Monday saw Asian stocks showing some improvement and becoming a fraction firmer. The change came after investors started focusing on the upbeat flow of US corporate earnings, just before a host of results, which are due for this week.
The investors have set aside geopolitical concerns for the moment.
The volumes kept low, however with the Japanese markets on holiday. MSCI’s broadest index of Asia-Pacific shares outside Japan increased by 0.24%, showing small gains for most markets across Asia.
The results which are due for this week include the reporting of a number of US companies; including Apple Inc, Mc Donald’s Corp, Coca-Cola Co and Caterpillar Inc.
The data from Thomson Reuters showed that of 82 companies in the S&P 500 that had reported earnings through Friday morning, 68% beat Wall Street’s expectations, roughly in line with the 67% rate for the past four quarters and above the 63% rate since 1994. The last week ended with the Dow Jones up by 0.9%, S&P 500 up by 0.5% and the Nasdaq up by 0.4%.
The US treasuries and German debt have remained well underpinned amid geopolitical concerns. However, on Monday US 10 year yields were steady at 2.48%. Whereas, the German bunds were yielding at just 1.16%, having neared all-time lows.
The downing of the Malaysian passenger plan on Thursday has sparked speculations about rising tensions between the west and Russia. Later today the UN Security Council is due to vote on a resolution aimed at condemning the downing of a Malaysian passenger plane. John Kerry (US Secretary of State) on Sunday put forward what he said was overwhelming evidence of Russian complicity in the downing of the passenger plane.
On the other hand, the Gaza-Israeli conflict has intensified and the military offensive so far has killed hundreds of Palestinians and 13 Israeli soldiers. John Kerry will be travelling today to meet with Egyptian officials and discuss the crisis.
The major currencies have started becoming steady now. The dollar index is steady at 80.513 and has retreated from a one-month peak seen last Friday, when the euro bounced off a five-month trough of $1.3491.
According to traders, buying interest below $1.3500 helped squeeze the euro up to $1.3530. The common currency should see solid support at $1.3460/80, an area that had provided a floor on several occasions in the past 10 months or so.
The Euro was at 137.09 yen after a five-month through of 136.71 and the greenback was at 101.30.
Gold which was swinging between $1,292 and $1,339 in the last week was now idling at $1,310.95 an ounce.
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(Reuters) – World stocks inched up and U.S. bond yields steadied after almost three weeks of gains on Tuesday with Federal Reserve policy setters expected to end six years of aggressive monetary stimulus.
The Fed kicks off a two-day meeting later with markets betting on an announcement that it will stop its post-financial crisis high-intensity asset buying and reinforce that a softly-softly approach will be taken to raising rates.
With the euro zone running into turbulence again and China’s giant economy also struggling for pace, the prospect of a world without U.S. stimulus has troubled markets over the last couple of months, but they finally seem to be getting used to the idea.
European shares rose for the fourth time is six days, helped by better-than-expected results from pharmaceutical group Novartis and Swiss bank UBS, while the dollar, commodity markets and U.S. bond yields steadied.
“I think in the last few days we have had a reality check,” fund management group Hermes’ chief economist, Neil Williams, said. “The world is certainly not a happy place at the moment but it hasn’t got that much worse in recent weeks.”
“I’m expecting the Fed to re-assert its dovishness, they haven’t come this far including six years of QE (quantitative easing) to end it abruptly and leap towards a rate hike.”
London’s FTSE, Germany’s DAX and France’s CAC were up 0.5, 1.2 and 0.4 percent respectively and the euro, the pound and benchmark German government bonds all traded around recent levels.
Gold also recovered its footing after falling to its lowest in nearly two weeks, while emerging market stocks, which are also seen as vulnerable from reduced U.S. and global stimulus, rose 0.7 percent as hopes of more reforms of state-owned business saw Chinese stocks jump 2 percent.
Sweden’s crown slid to a four-year low against the dollar and a four-month trough against the euro after the country’s central bank, the Riksbank, surprised markets with a cut in interest rates to zero.
Most analysts had forecast that the bank would lower its main interest rate, the repo rate, to 0.1 percent from 0.25 percent to fight the risk of deflation. But it went a step further and forecast an even lower rate path for the future.
