27.09.13 Friday Morning

Leading indices ended the week in negative fashion with the FTSE, Dow and S&P all falling back late on Friday due to comments from Federal Reserve Bank of Chicago President Charles Evans on the on-going issue of tapering.

Evans suggested the U.S. central bank could start reducing its bond buying at its October policy meeting, although he did also state it could happen later than that.

After 3-weeks of gains, indices had opened the week fairly calmly amid German election results. Whilst Angela Merkel’s Christian Democratic party won 41.5 percent of the vote, her Free Democratic allies failed to take any seats in the lower house of parliament. With the Social Democratic party making clear their reluctance to form a coalition, the negotiations between the two main parties may not be as smooth as some had hoped. Negotiations to form German governments usually last from four to six weeks.

The Euro has approached a 7-month high versus the dollar. The currency has received a boost on the back of the fact that the most likely outcome of the elections is a coalition with the Social Democrats. Early indications would suggest that the new coalition would be somewhat friendlier to the peripheral nations in the currency bloc.

Meanwhile, the dollar has suffered as a result of the on-going confusion regarding U.S. Federal Reserve tapering. Headline indices have given back all of the gains seen since the Federal Reserve surprised investors by refusing to reduce its $85 billion bond buying programme on September 18th. The S&P has slid for 7 consecutive sessions now as market participants continue to search for clues regarding future tapering. There is little doubt that developments at the Federal Reserve are driving the market.

Federal Reserve Chairman Ben Bernanke cited the danger to the economy from the budget battles as one reason the central bank decided not to pull back on its monetary stimulus. So far, financial markets haven’t been shaken by the prospects of an impasse, with the S&P up 20 percent this year putting U.S. stocks on pace for the best annual gain in four years.

The last time Obama and Congress were at a stalemate over the debt ceiling, in 2011, Standard & Poor’s lowered the government credit rating. Now, Obama is stepping up his rhetoric in urging Congress to pass legislation to avert a debt default or government shutdown, warning in a Sept. 20 speech that Republicans risk creating “profoundly destructive” consequences for the U.S.

Republican leaders in the House notified members that a vote on raising the debt limit could come as early as Friday. Obama has warned Congress that the treasury was quickly running out of funds to pay government bills and could soon face a damaging debt default. Treasury Secretary Jack Lew pleaded with Congress to raise the $16.7 trillion debt limit and said the government would not be able to borrow funds past October 17.

With fresh indications now pointing towards an October stimulus cut, banking shares have weighed on the FTSE 100. Concerns about the timing of an expected scaling-back of the Fed's quantitative easing programme took their toll on the UK banking index, which is off 0.8 percent this week. Banks were not helped by the fact that at the Labour party annual conference held in Brighton, Ed Balls, the man who could be chancellor if Labour wins the next election, made clear his plans to increase taxes on banks' balance sheets and introduce a levy on bankers' bonuses to pay for spending on childcare and job guarantees. While data due next week may show U.S. employers added more workers to their payrolls this month than in August, boosting the outlook for the largest economy, the risk of a U.S. government shutdown remains. Congress still hasn’t passed a budget for the 2014 fiscal year, which starts on Oct. 1.

Stock of the Week

-Centrica & SSE – down 7.48% and 5.59% respectively:

Shares in the two energy giants have slumped all week after Ed Miliband made clear that Labour intend to freeze energy prices for at least 40 months if elected. By the end of Wednesday, SSE had dropped 5.6 per cent to £14.89 and Centrica (which was trading ex a 4.9p dividend) lost 5.3 per cent to 375.6p. Credit Suisse had assumed that, to pass on costs and protect margins, gas and electricity bills had to rise by another 10 per cent within the next month.

Next Week’s Notable Economic Data

Tuesday -

• CNY – Manufacturing PMI @ 14:00
• GBP – Manufacturing PMI @ 09:30
• USD – ISM Manufacturing PMI @ 15:00

Wednesday -

• AUD – Trade Balance @ 02:30
• GBP – Constructions PMI @ 09:30
• EUR – Minimum Bid Rate @ 12:45
• USD – ADP Non-Farm Employment Change @ 13:15
• EUR – ECB Press Conference @ 13:30
• USD – Fed Chairman Ben Bernanke Speaks @ 20:30

Thursday –

• GBP – Services PMI @ 09:30
• USD – Unemployment Claims @ 13:30
• USD – ISM Non-Manufacturing PMI

Friday –

• USD – Non-Farm Employment Change @ 13:30
• USD – Unemployment Rate @ 13:30
• CAD – Ivey PMI @ 15:00

Next Week’s Notable UK Earnings

Monday –

• Homeserve Pre-Close Trading Statement
• ICAP Pre-Close Trading Statement

Wednesday –

• Domino’s Pizza Group Q3 2012 Interim Management Statement
• Electrocomponents Trading Update for the period ending ended 30 Sep 2013

Thursday –

• Easyjet Pre-Close Trading Statement

Ted Baker Interim Earnings Release