Monday 09.30 BST. European investors are bullish ahead of the US Federal Reserve’s meeting on Tuesday, which is anticipated to introduce some easing measures following last week’s disappointing jobs report.
Markets shot up at their open, adding to slight gains in Asian shares. The broad FTSE Eurofirst 300 index is up 1.3 per cent and crude oil is higher, a sign of optimism about growth that could follow from looser US monetary conditions. The Japanese yen is lower as traders sell “safe haven” currencies.
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“Today is a bit of a turnaround from Friday’s movements. So far markets seem to believe that the disappointing jobs report now means stimulus is just around the corner,” said James Hughes, market analyst at CMC Markets in London. “Easing is seen as a positive, a way for the Fed to acknowledge it has seen slowing and take quick action.”
US Treasuries are flat, however, as investors contemplate what measures the Fed’s Open Market Committee is likely to take following a downbeat turn in US economic indicators and dovish comments from officials of late, including chairman Ben Bernanke. Futures trading is pricing in a 0.3 per cent higher level for the US’s S&P 500 index, after the index had narrowed its losses going into the close on Friday.
“It’s a close call, but we expect an announcement that the proceeds from maturing or prepaid [mortgage-backed securities] will be reinvested in the bond market, most likely Treasuries,” said Jan Hatzius, chief economist at Goldman Sachs. “However, it is also very possible that the committee will require more time for a shift.”
Mr Hatzius also suggested the market’s reaction itself in the near-term could be a guide to the Fed’s course. If markets continue to rebound in anticipation of a shift, the Fed could be forced to deliver something so as not to risk the recovery of financial conditions and “hasten the transition to further easing steps”.
Stocks and other risk assets such as oil had fallen sharply on Friday after the US said the economy lost more jobs than expected, with the private sector contributing less hiring than hoped for.
A strong earnings season for companies globally, which has helped shares recover from their 2010 lows in June, has not brought with it many signs of a stronger foundation for growth. Goldman Sachs over the weekend downgraded their forecast for the US economy in 2011, estimating growth at only 1.5 per cent from now until the second quarter of next year.
That has had spill-over affects on other parts of the globe as well. In Japan, shares have been hit – including a further drop earlier today – by a climbing yen that is the result of investors selling the dollar, fearing lower growth and interest rates. The rising yen has hit exporting companies, the core of the Japanese economy.
Tomorrow’s rate meeting for Tokyo’s central bank will, like the Fed’s, be closely watched. Similarly, no formal measures are expected, though it is likely the language of the bank will reflect heightened anxiety, according to economists.
• Asia. Shares in the region were up 0.1 per cent, paring earlier losses as investors muted their initial reaction to the US jobs report. The Nikkei 225 average was down 0.7 per cent after the widely read Goldman Sachs report also downgraded its outlook on Japan’s growth, citing the rising yen and expiring government stimulus programmes.
Shares in China were higher, however, with the mainland Shanghai Composite index up 0.6 per cent, and Hong Kong’s Hang Seng index up 0.5 per cent. Key economic figures released this week are expected to show slowing in the economy, which in China is a bit of a relief as that may reduce pressure on prices and help to deflate potential bubbles in property and local bank lending.
• Europe. A surprisingly strong showing for German exports in June, growing 3.8 per cent in the quarter, helped to spark a strong opening. The FTSE 100 index in the UK is up 1.5 per cent, and Germany’s Dax index is up 1.2 per cent. France’s CAC 40 index was also 1.4 per cent higher, in spite of the Bank of France forecasting a dip in GDP growth in the third quarter, from 0.4 per cent to 0.3 per cent.
As earnings season winds down, with more than two-thirds of companies having already reported, investors will be closely tracking economic news. The Bank of England will put out its inflation report on Wednesday, which will give colour on its decision to hold rates steady last week. On Friday, full eurozone quarterly GDP data will also be released.
• Currencies. There was little action in Asian and early European trading. The yen was slightly weaker against the US dollar, up 0.2 per cent to Y85.61. The yen is at post-crisis highs, and a 15-year peak for the yen looms below Y85 against the dollar. It nearly touched that level last week after the jobs report.
The pound is softer, down 0.3 per cent against the dollar at $1.5941. The euro is flat at $1.3288. Both are at four-month highs following a July in which European economic data surprised to the upside, versus disappointing data in the US. The European currencies’ rise has cooled, however, following still dovish remarks from the European Central Bank and a continued pause by the Bank of England.
Other indicators of global risk appetite were barely moved. The carry trade was mostly unchanged, wtih the New Zealand dollar flat and South African rand up just 0.4 per cent against the yen. The Canadian and Australian dollars, both tied to commodity prices, were also flat.
• Debt. US Treasury 10-year yields added 1 basis point at the European open, after falling to new 2010 lows on Friday, to 2.81 per cent. The two-year US bond yield remained at record low levels, at 0.51 per cent. The move last week, in which 5- and 10-year bonds were the most heavily sold off, suggested a growing expectation of Fed easing. Those are the bonds most likely to be purchased by the Fed to add cash to the economy.
Japanese 10-year bonds were nearing their lows, down 4 basis points to 1.03 per cent, nearing their post-crisis low point of 1 per cent. The Japanese central bank is increasingly expected to initiate some kind of easing of its own.
The European benchmark 10-year German Bund, was sold off, up 1bp to yield 2.52 per cent. Meanwhile, credits of “peripheral” countries were in demand, with Greek two-year bonds rising 11 basis points.
• Commodities. Benchmark crude oil was up 0.8 per cent to $81.34 a barrel. The turnround in risky assets of late has not much affected oil, which has remained at three-month highs near $81. As hurricane season looms in the US Gulf of Mexico, potentially interrupting supply, prices will have a difficult time moving much further down.
The effects of a Russian drought, fires and subsequent ban on wheat exports is spilling over into other commodity markets such as barley, and potentially even meat and other grains. Though the surge in prices in the soft market has had little impact on energy and industrial commodities, a sustained rise could raise fears of inflation in food prices.
Gold is gaining as investors anticipate a flood of paper money following easing measures from central banks around the world. It is up 0.4 per to $1,207 an ounce.
