Global Analysis

Well 2012 has been quite a year. US ISM came in at 49.5 vs expectations of 51.5. Also recently the final reading of the PMI for China was 51.5 in December according to statements form HSBC holdings and was the fastest pace in 19 months. The last month has also seen the JPY weaken significantly against the USD due to a change in government and the expectations of more aggressive monetary policy form the BoJ.

Shinzo Abe, the prime minister wants an increase in fiscal spending to beat deflation and give a boost to Japanese exports as their goods become cheaper to foreign entities due to the weakening of it's currency.

Also the other big story to look at has been the impending US Fiscal Cliff with automatic taxation and spending cuts on the agenda which should be resolved imminently. This should help give a boost to global markets. This year has seen healthy returns in Greek government bonds and also equity markets. Will 2013 be a year for equities or a safe haven play into the USD? Lets see how the markets play out.

Global Macro Analysis and U.S. elections

So the last few weeks have seen the markets correcting after a rally which has been quite interesting due to the divergence between leading indicators and market performance. From a global macro perspective the world economy is looking in better shape given the ISM figures in China and the U.S were better than expected. In addition the Non-Farm Payrolls data also beat expectations with the slight disappointment in the unemployment rate ticking up slightly but still below the political headline figure of 8%. Consumer confidence in the U.S. has also picked up in the last quarter indicating retail spending is on the increase whilst housing starts and building permits have also been increasing on a month by month basis which has added to positive sentiment going into the Christmas season. Also looking forward to the U.S. elections to see the result of the Obama/Romney presidential race. There could be a situation unfolding where Obama wins but Republicans dominate congress. Therefore the risk of the fiscal cliff becomes slightly greater and could contribute to a slowdown in GDP growth for 2013. Lets see how the scenario unravels! 

Quantitative Easing

Well the last few weeks have been very interesting given the FED decided that now was the right time for QE3 given the stubbornly high unemployment rate which has been stuck above the key figure of 8% since Q1 2009. Furthermore the BoJ has also decided to pump more stimulus into its economy. Could this equal currency wars where countries' are all trying to devalue their currencies at the same time to make their trade more competitive internationally? Who could be the next country to inject liquidity into its system? I suspect China may be next. Therefore with all the liquidity being pumped globally do we expect higher commodity prices? I would think so as governments are taking a Keynesian approach to slower global growth and intervening to try and accelerate economic expansion. I expect gold prices to be supported as an alternative investment and would expect a short term correction and in general the markets as a whole before another rally up to all time highs. Looking forward to the US ISM figure where a number <50 would be a worrying sign and a fourth consecutive month where the manufacturing sector is in a phase of contraction in addition to the non-farm payrolls data. Good luck trading!

U.S. Analysis

This month has been quite interesting. The US ISM came in below 50 again against expectations of a figure above 50 whilst simultaneously the Non-Farm Payrolls data smashed estimates which saw equity markets rally on that particular day. In addition Housing starts and building permits beat expectations. Attached below is a snapshot of figures for this data from Bloomberg. This has led to many portfolios with positive themes with regards to a housing recovery in the US and the potential of going long US Housing stocks. 

In the meantime the big question on investors' minds is whether Ben Bernanke is going to pump liquidity into the system by following through with the much anticipated QE3. There will be a keen eye on the Jackson Hole summit where the Fed Chairman, Ben Bernanke will be speaking and professionals will be looking at the rhetoric and signs of any additional stimulus to the financial system. Given that the unemployment rate has been stubborn for a while, the attention to this summit is particularly high. If comments suggest additional QE we know what is likely to happen given the effects of QE2. Let's see if markets are disappointed or excited?

Thoughts on the Markets

So over the last couple of weeks the U.S has looked quite interesting. The UMCSI came in at 72 which was below the forecast of 73.5, housing starts came in at 760,000 above forecasts and building permits gave a figure of 755,000 which was down from the previous month (784,000) and also below the Bloomberg survey of 765,000. Other interesting stories was the close to 50% drop in earnings from Morgan Stanley which would probably lead to job cuts in the next quarter. Also the probability of QE happening this year has been significantly reduced due to the robust performance in the USD against the major and emerging economies in addition to the weakness in the 10 year treasury yield which is < 1.5%. Instinct also suggests that the yield isn't at record lows because the U.S economy is in good shape but because the rest of the world is not in the best of shape. Also quite recently the ratings agency Fitch gave a little reminder to the United States of their current rating and outlook which is AAA (Negative Watch) so maybe a possible downgrade not too far down the line. A cut by the ratings agencies doesn't necessarily mean that yields will go up. However last year this was the case with the S&P downgrade of the U.S. and the majority of the sell off in Equities markets came beforehand due to a slowdown in GDP growth. As GDP growth stabilised the market then rallied.

Also recently Moodys posted a negative outlook for Germany which was interesting possibly on the back of GREXIT fears.

In conclusion there are severe headwinds and the much discussed fiscal cliff is real due to the risk of severe GDP contraction in the U.S., political risk in not fixing the situation and the automatic spending cuts which come in from Dec 31st. We expect a market correction by a minimum of 10% due to these factors. However regardless of the situation this is a cyclical bull market

Thoughts on the Markets

Well it’s been an interesting week. The HSBC Flash China Manufacturing PMI came in at 48.1 for June down from 48.4 in the previous month. So the Official PMI, which is government backed and looks at the big corporations is in the expansion zone whilst the HSBC Flash PMI, a private sector survey of SME’s is in a contracting phase. Which number to believe? I know which number I trust. Indeed the US ISM came in below 50 at 49.7. That was a surprise to the market and the New Orders part of the survey also came in very disappointing. This is also the first time the ISM has come below 50 since July 2009 (34 months). Being a leading indicator it will be interesting to see what the number is for July. If it comes in below 50 again the that could signal a potential recession in the USA within 12-18 months and a market collapse as the ISM is a powerful leading indicator to the business cycle. Also the Non-Farm Payrolls number of 80,000 came in below expectations of 100,000. Private payrolls were worse at the 84,000 level which was below a consensus of 106,000. The Unemployment rate was at 8.2% which was in line with expectations. The US Market was looking to this number for confidence but due to missing expectations the market sold off. It’s still looking stable but that has been due to the out performance of the defensives sector in holding up the market.  The worst news is that the number doesn’t look that bad to warrant more QE. So in conclusion there looks to be a global slowdown in manufacturing which doesn’t look positive for the global economy. On a final note the last time a Britain was in a Wimbledon Final (which was 74 years ago) we were in a global depression. Now that is something to think about!

Thoughts on the Markets

China Manufacturing PMI at 50.2 in June from a previous of 50.4. The consensus was a drop to 49.9. This is positive given the number is above 50 which signals an expansion. However there is still uncertainty and no clear direction. If the number did come in below 50 then we could say that the Chinese economy is contracting and would therefore expect a recession within 12-18 months as this is a leading indicator (an indicator that changes before the economy as a whole changes) and powerful to the business cycle. Just waiting now to see the HSBC Manufacturing PMI number which had a previous value of 48.4. Also looking forward to the US ISM Manufacturing number which had a reading in May of 53.5. A number above this for June will be positive for the markets especially in the USA and could continue a risk on rally seen at the end of this week due to a positive outlook from the EU Summit which eased repayment rules for Spanish Banks, relaxed conditions for possible aid to Italy and unveiled a $149 billion growth plan for the regions economy. In addition this could be a technical short squeeze to flush out the weak players. Also looking ahead to Non-farm payrolls data due on 06/07/2012. This isn't a leading indicator but traders love moving the markets on this number. Lets see how this week plays out for the global markets.