A horrid start to the year that saw many of last year’s concerns resurfaced, ending with equity markets finishing the week down around 6%. China fears appeared to be the catalyst at the start of the week. As the week continued, renewed fears of a global currency war that may lead the US dollar to rise further, added to the concerns. The Federal Reserve’s stated aim to further normalize interest rates, could add further strength to the US dollar. The effect of this combination may drive the US economy back into recession.
The continued strength in the US dollar should put further pressure on commodity prices. This in turn may further damage emerging market economies, which could then further weaken the global economy. We have a vicious circle.
The fourth quarter results season this week starts later on Monday with Alcoa. According to “The Street”, analysts are forecasting earnings in the fourth quarter of 3 cents a share on revenues of $5.38bn, against 33 cents a share on revenues of $6.4bn this time last year. Other notable companies reporting this week are, Intel, JP Morgan and Wells Fargo. The quarterly earnings season is always vital to the outlook for stock market prices. A better than expected outcome at the end of the third quarter helped stabalise equity markets into the end of 2015.
China will remain in focus on Wednesday as we get the December’s Chinese import export data.
On Friday the latest US payroll data beat expectations as 292,000 jobs were created against forecasts of around 200,000. The unemployment rate stayed at 5%. This week is littered with several speeches from members of the Federal Reserve, who we assume will continue to defend December’s decision, and remain cautiously optimistic for the US economy. The highlight this week will probably be again on Friday, with the latest consumer confidence and retail sales data for December.
It’s a busy week for macro data in the UK; on Tuesday we get Industrial and Manufacturing data for November. On Thursday the latest Bank of England interest rate decision, and minutes from the December meeting. Economists will be looking for signs when and if the Bank of England is looking to follow the Federal Reserve in raising rates.
On Thursday the latest ECB rate decision is announced, followed by the post announcement press conference. The euro area economy appears to be slowly gaining strength. The euro area grew 1.6% annualized in the third quarter, the equal highest rate since 2010. Mario Draghi disappointed the markets by not increasing QE in December, instead extending the duration.
Looking to the week ahead, many traders will be waking this Monday with nervous anticipation. Merrill Lynch and Citi sentiment indexes are allegedly suggesting a bounce in equity markets is due at least in the short term. At present, that still feels like this is the positive in equity markets favor, as the macro outlook continues to remain uncertain.