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Market sentiment improved this week, with major US indexes pushing higher on Super Tuesday: S&P 500 and Nasdaq surged 2.4% and 2.9% respectively, and election excitement increased risk-on appetite. S&P 500 finished at $1,999, up 2.7% on the week. Vix volalitily index came down to its lowest level in 2016 to trade at 16.86. 10-year US Treasuries traded up 5bps to end at 1.88%. Despite improving market sentiment, most analysts remain cautious of fundamentals, which have not actually improved much since last week.
Oil continued to trade with a positive correlation to stock markets, and ended the week on a high note, with Brent rising 10.3% to $38.72. This was despite data on US crude inventories showing an increase of 10.4m barrels to 518m, four times higher than the forecasted 2.5m rise. All other base metals also rebounded, on the back of decreased concerns over further renmimbi devaluation and expectations of further accommodative monetary policy in Europe and Asia. Copper outperformed, ending the week at $5,027 per tonne and hitting its highest level since last November, at $5,059.
Gold continued its rising trend for the year, as investors remain cautious of enduring market volatility. The price reached $1,272 on Friday, its highest level since last February and officially entered bull market territory. The US Dollar index came down 0.3% to trade at 97.694, as emerging market currencies outperformed against the dollar.
Economic Data this week continued to surprise on the upside. Non-farm payrolls increased by 242K, exceeding expectations of a 190K increase and beating last month’s initial reading of a 172K increase (gains of the previous two months were revised upwards by an additional 30K). Unemployment rate came in at 4.9%, in line with market expectations and at its lowest level for the past 8 years. The only slightly disappointing labor market data was the average hourly earnings, which fell by 0.1% for the month. Moreover, the ISM manufacturing and non-manufacturing surveys both exceeded expectations, helping to calm fears of a US recession despite continued shrinkage in manufacturing activity. Trade data showed a widening US trade gap, as exports fell to a 5 -1/2 year low. The US introduced increased tariffs of 266% on steel imports from China, with smaller increases for other steel importers. Next week we are expecting further data on export and import prices, along with initial jobless claims and wholesale inventories.
Fed funds futures are still pricing in around 70% for a rate hike in 2016, with positive labor market data pushing the earliest date for a rate hike to November.
It has been a tough beginning of the week for European equities. After having received disappointing data about Eurozone inflation, with Consumer prices falling 0.2% year over year in February, setting the stage for a more accommodative policy from the European Central Bank when the Governing Council meets on 10 March. European shares rose on Friday after strong U.S jobs data eased concerns about a possible recession in the world’s largest economy, with miners boosted by firmer metals prices and auto stocks making their seventh day of gains in a row. The pan-European FTSEurofirst 300 index rose 0.7% to 1,344.62, scoring its third straight week of gains, while the euro zone’s Euro STOXX 50 index climbed 0.8%.
European stocks have rallied after a rocky start to 2016, as oil prices recovered and fears over a U.S. economic slowdown diminished, but the FTSEurofirst remains down around 6.5% since the start of the year. Auto stocks were up, for the seventh straight sessions, led by German carmaker Volkswagen which ended up 4.2%. Investors took heart this week from more upbeat comments over the Chinese market at the Geneva car show and were attracted by low valuations after this year’s selloff. Yields on the Germany 10-Year soared more than eight and a half basis points ending the week at a yield of 0.235%.
EUR/USD rose sharply on Friday moving above 1.10 for the first time in March, as investors dismissed the possibility of a March interest rate hike by the Federal Reserve after average hourly wages fell slightly last month.
Investors turn their attention to the ECB’s monetary policy meeting next Thursday in Frankfurt, where its Governing Council is widely expected to approve a wide range of stimulus measures. When the central bank last met in January, it held its benchmark interest rate at a record-low of 0.05. Next week, the ECB could lower its deposit and margin facility rates, while increasing the scope of its €60 billion a month bond buying program.
Britain’s FTSE 100 index closed at 6199.43 , 1.74% higher than the last Monday’s opening.
At the London Metal Exchange (LME) it has been a remarkable week for commodity prices.
