Friday 17:30 BST. The strong upward momentum enjoyed by risk assets for much of the week faded away on Friday as Wall Street’s closure for Independence Day left markets lacking inspiration.
But the underlying backdrop remained broadly constructive as a string of encouraging US data – perhaps most notably the June non-farm payrolls report– fuelled optimism about the health of the global economy.
Furthermore, Janet Yellen, chairwoman of the Federal Reserve, emphasised this week that there was no need to raise US interest rates yet to combat financial instability.
“Growth appears to be improving on a global scale without any signs of inflationary pressure, and central banks are not seeing an urgent need to adjust the very accommodative monetary policy,” said Allan von Mehren, chief analyst at Danske Bank.
US equities climbed to record highs after the payrolls data showed the unemployment rate falling to 6.1 per cent, as employers added 288,000 jobs last month.
The S&P 500 index rose 1.2 per cent over the shortened week to 1,985 while the Dow Jones Industrial Average broke above 17,000 for the first time as it gained 1.3 per cent.
In Europe, the FTSE Eurofirst 300 slipped 0.3 per cent on Friday but was still up 1.7 per cent over the five-day period.
The Nikkei 225 in Tokyo rose 0.6 per cent, for a weekly gain of 2.3 per cent, as it reached its highest in more than five months.
In contrast to the US equity market – which held on to virtually all its gains in the wake of Thursday’s jobs numbers – the government bond market’s reaction was far less clear-cut.
The yield on the 10-year Treasury initially rose to a two-month high of 2.69 per cent, as the market factored in the chances of the Fed raising rates earlier than expected. But the yield finished just 1 basis point higher at 2.64 per cent – although that was 11bp higher on the week.
Jim Reid, macro strategist at Deutsche Bank, suggested the move back down in yield might have been a result of some of the detail in the report.
“Some noted that wage inflation indicators remained benign, with average hourly earnings [growth] at 2 per cent year-on-year, roughly where it’s been bouncing around for the last 18 months and broadly in line with consumer price inflation.
“Others highlighted that the number of people working part-time because they can’t find full time work rose; also many of the gains were in relatively low paying sectors and that the overall participation rate is stuck at 35-year lows.”
The payrolls data offered some support to the dollar, which rose about 0.3 per cent against a weighted basket of its peers over the week.
Gold initially lost ground but steadied on Friday to stand at $1,320 an ounce, flat on the day and up $5 higher over the week.
The jobs figures overshadowed Thursday’s other big event – the European Central Bank’s policy meeting. In any case, few were expecting fireworks from the ECB, after it cut interest rates and unveiled other measures aimed at staving off deflation in June.
In the event, ECB president Mario Draghi provided details of its offer of cheap loans to banks – so-called targeted longer-term refinancing operations – and reiterated its commitment to take further unconventional measures.
Alberto Gallo, credit strategist at RBS, said the ECB faced a dilemma.
“It wants banks to increase lending so that growth and inflation improve,” he said. “But it also wants banks to strengthen their balance sheets, which may mean they have to shrink. The TLTRO cannot really solve this dilemma.
“The real game-changer is an asset-backed securities purchase programme, which may also alleviate the capital costs of lending, as well as give cheap funding. This may come in the first quarter of next year, if lending and inflation have not improved.”
A far more unexpected central bank decision came from Sweden, as the Riksbank also moved to counter the threat of deflation by cutting interest rates by a hefty 50bp to 0.25 per cent.
“Underlying inflation pressure is much lower than the Riksbank had assumed as recently as April, despite good economic activity, so that its forecasts for 2014 and 2015 had to be revised notably downwards,” said Lutz Karpowitz, analyst at Commerzbank.
In industrial commodities, fading concerns about Iraq and hopes of increased supply from Libya pushed oil prices steadily lower. Brent crude was down 34 cents on Friday at $110.66, a fall of $2.64 over the week.
Copper slipped 0.4 per cent on Friday to $7,150 a tonne, after hitting a four-month high on Thursday. For the week, the metal rose 3 per cent, its best performance since September.
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