“Reading between the lines, it looks like Riksbank will keep rates low… This will weigh on the Swedish crown, with most losses likely to come against the dollar,” SEB’s chief currency strategist in Stockholm, Carl Hammer, said.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan added about 0.4 percent but Japan’s Nikkei dropped 0.4 percent after disappointing results from Canon offset positive retail sales data.
In the United States, data on Monday had been far from encouraging.
Services sector activity slowed in October to a six-month low, while manufacturing output in Texas decreased, providing more evidence that the Fed is likely to take things slowly in the coming months.
The dollar index, which tracks the U.S. unit against six major rivals, inched up about 0.15 percent in Europe to 85.629 as early Wall Street futures prices pointed to a solid 0.4-0.5 gain for stocks later.
Among commodities, U.S. crude was flat at $81.04 per barrel after dropping as low as $79.44 on Monday, its lowest level since June 2012, after Goldman Sachs cut price forecasts.
Brent crude shed 0.2 percent to $85.65, as concerns about weak global demand and ample supply kept a cloud over the market though growth-attuned metals — copper, nickel and aluminium — continued their recent rebound.
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China’s manufacturing output grew at its fastest pace in more than two years in July, pointing that China’s economy may be stabilizing.
The figures for July were promising. According to the National Bureau of Statistics; the official Purchasing Managers Index (PMI), which measures activity in bigger factories and is a key to measure sector’s health rose to 51.7 in July from 51 in June. The rise in figures meant an increase in the expansion.
The improvement and growth in the manufacturing sector is a direct result of a series of steps taken by China in the recent months to help boost its economic growth.
The HSBC PMI survey, which measures manufacturing activity in relatively smaller factories, gave a preliminary reading of 52 for July, which was an 18 month high.
China’s growth stabilizing:
China, which is also the world’s second largest economy, has recently witnessed a series of positive economic data along with the rise in PMI.
In June, China’s economy witnessed a 7.5% rise in the April to June quarter, from a year ago.
Other data also points to the positive developments taking place, with factory output, fixed asset investment and retail sales showing an increase in the recent weeks.
The positive outlook of China’s economy has encouraged policymakers to take steps to help further boost China’s growth.
Planning to cut taxes on smaller companies and speeding up the construction of railway lines across China are part of a series of steps taken by policymakers.
Other steps include China’s central bank making more cash available for banks engaged in lending to agriculture related businesses and smaller companies.
Furthermore, the central bank has also said that it will encourage banks to lend more to exporters in order to boost shipments.
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Central bank’s head, Janet Yellen, confirms cessation of buying bonds in October after injection of £4.5 trillion over five years
The US Federal Reserve has called time on its $4.5 trillion (£2.8tn) quantitative easing programme, introduced more than five years ago to steer the world’s largest economy through the financial crisis.
The central bank, led by Janet Yellen, said it would cease buying bonds this month.
Announcing the decision made at its October policy meeting, the Fed said: “The committee judges that there has been a substantial improvement in the outlook for the labour market since the inception of its current asset purchase programme. Moreover, the committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the committee decided to conclude its asset purchase program this month.”
It brings to an end the programme which marked a radical departure for US monetary policy, hugely swelling the Fed’s balance sheet in a bid to prop up a battered financial system.
The Fed began to slow its purchase of Treasury bonds and mortgage-backed securities in January, but until now it had not confirmed an end date. The central bank has steadily reduced its monthly bond purchases from a peak of $85bn a month to $15bn a month.
Despite the end of its bond-buying programme, US monetary policy remains ultra-loose, with an interest rate range of between zero and 0.25% since December 2008.
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The European Central Bank took strong measures and dropped interest rates even more when they received growth and inflation rates that were weaker than their expectations.
They decreased their deposit rate to -0.20% and interest rate to 0.05% and declared two new programs through which they will buy asset backed securities and bonds. The news announced the dropping of the euro to 1.29 US dollars.
The purchasing managers’ index was also changed downwards. The total Markit PMI output went down to 52.5, which is lower than the expected 52.8 and the 53.8 that was July’s concluding output. In July Eurozone’s retail sales decreased by 0.4%, after witnessing an increase of 0.3% in June. The decline in July was more than expected.
