17.01.14 Friday Morning

Price moves have been wild throughout the week as the market tries to second-guess the speed of tapering by the Federal Reserve, and when it might actually start raising interest rates. Two of the more hawkish Fed officials, Dallas Fed chief Richard Fisher and Charles Plosser at the Philadelphia Fed, reaffirmed their determination to stick with tapering. The Fed, who meets next on January 29th, announced last month a reduction in its monthly bond-buying program, citing a recovery in the labour market.

U.S. indices have swung between gains and losses as better-than-forecast retail sales and corporate merger activity underlined the strength in the economy. Notably the number of Americans filing new claims for unemployment benefits fell for a second week last week. However, the SPX 500 fell 1.3% during yesterday’s session, the most since November, as investors weigh up further upside potential in equities after a 30 percent rally last year sent headline US and European indices to all-time highs.

Wednesday’s Beige Book data painted a positive outlook regarding economic health showing steady manufacturing growth, rising consumer spending and improving real estate markets. Eight of the 12 Fed districts reported increases in hiring. About half reported a slight to modest increase in wages. The assessment will likely encourage the Fed to continue tightening its ultra-loose monetary policy.

On a note of caution for bullish traders, the SPX 500’s retreat from all-time highs yesterday has been in part driven by disappointing earnings from banks including Goldman Sachs and Citigroup Inc, though some noted that the broader impact was limited.

Recovering from the most significant losses seen since September last year, Asian shares received a much needed boost after the World Bank raised its global growth forecast. Policymakers cited continued strength in advanced economies, offsetting the potential negative impact tighter monetary conditions will have for developing markets, as the main factor. The World Bank upgraded its forecast for global growth this year by two tenths to 3.2 percent, and predicted a faster pace for both 2015 and 2016.

A growing number of British politicians have started to ramp up their euro-sceptic rhetoric in the past few days with certain policymakers of the opinion that the EU’s treaties are “not fit for purpose” calling for reform or alternatively reconsidering their position within the bloc. Chancellor George Osborne said EU treaties had to be amended to protect member states like his own that don't use the euro.

The comments will be seen as provocative from those who are keen to keep all members within the eurozone with policymakers extremely unlikely to allow Britain to pick and choose what rules they would like to follow and have already reiterated that there will be no exceptions for any member of the bloc. Jose Manuel Barroso, the president of the European Commission, believes countries taking a stance similar to Britain’s now have a "narrow, chauvinistic idea of the protection" of their interests.

With U.S. data continuing to beat forecasts, attention will now turn to the remaining earnings set to be released. Investors will continually bear in mind the January 29th Fed meeting and will be scanning for clues regarding further tapering and interest rate rises. If earnings improve, coupled with strong data, the upside potential for equities seems to be significant, especially considering how high equity valuations currently are.

Stock of the Week: IGas

IGas Energy, a British onshore oil and gas explorer and developer, has had a remarkable week after gaining some 35.9% from last Friday’s closing price. This comes after Total, the French energy giants, bought a 40% stake in two shale-gas exploration licenses in the U.K. the first major oil company to invest in the country's unconventional gas reserves. Total's decision is a significant vote of confidence in Britain's shale-gas prospects, and could be a boost to the government in London, which has sought to lure big companies to develop shale hydrocarbon.

Next Week’s Notable Economic Events:
 

Monday –

• CNY – GDP q/y @ 02:00

Tuesday –

• EUR – German ZEW Economic Statement @10:00
• CAD – Manufacturing Sales m/m @ 13:30
• EUR – German Constitutional Court Ruling @ Tentative

Wednesday -

• AUD – CPI q/q @ 00:30
• JPY – Monetary Policy Statement @ Tentative
• 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
• CAD – BOC Monetary Policy Report @ 15:00
• CAD – Overnight Rates @ 15:00

Thursday –

• CNY – HSBC Flash Manufacturing PMI @ 01:45
• EUR – French Flash Manufacturing PMI @ 08:00
• CAD – Core Retail Sales m/m @ 13:30
• USD – Unemployment Claims @ 13:30
• USD – Existing homes Sales @ 15:00

Friday –

• CAD – Core CPI m/m @ 01:30