December 2010

Global Stock Indices Rise 8.9% YTD, Interest Rate Risk Grows in 2011

Stock indices were mostly higher over the past week as positive economic data continues to trickle in. There has been a noticeable lack of negative news flow now that the European sovereign debt worries have fallen off the radar. What will be the next shoe to drop? Interest rates, perhaps.

United States

U.S. equities continue to defy gravity as even minor corrections cannot maintain themselves. Volatility has plunged, with the S&P 500 Volatility index hitting the lowest levels since 2007 near 15.4 at one point. Meanwhile, the S&P 500 itself hit a 27-month high, surpassing levels the index traded at just before the Lehman Brothers bankruptcy.

With this week lying between the Christmas and New Year holidays, volume will be incredibly light. Similarly, the economic calendar is fairly light, with the only releases of significant being the Conference Board Consumer Confidence survey set to be released on Tuesday. Expectations are for a 56.4 reading for the month of December, the highest since May. Pending Home Sales on Thursday is another widely-followed release, with the consensus calling for a 0.8% month-over-month increase after the 10.4% increase in October.

Neither the consumer confidence nor the pending home sales figures are significant enough to derail the current uptrend in equity markets. For that we will need something more meaningful. The surprise China rate hike wasn’t enough, but there are plenty of potential landmines for the markets come 2011. Another spike in long-term U.S. Treasuries is something to watch for. A move toward 4 to 5% could spur some selling.

Europe

European equities were mostly higher, but we saw selling in German and French stocks.  The former we can chalk up to mere profit taking after region-leading gains this year. The underperformance in France, on the other hand, likely had something to do with the number of Jobseekers reaching a six-month high in November. All told, it has been a year of divergence for European equities, with performance tied closely to sovereign concerns.

2011 will likely feature more of the same, with the potential for some catch up in the IBEX and FTSE/MIB if Spain and Italy, respectively, are able to navigate the new year successfully. While downside remains if the sovereign debt crisis spirals out of control, a lot of those risks have already been priced in. Risk averse investors can stick to the regional safe havens of Germany (DAX), Sweden (OMX), and to a lesser extent, the UK (FTSE 100).

Like in the U.S., trading volume will be thin this week, with the only significant release being German CPI figures, but no fireworks are expected there.

Asia

Developed economy Asian equities are all finishing the year with very similar returns—a 7% underperformance to the MSCI World Index. A rate hike by China over the weekend is not helping matters, as all three of the indices kick off the new week to the downside. Next year will be an interesting one for Asian stocks. Economists are expecting that the PBoC may hike rates another four times. Expect volatility as markets eagerly watch to see if the world’s second largest economy can successfully orchestrate a soft landing. This Thursday we get the HSBC Manufacturing PMI figures for China, but the official government release will be on Saturday.

Global Stock Indices are Mixed on U.S. Recovery Signs, Europe Debt Worries

Stock indices were mixed this past week, with much of Europe declining, while the U.S. advanced. Euro-Zone sovereign debt concerns continue to linger and that has taken a particular toll on the equities of the nations with the most troubled finances. On the other hand, good news continues to trickle out in the United States with the only obstacle for stocks being the overbought conditions that have developed after such a sizzling rally.

United States

U.S. equities continue to grind higher, but gains have been much more gradual after the sharp rally we have already seen. Short-term price action will likely be dictated by news flow. Longer-term, the consensus is for another year of gains in 2011, with most analysts expecting double digit advances in the major indices.

Looking toward the rest of this week, there are some notable economic data still to be released in this holiday-shortened period (Friday will be closed in observance of Christmas). Existing Home Sales is the most significant release related to the housing market and we should get those figures on Wednesday. Sales are expected to have risen in November to 4.75 million units from 4.43 million. It is well-established that housing remains one of the weakest areas of the U.S. economy, thus any downside surprises are likely already discounted.  Perhaps the most important release of the week is November Personal Income and Personal Spending data which are expected to have risen 0.2% and 0.5% respectively. As consumer spending is the most significant driver of the U.S. economy, these figures are crucial.

Europe

The dichotomy we have seen all year continues, with the stronger safe haven regions of Germany (DAX) and Sweden (OMX) holding onto double digit gains for the year, while the more troubled regions such as Spain (IBEX) and Italy (FTSE/MIB) hold onto double digit losses.

