12 January 2015
Good morning and happy new year
# European stock markets fell heavily Friday as reports emerged indicating that the ECB would come up with a compromise QE program that may be smaller than what the market was expecting and would involve individual EZ central banks purchasing the bonds in order to insulate the ECB to the risk of holding the sovereign bonds. The move lower was led by the FT Milan Index which fell over 3.0% and the Spanish IBEX which dived close to 4.0%. As a result the pan-European Stoxx600 ended the day down 1.29%. Major U.S. bourses also fell amidst the wildest start to trading since 2009. The S&P 500 had up and down swings of more than 1% on three separate days, with an average move of 1.3% for the full five days. The volatility stands in contrast to 2014, when the gauge fluctuated 0.53% on average each day for the calmest year in U.S. stocks since 2006. Worries about Europe’s ability to fight low inflation along with a surprising fall in U.S. wages sent the big board to a 0.84% loss. In a slightly sobering start to the year the S&P registered its first back to back weekly declines since October.
# Friday’s U.S Non-farm payrolls report showed the U.S. concluded its best year of job growth in 15 years as the unemployment rate fell to a post-recession low last month but it was the wages component that stole the limelight with a surprise drop. Employment climbed by a seasonally adjusted 252,000 in December, closing 2014 with strong hiring momentum that appears set to continue into this year. What’s more, revisions showed employers added 50,000 more jobs in October and November than previously estimated. Thus the unemployment rate fell to 5.6% from 5.8% outpacing forecast for an improvement to 5.7%. Wages however, surprisingly fell 0.2% in December, at odds with what would be expected in a tightening labour market.
# The USD weakened across the board in response as the markets’ initial reaction was that the Fed can be patient in its anticipated rate raising program. The local NZD and AUD pairs continued to benefit (despite falls in oil and metals prices for the latter) as U.S. yields fell again. The EUR/USD managed a modest bounce after 7 days of losses prior whilst the USD/JPY finished the week near its recent lows.
# The bench mark U.S. 10 year bond yield now sits this morning at 1.95%, down from 2.02% on Friday and 2.23% when the market broke for the Christmas holiday season.
# Crude oil remained under pressure with the U.S. benchmark WTI closing for a 4th consecutive day under US$50 a barrel. With the Saudi’s showing no sign of reducing output amidst minimal global demand growth the debate is moving to just how low prices can go and what the means for the global economy. I must say that I was pleasantly surprised by the cost reduction at the pumps when filling the tank of the SUV in preparation for the 8 hour drive home from the beach house yesterday. But will I now spend that saving…?
All the best for the trading year. I suspect that after last year’s mult-decadal lows in volatility we are in for a much more ‘active’ year where trading opportunities will abound.