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Mike van Dulken, Head of Research at Accendo Markets, commented in his Weekly Roundup to clients,
Since we last wrote the UK flagship Index closed 2013 +14.4%, capping off a terrible year for its miners (-30% to -60%) but a great one for the likes of airlines (+100 to +120%) and financial services (+35% to +100%). A 2.4% gain in December also took the month’s positive close tally to 20 out of 22. Santa rallied again. Even if the month didn’t start well, it certainly finished strongly.
Equities have made a good start to 2014 holding right around the 2013 close with some nice New Year volatility for short-term traders. May the long-term 4yr crisis-recovery uptrend continue but not without those interesting ups and downs which keep things so interesting for both myself and our trading clients.
This afternoon the FTSE has been testing its festive highs of 6770 with the positive global economic sentiment we took into Christmas thanks to the Fed FOMC’s decision to begin tapering its QE3 stimulus programme based on economic recovery still helping. We’re a touch lower now however, after a strange US jobs report where Non-Farm Payrolls (NFP) disappointed (74K v 200K est) but the unemployment rate dropped (6.7% v 7.0%). But only because the participation rate fell to 35 yr lows (people leaving labour force pool). Note also workers doing less hours and earning less!
Much discussion now whether the improvement in unemployment rate supports the US central bank’s plans to taper or whether it will hold off from another measured reduction in January to see if December was an anomaly. Maybe today’s data will see tapering paused immediately before it really even gets started. We expected at least one pause in 2014 but not this early. With plenty of contradictory Fed member comments to come along with more inevitable poor data we’re unlikely to have seen the last of 2013’s taper-on/taper-off. Are you ready for the 2014 version: taper-pause/taper resume?
A pause would be in-line with some caution in the Fed’s December minutes, however, maybe the FOMC won’t care about one month’s data, dismissing the report and focusing more on overall improvement to date and other data points. Caution would be understandable though, given its move to begin removing a major market risk-prop. The last thing it wants to do is spook markets. It spent most of 2013 prepping us for tapering. A pause would, however, highlight retained flexibility on how long it takes to exit QE3 and that decisions do remain very much data dependent.
Although the Fed has committed to keep rates at rock bottom until QE3 ends and unemployment falls below 6.5%, today’s report does take us rather close to that threshold and may see the Fed required to adjust its forward guidance (policy promise rather than action; cheaper) to reassure markets that interest rate rises are a way off yet. Markets like the idea of tapering implying economic recovery but they are not ready for tighter monetary policy yet. Then again, with US markets still trading close to all-time highs, the threat could be used to keep any excess market enthusiasm in check to avoid any nasty collapses. Remember US markets gained 25-30% last year. Global peers did pretty well too.
Equities are off their best levels as we write but certainly not reacting badly, taking the out-of-kilter jobs data in their stride. Nice to see markets not panicking. After all, one month’s data does not a trend make. The same can be said for the lack of reaction to disappointing overnight Chinese trade data which failed to exacerbate domestic and international growth concerns after exports dropped, or the ECB reinforcing its dovish rhetoric suggesting the region still needs plenty more monetary policy to help the region recover and resolve internal North/South and East-West divides. A new more mature and pragmatic start to 2014?
Picking things up right where we left off – nice and busy – I offer my best wishes and good health to all readers.
