25.01.13 Friday Morning

Poor preliminary UK GDP figures, indicating a contraction of 0.3% in the economy for the fourth quarter of last year, did little to stop the FTSE’s positive start to 2013 as the index sailed past the 6,250 mark on Friday – hitting 56-month highs.

The FTSE 100 last year underperformed European peers, registering just a gain of around 6% in 2012 versus near 30% gain for Germany’s DAX. But despite the low growth environment in the UK, investors clearly still see value in the market, perhaps instead taking heart from Wednesday’s data showing a strong UK labour market with unemployment falling sharply, propped up by demand for sterling.

Indeed it seems there are reasons to be optimistic this year for a gradual improvement in 2013 and beyond. Encouragingly for the UK, a regaining Chinese economy, strong recovery in the US and Europe finally turning a page by moving out of crisis mode does bode well for large UK corporates with solid global footprints.

The softening of sterling boosts the UK’s competitiveness and the Bank of England’s currently policies are still easing credit conditions. UK businesses have also de-leveraged since the crisis of 2008, ramped up cash-reserves and are generating jobs; these are the bright spots that financial markets are currently focusing on.

The week started with Martin Luther King Day and the closure of the U.S. markets. Trading volumes, as expected, were thinner than usual. However, this did not weigh on European equities with the FTSE hitting its highest intraday level since May 2008. This could also be attributed to developments in Washington where U.S. lawmakers made encouraging steps towards raising the debt ceiling.

Things seemed to take a turn for the worse on Tuesday when rumours surfaced that German financial watchdog BaFin had asked two banks to trial scenarios that foresee a separation of retail and investment activities. Deutsche Bank’s share price tumbled on speculation it was one of the banks involved.

Meanwhile the FTSE was also suffering, being led down by Vodafone. Vodafone’s share price was hit when partner group Verizon Communications posting disappointing Q4 earnings. European indices rallied after a combination of a strong Spanish bond auction resulting in falling yields and a strong German ZEW survey that showed business confidence at its highest level since May 2010.

Google & IBM both posted strong figures, impressing investors; however Netflix results were the most eye-catching with expected EPS at -0.14 when the actual figure was 0.13 and consequently trading 40% higher in the next session. Over in the UK, Unilever reported particularly impressive results with full year sales reaching £51.3bn.

Apple’s 9% drop, attributed to higher levels of competitiveness in the market (Samsung in particular) and rising costs, was overshadowed by the passing of a vote to increase the Federal debt deadline set by 3 months. Shortly after this, the S&P reached 1500, a level not seen since Dec 2007 (before the financial crisis).

A wealth of strong U.S. macro data kicked up U.S. sentiment further with weekly jobless claims being the most significant, falling to 330,000, the lowest level in 5 years.

Next Week’s Notable Economic Data:

Monday –

• USD – Core Durable Goods Orders.
• USD – Pending Home Sales.

Tuesday –

• USD – CB Consumer Confidence

Wednesday –

• USD – ADP Non-Farm Employment Change
• USD – Advance GDP
• USD – FOMC Statement.

Thursday –

• USD – Unemployment Claims

Friday –

• USD – PPI
• GBP – Manufacturing PMI
• USD – Non-Farm Employment Change
• USD – Unemployment Rate
• USD – ISM Manufacturing PMI