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US economic data came in mixed, giving supple reason for the volatility seen in financial markets. The S&P 500 is trading near 2014 lows, due to intense dollar weakness on the back of the futures market pricing in almost 0% chance of rate hikes for 2016. As a result, safe havens have shot up with Gold trading near $1240 per ounce and ten year Treasuries trading as low as 1.55%. DXY index stands at 95.97, on the back of an appreciating Yen. The week began with markets opening to a disappointing job’s report from last Friday, non-farm payrolls increased by 151,000 vs. expectations of 190,000, while the unemployment rate held steady at 5%. On the contrary, this week’s US jobless claims fell by more than the consensus 285,000, to 269,000. Data came out this Friday, showing that consumer sentiment fell to a 4 months low (at 90.7 vs. expectations of 92) even on the back of an increase in retail sales 0.2% in January 2016, vs. expectations of 0.1% increase. Fed chair Janet Yellen spoke on Wednesday with a cautionary tone, highlighting that the US is exposed to global market developments and thus growth could be stifled in the short-term if volatile conditions persist. She did not rule out the possibility of cutting rates, helping to cement market expectations of no further rate hikes for 2016. We have seen the yield curve flattening with the yield on ten year Treasuries decreasing, but no true signs of an economic recession yet. Next week’s data will give a better picture of where the economy is heading. We are expecting data on PPI, inflation, Industrial Production and Housing Starts.
It hasn’t been an easy week for European markets ravaged by fears about the financial sector and by figures below expectations for the major economies. Only Friday, after having touched a weekly low on Thursday, when it lost about 7.4% since the opening of the week, the pan-European Stoxx 600 closed up by 3% on the back of a rebound of Commerzbank, rallying the morning rally after having announced the restoration of his dividend and closing at +18%. This ultimate positive sentiment has spread to the entire European banking system with Unicredit gaining 14% on the day, Deutsche Bank 12% and UBS 5%. Investors confidence didn’t increase however for Monte dei Paschi which lost another 5% on the day. The generally risk-on environment has increased safe haven demand pushing down yields for core government bonds while increasing the spread in peripherals. In the real economy Spain has shown sluggish industrial production for December (YoY) coming out at 3.7% vs 4.1% expected along with Italy respectively -1% vs 1.4% expected. However the biggest disappointment comes from Germany showing December (MoM) industrial production growing at -1.2% vs 0.4%, exports contracting by 1.6% versus an estimated growth of 0.5% and a fourth trimester annual PIL slightly below expectations coming out at 2.1% vs 2.3%. In spite of this week volatility however the EUR closes the week gaining against the Dollar and the Pound about 0.84%.
This week the economic data published showed a mixed picture of the UK economy. First of all as the Office for National Statistics announced on Friday, construction output fell 0.4% in the fourth quarter after a 1.7 % decline in the third quarter. This means that British construction output slipped more than expected in the fourth quarter, dragged down by reduced infrastructure spending despite housebuilding increasing at the fastest pace since the start of 2014. Output in the housebuilding sector rose at its fastest rate since the middle of 2014, growing by 4.1% after a 5.7% decline in the previous quarter. Moreover British industrial output suffered its sharpest monthly drop in December since 2012 as warmer than usual weather curbed demand for electricity and gas and manufacturing continued its decline. However, British private sector employers plan to raise wages by 2.8% this year compared with 2.4% in 2015, a Bank of England survey showed on Wednesday, offering policymakers some assurance that wages will pick up in line with their forecasts. The FTSE 100 registered a weak performance this week and closed at 5707.6 by about 2.4% lower than last week. This strong fluctuation result from the increased volatility since the beginning of the year. By the end of 2015 the implied volatility of the FTSE 100 was about 15% and during this week it peaked at about 32%. Moreover the Sterling declined to about 1.2880 Euro by the end of the week which is the lowest value since more than one year.
Elsewhere in the World
Japanese equity markets have been among the worst performers of the week, with the Nikkei Index down more than 11%, on worries over the state of the global economy and an ever-stronger JPY. Extreme volatility and a deterioration in market sentiment during the past weeks have indeed pushed the JPY, considered a safe haven asset, at 113,2 against the USD, levels last seen in November before the US rate hike. Even if the recent cut of interest rates into negative territory by the Bank of Japan hasn’t been effective in stopping the appreciation of the JPY, it did end up pushing yields on 10y Japanese Government Bonds for the first time into negative territory on Tuesday. However, they came back to trade slightly above zero in the following days and closed the week at 0.09%. While China’s markets have been closed for the whole week due to the Lunar New Year Holidays, Hong Kong markets reopened on Thursday with the Hang Seng index falling sharply and closing the week down 5%, which brings its yearly decline to 25%.
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