In the United Kingdom, the Bank of England managed to keep up its asset purchase ceiling at £375 billion. It also managed to regulate its bank rate at 0.5%, which has been maintained since early 2009.
The finance minister of Germany, Wolfgang Schauble stated that they might miss their growth target of 1.8%, let alone exceed it, as he had expected two months earlier.
The economic status of US remained healthy, and the latest news pointed to a steady recovery. In August alone, employers made an addition of 142,000 jobs, which lowered the unemployment rate to 6.1%.
For the FOMC meeting that will take place in the mid-September, the Fed issued their Beige Book. The spending rate of consumers and residential real estate happenings are positive, but reserved. Almost all of the districts have reported a lacking of skilled labor, and the price pressures stay low.
The pending home sales in July also increased more than expected. The trade gap in the US was also shortened by 0.6% in July to US$ 40.5 billion because of the increase in imports and exports. The official increasing rates were 0.7% for imports and 0.9% for exports.
The Brent price decreased lower than $100 last week, due to which energy stocks struggled.
The decrease in Chinese demand for iron-ore led to prices falling under $85/ton which is a record decrease in 5 years.
The Fed will set a rate during a period of full employment and steady inflation of 2%, this is defined as the neutral Fed rate. This Fed rate, even though it is just an estimate, still has a lot of significance, since it will act as a determinant for long-term bond yields.
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Recently the inflation rate in the United Kingdom has gone up with June seeing an increase in the prices of food and clothes. The consumer price index rose to 1.9% in the month of June from 1.5% in May.
The expectation of an increase in the interest rate, following the increase in inflation has also raised the pound to a record six year high against the US dollar at $1.7192.
Due to the warmer climate this year, the high street clothes retailers have delayed their sales promotions. This has resulted in a price increase between May and June, compared to the same period last year, where prices saw a decline. Food prices have also risen in the same period compared to the last year, where they saw a decline. Furniture and airfare prices also saw a comparatively higher increase than the last year. All these factors have led to inflation rates reaching a five month high in the month of June, well above forecasts; however, the inflation rise is still below the Bank of England’s 2% target and has been so for the last six months. At the same time, wage increases are expected to still lag behind inflation.
According to Chris Williamson, Chief Economist at data specialists Markit; the increase in inflation has further raised expectations that the Bank of England will raise the interest rates sooner rather than later. This has also pressurized the Bank of England to decide when to increase interest rates.
However, the economists remain divided as to when the increase in interest rate will come about. There is a speculation that there might be an increase in November or early 2015. However, investors are betting on an interest rate rise before the end of 2014. At the same time, markets have priced a rate increase from 0.5% by the end of the year. Markets becoming more confident that the Bank of England may raise interest rates before the end of the year, has led to the British Government’s bond prices tumbling following the rise in data and sterling.
Given the positive economic outlook of UK, Rob Wood, the chief UK economist at Berenberg, predicts a 60% chance that the Bank of England will begin increasing interest rates in November this year.
Important to note is that since last year, the consumer price index had been falling, which has helped the Bank of England to hold off on raising interest rates, despite UK’s strong economic recovery. However, now the stage is completely set for an increase in interest rates, as the UK economy along with an increase in inflation is growing strongly, there is also a boom in the housing market with house prices increasing and unemployment is also going down.
According to former Bank of England Policy maker, Andrew Sentence, this raise in inflation also points to the fact that the economy is strong enough to withstand a rise in interest rates. He further said that the rate rise should take place later this year rather than in 2015, because in 2015, MPC could be “tempted to postpone a rise beyond the general election, which would be too late”.
On the other hand, Mark Carney (Governor of the Bank of England) has rebuffed the Bank for International Settlements’ call to raise interest rates faster, commenting that the recommendation was “outside political and economic reality”. According to Carney, the timing of the first rise in interest rates would be “driven by data”. He further added: “The only guidance that the new Monetary Policy Committee is now giving is around the expected medium-term path of interest rates, not the timing of the first rate rise.”
According to Mark Carney, the biggest risk to the economic recovery is over-heating in the housing market. Particularly, the high levels of mortgage debt taken on by households. This is because when debt levels get too high, British people “economize” everything else in order to pay their mortgages. This leads to a major macroeconomic impact, if many people are highly indebted. Thus, leading the economy back in to recession.
