The year 2013 started on a positive note with the US house approving a Senate budget bill, which permanently extends the “Bush” tax cuts for most taxpayers except for the wealthiest Americans. The bipartisan deal struck at the last minute was able to avert most of the so-called fiscal cliff and caused global markets to explode higher the first trading day of the year.
However, after a very strong start of the year, investors ended the first trading week of 2013 confused and worried. Indeed, the FOMC minutes surprised the market by suggesting that QE4 was not as unlimited as many had expected i.e. at least to the end of the 2013. In relation to this matter, the FOMC minutes said “In determining the size, pace, and composition of its asset purchases, the committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.” Yet the minutes suggested several thought purchases could be halted well before the end of 2013. The reaction was swift, affecting most of asset classes from equities, gold and bonds.
Economic data have been stronger in the US as of late, with ADP employment change stronger than expected but mostly on payback from Hurricane Sandy. The dollar well supported into year-end, rallied further against all the majors and especially versus the Japanese yen.
After a strong start of the year, trading as high of 1.3300, the euro slumped to 1.2998 on Friday to close the week at 1.3069.
Sterling Pound has a similar performance on the back of strong PMI manufacturing data. The Pound went as high as 1.6381 on the first trading day of the year to close the week at 1.6069
The highest underperformer of the past couple of weeks remains to be the yen. Indeed, the negative news on the yen keep coming, pushing the currency to levels not seen since the mid of 2010. The Fed minutes released on Thursday added to the pressure taking the yen to close the week at 88.15. After an initial boost from the announcement of QE3 couple of weeks ago, gold prices went on to the defensive for the latter part of December. The minutes from the Fed continued pressuring the commodity after a relatively strong start the first day of the year. Gold closed close to the lows of the week at $1656.
Oil prices had a different start of the year. Reaching a high of $93.87 after the Fiscal cliff deal, oil prices remained well supported to end the week at $93.09.
ADP employment impress mostly on Hurricane Sandy payback
ADP employment change registered a gain of 215,000 jobs in December, far exceeding any recent months’ gains and beating economists’ estimates by 75,000 jobs. ADP also revised its November number from 118,000 jobs added to 148,000. Analyst suggested that that Hurricane Sandy likely had a significant effect on the November numbers; however, the figures remained weaker than a year ago.
The dollar and Treasury markets reacted as expected, but equity markets held well, which suggests investors are more confident of the US recovery than they were earlier and without help from balance sheet expansion from the Fed.
Europe & UK
Global markets await the ECB decision next week
In Europe, markets turn their focus over the next ECB Council meeting on Thursday. ECB’s President Mario Draghi comments last month hinted that a rate cut could be considered in the future if needed, a fact that is weighting on the currency since the beginning of the year.
As Europe was mostly on holidays for the past two weeks, we discuss our opinion on the currency for the beginning of 2013. After regaining over 10 big figures from the low registered in July 2012, the European crisis might flare up again during the first quarter of 2013. The slowdown in growth, the Spanish bailout uncertainty and the diminishing market confidence could push the euro to trade in a volatile manner.
Over the medium term, we expect the single currency to remain within range due to the decrease in tail risk as the Greek situation is out of the picture after receiving the latest bailout tranche. Similarly, reports showed that Spain’s banking sector is in need of approximately ¤40bn versus the previous estimates of ¤100bn. Political risk however remains at the top of the “fear” scale, with Germany and Italy awaiting elections.
European and German PMI disappoint
The beginning of the year European excitement was tempered by some disappointing December PMI data. Indeed, European Services and factory PMI contracted more than estimated in December adding to signs that the recession in Europe may extend into 2013. The German manufacturing also decreased in December to 46, from 46.8 points in November. According to analysts, the German manufacturing sector is finding it increasingly difficult to maintain output volumes close to those seen during the peak of the recovery period. The struggle to consolidate the impressive gains seen over the past few years appears to have intensified during the winter of 2012, with December PMI data showing further falls in production and new business levels.
German unemployment slightly higher
Unemployment in Germany rose for the ninth month in December but held at 6.9 percent in December. Indeed, data showed the unemployment figure rose by 3,000 to 2.942m, much lower than the expectation for a rise of 10,000. Germany continues to weather the eurozone crisis fairly well and remains unaffected by the rise in unemployment in the peripheral European countries.
UK PMI depict a confusing picture
The UK PMI manufacturing jumped to a 15-month high helped by the growth in both output and new orders. Indeed, manufacturing PMI came at 51.4 compared to expectations of 49.1 in December. While it was the first time since March 2012 that the PMI showed expansion in the manufacturing sector, the UK Services PMI fell into contraction in December against all expectations. According to analysts, the pound should suffer from the absence of eurozone tail risk which creates repatriation flows, policy uncertainty surrounding Mark Carney and poor basic balance of payments data along with downgrade risks.
Asia
China’s services growth slowing in December
China’s HSBC services PMI saw its slowest rate of expansion in December of 2012. Indeed, The HSBC services Purchasing Managers’ Index (PMI) for December dropped to 51.7 in December from 52.1 in November. The number does not however worry analysts who believe that most indicators point to a fourth quarter recovery, but the growth momentum into next year remains in question. A sub-index measuring new business orders rose also in December to 52.4, according to the report, but with only 13 percent of survey respondents reporting a higher level of new business that month. THE PENINSULA
