Europe looks set for a difficult start on Monday as futures track the US and Asia lower in response to the stronger US jobs report on Friday that drove fears of an earlier rate hike.
It seems ridiculous to fear a rate hike in the US when you consider that the cause of it is a thriving economy, low unemployment and rising wages which in turn lead to rising inflation. However, that is the situation we now find ourselves in. Bubbles are being created everywhere in the markets as investors continue their mission for yield in this low inflation, low interest rate environment.
If interest rates rise in the US, there is a fear that the rally stock and bond markets will grind to a halt and move into correction mode as the yield on offer loses its attractiveness. I guess it now depends on whether the strength of the market and earning potential of these companies now warrants further price rises in these stocks. The reaction to Friday’s jobs data would suggest that investors are not so sure.
A downward revision to Japan’s fourth quarter GDP figure hasn’t really helped lift spirits. The country grew by only 0.4% in the last quarter, below the initial 0.6% reading, pulling the annualised figure down to 1.5% from 2.2%. The revision appeared to be driven by in small reduction in capital expenditure which was originally recorded as a small increase. While this is a little disappointing, the country is recovering from recession following the sales tax hike last April and therefore we should be pleased that it has bounced back so quickly.
In China, the latest trade data showed an enormous rise in exports in February, up 48.3% from last year, while imports plummeted by 20.5%. The decline in imports is being largely driven by declining commodity prices which gives the impression of falling demand for them but that isn’t necessarily true. In many cases, trade volume is similar or rising but the value of those imports is much lower.
The rise in exports was largely driven by increased demand from the US and the EU compared to last year, although both were actually lower compared with January. Another thing to consider here in the Chinese Lunar New Year which fell in February this year and is believed to have contributed to the massive surge in exports. In order to overcome this, we’ll usually combined the first two months of the year and combine it to the same period a year earlier to get a better idea of trade performance. This shows exports growing by only 15% on the year which is nothing special.
This week is looking a little quieter in the markets, especially compared to the one just gone. Today’s eurogroup meeting of finance ministers is unlikely to yield an agreement on reform measures for Greece although the alternatives proposed by the new government will be explored. Greece has until April to reach an agreement with its lenders and history tells us that we can expect hard bartering from both sides right up until that deadline.
The FTSE is expected to open 28 points lower, the CAC 21 points lower and the DAX 51 points lower.
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