15.11.13 Friday Morning

The S&P 500 and the Dow average were both trading at record highs on friday afternoon after the Federal Reserve refrained from tapering its $85 billion in bond purchases per month and economic reports and earnings released beat forecasts. In fact, some 75 percent of the 450 S&P 500 companies that have reported earnings so far this period have beaten analysts’ estimates. 

Federal Reserve chairman nominee Janet Yellen signalled stimulus will be maintained until the U.S. economy improves significantly, boding well for other major economies. Yellen’s comments on Wednesday made clear her view that record stimulus measures should only be tapered after a sustained recovery, encouraging bullish investors who fear that any reduction in stimulus will trigger a sell-off.

Whilst calls for a correction have grown stronger in some quarters, what we are seeing is investors buying into any weakness that may emerge. What spread betters must be bare in mind is that traditionally, the markets tend to go up in November and December. With the S&P 500 surging 26 percent already this year, the benchmark gauge is on course for its biggest gain since 2003.

Meanwhile the FTSE 100 is trading just over 100 points off of the recent highs seen on November 30th at 6798.5 and there is little in the current technical picture to suggest that it is about to fall away. Additionally, British inflation unexpectedly dropped to its lowest rate for more than a year in October, falling to an annual rate of 2.2 percent in October from 2.7 percent in September.

On a more sombre note, the European recovery has suffered a serious setback after both Germany and France released GDP data that missed forecasts. In fact, France saw its economy shrink by 0.1% in the three months through September. This comes after President Francois Hollande failed to revive corporate investment in the face of one of the world’s heaviest tax burdens.

The figures, which follow France’s exit from recession in the second quarter, underline the issues Hollande is confronting as he tries to revive Europe’s second-largest economy and reverse an increase in unemployment that’s at a 14-year high. German GDP rose 0.3% in the same period after rebounding in the second quarter from a winter-induced slowdown.

The German economy is returning to a more moderate pace of expansion, according to the Bundesbank. That may restrain the pace of expansion in the euro area as countries including Italy and the Netherlands struggle to emerge from a recession. Growth in the third quarter was driven exclusively by domestic demand, whilst investment in equipment and construction increased and private and government consumption rose slightly.

U.S. interest rates have been thrust into focus after Yellen admitted that policy makers could reconsider whether to cut the interest rate it pays on excess reserves, currently 0.25 percent. So far, U.S. central bankers have been concerned that lowering the rate would damage the functioning of the money market.

The FOMC has held its main rate near zero since December 2008 and pledged to keep it there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn’t rise above 2.5 percent.

Traders will watch with interest Fed chairman Ben Bernanke's speech on Wednesday next week for any hint of a possible rate cut.

Stocks of the Week: Ophir Energy

• Ophir Energy – Africa focused oil explorer Ophir Energy’s share price soared after the FTSE 250 firm agreed to sell half its stake in a Tanzanian project for £800m.

• The firm, which is backed by billionaire Indian steel tycoon Lakshmi Mittal, sold a 20 per cent interest in three offshore Tanzanian liquefied natural gas (LNG) blocks to Pavilion Energy, a unit of Singapore investment firm Temasek.

• The Tanzanian fields, which Ophir discovered with its partner BG Group, are estimated to hold 15 trillion cubic feet of gas.

• The sale is expected to complete in the first quarter of 2014.

Next Week’s Notable Economic Data:

Tuesday –

• AUD – Monetary Policy Meetings Minutes @ 00:30
• EUR – German ZEW economic statement @ 10:00

Wednesday –

• USD – Fed Chairman Bernanke Speaks @ 00:00
• GBP – MPC Asset Purchase Facility Votes @ 09:30
• GBP – MPC Official Bank Rate Votes @ 09:30
• GBP – Inflation Report Hearings @ 10:00
• USD – Core CPI m/m @13:30
• USD – Core Retail Sales m/m @ 13:30
• USD – Existing Homes Sales @ 15:00
• USD – FOMC Meetings Minutes @ 19:00
• CAD – BOC Gov Poloz Speaks

Thursday –

• HSBC Flash Manufacturing PMI @ 01:45
• EUR – French Flash Manufacturing PMI @ 08:00
• EUR – German Flash Manufacturing PMI @ 08:30
• AUD – RBA Gove Stevens Speaks @ 09:05
• USD – PPI m/m @ 13:30
• USD – Unemployment Claims @ 13:30
• USD – Philly Fed Manufacturing Index @ 15:00

Friday –

• EUR – German Ifo Business Climate @ 09:00
• CAD – Core CPI m/m @ 13:30
• CAD – Core Retail Sales m/m @ 13:30

Next Week’s FTSE 100 Earnings:

Monday –

• Petrofac – Interim Management Statement
• Capita – Interim Management Statement

Tuesday –

• Melrose Industries – Interim Management Stadium
• ITV – Interim Management Statement

Thursday –

• Johnson Matthey – Q2 2013/14 Earnings Release