Caution reigns ahead of US jobs data

Tuesday 20:05 GMT. World markets adopted a cautious tone ahead of a series of important risk events later in the week, with equities and the dollar retreating as Treasury bonds and the yen attracted buyers.

On Wall Street, the S&P 500 equity index closed 0.3 per cent lower at 1,795, while the FTSE Eurofirst 300 index fell 1.5 per cent, its biggest one-day drop since August. In Tokyo, the Nikkei 225 rose 0.6 per cent, helped by the dollar’s early rise to a six-month high against the yen of Y103.37.

But the yen subsequently recovered, with the dollar down 0.6 per cent at Y102.29 as the slide in equities lifted demand for “havens”.

As well as the release of the hugely important November US employment report on Friday, markets will also have to deal with a further batch of global purchasing managers’ indices – this time from the service sector – as well as interest rate decisions in the eurozone and the UK on Thursday.

The US data could provide further clues as to when the Federal Reserve might start paring back, or “tapering”, its economic stimulus measures. Encouraging manufacturing figures on Monday rekindled speculation that the Fed could begin this process before the end of the year.

“Right now, financial markets do not look prepared for tapering should the Fed decide to trim bond purchases at the December 17-18 meeting,” said Steve Barrow, strategist at Standard Bank.

“This could leave markets vulnerable should data, such as Friday’s non-farm payrolls, suggest that the possibility of tapering needs to be priced in to a greater extent than it is right now.”

While the outlook for Fed action will remain at the top of the market agenda, there will also be plenty of interest in what the European Central Bank has to say in light of recent concerns about disinflationary pressures and weak growth in the eurozone economy.

“We continue to see a significant risk that the ECB could surprise with further monetary easing at its meeting this week,” said Divyang Shah, global strategist at IFR Markets.

“Whether the ECB believes it has taken adequate insurance against the persistence of low inflation and the risks of deflation will determine whether additional action is needed. At the very least, the ECB could decide to address the declining excess liquidity early, just to maintain easing expectations and dispel any perception it is out of ammunition.”

The euro rose 0.4 per cent against the dollar to $1.3593 and inched up 0.2 per cent against sterling. However, the pound hit a five-year high against a trade-weighted basket of currencies and pushed back above $1.64 to trade near a two-year high against the dollar as strong construction data fuelled fresh optimism about the UK economy.

Samuel Tombs at Capital Economics suggested sterling’s appreciation could spur the Bank of England to take action soon. “The Monetary Policy Committee might conclude soon that its guidance has not done enough to anchor sterling,” Mr Tombs said. “For a start, the rise in the pound has increased the chances that inflation falls significantly below the 2 per cent target next year.

“Merely expressing concern about sterling’s strength earlier this year caused it to fall. If this did not work, the MPC could downplay further the significance of the unemployment rate threshold used for its guidance, or even lower it.”

In spite of the strong construction figures, the yield on the 10-year UK government bond fell 4 basis points to 2.81 per cent. In the US, Treasuries partially reversed Monday’s fall in prices, with the 10-year yield down 2bp at 2.78 per cent, while the German Bund yield eased 1bp to 1.73 per cent.

Portugal’s 10-year sovereign yield fell 8bp to 5.89 per cent after a successful government debt exchange raised the prospect of a smooth graduation from the country’s bailout programme when it expires next year.

Gold, which fell heavily on Monday as the Fed tapering speculation gathered pace, initially slipped further to a five-month low of $1,215 an ounce – although it later managed a modest $2 rally to $1,222.

Industrial commodities put in divergent performances, with copper edging back 0.2 per cent in London to $6,960 a tonne but Brent crude oil settling $1.17 higher at $112.62 a barrel.

“The energy complex is being supported by continued supply disruptions among some of the key Opec members together with the seasonally colder than normal weather in the US,” said Ole Hanson, head of commodities strategy at Saxo Bank.

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