Global equity markets saw more wild swings this week as investors reacted to a mixed batch of US economic data, another interest rate cut by the Federal Reserve, corporate takeover activity and reports of a rescue package for bond insurers.
The week’s most keenly awaited economic releases came on Friday in the form of US jobs and manufacturing reports. In spite of a shock decline in non-farm payrolls, analysts were fairly sanguine about the figures.
Payrolls fell by 17,000 last month compared with expectations of an 80,000 increase – the first drop since August 2003. However, the unemployment rate eased to
4.9 per cent from 5 per cent.
“Today’s numbers add some downside risk to our forecast of a slowing labour market,” said Peter Possing Andersen, analyst at Danske Bank.
“That said, it is comforting news that the rise in the unemployment rate is not accelerating. If the unemployment rate is moving up only slowly, there is a good chance that the economy will be able to absorb the weakness from the labour market without entering a recession.”
There was better news on the manufacturing front. The Institute for Supply Management’s index of manufacturing activity rose to 50.7 in January – back above the 50 threshold that indicates expansion.
“The ISM index is consistent with GDP growth of roughly 2 per cent,” said Paul Ashworth at Capital Economics.
“In short, the index suggests the prospects of a recession are fairly remote.”
Stephen Stanley, chief US economist at RBS Greenwich Capital, noted that purchasing managers were asked this month whether turmoil in financial markets was having any effect on their company’s ability to obtain regular or additional financing. Nearly 93 per cent answered “no”, according to Mr Stanley.
“Financial conditions feel disastrous for much of Wall Street and for many subprime households, but we have seen nothing to suggest that a widespread credit crunch is developing,” he said. “This, in our minds, is a key reason why the current economic weakness will not mushroom into a prolonged and/or deep recession.”
Earlier this week, the Fed moved to avert a recession with its second aggressive interest rate cut in the space of eight days. The 50 basis point reduction left the Fed funds rate at 3 per cent – although Wall Street’s positive reaction proved short-lived.
However, equity markets gave a more positive response to soothing comments from bond insurer MBIA on Thursday and reports on Friday of a rescue package for the ailing sector. Microsoft’s $44.6bn bid for Yahoo and news of stakebuilding in mining group Rio Tinto also improved the mood.
In New York on Friday, the S&P 500 finished 4.9 per cent higher over the week – its best weekly performance for nearly five years – while the Eurofirst 300 put on 1.8 per cent. Tokyo did less well, with the Nikkei 225 Average down 1.5 per cent.
However, the weekly gains in the US and Europe masked dreadful monthly performances. According to Andrew Lapthorne, quantitative analyst at Société Générale, global stocks fell 7.7 per cent in January, the worst start to a year since MSCI began publishing data in the 1970s.
The S&P 500 fell 6.1 per cent, its worst January since 1990, while the Eurofirst 300 shed 11.7 per cent.
On the currency markets, the dollar fell to within a whisker of its lifetime low against the euro following the non-farm payrolls report but later rebounded strongly to a gain of 0.4 per cent against the single currency.
Short-dated US government bonds rose sharply after the Fed cut rates and indicated there could be further easings to come.
The yield on the two-year US Treasury fell 12 basis points to 2.07 per cent, while in Europe, the two-year Bund yield fell 6bp to 3.38 per cent as the market began to look for the European Central Bank to soften its hawkish stance on interest rates.
In commodities, US crude prices ended the week at $88.96 a barrel. Gold touched a record high of $936.50 an ounce on Friday before retreating sharply.