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By Wednesday, following a much stronger ADP payroll estimate of 297k in the US, it seemed like we might start the year on a barnstorming note. But, it turned out to be an inaccurate estimate, as the payrolls were adjusted for revisions and ended up about in-line with expectations. By the end of the week, most equity markets had made modest gains for the week, including every major developed market, except Spain and Portugal, most of the BRIC and N11 markets, except notably India, and Bangladesh, Indonesia and Vietnam. THE FIRST 5 DAYS RULE. What is rather encouraging for those of us with a bullish persuasion is that the main US markets were in positive territory after the first 5 days of trading. This satisfies an observation that some technical types like to see, and indeed, one that I have also become rather focused on in recent years. Not just legend, but based on actual evidence over many decades, it follows that when the US market posts a gain after the first 5 days of January trading, then we are in for a positive year. The S+P closed up just more than 1 pct with the Dow just less, so that is good enough for me. The rule has had a high probability of success over many decades, and was especially helpful in the past two uncertain years. In 2009, it was of no help for the near term momentum of the rest of that January or February. But, the year turned out indeed to be a good one. Last year was more straightforward, albeit less spectacular. What will 2011 be like? Those of you with a Stock Market Almanac can read all these wonderful bits of statistical stuff for yourselves. And for those of you without one, just think of your own! GLOBAL NEWS MIXED. As I joked about with some colleagues, one of my New Year’s resolutions was to try and be more objective about ongoing economic releases and policy developments as we go through the year. As often as a week progresses, especially when I am travelling, I write down in my notepad interesting releases and other anecdotes that I come across. This week, I didn’t travel, so much of what I wrote down related to data releases. By the end of the week, I was close to breaking my resolution as those that ticked negative were about the same as those that ticked positive, which I didn’t like. I consoled myself that the ones that were positive were more important! In all seriousness, the positives were stronger. Amongst the positives were much of the news in the US, especially the leading indicator type releases such as the manufacturing and services ISM. Even though weekly job claims ticked back up as expected, the underlying 4-week trend remains down. As discussed, US employment data managed to both positively and negatively surprise, which was all a bit odd. But as one commentator suggested, perhaps we all shouldn’t spend quite so much time on it as we do. It is a statistic that is almost guaranteed to be revised. The UK managed to both really positively and negatively surprise with its manufacturing and services PMI releases, which was even odder than the US employment data. In some ways, we end the week none the wiser. According to the manufacturing data, the UK is booming, while the services data suggests a rather dramatic slowing. I suppose both could be true, but I rather doubt it. Probably more likely that the services data was somewhat weather affected. (Honest, no bias.) On the continent, I am not sure what to make of what we learned this week, other than the fact that sentiment towards EMU and the so-called peripheral bond markets remains rather grim. On the economic news, it was mixed to good, with Germany again the main source of particularly good news. It was interesting to see that the manufacturing PMIs in some of the troubled countries were a bit better also. The bond market performance and that of the Euro displayed a clear message to policymakers that they are far from persuading the markets with their frequent attempted soothing words. And, it is interesting that a number of hints from Chinese policymakers had little impact on the markets. Clearly, that was one of the main sources of trouble this first week. I continue to be of the opinion that EMU policymakers will have some new ideas up their sleeves, and I gather that by the end of the week, some talk about aspects of these was percolating. In the BRIC world, it was good to see Chinese stocks have a modestly positive week ahead of a whole batch of important data releases, especially the now all-important CPI. In Brazil, new President Dilma said all the right things in her New Year’s inaugural speech and now we await action to control government spending and reverse likely higher interest rates. Alleviating the pressure on the BRL, which is clearly needed for the momentum of the industrial sector, will probably require more than capital controls, although there was an additional step introduced this week. Of the world disappointments, India was one of the most notable, with the latest balanced of payments data showing a current account deficit of 4.1 pct of GDP in Q3 of 2010, a level that has apparently historically coincided with difficulties. Rather even more disappointingly, net FDI flows remain very small, albeit positive. It is interesting that India’s stock market was one of the weakest globally in the first week of the year. Over the weekend, the PM has talked about the likelihood of 10 pct real GDP growth in the year, starting this coming April. But for this to be bullish for the Indian market, either the current account has to stabilize soon or the government has to introduce measures to attract more FDI. One of most talked about topics of the week – although nothing like the incessant chatter on EMU (note a 20-minute special on the BBC News night Thursday) – was food prices, with many correctly suggesting a continuation of the strong increases in Q4 would be problematic. World Bank Head Bob Zoellick suggested in an FT op-ed that this will be a major topic under the G20 leadership of Sarkozy. While his piece suggested a number of smart measures to alleviate some pressures, it is not clear how quickly or smartly they can be agreed. Typical of the pattern of the week with much economic data, as the chatter increased, commodity prices actually fell. GOLD. AN END TO THE BULL RUN? Speaking of which, after making fresh highs in the low 1400’s, Gold slipped back significantly by the end of the week. A number of commentators are understandably wondering whether its glisten might be coming to an end. After being a fan for many years, I have been dubious for the past two years – linked mainly to my optimism for post crash global recovery. So, I am not sure I am a good person to listen to on the yellow metal. With this caveat, if the US is mending and on the road to recovery, I really am not sure quite what the bulls have got left in their armoury to argue. I suppose if you believe that real interest rates will stay at these paltry levels, not least because the US economy can’t cope with them rising, then perhaps that is a good enough reason. But, it seems to me that we are in for quite a test of this view ahead. As with everything else, we shall see. Meanwhile, while my football team is seemingly being offered a record 19th top league title by others stumbling all over the place. This weekend, we resume pleasantries with a fallen star from down the road. Shame I shall be on a plane to NY while the fun is being played out. Jim O’Neill |
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