ECB,BOE,RBA MEETINGS/ US-CHINA DEC TRADE DATA/CHINESE INFLATION/EU BUDGET SUMMIT/EUROPEAN EARNINGS/BUND AUCTION/SERVICES PMIS
Wednesday’s global markets were a pretty good illustration of the nature of new year rally. The largest economy in the world reported a shock contraction of activity in the final quarter of 2012 despite widespread expectations of 1%+ gain and this month’s bulled-up stock market barely blinked. Ok, the following FOMC decision and Friday’s latest US employment report probably helped keep a lid on things and there was plenty of good reason to be sceptical of the headline U.S. GDP number. Reasons for the big miss were hooked variously on an unexpectedly large drop in government defence spending, a widening of the trade gap (even though we don’t get December numbers til next week), a drawdown in inventories, fiscal cliff angst and “Sandy”. Final consumer demand looked fineand we know from the jobs numbers (and the January ADP report earlier) that the labour market remains relatively firm while housing continues to recovery. The inventory drop could presage a cranking up assembly lines into the new year given the “fiscal cliff” was dodged on Jan 1 and trade account distortions due to East Coast storms may unwind too. So, not only are we likely to see upward revisions to this advance data cut, there may well be significant “payback” in Q1 data and favourable base effects could now flatter 2013 numbers overall.
Yet as logical as any or all of those arguments may be, the reaction to the shocker also tells you a lot about the prevalent “glass half full” view in the market right now and reveals how the flood of new money that’s been flowing to equity this year has not been doing so on the basis on one quarter of economic data. An awful lot of the investor flow to date is either simply correcting extremely defensive portfolios toward more “normal” times or reinvesting with a 3-5 year view in mind at least. There’s a similar story at play in Europe. Money has come back from the bunkers and there’s been a lock-step improvement in the “big picture” risks – we are no longer factoring in default risk into the major bond markets at least and many are now happy to play the ebb and flow of economics and politics and market pricing within more reasonable parameters. There are no shortage of ghosts and ghouls still in the euro cupboard – dogged recession, bank legacy debt issue, Cyprus, Italian elections etc – but that all still seems more like more manageable country risk for many funds and a far cry from where we were over the past two years of potential systemic implosion. Never rule out a fresh lurch and the perceived lack of market crisis itself may take the pressure off Brussels and other EU capitals to keeping pushing hard to resolve the outstanding conundrums. But it would take an awful lot now to completely reverse the recent stabilisation, not least given the ECB has yet to fire a bullet of its new OMT intervention toolkit.
And so a hugely impressive January for risk assets comes to a close today. For the record, global stocks have clocked up almost 5% – the best month in 12, even if still shy of last Janauary’s 5.7% gain. Wall St stocks, where total returns indices hit record highs last September, are now within reach of new price records after a 5.7% gain this month. Although January is typically an the best month of the year for stocks, this year’s gain is more than three times the average January gain of since 1928 and there have been record new investor flows in excess of $55 billion. If only for health reasons alone, February will not be as effervescent and the final days of this month already see some cooling of prices and firming of volatility indices. There may well be some pullback if any of the peristent euro zone or US political rows gain more attention — but few assume this shift will evaporate as easily as it has done in recent years.
DATA/EVENTS TO WATCH NEXT WEEK
Europe Q4 earnings Mon: Julius Baer
Spain PM Rajoy meets Germany’s Merkel in Berlin Mon
RBA rate decision Tues
Europe Q4 earnings Tues: UBS, BP, BG
Global Feb services PMIs Tues
EZ Dec retail sales Tues
France’s Hollande speech to European Parliament Tues
Europe Q4 earnings Weds: GlaxoSK, ArcelorMittal, Svenska Handelsbanken, Volvo
German 5-yr government debt auction Weds
Poland/Iceland rate decisions Weds
US Q4 earnings Weds: Marathon/Time Warner
Europe Q4 earnings Thurs: Vodafone, Credit Suisse, Daimler, Danske, Telecom Italia