After two days of correction, markets snapped back on Friday night and there were some big gains. On Wall Street, the S&P 500 was up 0.9 per cent (1515), the Dow rose 119 points (14000) and the Nasdaq was up 0.97 per cent (3161).
Now this was sparked by two key events. Firstly, signals from the Fed that the printing presses weren’t about to be stopped or even slowed for some time yet. Specifically, St Louis Fed president James Bullard said on CNN that "Fed policy is very easy and it’s going stay easy for a long time”. This obviously gave markets some confidence that the crack will continue flow freely.
The other key event was the German IFO survey, which was fairly upbeat – with the business climate index rising to 107.4 from 104.3, which is the highest level in in about two years. Again, this signals that Europe is close or already at a turning point and the good news is that this is actually a decent survey. European stocks got a solid boot from that and the Dax rose 1 per cent, the CaC was 2.3 per cent higher and the FTSE was up 0.7 per cent. That said euro weakened by about 40 pips and is currently at 1.3226.
Now in terms of the week ahead, the sequester is going to be on everyone’s lips. So far people are ignoring it, including Congress – there is still nothing. No agreement and they don’t even seem to be talking about it. Indeed the general expectation now is that not only will the US fall off this cliff, it will likely take some time to be resolved. How bad will the damage be? Notionally it's $85 billion per month, half of which is meant to be defence related.
Two things. The US will never cut its defence budget while it is terrified by China’s rise. Secondly, while it’s notionally $85 billion per month, the fact is there is a lot of discretion in how and when the actual cuts take place. So trying to get a guestimate as to how much will actually be cut every month is virtually impossible. It does highlight why QE won’t end though.
There are probably only a few other minor things worth noting. The UK lost its AAA rating (as granted by Moody’s), as did the Bank of England, which is why you will find the British pound 150 pips lower than what it was last week (1.5097). Note also that the Japanese yen shot up to 94.71 from 93.26 on Friday. The Japanese government is apparently going to appoint a new governor to the BoJ today and they want – have publically announced it – some money printing, crazed lunatic at the helm. I can only assume that the Japanese government is bitterly disappointed that Mark Carney is already taken – the man is a well-known money printing loon.
What I find incredible amid all that the Fed and BoJ action today is that commodities got little love. Gold fell a further $5.8 to $1572 and copper was down 0.6 per cent, although crude got a modest bid, rising 0.6 per cent.
Alrighty, moving on, there is some big macro data this week. For Australia it will be the December quarter capex figures (Thursday at 1130 AEDT). Recall that from mid to late last year policy makers and any business leaders had to don the nappies when they saw iron ore prices fall. The stench of soiled nappies filled the air as our leaders collapsed into one big quivering mess. Trembling, they sobbed, at a loss as to what they should do. The mining boom was over.
Thankfully for the rest of us (and awkwardly for leaders), iron ore prices rebounded quite quickly. Now, while capex intentions were revised down during that period, by a record amount everyone was happy to tell you that investment intentions remained strong (expected to rise 20 per cent). I suspect that in these figures we’ll likely see another deterioration, notwithstanding the fact that intentions are surveyed through January and February, simply because I doubt that is sufficient time for plans that were shelved to be started again, especially during the summer holiday period. However, I don’t think it is the end of the mining boom – there is and never was any evidence for this claim. Any investment that is shelved won’t be shelved for long.
In addition to that data we see some housing figures: the Reserve Bank's private sector credit (Thursday) and RP Data-Rismark’s house price series figures (Friday).
Looking abroad, for China there are a couple of PMIs, with the flash estimate today at 1245 AEDT and then we get the official measure at the same time on Friday.
In Europe, the key data is the business climate indicator on Wednesday, and German employment data alongside consumer price data on Thursday. On Friday we see the eurozone unemployment rate.
Finally for the US, we see a couple of Fed manufacturing surveys for Dallas and Chicago tonight, and on Tuesday home prices, new home sales, the Richmond Fed manufacturing index and testimony from Ben Bernanke to the Senate banking committee.
Wednesday night we see durable goods orders and pending home sales, then on Thursday night the key release is US fourth-quarter GDP revisions. Recall growth was initially reported as a fall of 0.1 per cent, which is expected to be revised up to growth of 0.5 per cent.
Finally for Friday the key release is the ISM survey – currently at 53.1, the index is expected to fall to 52.5.
Have a great week…