A disappointing start to the US earnings season yesterday prompted the first real decline of the year in the Dow with Alcoa losing over 10% on lower than expected results. Concerns over a possible government levy on US banks did not help sentiment. Concerns that China may be about to start raising their interest rate were exacerbated by the People’s Bank of China’s decision to raise the proportion of deposits banks must set aside as reserves which may well be a precursor to the first rate hike.


UK Industrial Production reported this morning for November was a little better than expected with a 0.4% jump. Manufacturing output was flat against expectations of a 0.3% improvement. Looking at the constituent figures it was interesting to see that consumer durable and non durable production fell over the month which may well indicate that consumer expenditure is likely to tail off over the coming months. The data does at least suggest that the UK economy is now out of recession although growth for Q4 is likely to be very modest indeed.

In the US today we get the publication of the Beige book which compiles anecdotal accounts of economic activity across the Fed's 12 districts and does provide helpful clues to where economic activity is heading.

After the 3% or so gain in the FTSE100 in the first few trading days of the New Year we would expect to see the market taking a breather and even giving up some of the gains made during 2009 before a base can be found for further gains this year. To us the rally is now looking to start a little tired and we can expect more range bound trading during the first few months of the year.

A lot of comment yesterday about world governments taking advantage of low interest rates to raise money ahead of an expected tightening in rates later this year. This is a theme that is likely to continue although any tightening is likely to be very modest in nature during 2010.


On the economic front, French Industrial production rose by twice the expected amount during November with a 1.1% gain.

The UK RICS house price survey out today suggests that the pace of recovery in the housing market is slowing which is consistent with several forecasters that have suggested house prices will end 2010 down rather than up.

Tesco’s trading statement was a little above expectations and it would seem the food retailers have enjoyed a better than expected Christmas trading period. It is possible they benefitted from a degree of panic buying caused by the cold weather in December but so far the market is giving them the benefit of the doubt and the sector has rallied during the first few trading days of the year. Morrisons are due to report on the 21st January.

The reported decline of 85,000 in the Non Farm Payrolls for December in the US led to some headlines suggesting that the improving employment trend may already have reversed. This was especially so given that the number for November was revised upwards to a positive number of 4000 against the previously reported number of a 11000 decline. It is unlikely that the trend has been broken and there is every reason to expect the number to turn positive once again over the next couple of months. It should be borne in mind that this data can be very volatile as well and is subject to quite big future revisions. The market took the figure in its stride and we are yet to see any data this year that has caused a big upset. However at some point we will reach a point whne positive data is taken negatively as it will raise concerns over both fiscal and monetary tightening. We are some way off from that point but it will undoubtedly happen at some point this year.

A very strange start to the 2010 trading year with the market almost having a holiday feel about it with no volatility and clearly everyone making snowmen instead. Without volatility it becomes incredibly difficult to find high conviction trades unless you believe the market is going to continue this rally. We are sceptical and expect some form of profit taking soon but saying that we could easily see another 1-2% on the FTSE100 before it happens. Either way we need a good down day to start picking trades and unless the Non Farm Payrolls disappoint in a big way this afternoon in the US we are unlikely to get the movement we need until next week. There are times when trading can be very frustrating and this week has been one of them but as always by sitting on the sidelines you are at least not losing money and trades will always come along eventually.

The Sainsbury's Q3 trading statement this morning was a little better than most brokers expectations. Like for Like sales growth of 4.2%(excluding petrol and vat) compared to consensus expectations of around 3.6% and the previous quarterly figure of 5.4%. Estimates for the company will not be changed as a result of the update today. Merril Lynch downgraded Sainsbury earlier in the week to underperform from neutral. We retain our view that the shares will remain range bound for at least the first 6 months of the year unless bid speculation resurfaces and it is a stock we expect to trade over the coming weeks.

The Producer Price Index for Europe published today for November showed that inflationary pressures are starting to edge up a little with a 0.1% increase although on an annualised basis including energy the rate of producer inflation is -4.4%. Given the considerable amount of slack in the Euro Zone economy it is difficult to see inflationary pressures starting to build for some time yet.


