by Cliff Wachtel, Global Markets
Part 1: Last Week in Review
Here’s Part 1 of a 2 part series-a quick review of each day’s top market drivers and their ramifications. Part 2 focuses on lessons and conclusions to use for this week. Links to special report on why USD is behaving like a risk currency, and what is really behind this behavior.
MONDAY: Bearish Chinese tightening, bullish hopes for easing elsewhere
Asia was a mixed bag Monday, with Chinese shares slammed by further restrictions on the real estate buying, most others down modestly, which is no surprise given how many (like Australia, which was also hit by poor housing data) are tied to China. The big outlier was Japan, up solidly 0.4% as its new central bank head nominee outlined an aggressive stimulus plan to raise inflation. Still seems like an odd thing to want for a country that cannot stay solvent without low sovereign borrowing costs, but never mind. The markets liked it.
Indexes here too were mixed, with mostly modest moves up or down, as bearish political uncertainty in Italy and some disappointing earnings was countered by (what else?!), hopes for new stimulus coming from the EU or ECB meeting later in the week, as well as news of new or continued easy money policy coming from central banks of Australia, the UK, Japan and Canada.
All indexes closed modestly higher for no discernable reason on any particular news, ignoring the bearish news from Asia and Europe noted above. Again, probably anticipation of continued or new easing from the five central bank meetings this week
TUESDAY: Rising stimulus hopes lift all risk asst markets, US markets boosted by key US report
Almost all indexes closed higher. Japan was up on more easing talk, this time from the nominee for deputy governor of the BoJ. Shanghai was up too, partially due to a technical bounce after Monday’s plunge.
All indexes were strongly higher between 1-2% or more on a combination of some good earnings news and continued hopes for news of continued or new central bank easing from EZ finance ministers. After the latest Euro group meetings, they appear to less pro-austerity. Per EU Economic and Monetary Commissioner Olli Rein, economic conditions countries “may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits.” Meanwhile markets ignored the continued decline in EZ business activity.
All indexes here too were up strongly due to the knock on effect from Europe and Asia, aided by the key ISM non manufacturing index beating expectations, coming in at 56 for February vs. an expected 55. Some saw the report as particularly significant and a signal that the US recovery was indeed continuing. Especially encouraging was the recovery in the new orders index, component of the report which had fallen last month.
WEDNESDAY: Markets drifted higher without any significant headlines but rather on technical momentum
Almost all indexes higher on continued bullishness based on hopes for new easing, aided by the better than expected ISM services report in the US Tuesday, which, bodes well for Friday’s US monthly jobs reports. The prior days’ rallies are also fueling technical, momentum driven buying.
One sign of this strong momentum is that the Nikkei was higher even though the JPY was also higher. Much of Japan’s rally in the past month’s has been directly tied to a weakening Yen, so it’s a bullish sign that Japanese stocks can rise even without further Yen weakness.
Another sign of that momentum is that Asian stocks were up so close to the coming US monthly jobs reports on Friday. Asian stock markets tend to get cautious in the days before these reports and to be prone to profit taking, perhaps because the time differences prevent Asia from reacting to the Friday reports until next week.
Risk assets were mostly lower to varying degrees, only German and Dutch stock indexes were up at all. There was no clear reason for the move.
Although the Dow made its second new high in two days, overall US markets were mixed and essentially flat for the day
THURSDAY: Anticipation of US jobs report, disappointment from ECB
Indexes were mostly lower on a combination of profit taking as the Nikkei hit new highs and caution ahead of US monthly jobs reports on Friday, which come after Asia is closed.
Almost all indexes were modestly higher, though they gave up most of their earlier gains on the day after the ECB’s disappointing lack of hints of new stimulus, which many expected given the ongoing deterioration everywhere in the region except for Germany, and the recent comments by EU finance ministers noted above that indicated some willingness to reduce austerity measures imposed on the GIIPS block nations. ECB President Draghi also was decidedly downbeat about the region saying that Risks remain to the downside, he says, announcing cuts to the ECB’s EU GDP growth (or contraction) forecasts for 2013 and 2014.
Indexes were all modestly higher, aided by better a than expected weekly new jobless claims report, which helped feed a growing belief that Friday’s monthly job report will be better than expected and fuel further stock gains. A jump in consumer credit also suggested increased confidence among wage earners.
FRIDAY: US monthly jobs reports, hint of a sea change in the USD?
Indexes were mostly moderately higher, although Japan, Hong Kong, and Bombay were up 2.6, 1.4, and 1.4 %, fueled by follow up effect of US markets, which have risen on early indications of a strong US monthly jobs report, along with the usual ongoing stimulus hopes and technical momentum. Even Hong Kong was strong despite the latest Chinese moves to cool the critical property sector.
Virtually all indexes were solidly higher, with Spain up nearly 3% and Italy up 1.6%. The key market driver was the US monthly jobs report for February, which struck exactly the right balance to drive markets higher: it beat expectations strongly enough to be clearly bullish, yet wasn’t seen as good enough to threaten any reduction in the US stimulus that has been a prime driver of the ongoing rally.
US unemployment fell to 7.7% from 7.9%, while the Fed says it won’t tighten monetary policy until it sees 6.5%. Many thus believe the easy money keeps flowing in until the official unemployment figure gets to around 7%. Then anticipation of tightening might begin to pressure stocks and other risk assets.
So the market got everything it wanted, good news and no threat to the continued stimulus is one of the key pillars of the current rally. The other is ongoing calm about the EU. As we saw last week, rising anxiety about new solvency risks can kill market rallies as they have each time they’ve happened in recent years.
Skepticism On US Jobs Recovery
Underpinning the belief that stimulus would keep coming from the US and elsewhere were a number of prominent voices who were skeptical about the US’s jobs recovery. See part 2, Lessons and Conclusions, for a summary of what’s justifying skepticism on both US the jobs picture and recovery in general. See also our special report on the USD and what its response Friday really meant.
US indexes rose more modestly than in Europe, overall just under 0.4%, on the same market drivers noted above for Europe. Overall the big four US indexes ended the week over 2.2% – 3% higher, and the bellwether S&P 500 index was up 2.2%.
Please proceed to part 2 for lessons and conclusions. See here for a special report on what everyone must know about the possible tectonic shift in the USD , what it means, and what Friday’s action does and does not tell us about the USD’s future.
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