Commodities rally on weakening dollar

In this week’s bulletin:

  • US jobs data surprises on the upside
  • Commodities rally on weakening dollar


Market eye

  • US jobs data surprises on the upside
  • Commodities rally on weakening dollar

Global markets burst into life on Friday as stronger than forecast jobs data in the US provided a welcome fillip after the leading bourses had struggled for traction during the earlier part of the week. The FTSE 100 Index finished the week up almost 3 per cent, the FTSE Eurofirst 300 gained 2.35 per cent and, in the US, the S&P 500 index also ended in positive territory.

Anticipation over whether the US Federal Reserve and the European Central Bank (ECB) would announce new easing measures played on the minds of investors but – as we’ve come to expect – that optimism, in the meantime at least, remains misplaced. Whilst many commentators expect the Fed to introduce another round of quantitative easing, or QE3, in September, the market reaction to the latest ECB meeting was initially negative, with share prices tumbling and the continued sell-off of Spanish and Italian bonds intensifying.

Despite the proclamation just last week that the ECB would do whatever is necessary to save the beleaguered eurozone, Mario Draghi’s less-than-convincing statement that the central bank “may consider” again buying short-term government debt fell short of the comprehensive support that investors were expecting. The disappointment was compounded following the ECB President’s intimation of stronger action before the policy meeting. However, as seems to be the case currently, market sentiment had shifted once more in the eurozone, with investors growing confident that the ECB would soon announce stronger measures for supporting embattled bond markets.

Elsewhere, oil prices rallied more than $3 a barrel to their highest level in 10 weeks, leading a surge in commodity markets on the back of the stronger US jobs data and a sharp fall in the dollar. A weaker dollar supports commodities, which are nearly all priced in dollars, by making them cheaper for non-US consumers. Beyond the oil markets, agricultural commodities ended the week broadly flat, as traders attempted to assess the damage to corn and soya bean crops from the worst US drought in more than a century. As if to highlight the severity of the situation, on Thursday Mexico bought 1.5 million tonnes of US corn – the biggest single-day purchase of the grain in almost 20 years.


Could US employment numbers suggest a stabilising economy?

  • Fears over recession abated but data may ‘hide’ difficulties ahead

According to figures released on Friday, the US added a better-than-expected 163,000 jobs in July, a sign that the recent slowdown in the world’s largest economy might have stabilised. Add to that a small rise in the Purchasing Managers’ Index for the service sector, and fears that the US economy is following Europe into recession may be beginning to ease.

The rise in non-farm payrolls beat expectations of 100,000 new jobs and compares with a negatively revised figure of 64,000 for June. Although the gain is obviously a vast improvement over the past few months, it is still well short of the 250,000+ gains seen at the start of the year. The employment rate has actually increased during July, up from 8.2% to 8.3%, pointing to a stuttering economy that cannot create enough jobs to bring down unemployment.

Monthly payrolls are the single most important indicator of the health of the world’s largest economy. Should July’s improvement continue into August, it could complicate the Fed’s decision on whether to ease monetary policy further; although Paul Ashworth of Capital Economics suggested this alone will be enough, adding:

“We doubt the economic news is enough to persuade the Fed to hold fire in September.”


Action and inaction continues to drive the market

  • Last week demonstrates that ‘relief rallies’ remain
  • The lack of a clear, single solution suggests this is likely to continue

If the eurozone crisis has demonstrated anything then, surely, it must be that timing the market is more difficult that finding a universal solution to the economic problems faced by the beleaguered region.

Investors retreated on Thursday after Mario Draghi delayed intervention in stressed Eurozone government debt markets, making such action conditional on politicians first activating the bond-buying powers of Europe’s bailout funds. Yet in Friday trading, European share prices rebounded and Spain and Italy, two of the countries whose bonds have been most savaged, saw borrowing costs fall sharply as confidence returned that Mr Draghi would eventually act decisively.

So what changed overnight to drive this dramatic change of sentiment? In short, very little. In the absence of a silver bullet to repair and resolve all of the underlying problems stock markets have been caught in an infuriating cycle over the past few months.

As the chart below shows, highlighting the Spanish and Italian indices as an example, market reaction to the expectation of a catalyst for a solution and then the disappointment when this fails to be delivered is driving huge volatility in the market.





Source: Bloomberg; data to 5 August 2012. Past performance is not indicative of future performance.

Taking Spain and Italy as an example, the promise of considered, central bank-led progress buoyed investors and pushed up equity markets. Yet markets fell back on Thursday when it became clear that such a proposal had failed to be delivered, before optimism, once again, began to swell.

Against this backdrop, investors need to retain a rational view of proceedings and focus on the fundamentals that drive returns over the long term. Burgundy Asset Management, co-managers of the Greater European funds shares this view on the problems with investing in the region.

“Whilst many commentators speak of the eurozone problems, we don’t consider the continent as a homogenous area – the challenges facing individual countries vary greatly. Bottom-up stock-picking is key to our investment process; so, despite the challenging economic environment facing Europe, an investment that matches our strict valuation criteria will be added to the portfolio regardless of where it’s domiciled.”

Burgundy concedes that, whilst in the short term equity markets are likely to remain volatile, investors who wait for the market to recover before committing capital risk missing the opportunity, adding,

“You’ll pay a high price for a cheery consensus.”


Children are the future

  • Junior ISAs fail so far to hit the mark

The government’s latest incarnation of its tax-efficient savings vehicle for children has, once again, failed to inspire. Junior ISAs, a cut-down version of the adult scheme, were launched in November 2011 and offer a simple, flexible and tax-efficient way for parents, grandparents, family and friends to save regularly for children under the age of 18 who were not eligible for the now defunct Child Trust Fund.

However, only 72,000 accounts were opened in the first five months, a tiny proportion of the 6 million children who were eligible at the start of the scheme. Many commentators have been quick to point at the current economic climate and investors’ aversion to what are often perceived as ‘riskier’ stock market assets as the reasons for the low take up so far. Yet given that these investments are likely to be held for the long term, investors should not be dissuaded by the short-term market fluctuations.

Given the future financial challenges faced by the next generation and the imperative of taking advantage of all tax saving and tax-advantaged opportunities, the Junior ISA is an important tool in building capital for loved ones.

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