Market Insight - Dec 17

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

Equities
Global equities saw ongoing inflows this week with the exception of the US markets which were sidelined due to the protracted budget discussions between Obama and the Republicans. Left unresolved will see some US$607bln in raised taxes and federal spending cuts hit the economy. Many commentators are now suggesting it would throw the US into recession. This has been supported by a 6.3% increase in the CBOE Volatility Index which is used as a fear gauge for the US Equity markets. Once again the economic data this week points to a recovering US economy with no sign of any inflationary pressures coming from the significant stimulus that the Federal Reserve has pumped into the market. The November Core CPI data release printed below forecast (0.1% vs 0.2%) at the same time Manufacturing (54.2 vs 52.6) and Industrial Production (1.1% vs 0.3%) beat expectations. The heart of the US economy seems to be showing signs that will pleasing those trying frantically to devalue the US Dollar to boost exports. It was announced this week that the FED would keep their official cash rate unchanged and increase their asset purchase programme by an additional US$40bln per month until the unemployment rate was lowered substantially. Share buybacks and special dividends to the tune of US$40bln have now been recently paid out of corporate coffers to ensure that shareholders do not get impacted by Obama’s proposed new tax regime. The key mover on the week was the Chinese market which closed the week up 4.3%. This index has now risen a whopping 10.0% since the start of December. The catalyst to this was early week improving manufacturing data releases but more so the announcement the by the State Administration of Foreign Exchange that Sovereign Wealth Funds and central banks can now breach the $1bln cap on foreign ownership of equities. Also that China may look to remove the requirement that Renminbi Qualified Foreign Institutional Investors hold the majority of their purchases in bonds. It seems that Chairman Guo Shuqing of the Chinese Securities Regulatory Commission is embarking on a programme to improve the poor performing Chinese equity market.
Weekly Moves: Australia 200 +0.8%, Hong Kong +1.9%, Japan +2.2%, China +4.3%, France +1.0%, Germany +1.2%, UK +0.1%, Dow Jones -0.2%, S&P500 -0.4%, Nasdaq -0.5%

Currencies
The US dollar saw strong outflows this week with the US Dollar index closing down 1.1%. The EURUSD performed well this week following an agreement by the EU Finance ministers to put the European Central Bank in charge of all euro zone lenders. This is substantial as it will enable direct bailout of banks via the firewall fund. Although this is not anticipated to take effect till 2014, the market embraced the security and pushed the currency up 1.9% for the week. The NZDUSD continued its climb adding another 1.6% this week following a release to the market that the Fonterra payout to farmers would be increased by 25c per kg. This now sees the Kiwi 4% higher in the past four weeks. This will be frustrating for the hapless manufacturing sector. With the Federal Reserve official interest rate announcement to keep official rates unchanged the last for 2012, we now lead into the start of the holiday season wondering what 2013 will bring. It certainly has been a roller-coaster ride for the currency markets this year. Japanese election results will be known by the end of the weekend, where it is anticipated the incumbent government will be significantly beaten.
Weekly Moves: AUDUSD +0.5%, GBPUSD +0.8%, EURUSD +1.9%, NZDUSD +1.6%, USDCAD -0.2%, USDJPY +1.3%, USDCHF -1.8%

Interest Rates
This week saw outflow of capital from the global bond markets as investor’s seemed to be shifting their holdings into the non US equity markets on the back of a better global economic landscape. Evidence of stabilisation and improvement of the Chinese manufacturing sector has improved investor confidence in the region. All markets saw yields up except the short end of the US curve. Short term fears around protracted budget discussions did see funds that wanted to remain in the interest rate markets flow into the 3 month and 2 yr maturities. Of course there is the potential for these global outflows to reverse aggressively if the Fiscal cliff issues re not dealt with quickly. Pressure is certainly mounting on Mr Obama and Mr Boehner to resolve their differences.
Closing Yields (Weekly Move):
3m 5y 10yr 30yr
US 0.03% (-0.06%) 0.69% (+0.07%) 1.70% (+0.08%) 2.86% (+0.05%)
UK 0.45% (+0.00%) 0.85% (+0.10%) 1.86% (+0.12%) 3.15% (+0.04%)
Germany 0.00% (+0.00%) 0.33% (+0.04%) 1.35% (+0.05%) 2.24% (+0.00%)
Japan 0.10% (+0.00%) 0.18% (+0.01%) 0.74% (+0.03%) 1.96% (+0.06%)
Australia 2.98% (+0.00%) 2.89% (+0.21%) 3.38% (+0.26%)

Metals
Precious metals continued to see outflows with both Gold and Silver closing the week lower. Benign inflation figures released this week have predominantly been below forecast. China CPI (2.0% vs 2.1%) and PPI (-2.2% vs -2.0%), France’s CPI (-0.2% vs 0.0%), European Core CPI (1.4% vs 1.5%) and US PPI (-0.8% vs 0.5%) and Core CPI (0.1% vs 0.2%) all missed to the downside. It appears that investors are happy to have banked their recent gains and stay out of what is likely to be a volatile close to the year with the fiscal cliff resolution firmly in the headlights. The global improvement in the manufacturing sector disclosed this week has seen copper supported again with the metal closing 0.2% higher. Copper is now 6% higher than it was four weeks ago.
Weekly Moves: Gold -0.5%, Silver -2.5%, Copper +0.2%.

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