22.06.12 Friday Morning

Throughout the world markets were seeing steady growth this week until global manufacturing data rocked the boat with markets turning as investors shunned risk on positions. China’s HSBC flash manufacturing PMI reported an eighth successive month of manufacturing contraction whilst the US Philly Fed Index shook markets with its worst figure since last September. Other prints from Europe did little to improve the mood. The Dow Jones retraced 250 points for its second biggest loss of the year as a snowball effect emerged following the figure and unanimity that the Fed had not done enough to provide further stimulus to the economy by pursuing with Operation Twist.

The week started on a positive note with the centre-right party New Democracy establishing a victory in the Greek elections. The pro-bailout party has formed a coalition with PASOK and the Democratic Left in a move which should add stability to the debt stricken country. The coalition is seeking a 2 year extension to reach bailout fiscal targets, an extension they seem likely to get. However, Greece stands to lose its status as a developed country on the MSCI world index. The index provider placed Greece under review late on Wednesday, in a move that could affect whether institutional investors with mandates attached to MSCI classifications can invest in Greece’s stock market. Eurozone sovereign bonds rallied on reports that the Spanish banks would require as much as €150bln, however independent auditors say the figure is more likely to be €62bln. Spanish bonds yields peaked above 7%, the level described as untenable by the ECB.

Commodities were not immune to the sell off with Oil dropping below the $80 a barrel mark with poor manufacturing figures and high inventory numbers shelling the demand for the black gold. The news that QE is to be put on the back burner harmed Gold as it dropped 3.5% over the course of the week. Silver lies on its 2012 low whilst the Gold/Silver ratio is at a 20 month high.

The Fed was not alone in discussing QE with the BOE voting 5-4 in favour of keeping theirs at £325 billion. This though however is a sway in favour of easing after previous votes held an 8-1 majority with extra stimulus on the cards more than before after falling inflation figures.

As stock markets started to tail off from the middle of the week one equity witnessed some extreme volatility. Invensys (ISYS) surged 70 points before dropping straight back the following day after a preliminary approach from Emerson (EMR) came and went. The company has been surrounded by bid rumours but this is the first time the stock has reacted to news of a potential buyer. Whitbread announced like for like sales up 4.5% and Severn Trent launched an RPI linked 10 year retail bond. Aer Lingus announced Wednesday that it had shot down a surprise bid from Ryanair to seize control, saying its offer is too low. The former state-owned airline said it was unlikely any buy-out could be completed anyway, considering Michael O'Leary's firm was already being investigated by the UK Competition Commission over its existing 30% share. Ryanair's fresh offer would value Aer Lingus at 694 million euro (£560 million).

Next Week:

Figures to look out for are Public Sector Net Borrowing and Current Account data from the UK on Tuesday and Thursday respectively whilst there is an EU Summit all day on Thursday. It’s the quiet season for reports with the prominent ones coming from Ocado, Carpetright, Standard Chartered and Debenhams.