17.05.13 Friday Morning

With central bank activism, in the form of quantitative easing, being the main driver behind the surge in risk assets (leaving global indices at multi-year highs), investors were concerned by news that the Fed has begun mapping out an exit strategy to scale back its $85 million a month QE programme.

This comes following a string of encouraging data, with indications that the economy is finally on the path to recovery. Investors always knew that QE would be withdrawn eventually; however, any imminent withdrawal would spook the markets.

Last weekend’s G7 finance meeting gave little indications as to which direction the markets will go in. Japanese currency devaluation was a prominent talking point however. G7 policy makers agreed that they will tolerate a weaker yen and will continue to monitor the impact on FX money markets.

Sticking with Japan, the April domestic corporate goods price index climbed 0.2% (0.1% exp).Subsequently, the Nikkei 225 closed above 15,000 for the first time since Jan 2008. The Yen touched a 4-and-a-half-year low against the dollar, boosting the earnings outlook for exports.

Growing concerns on Chinese data has dragged on the mining sector all week. Australian shares have dropped as miners losses deepened on weaker metal prices, Rio Tinto alone has seen a 5.8% drop. Lonmin shares have fallen by nearly 8% after suffering a repeat of the strike action seen at their South African mines last year.

This week’s German ZEW flattered to deceive, falling to 8.9 from 9.2 after initial forecasts pointed towards an increase. Any expected sell-off was tempered by strong eurozone production data which showed a sharp rise.

As the week neared the end, disappointing eurozone data came thick and fast. Growth figures showed that France slipped back into recession, with GDP contracting 0.2%, whilst Germany only narrowly avoided recession themselves, posting a 0.1 rise in GDP. The euro fell below the 1.29 level against the dollar.

The region in general fared even worse with data released showing that eurozone consumer inflation has fallen to a 3 year low. Additionally, the eurozone economy extended their recession to a record sixth quarter.

With the prospect of a withdrawal of QE from the Fed at the forefront of investors' thoughts, the dollar has achieved significant gains and is now weighing on the price of gold. Gold has now lost 18% year-to-date.

Bank of England chief Mervyn King gave his final quarterly inflation report before handing the reins to Mark Carney. After repeatedly having to cut its growth outlook and lift its inflation forecasts since the financial crisis, King was glad to sign off as the bearer of good news.

For the first time in years, the central bank predicted that growth would be faster and inflation lower than it expected three months earlier, though King still warned the recovery could not be taken for granted.

Weakness on Wall Street saw European indices open up on the back foot. US jobless claims rose yesterday to 360k (332K exp), whilst the Philly Fed Index came in at a disappointing -5.2 (+2.5 exp). However, stocks pared their decline as banks advanced, after traders dismissed a Federal Reserve policy maker’s warning that the central bank may reduce its monthly bond purchases as early as this summer.

Looking ahead, we have a European bank holiday on Monday which will ensure thin volumes in markets that remain open. We also have Fed Chairman Ben Bernanke speaking on Wednesday. Investors will be looking for any clues that may indicate the direction the Fed will take regarding future monetary policy.

Stock of the Week:

Easyjet – EasyJet has soared to the top of a fading FTSE 100 after better than expected first half figures.

The budget airline reported a loss of £61m, down from £112m in the same period last year and better than forecasts of a deficit of some £64m.
It was helped by an earlier Easter and a rush of Britons flying off to escape the cold weather, as well as reduced competition.

Next Week’s Notable UK Earnings:

Monday –

• BTG PLC preliminary 2013 earnings release
• Cranswick PLC preliminary 2012 earnings release

Tuesday –

• Vodafone Group PLC preliminary 2012 earnings release
• Homeserve PLC preliminary 2012 earnings release

Wednesday –

• Shaftesbury PLC interim 2013 earnings release
• Great Portland estates PLC preliminary 2012/13 earnings release
• Britvic PLC Q2 2013 earnings release
• Cable & Wireless PLC preliminary 2012/13 earnings release
• Firstgroup PLC preliminary 2013 earnings release

Thursday –

• SABMiller PLC preliminary 2013 earnings release
• Paypoint PLC preliminary 2012 Earnings Release
• Investec PLC preliminary 2013 earnings release
• Aveva Group PLC preliminary 2012 earnings release

 

Next Week’s Notable Economic Data:

Tuesday –

• AUD  - Monetary Policy Meetings Minutes
• GBP – CPI y/y

Wednesday-

• JPY – Monetary Policy Statement
• JPY – BOJ Press Conference
• GBP – MPC Meetings Minutes
• CHF – SNB Chairman Jordan Speaks
• CAD – Core Retail Sales
• USD – Existing Homes Sales
• USD – Fed Chairman Ben Bernanke Testifies
• USD – FOMC Meeting Minutes

Thursday –

• CNY – HSBC Flash Manufacturing PMI
• EUR – French Flash Manufacturing PMI
• EUR – German Flash Manufacturing PMI
• GBP – Retail Sales m/m
• GBP – Second Estimates GDP q/q
• Spanish 10-yr bond auction
• USD – Unemployment Claims
• USD – New Home Sales
• NZD – Trade Balance

Friday –

• JPY – BOJ Gov Kuroda Speaks
• EUR – German Ifo Business Climate
• USD – Core Durable Goods Orders m/m