Today in the US we get the Non Manufacturing ISM data for December with the consensus looking for an improvement to 50.4 in December from the previous level of 48.7. We also get the ADP private payrolls data in the US for December which will be closely watched for sign of a further improvement in the rate at which jobs are being lost in the US ahead of the Non Farm Payroll data due out on Friday which may well post a positive number. Later today the minutes of the latest FOMC meeting will be published. With economic recovery appearing to be picking up pace the minutes will be scrutinised for further details of a timescale to the winding up of the asset purchase programme which the committee has already stated will be phased out in 2010.

The ISM Manufacturing Index data announced yesterday for the month of December was strong at 55.9 from 53.6 in November. This suggests that growth has been maintained during Q4 and it will be interesting to see what the ISM Non Manufacturing Index for December shows when it is published tomorrow. The figure for November was 48.7 and the consensus is looking for an increase to 50.4. US Construction spending for November declined by a little more than consensus expecations at -0.6%.

Barclays has risen by 6% at the time of writing with rumours of an upgrade to guidance from the company and also a bullish broker note that has been published today.

The market continues to rally with financials generally strong today whilst many consumer stocks are lower. It is difficult to see this rally continuing much further in the short term.

The first day of trading for 2010 appears to have started well with the FTSE100 up 30 points at the time of writing. Most of the pundits in the press seem to have a negative view on the outlook for 2010 whilst most mainstream brokers are very much positive as you would expect. It is very difficult to assess the outlook for 2010 with so much that could go right and indeed wrong. At present it is difficult in my view to see this market being much higher than where it currently stands by the half year stage. We have an election to contend with and the need for urgent spending cuts to at least start reducing the huge level of UK debt. With the prospect of mediocre UK economic growth during 2010 it will take a good recovery in earnings to drive valuations forward as it is difficult to see much in the way of multiple expansion. I am always wary of a strong start to trading and prefer to see at least some profit taking before starting to take any major long positions.

A further downgrade to Q3 US GDP to just 2.2% against consensus estimates of 2.7%.  A lower rate of inventory replacement was the primary reason for the downgrade. This perhaps shows that US companies are not so enthusiastic about rebuilding inventories with expectations that the economic recovery will not necessarily be as robust as many expect. This is a theme we are likely to see as we start 2010 with inventory replacement likely to remain less than expectations which is likely to prove to be a drag on 2009Q4 growth and may well result in growth falling away further as we move through 2010.

UK Q3 GDP growth was revised up to -0.2% from -0.3% which is not a major surprise although some commentators were expecting a higher revision with the number turning positive.

The markets look as if they will be standing at close to highs for the year. The two day rally we have had is typical of the end of year moves on light trading volume. It is not to be trusted and generally means we encounter profit taking as the New Year begins and is something to be wary of if taking long positions during the last few days of the year.

As always at this time of the year analysts focus on the performance of the retailers and what is going on in the high street. All indications so far this year are that discounting and sales whilst in full swing in many areas, the level of discount promotional activity is less than last year with many retailers holding their nerve and prices into the final few days. The most heavily discounted areas at present are clothing and furniture. With Woolworths now absent from the high street many toy sellers would be enjoying a better time and from the listed companies Home Retail which owns Argos is likely to be a main beneficiary. All will be revealed in early January when the main players will update the market on their Christmas performances.


With the holiday season upon us we are not likely to see too much in the way of major market movements although there is still plenty of economic data on the agenda this week. In the US look out for the final estimate for Q3 GDP which is expected to remain close to the second estimate of 2.8%. On Wednesday in the US we get the University of Michigan consumer sentiment data for December and on Christmas Eve Durable goods orders for December.

On Tuesday in the UK we get the final estimate for UK Q3 GDP which may well see an improvement on the previous quarter on quarter estimate of -0.3%. On Wednesday we get the minutes from the latest Bank of England MPC meeting which is unlikely to yield any surprises.

On Friday we closed out our latest long position in Sainsbury at a profit.

The US weekly initial jobless claim are much in focus these days with everyone looking for a definite and sustained turned n the US unemployment rate. The data this week has disappointed with claims rising once again. The monthly trend in the Non Farm Payrolls should still show a decline in the rate at which unemployment is increasing.


