Weekend summary & the ECB Ahead
March 07, 2016
An impressive payrolls number on Friday put a rate hike in the US back into play. Jobs created in February beat expectations, immediately putting the brakes on a stock market rally, as equity investors don't relish the idea of bond yields rising, giving them a bit of competition for investors' cash. The US stock market did close higher, with the S&P closing at 1,999.99, a price it hasn't seen since the 1st of January. It's likely we'll get back above the 2k level, but can't see it going too much higher if rate rises become a persistent theme.
In Europe; Germany are concerned that Portugal's relaxed budget is going to mean they need to tap more funds from the bailout mechanism. The Eurogroup are going to ask Portugal to change their economic policy after the new government announced an anti-austerity budget two weeks ago. Ratings agencies initially said the budget was a credit positive, but concerns from within Europe are probably amplified because they fear other European nations could follow suit.
Italy is one of those countries and the EU will apparently send a letter to the Italian leadership over the state of public finances with similar letters heading to Spain, Finland, Austria and Belgium. Germany will also be concerned that European sovereign debt might spike if there is a Brexit, saying that a post Brexit period wold be poison to the economy.
In oil; Saudi have said that the prospect of them cutting their output whilst others raise theirs is unrealistic. Iran have said they are set to see crude exports hit 2m barrels per day by the end of March. Despite both pieces of news, oil is closer to $40 this morning.
We've seen china's new five year plan announced over the weekend, they're going to aim for a 6.5-7% GDP target this year and want to see GDP above 6.5% for the following five years, with the service sector picking up some of the slack from manufacturing, whilst large government infrastructure plans will also contribute. Take note Europe – Their rail investment plan is worth $123bn and their road infrastructure plan an eye watering $253bn. Not that we think Europe needs to spend that much, but even a fraction of this would go a long way, especially when you can finance it virtually for free.
Something that markets will welcome is the government's pledge to keep the currency more stable and to improve their communication to markets. The PBoC believe the Yuan is at a stable level against a basket of currencies and they are happy with their level of FX reserves, which should mean that we see less large scale buying/selling from them and hopefully more stability – something the IMF will be pleased to see as the Yuan is just 7 months away from becoming a 'reserve currency'.
Market reaction to the plan has been fairly muted, with a rise in stocks of less than1% overnight. Europe has opened very slightly lower this morning, but not enough to be of concern. Looking to the week ahead; a lot of it will be about central banks, with the main focus the ECB on Thursday. The market is expecting Draghi to announce further stimulus measures, but there's plenty of division amongst policy makers as to whether or not this is the smart move. We'll have to wait and see.
Have a great week.