Last week ended with a risk off tone as the US dollar and the yen have rallying while for once the euro and commodity currencies coming under pressure. Selling pressure on global equities continues with the S&P and Nikkei dropping at the end of the week.
On the other hand, the turbulence in emerging markets that started in May 2013 when Chairman Bernanke mentioned the possibility of a reduction in asset purchases in the months ahead continued this week as investors who parked their money using cheap funding continued their deleveraging process. Indeed, emerging market currencies saw another round of selling early in the week and large volatility swings hit the market affecting mostly the Turkish Lira.
In the developed markets, the Dollar Index rose slightly last week, after the FOMC decision to taper its asset purchases by an additional $10bn. We also had better than expected economic indicators coming out of the US that supported the dollar’s strength, especially the US GDP data that grew at 3.2 percent annualised rate in the fourth quarter, indicating that the Federal Reserve could continue with its ongoing tapering proses.
The Sterling Pound fell against a broadly stronger dollar reaching a low of 1.6425, due to worse than expected business lending data, that reduced the chance for a rise in official interest rates within a year. Bank of England Governor Mark Carney reiterated last week that Britain’s economic recovery had further to run before monetary tightening.
The euro currency fell against its US dollar counterpart, reaching a low of 1.3480, after eurozone inflation data on Friday showed a surprise drop to 0.7 percent year-on-year in January, while analysts had expected a rise to 0.9 percent increasing the chance for an European Central Bank rate cut rates further.
US New Homes Sales dropped more than expected in December, the Commerce Department announced last week that sales fell 7 percentto a seasonally adjusted annual rate of 414,000 units, marking the second straight month of declines in sales. Market analysts attributed the drop in home sales to bad weather that slowed the market and buyers adjusting to higher borrowing costs and rising property valuation. New home prices rose 8.4 percent in 2013, the largest increase since 2005.
US consumer confidence improved last month, as consumers grew more optimistic about both business conditions and the job market. The Conference Board said its index of consumer rose to 80.7 points, well above market expectation of a 78.1-point rise. The Director of Economic Indicators at The Conference Board said, “Consumers’ assessment of the present situation continues to improve, with both business conditions and the job market rated more favourably. Looking ahead six months, consumers expect the economy and their earnings to improve, but were somewhat mixed regarding the outlook for jobs. All in all, confidence appears to be back on track and rising expectations suggest the economy may pick up some momentum in the months ahead.”
Last week, the Federal Open Market Committee decided to reduce its bond purchases by another $10bn, The Fed said it would buy $65bn in bonds per month starting in February, down from $75bn. The Fed shaved its purchases of US Treasuries and mortgage bonds equally. The US Federal Reserve stuck to their plan to unwind its extraordinary economic stimulus despite recent turmoil in emerging markets. The action was widely anticipated, although some investors had speculated that the US central bank might put its plans on hold given the jitters overseas.
In addition to the tapering, the Fed made no changes to its other main policies they maintained their pledge to keep interest rates low for some time to come.
The number of Americans filing new claims for unemployment benefits rose last week, the Labor Department said, that the Initial claims for state unemployment benefits increased by 19,000 to a seasonally adjusted 348,000, slightly above market expectation a 330,000 new claims. Last week’s reading was the highest since mid-December.
US pending home sales dropped in December reaching a two-year low, due in part to unusually cold weather across the country, pointing to signs of a slowdown in the housing market.
The Pending Home Sales Index dropped 8.7 percent to 92.4, the lowest level since October 2011, while Contracts were 8.8 percent below the December 2012 levels. The Drop was due to higher borrowing costs and bad weather that held back sales.
The US Gross Domestic Product grew by 3.2 percent in the fourth quarter of 2013 as Americans’ spending climbed the most in three years and exports improved, laying the ground for further improvement in 2014. The annualised gain in the GDP came in line with market expectations. The Consumer spending which accounts to more than 70 percent of the total economic activity rose at a 3.3 percent, the strongest since the fourth quarter of 2010.
German business sentiment climbed in January to its highest level since July 2011, suggesting Europe’s largest economy is on track for a strong start to 2014 after growing only modestly last year. The German Ifo business climate index rose to 110.6 in January up from 109.5 last month. Germany is the Eurozone’s largest economy, and the region will need the German locomotive to lead the way to an economic recovery.
German unemployment dropped more than expected in January, as businesses grew more confident in the strength of Europe’s largest economy. The number of people out of work reduced by a seasonally adjusted 28,000 to 2.93 million, after falling a revised 19,000 in December. The adjusted jobless rate surprisingly dropped to 6.8 percent, unchanged from a revised December figure and matching the lowest rate in at least two decades.
The Peninsula