Iron ore, the steelmaking ingredient, has rebounded 20 per cent this year to more than $50 a tonne, catching many analysts and even some producers on the hop.
Industrial metals such as copper, zinc and aluminium have risen to their highest levels since the autumn, triggering a big rally in beaten-down mining stocks. Anglo American and Glencore, the worst-performing stocks on the FTSE 100 last year, have rallied by 86% and 66% respectively so far in 2016.
Mining stocks like Glencore, Anglo American, BHP Billiton, Antofagasta and Rio Tinto all rose by between 5.9 to 11.9 percent this week, helped by a rally in the prices of major industrial metals. Copper was headed for its biggest weekly advance in about six months, amid optimism about demand and cuts in output.
London Stock Exchange Group, which is in talks to merge with Deutsche Boerse to create a pan-European trading house, reported a 31% rise in full-year adjusted pre-tax profit on Friday.
EUR/GBP closed at 0.7729, with the GBP signaling a slight appreciation after the big drop to 7-year low of the precedent week.
Japanese stocks rose on Friday in choppy trade, but gains were limited as investors cautiously waited on a key U.S. jobs report after unexpected signs of unemployment rising in the service sector. The Nikkei ended 0.32% higher at 17,014.78 after trading in negative territory. The index rose for a fourth day, the longest winning streak since November 2015.
For the week, the Nikkei added 5.1,%, posting the third weekly gains.
Japan crossed a financial milestone on Tuesday as the country sold new 10-year bonds with a yield below zero for the first time at a government auction. This action highlights the challenge of retaining support for unconventional central bank measures, with Prime minister Shinzo Abe struggling to maintain momentum behind his “Abenomics” growth policies. Japan is the second country to sell 10-year bonds at a negative yield, after Switzerland became the first to do so in April last year. The auction, of Y2.2tn ($19.4bn) in 10-year paper, at an average yield of minus 0.024%, means investors have paid a fee to lend money for a decade to the government, the most indebted G7 nation. The buy side appears to have been almost entirely composed by dealers and speculators looking to hold the paper for a brief time or covering short sales accumulated in expectation of the yield dropping into negative territory.
Moreover, BOJ came out with a statement that rates won’t be lowered further into negative territory for this period. Prime Minister Shinzo Abe also announced that the planned 10% sales tax hike for next year will be implemented, despite possible detrimental effects on consumer spending.
A great week for the US S&P 500, Japanese Nikkei 225, and other global financial bellwethers pushed the inversely-correlated Japanese Yen lower against almost all G10 counterparts.
Japan will release Q4 GDP data on Monday, 7 March. The final reading of GDP is supposed to show that Japan’s economy shrank 0.4 per cent sequentially in the final three months of the year. On an annualized basis growth may have slipped 1.6 per cent in the fourth quarter.
Rest of the World
Risk-on sentiment has also spread to emerging markets, with the MSCI EM equity index up by 15% since the start of the year, and continuing this trend over the week on the back of re-bounding oil and commodity prices and a weaker dollar. Emerging market currencies performed well with the Brazilian real and Russian rouble currencies outperforming on Friday, respectively rising 2% and 0.9%. The Argentinian peso has gained 4.6% for the week as Argentina concluded a final agreement to repay 75% of outstanding credit holdouts and returned to international capital markets with a $15bn bond sale.
China began the week by cutting its reserve requirement ratio by 50bps to 17%, driving expectations of further accommodative policy across Asia and sending Asian stock markets rallying for the week. Chinese indices were undeterred, despite Moody’s revision on its outlook in China from “stable” to “negative” mostly due to concerns over debt piles and capital outflows. The National People’s Congress began this week, in which China will publish its thirteenth Five-Year Plan and further reform measures to boost growth to the expected 6.5-7%. The PBOC intervened in the markets before the event; supporting the stock market and helping the Shanghai Composite achieve its best weekly gain for the year, increasing 3.9%. The manufacturing sector continued to disappoint, as the Caixin Manufacturing PMI decreased to 48, contracting for the twelve month in a row.
Finally, Australia surprised to the upside with the economy expanding 3%, ahead of an estimate for 2.5% growth, on the back of a renewed focus on the services sectors over mining.
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