Since the recent rise in inflation was due to retailers’ decision of postponing sales, according to Samuel Tombs of Capital Economics, the inflation will ease again by the end of this year, which shall remove the pressure to raise interest rates immediately.
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The US unemployment rate fell to its lowest level since 2008 on Friday, in a move hailed as a sign of progress by economists despite 9 million people remaining out of work.
The Bureau of Labor Statistics (BLS) said that the unemployment rate fell to 5.8%, as employers added 214,000 jobs in October. The average monthly gain in the past year was 222,000. The industries that added the most jobs were “food services and drinking places, retail trade, and health care” the BLS said.
In its report, the BLS said that the number of unemployed has fallen by 1.2 million this year and the number of long-term unemployed has fallen by 1.1 million.
Long-term unemployment is a persistent problem in the US that has vexed even top economists. “There is debate about why long-term unemployment remains so high,” Federal Reserve chair Janet Yellen said in a speech in April.
The October jobs report says 2.9 million Americans have been without jobs for 27 weeks or more, which accounts for 32% of all the unemployed people in the country.
Justin Wolfers, a fellow at the Peterson Institute for international economics, called the jobs numbers “a great report” and publicly hailed one of the BLS’s data points, the household survey, which suggested that 683,000 people found new jobs in October.
Others were sceptical of the household survey. “These data, remember, are much less reliable than the payroll numbers, and can’t be taken seriously month-to-month,” wrote Ian Shepherdson of Pantheon Macroeconomics.
Others warned about embracing too much optimism.
“While this is a sign that the economy is slowly moving in the right direction, if you look below the headline numbers, it’s obvious that today’s labor market is still far from normal,” the Economic Policy Institute said. “The economy may be growing, but not enough for workers to feel the effects in their paychecks.”
The National Women’s Law Center, similarly, objected that most of the gains were jobs gains were in low-paying minimum-wage jobs.
“Although job growth continued last month, it’s troubling that half of the 214,000 jobs added were low-wage. The largest job gains were in the restaurant industry, where most of the workforce relies on tips—and the federal minimum cash wage is just $2.13 an hour. Finding a job that pays poverty-level wages doesn’t feel like a recovery,” the NWLC said.
Peter Morici, an outspoken professor at the Robert H Smith School of Business at the University of Maryland, who has been critical of the Obama administration’s jobs policies, put his objection vividly: “One in six men between ages 25 and 64 – too old for college and too young to retire – are jobless. Many are simply sitting at home watching ESPN and often relying on friends and relatives for support.”
There are indicators that the economic recovery is slower than many would like.
While the so-called topline numbers – the number of jobs added and the unemployment rate–- are often cited in discussions, they have their flaws. The jobless rate, for instance, has been dropping in part because it only measures people who have been actively looking for jobs; when people stop looking; they are no longer counted as “unemployed” according to the government figures. In addition, the number of jobs added is frequently revised, often by large margin; the BLS reserves a margin of error of 100,000 jobs.
There are several other statistics that economists look for to gauge the health of the labor market.
One is the number of people who are “part-time for economic reasons,” which the BLS classifies as those “who would have preferred full-time employment, [and] were working part-time because their hours had been cut back or because they were unable to find a full-time job.” There are 7 million Americans in that category.
Another measure is “discouraged workers” who have given up looking for jobs because they believe there are none available. There are 770,000 Americans who fit that description – essentially unchanged from the same time last year.
One of these telling statistics is the “U-6 unemployment rate,” a more expansive measure that counts the “total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force.” That means all people who are unemployed as well as those who have taken jobs they don’t want out of financial desperation.
That U-6 number remains elevated, suggesting that 11.5% of the country is unemployed – in contrast to the milder 5.8% top-line unemployment rate. The U-6 rate has dropped in October, however, from 11.8% in September.
Another measure that economists put emphasis on is the “labor force participation rate,” which measures how many Americans are working as a percentage of the overall labor force. That percentage, a very low 62.8%, is nearly the lowest since the recession of 1978.
Joblessness also shows stark differences by ethnic group. The black unemployment rate, at 10.9%, is more than double the white unemployment rate of 4.8%.
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