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S&P 500 started the week off strong and closed 2.8% higher, at 1,917, on the back of an oil price rally. The rally was due to an agreement between major oil producers, including Russia and Saudi Arabia, to set crude output at January levels but the oil price came back down on Friday with Brent closing at $33.01 and WTI trading below $30 as increasing US inventories put additional pressure on prices. Gold traded down to $1,228 from its high last week as global markets showed an increased risk appetite.
The released Fed minutes featured an overall dovish tone due to apparently increased downside risk from negative global developments, although Fed Chair Yellen highlighted that the US has limited downside risk exposure to a slow-down in China. Once again, the chance of a rate hike in March seems slim, as we are still not seeing strong increases in consumer spending despite gains in real income from rising employment and falling energy prices.
We did however see CPI come in at 1.4%, above expectations of 1.3%, and an improvement from 0.7% in January. Annual core inflation accelerated to 2.2% from 2.1%. Moreover, industrial production data increased 0.9%, above expectations of a 0.4% gain. US Housing starts decreased by 3.8% and disappointed market expectations of a 2.5% increase.
Finally, US Jobless claims decreased to 262,000, exemplifying signs of an increasingly strengthened jobs market.
Next week, we are expecting data on Manufacturing PMI, existing home sales, durable goods orders and quarterly GDP data.
The panic and uncertainty of last weeks seem to have faded. The Eurostoxx50 gained roughly 100 points from Monday closing on Friday at 2,871. Also the other European exchanges registered the first positive week of 2016 led by the partial recovery of financial institutions and industrial stocks.
On Tuesday, the economic sentiment of major German institutional investors elaborated by the ZEW institute was above the expectations by one point. Nevertheless, it declined by 11 points since its last analysis.
On the same day, the ECB released the accounts of the last monetary policy meeting held in January: the Governing Council was unanimous in concluding that the monetary policy stance needed to be reviewed and it is very likely it will be reconsidered at the next monetary policy meeting next month, when new ECB macroeconomic projections would be available. Furthermore, the ECB released its annual Profit&Loss account recording a net profit of 1.08 bn thanks to the stronger USD. Indeed, on Friday evening one euro was exchanged with 1.1131 USD, 0.83% lower than on Monday.
This week in the UK has been driven by three important factors: the first one is the debate between the EU and David Cameron regarding Brexit. On Friday the prime minister reached an agreement in Brussels, obtaining a seven-year “emergency brake” in order to slow down the access to welfare for migrants. This agreement is going to be fundamental for the permanence of the United Kingdom in the European Union, stated Cameron. The FX market strongly reacted to this decision and on Friday the GBP has seen an appreciation against EUR and USD, recovering part of the losses cumulated in the first part of the week.
The second factor, that instead can justify the good performance of the FTSE 100 on Wednesday (+2.6%), despite the flat performance of the first two days of the week, is the commitment of the biggest players in the oil industry (except for Iran) to freeze oil production at January levels. Even if this standalone decision cannot reverse the downward trend of the commodity, the market has seen in this agreement a first attempt to solve the issue, confirming the current positive correlation between oil prices and equity indexes.
Finally, the third factor that sustained the FTSE 100 in the second part of the week has been the increase in the MoM retail sales (calculated as the adjusted-inflation change in the value of retail sales during the month) that, with a +2.3% has beaten the expectations of a lower 0.8%. On the other hand, the MoM CPI registered a worst than expected performance, registering a -0.8% versus a consensus of -0.7% followed by the unemployment rate that signed a negative MoM performance: 5.1% versus an expected 5%. All in all, the FTSE 100 opened at 5797.34 on Monday and closed at 5950.23 on Friday registering a +2.68% during the week.
Rest of the World
This week was characterized by upbeat sentiment across most equity markets in Asia, with the improvement in investors’ risk appetite spurred by rallying oil prices ahead of a possible agreement between Russia, Saudi Arabia, and other major oil producers to freeze output.
In Japan the Nikkei 225 had on Monday its best session since 2008 (+7.2%), and closed the week up almost 7%, even if its yearly performance remains deep in the red (-12.6%). The JPY, after having touched 114.83 against the USD on Tuesday, closed the week strengthening again at 112.64, and thus remaining extremely close to its 18-months high.
Another important factor supporting risk appetite was fading concerns about China and in particular of a further sharp depreciation of the renmimbi. After the PBoC statements denying there was any base for a persistent depreciation of the currency, the RMB enjoyed on Monday its biggest one-day rise against the USD in more than a decade, and closed the week at 6.524.
The Shanghai stock market, which was closed last week for the Lunar New Year Holidays, marched steadily higher during the week, thus finally experiencing a steep decline in the extreme volatility that had characterized its performance since the beginning of the year.
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