Market iQ - 2012-03-15

United States: 

Data released during the week ended March 9, 2012, highlighted economic data on consumer credit, trade and the labour market. Consumer borrowing rose more than forecast in January, capping the biggest three month gain in more than a decade as demand for autos improved and Americans sought more education. 

Credit increased by US$17.8 billion to US$2.51 trillion. The increase in January comprised of an increase in non-revolving credit by US$20.7 billion (biggest gain since November 2001) and a drop in revolving credit by US$2.95 billion (first decrease since August 2011). Strong credit is a good sign for the economy as consumption spending accounts for a significant portion of the United States economy. 

 

The trade deficit widened in January to the largest since October 2008 as imports rose to a record high. The gap increased 4.3 per cent to US$52.6 billion, more than forecast, from a revised US$50.4 billion in December. The increase in imports largely reflects the increase in consumption spending in autos, which was mirrored in the increase in consumer credit in January. Rising energy costs may have likely contributed to the widening trade gap,  The labour market continued to show signs of improvement for yet another month. Non-farm payrolls increased by 227,000 in February following a revision to 284,000 for January. 

This improvement marked the best six months for payroll growth since 2006. The jobless rate held at a three-year low of 8.3 per cent, while the participation rate increased incrementally form 63.7 per cent to 63.9 per cent. Better job creation lays the groundwork for a pickup in household spending which continues to underperform. 

 

Europe

The highlight of last week was undoubtedly the Greek debt restructuring. The majority of bondholders had voluntarily accepted the debt exchange and allowed Greece to achieve an 85.8 per cent participation rate, in excess of the minimum 75 per cent participation level set by the Greek government. Despite this, the Greek government decided late last week to implement collective action clauses for some bondholders, which forced those unwilling bondholders to accept the debt exchange. This resulted in a 95.7 per cent participation rate being attained. The International Swaps and Derivatives Association (ISDA) announced that the execution of the clauses constituted a credit event and result in approximately US$3.2 billion in credit default swaps.

 

Following the successful debt exchange, euro-zone ministers will now sign-off on a second support package for Greece. At the time of writing, the International Monetary Fund had not decided on what it would contribute to the bailout, but it is likely to reduce its original contribution from the 27 per cent of the overall aid package it offered for Greece’s first bailout in May 2010, to 14 per cent. Attention in Europe will now focus on possibly bolstering the region’s firewall. Suggestions to boost the euro 500 billon stabilisation fund to almost euro 1 trillion are being resisted by Germany.

 

Another concern revolves around Greece’s upcoming elections which are tentatively scheduled for late April or early May. If the winners of this election decide not to follow through with the austerity measures put in place by the current administration, it will threaten further financial support for Greece. Additional concerns were raised about Spain last week when Prime Minister Mariano Rajoy announced that the budget deficit target for the 2012 budget would be 5.8 per cent of gross domestic product (GDP) instead of the previously agreed 4.4 per cent. It is expected that Spain will clarify its position on this matter on March 12, 2012.

 

Weekly International Equity Watch

 

US stocks rise nine out of ten weeks

Better than expected jobs data hinting signs of a gradual recovery to the US labour market and developments in Greece’s debt restructuring sent the S&P 500 up 0.1 per cent week on week to a close of 1,370.87. US employers added 227,000 jobs in February boosting the rally in equities despite the news of China’s lower growth target and the Euro region’s economic contraction. Telecommunication stocks rallied the most over the week, followed by stocks in the consumer discretionary and staples sector. The large-cap index was relatively flat falling slightly by 0.4 per cent with the Dow Jones index closing at 12,922 with stocks Wal-Mart Stores Inc and Home Depot Inc leading the gains on the index. The tech-heavy Nasdaq saw a rise of 0.41 per cent to a level of 2,988.34 over the period. Year-to-date, the S&P 500 is up 9.01 per cent as better than expected economic data continues to boost investor confidence with calls of a 1,700 level by year end, should economic growth surprise investors.

 

European stocks post biggest weekly drop since February 10

Weaker than expected euro economic data led to an overall fall in the Stoxx Europe 600 Index by 0.66 per cent week-on-week to 265.44, but is up 8.55 per cent year-to-date. The European Central Bank’s monetary initiatives to battle the region’s debt crisis and better than estimated US data continue to add momentum to the euro equity markets. Germany’s Dax index closed 0.59 per cent higher for the week to 6,880.21, while United Kingdom’s FTSE 100 closed 0.40 per cent lower to 5,887.49.

 

 

TTSE Composite Index down year-to-date