Market Insight March 11

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

Equities
Global equity markets continued to see capital inflows this week as continued better than expected data releases globally gave investors confidence to continue to look to the equity markets for better returns than other asset classes. Key indicators that are being watched closely by market participants are indicating that the US economy’s improvements are broad based and thus more sustainable. This week it was the turn of the employment sector to evidence improvements following last week’s manufacturing and housing data releases. Both the ADP Non-Farm (excludes farm and govt employment) Employment Change (198k vs 172k) and the important Non-Farm (Just excludes farming) Employment change (236k vs 162k) showed that the employment market is starting to finally benefit from the ongoing Federal Reserve Stimulus programme. What encouraged the market further was that the employment rate fell to 7.7%. This figure is still well above the FED’s target of 6.5% that it is using to manage further stimulus plans. Although the focus is on the unemployment rate when it comes to the FED stimulus program, they will also be looking at broader employment numbers. This month’s participation rate is one that will keep levels of concern high at the FED which printed 63.5%. This indicates that more people are leaving the workforce and is the lowest number since 1981. Asian markets excluding China rose again this week as regional stimulus (as well as US data) pushed the Japanese Nikkei to levels not seen since the collapse of Lehmanns in 2008. Japanese officials are strongly focussed on stimulating their way out of their long term growth slumber. The equity markets will be a beneficiary of this. China’s index was the only major global index to fall this week on policy changes to curb the over heating property markets. Down payments were increased, second mortgage rates were increased, home purchase numbers were capped and enforcement of property tax was instructed. European markets continued to improve following positive comments from ECB head Draghi and bond auctions in the region showed investors continued to believe in the turn around story.
Weekly Moves: Australia 200 +0.7%, Hong Kong +0.9%, Japan +5.80%, China -1.7%, France +3.8%, Germany +3.6%, UK +1.7%, Dow Jones +2.2%, S&P500 +2.2%, Nasdaq +2.1%

Currencies
The US dollar saw inflows during the week with the US Dollar index closing up 0.5%. It appears at present that equity markets and the US dollar are running in tandem indicating that the world is a buyer of US dollars and US Equities. The forward looking US growth profile is significantly better than Asia (ex China) and Europe at the moment. Although some volatility was seen in the currency markets, the majority of the majors closed the week within 1% of their previous weeks close. The only one to note was the USDJPY which closed the week up 2.7% on the back of comments by the favoured new Bank of Japan governor stating that the Bank of Japan’s asset purchased programme was insufficient to achieve the 2% target. The USDJPY has now risen nearly 15% in the last 12 weeks.
Weekly Moves: AUDUSD +0.3%, GBPUSD -0.8%, EURUSD -0.2%, NZDUSD -0.5%, USDCAD +0.2%, USDJPY +2.7%, USDCHF +0.9%

Interest Rates
This week saw outflows as the see-saw battle of will they or won’t they (the Federal Reserve) bring an end to their QE programme. Good news on the US employment data front this week saw investors move out of the bond markets and into the equities markets. This positive news (Unemployment rate down to 7.7%) was supported by the Release of the FED’s beige book, which is a composite of the filings by 12 FED banks of the economic conditions in their region, which showed positive readings and an better than expected data release in the ISM non manufacturing PMI (56 vs 55). This now means the US is showing improving signs across all key Housing, Manufacturing, non manufacturing and employment numbers. The uptick in interest rates in the US is an indication that the economy is on the mend. Of note this week was a statement by ECB President Draghi who said the economy in the Eurozone region will improve this year. Spanish Yields were pushed down to 4.75% - their lowest levels since Nov 2010. Official Interest rates remained unchanged following central bank meetings this week in Europe (0.75%), UK (0.5%), Australia (3.0%), Canada (1.0%), Japan (<0.1%).

Closing Yields (Weekly Move):
3m 5y 10yr 30yr
US 0.09% (-0.02%) 0.89% (+0.15%) 2.04% (+0.20%) 3.24% (+0.19%)
UK 0.37% (+0.01%) 0.91% (+0.19%) 2.06% (+0.19%) 3.36% (+0.18%)
Germany 0.07% (+0.06%) 0.51% (+0.11%) 1.53% (+0.12%) 2.37% (+0.10%)
Japan 0.07% (-0.01%) 0.11% (-0.01%) 0.65% (-0.01%) 1.70% (-0.09%)
Australia 2.91% (+0.01%) 3.10% (+0.20%) 3.55% (+0.21%)

Metals
Precious metals saw inflows this week with silver and gold posting its first gain in 5 weeks as expectations remained in place for global stimulus to continue. Although the FED’s unemployment rate (7.7%) focus remains steadfast, added concerns for them that the participation rate has fallen to its lowest reading since 1981 and will continue to see them with their foot on the stimulus pedal – at least until there are any major signs of inflation. Interestingly gold rose as imports by China from Hong Kong fell for the first time in 4 months. Some very interesting stats regarding the Chinese demand for gold – Exports from Hong Kong to China in January 2012 were 5,102kgs…in January 2013 it was 31,723. Copper closed this week up a tad, but was the first rise in 5 weeks as well. Mixed regional global growth expectations are keeping the battle between the bulls and bears heated.
Weekly Moves: Gold +0.2%, Silver +1.4%, Copper +0.0%

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