the US and Japan after successful monetary stimulus programmes helped growth.

As markets trade off multi-year highs on the back of global stimulus programmes, investors have started to dump risky assets in favour for safe havens after officials hint of a reduction to their programmes. Federal Reserve officials have been trying to convince investors not to overreact if and when the Federal Reserve decides to reduce their bond-buying program. Following a volatile week, confidence has now started to enter the market as an adjustment to the program doesn’t necessarily mean a complete end to their bond-buying scheme.

Stock of the week - Severn Trent
 
Severn Trent has seen shares fall over 11 percent this week after it failed to agree on a bid deadline by Tuesday. LongRiver consortium had made several bids with the final valuing the company at £5.2bn. They gave Severn Trent until Tuesday to agree to their terms which they failed to do. This saw the shares decline 8.8% following the breakdown in talks. Under takeover rules, the consortium cannot make another bid for Severn Trent for six months. Meanwhile Goldman Sachs yesterday upgraded Severn Trent to buy from neutral underlying the attractiveness of the stable, inflation-linked returns from the UK water assets.

Economic diary:
 

Monday

-          G8 Meetings

-          USD Empire State Manufacturing Index

 

Tuesday

-          G8 Meetings

-          AUD Monetary Policy Meeting Minutes

-          GBP CPI, Inflation Report Hearings, BOE Inflation Letter

-          EUR German ZEW Economic Sentiment

-          USD Building Permits and CORE CPI

 

Wednesday

-          GBP MPC Meeting Minutes

-          SUD FOMC Economic Projections, FOMC Statement and Press Conference

 

Thursday

-          CNY HSBC Flash Manufacturing PMI

-          Eurogroup Meetings

-          USD Unemployment Claims, Existing Homes Sales and Philly Fed Manufacturing Index

 

Friday:

-          JPY BOJ Gov Kuroda Speaks

 

Earnings Calendar:
          

Tuesday

-          Chemring Group Earnings

-          Aggreko Trading Update

Wednesday

-          Micro Focus Earnings

-          Imagination Technology Earnings Release

Thursday

-          Go-Ahead Group Trading Update

-          Ted Baker Interim Statement