It has been a strong fortnight for equities amid growing expectations that the US Federal Reserve would announce a third round of quantitative easing and that Germany’s constitutional court would rule in favour of Europe’s new bailout fund. Speculation has intensified that the US Central Bank will unveil further stimulus measures to boost the economy following the disappointing jobs report last week. Equities moved higher in anticipation despite reports that Moody’s Investors Service is considering lowering the US credit rating unless budgetary negotiations to reduce the debt/GDP ratio are met.
The Federal Reserve confirmed the speculation, saying it would pump $40 billion into the US economy each month until it saw a sustained upturn in the weak jobs market. The Fed said it would only purchase mortgage backed securities, in an effort to boost the housing sector and this would be in addition to its so called “operation twist” program, in which it is selling short-term bonds to buy longer-term US Treasury debt. Germany’s constitutional court gave a green light on Wednesday for the country to ratify the Eurozone’s new bailout fund. Germany is the only country in the 17-nation bloc that has yet to ratify the European Stability Mechanism (ESM), which will erect a €700 billion firewall in order to prevent the spread of contagion in the region.
Angela Merkel, the German chancellor, said in a speech to parliament “this is a good day for Germany and a good day for Europe.” Voters in the Netherlands also backed two pro-European parties, a result widely regarded as a test of opinion backing austerity and the recent Eurozone bailouts. The ball is now firmly in Spain and Italy’s courts. If they deliver the planned fiscal tightening and structural reforms, the debt crisis could end in a couple of years. Economic data, however, remains mixed with US job growth slowing sharply.
The unemployment rate fell to 8.1% from 8.3%, but employment rose by much less than expected in August. Employment increased by 96,000 jobs last month following a downwardly revised increase of 141,000 jobs in July, analysts had expected a 125,000 increase. Meanwhile, the number of Britons on unemployment benefits dropped in August by the largest amount in two years as companies created new jobs. Employment also rose to the highest level in over four years between May and June, raising hopes that improved prospects will allow consumers to spend more and boost the recovery.
China offered further reasons for caution following the release of a series of weak economic figures. Imports fell 2.6% on the year in August, confounding expectations of a 3.5% rise. Exports grew 2.7%, below forecasts for a 3% rise, which is concerning for a country where exports generate 25% of gross domestic product and support an estimated 200 million jobs. Technical analysis illustrates the strong moves experienced over the past two weeks, with a series of higher lows forming a medium-term upward trend since May. The oscillators are also rising with the MACD stepping into positive territory, implying there could be further upside to come.
A close above the August high at 5880 is needed to confirm the trend, with support seen at 5705 and 5600. In conclusion, the market has benefited from a series of highly anticipated political developments crucial to boosting the global recovery and resolving the European debt crisis. As is often the case, the news could be largely priced into the market in the short-term and there is likely to be an element of “buy the rumour – sell the fact”. That said, the trend is higher and the newsflow is positive, so I am looking to buy any weakness. A study released by the BNY Mellon Wealth Management revealed that the MSCI World Tobacco Index had the highest return out of 67 sectors in the MSCI World Index over the past 10 years.
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