Market Insight Dec 10

Market Insight Dec 10
By Bryn Griffiths (CEO, Edge Capital Markets)

Equities
Global equities saw ongoing inflows this week with the exception of the Nasdaq which continued to struggle under the weight of a falling Apple share price. Apple shares closed the week down around 9% at US$533.25/share. Apple has now lost nearly 25% of its market cap in the last 11 weeks. The broader S&P500 eked out a small gain and the 30 strong Dow Jones Index closed the week up 1%. The markets performed well despite the continued impasse on Capitol Hill with both sides continuing to fire snide barbs at each other with US House Speaker John Boehner calling the last seven days a “wasted week” in the discussions. It does appear that there are some House Republicans who are considering softening their stance on Obama’s demands to raise tax rates on the top earning US citizens, and this is giving hope to investors that a compromise will be made and the US$607bln fiscal cliff is averted by the end of the year. Good economic releases continued to be delivered out of the US Economy, and this will no doubt be giving Obama more firepower to get his position through. The improvement in the US economy appears to be wide spread with Manufacturing, Construction Spending, Total Vehicle sales, Factory Orders, Consumer Credit and Unemployment all printing numbers that beat forecasts for last month. The surprise came at the end of the week where consumer confidence data missed to the downside by a significant 74.5 vs 82.4. Of note this week is that we are finally seeing some action on the huge cash reserves that US corporates are sitting on with Macy’s announcing a US$1.5bln share buyback programme and McGraw-Hill Cos announcing a special dividend of US$2.50. This course of action saw the shares prices close the week up in both cases. It will be interesting to see if other companies follow suit and start to send excess cash back to investors in some form. The European markets closed the week higher despite the comment by ECB and Germany’s Bundesbank stating that growth in the Euro zone will contract at a faster rate than previously forecast. An improving manufacturing landscape in China saw their exchange close the week up over 4%. This is likely to continue its recent gains following the weekends better than expected Industrial output and retail sales economic data releases. Factory production climbed 10.1% vs 9.8% expected and Retail sales increased by 14.9% vs 14.6%.
Weekly Moves: Australia 200 +1.0%, Hong Kong +0.7%, Japan +0.9%, China +4.1%, France +1.4%, Germany +1.4%, UK +0.8%, Dow Jones +1.0%, S&P500 +0.2%, Nasdaq -1.4%

Currencies
The US dollar saw small inflows this week with the US Dollar index closing up 0.25%. The EURUSD fell for the first time in four weeks following the statement from ECB that growth forecasts for next year have been reduced, sparking investors to anticipate further cut in interest rates in the region. Not too sure what a cut in interest rates below the already low 0.75% official rate will do when rates in Germany up to 5yr maturities are well below this rate already. In fact 90-day and 2yr rates are negative. With the looming Japanese election where the opposition LDP party is expected to win a massive landslide victory, the USDJPY closed the week unchanged as investors paused for breath following the nearly 4% rise over the last four weeks. The biggest mover of the week was the NZDUSD which closed the week up 1.4% following the very hawkish RBNZ statement by newly appointed Reserve Bank Governor Graham Wheeler. The comment that the RBNZ expected growth to accelerate towards the end of next year caught the market by surprise. This statement was quickly followed up by expectations that unemployment rate would fall to the mid 5%’s over the coming years. This gave investors the green light to buy the currency as this puts the NZ Economy on a sound footing vs other countries that are facing economic contractions and falling interest rates over the same timeframe.
Weekly Moves: AUDUSD +0.3%, GBPUSD +0.2%, EURUSD -0.2%, NZDUSD +1.4%, USDCAD -0.7%, USDJPY +0.0%

Interest Rates
This week saw mixed reactions in the global bond markets as investors digested the statements of a whopping five central banks. The changes to official rates were somewhat telegraphed and largely predictable with the only central bank to make an adjustment being that of Australia’s who cut their rates by 25bps to 3%. The wholesale interest rate markets continue to price in further cuts from the RBA through to the middle of next year. The slowdown in capital spending on the resource sector is coming up a tad faster than the RBA was expecting so they are clearly trying to stimulate the rest of their economy to counter this. The rates are now at the low seen at the height of the Global Financial Crisis. They will definitely be encouraged by the stabilisation of the Chinese economy, and it will be interesting to see if this tempers their enthusiasm to deliver the cuts the market has priced in.
Closing Yields (Weekly Move):
3m 5y 10yr 30yr
US 0.09% (+0.01%) 0.62% (+0.00%) 1.62% (+0.00%) 2.81% (+0.00%)
UK 0.45% (+0.01%) 0.75% (-0.07%) 1.71% (-0.07%) 3.11% (+0.08%)
Germany -0.02% (+0.05%) 0.29% (-0.12%) 1.30% (-0.09%) 2.24% (-0.05%)
Japan 0.10% (+0.00%) 0.17% (+0.00%) 0.71% (-0.01%) 1.90% (-0.05%)
Australia 2.98% (-0.07%) 2.64% (-0.03%) 3.12% (-0.04%)

Metals
Precious Metals continued to see outflows with both Gold and Silver closing the week lower. The market appears to be range bound leading into the Federal Reserve’s Open Market Committee meeting announcement on Thursday morning NZT. UBS believe that any aggressive move by the FED would prompt a sizable move in the gold price. They are anticipating additional quantitative easing, so, if this is the case gold prices should appreciate. Copper has continued to perform well with this metal closing the week up 0.7%. We have now seen the price up over 6% in the last four weeks. Solid Industrial production numbers out of China over the weekend are likely to continue to provide support.

www.edgecapital.co.nz

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