Indeed, we have seen Spanish government bond yields remain near decade highs despite an overall improvement in the mood of financial markets. The 10-year Spanish government bond is holding right at 5.5%. Similar Italian bonds are trading at the highest levels since the financial crisis back in 2009 at 4.12%. Clearly, the sovereign debt crisis is by no means resolved and the prospect of persistently higher interest rates and risk premiums remains a burden for the stock markets of Europe’s weaker regions.

The economic calendar is extremely light this week. Wednesday will feature Italian consumer confidence and retail sales, while Thursday we get French consumer spending.

Asia

The Hang Seng shed almost 3% over the past week as China’s tightening measures continue to weigh on the Hong Kong index. We wouldn’t make too much of the recent action, for the index is particularly volatile. As can be seen from the chart below, the HSI went from year-to-date underperformance of 10% versus the MSCI World Index in May to 2.5% outperformance in November to the 7% underperformance currently. Indeed, for those who believe that China will be successful in orchestrating a soft landing, while maintaining robust growth, this may be a good buying opportunity. There are no major releases from China, Australia, or Japan this week other than the Bank of Japan rate decision which will likely be a nonevent.

Global Stock Indices Surge as Europe Worries Fade, U.S. Recovery Builds

This past week featured stellar gains for stock market bulls as global indices rallied across the board with the exception of the SMI, or Swiss Market Index, which fell slightly. Year-to-date the MSCI World Index is now up 6.7%.

The European sovereign debt concerns that have been so prevalent over the past several weeks faded a bit, leading to a boost in risk appetite. Strong economic data out of China and the United States further bolstered stocks. Going forward, more bullish price action seems likely amid strong momentum from last week and little in the way of negative news flow to spur any sort of profit taking.

United States

A strong start to the holiday shopping season and signs of an improving labor market (Friday’s nonfarm payrolls report notwithstanding) enabled U.S. stocks to put in impressive gains last week.  Given how well the U.S. indices performed in the face of a rather disappointing jobs report on Friday, we expect that this run has legs. Overall, the recovery in the world’s largest economy is picking up pace and that should fuel outperformance in the coming week. The economic calendar is rather light, thus momentum from last week will have no problem carrying over, with a good chance that the S&P 500 advances to a new two-year high in the coming days.

Traders should keep a close eye on the initial jobless claims numbers that are set to be released on Thursday. Many market observers considered last week’s nonfarm payrolls report an anomaly considering that earlier in the week we saw the best showing for the private ADP jobs survey in three years. The jobless claims figures could reinforce or refute this view.

Europe

European indices put in a strong showing last week and the gains were not limited to just Germany as has been the case over the past few weeks. In fact, Spain’s IBEX was the leading performer of the week after yields on the country’s sovereign debt plunged on speculation that the crisis will not spread to the Iberian Peninsula. Yields on Spanish 10-year government debt fell from 5.5% to 5.05%. Neighboring Portugal saw yields on its debt fall from 7.03% to 5.93%.

Given that the IBEX has been the worst performer of the major indices this year, some recovery is not surprising. Moreover, unless negative news flow regarding the sovereign debt crisis somehow gets much worse, we expect that last week’s outperformance will continue into the new week.  The decline we have seen in sovereign debt yields is meaningful and now that the European Central Bank has increased the rate of its bond purchase program, we could be in for a period of respite at the least. This bodes well for more gains ahead. That being said, Traders should closely watch the Irish vote on the 2011 budget. A failure to pass the measure could lead to renewed risk aversion, but we think the markets will be less responsive to any such news than was the case a couple weeks ago.

By the same token, as risk appetite increases, it is natural to expect a bit of underperformance from safe haven Germany.  Benchmark DAX lagged the performance of the MSCI World Index notably last week and this pattern may continue in the near-term.

Asia

The Asian indices all lagged last week due to various concerns. A sharp rally in the Japanese Yen on Friday bodes poorly for Japanese exporters; therefore the Nikkei may begin to underperform, reversing five weeks of outperformance. Poor economic data out of Australian was a burden for the ASX last week, thus the focus will be on the key releases of this week, highlighted by Thursday’s unemployment figures. Estimates are for a 20K increase and a decline in the unemployment rate from 5.4% to 5.2%. Ahead of the jobs numbers is the monetary policy decision from the Reserve Bank of Australia on Tuesday. Interest rates are widely expected to remain unchanged at 4.75%, however, the accompanying language will be critical. A dovish tone may be considered supportive for the ASX.  Finally, the Hong Kong Hang Seng will be swayed by the outlook for China and any potential tightening of monetary conditions in the country. Especially critical will be the Consumer Price Index, but that isn’t scheduled to be released until the week after next.