Stock markets have had a relatively quiet few weeks for fixed odds trading, though the trend has remained biased to the upside. It has been credit and currency markets that have seen most of the action of the last couple of weeks with the US dollar being punished, and with the dollar index falling over 1.5% on Friday alone. This is partly down to concerns over the US budget deficit, and fears that the Fed is trying to monetise their rising debt mountain. Another explanation for the slump is a returning appetite for risk from global investors. During the height of the crisis, the dollar, and US treasury bonds were seen as a safe haven. Now with confidence easing back into the system, this flight to safety appears to be rapidly unwinding. Bonds were massacred last week, while the US dollar fell heavily against a basket of currencies including Sterling and the Euro.
Funds are flowing out of ‘safe’ assets into riskier, more inflation resistant assets, such as equities, gold and oil. Oil and gold in particular are in demand with oil touching $66.46 on Friday, and gold surging to $980. It is interesting to note that oil is now 45% below its peak in 2007, while the Dow Jones is down 60%. Oil fell further, but has recovered quicker.
UK banking shares managed a positive week, with Barclays once again leading the pack. There was a midweek wobble on the release of the FSA’s stress test methodology, which many have been interpreted as not being stressful enough. The market appears to have priced in more adverse test conditions, causing many traders to reasses their assumptions about the UK banking sector’s ability to weather a sustained economic downturn.
The coming week starts with a bank holiday across most of Europe. UK manufacturing PMI and US ISM manufacturing data are the standout economic releases for the day. Tuesday brings more US housing data with the release of pending home sales. Wednesday brings ADP non farm employment changed and Fed chairman Bernanke testifying. Thursday is extremely busy with rate statements due from the ECB and MPC and Bank of Canada. Friday closes an already busy week with Non Farm payroll numbers. In the US, it seems to be the case that jobless claims data is setting a new record every week. Continuing claims are showing no signs of retreating, and it is no coincidence that mortgage delinquencies reached a record high of 9.12%. There was some positive news with new home sales rising month on month, but the down trend remains very much in place for the time being.
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