Equities rally despite good economic news

Is good economic news now being taken as good news for equity markets? Time will tell but on Friday the monthly non-farm pay roll number showed the US economy was continuing to recover as 203,000 new jobs were created in November. The jobless rate fell to 7.0%, one of the targets the Fed set itself to consider winding down its bond purchase program. Personal spending also increased in the US in the month of October. The FTSE 100, as one can see from the intraday chart, rose sharply on Friday afternoon after an initial move down. I pointed out on Thursday that first move after an economic report is often the wrong one. As economic data had been surprising on the upside, traders will have prepared themselves for a better than expected employment number. Good economic news had been taken as bad news for markets as investors anticipate it could signal the end of QE. On Friday traders looked to close positions on the fact, in this case there were no sellers just other traders looking to cover short positions. The end of the week rally did not prevent equity markets having a poor week, particularly in Europe. The FTSE 100 fell 1.5% on the week, the euro first 300 fared even worse down 2.6% after a less than inspiring ECB press conference on Thursday. THE S&P 500 once again had the best of the week ending down only marginally.

US treasury yields rose on the week, the US ten-year treasury yield closed the week at 2.86%. That equity markets held up in the face of rising bond yields could offer further encouragement for the Fed to contemplate starting to taper. The VIX fell sharply on Friday, another encouraging signs for equity markets. The week ahead will feature China as we get to see inflation data, industrial production and consumer spending data. Investors will be looking for continued signs that the Chinese economy remains robust. The WTO managed to agree a trade deal that some speculate could increase global trade by 5%, and according to the Sunday press, add £1bn to the UK economy.

The question will be whether this move on Friday is a prelude to the much-anticipated pre Christmas rally? According to Business Line, equity markets rise 8 out of 10 times in the month of December, with an average gain of 3.4%. The FTSE 100 is down approximately 1.5% for the month of December so far. To meet the average gain UK equities would need to rally almost 5% in the remainder of the month. Were that to occur the FTSE 100 would close the year just below 6900, close to its high earlier this year.

Posted on December 9, 2013 .