Elsewhere in the US we have had Leading Indicator data which is as it says a predictor of economic activity and these were a little ahead of expectations. It does look as though the US economy will continue its current growth spurt into 2010, but for how long is still very uncertain. The Federal Reserve meeting yesterday concluded with a commitment to continue with rates at 0.25% for 'an extended period'. However they also made it clear that many of the other stimulus measures currently in place will be withdrawn in early 2010 and the jury remains out on just what impact that will have on economic activity as the taps are slowly turned off.

In the UK retail sales data for November proved to be disappointing with a -0.3% decline following on from a 0.6% gain in October. This was against expectations of a 0.5% improvement especially with consumers expected to buy before the scheduled VAT increase in January.

The market has sold off heavily today after a weak day on Wall Street yesterday following Fed comments about removing some stimulus measures in early 2010. The Basel Committee of central bankers has today talked about the implementation of higher capital requirements for investment banks by 2012 which has caused a sell off across the banking sector.

As with the US Producer Price Index reported yesterday, the CPI data for November has shown some strength with a 0.4% month on month increase during November. This was primarily due to a hike in gasoline prices which looks likely to reverse to some extent with recent weakness in the oil price. The core rate remained unchanged leaving the core year on year rate at 1.7%. Elsewhere US housing starts for November reversed most of the October 10.1% decline with an 8.7% improvement to an annualised rate of 574,000. There is clearly a lot of scope for volatility in this number and also seasonal factors. The weather also played a role with a cold October followed by an unseasonably warm November.


We get the Federal Reserve interest rate decison this evening which is widely expected to remain at the targeted level of 0-0.25%. The accompanying statement will be scrutinised for any evidence of a change in the policy of rates remaining at current levels for 'an extended' period. At some point soon we can expect the language to change although rates look unlikely to be moved until later in 2010. On the day that the language does change it is almost certain that the market will sell off heavily if only temporarily. However, this will be a feature of 2010 with a real possibility that the start of monetary tightening will be the catalyst for a prolonged period of underperformance from the market.

A mixed bag of economic data today. In the US industrial production rose by more than expected during October with a 0.8% month on month increase compared to expectations of a 0.6% improvement. The Empire State Manufacturing index which shows the level of activity in the New York manufacturing sector fell sharply from a level of 25.0 in November to only 2.55 in December. A positive number indicates expansion and such a sharp decline is a little worrying. The consensus was expecting a number around the 20 level. The other worrying data from the US today was the Producer Price Index which shows the level of inflation within inputs. The rate rose quite sharply by 1.8% (consensus expected 1%) during November and more importantly even the core rate excluding food and energy rose by 0.5% (consensus expected 0.2%). The rise in the headline rate was primarily due to food and energy and with oil having fallen back again this may well be a short term blip. The core rate was pushed higher by light truck prices so again this is unlikely to be the start of a more pronounced hike in inflationary pressures at least in the short term.

In Europe we have had the ZEW economic sentiment index for Germany which fell back to 50.4 in December from the previous level of 51.1 which was broadly as expected. In the UK the CPI came close to returning to the Bank of England's targeted level of 2% with the CPI moving up to an annualised rate of 1.9% during November. This was primarily due to an increase in petrol prices. With the amount of slack remaining in the UK economy it seems likely that the recent inflationary pressures are likely to fade although an increase above 2% in the very short term does now look likely.

A quiet day on the economic front in the US and the news that Abu Dhabi has provided $10 billion to avert a default by Dubai’s Nakheel PJSC is likely to remain the major market driver this afternoon.


In Europe we have had Industrial Production data for October which registered a 0.6% month on month decline. This was not totally unexpected after the 1.8% month on month decline in Germany. Looking at the breakdown of the eurozone data it is interesting to see a sharp decline in non durable consumer goods production. It suggests that firms do not expect to see a sustained increased in consumer demand and if nothing else demonstrates that the recovery in Europe remains fragile and is seemingly on course for a GDP growth rate during Q4 that could be lower than Q3.

On Friday we closed out a long position in Sainsbury for a 1% gain. With the market up 50 points today and close to its high for the year we are going to sit it out and wait for a bad day to take the next long position.

The market definitely has a quiet feel to it at the moment despite a good two day movement which I suspect is on low volumes. This afternoon the key data to look out for are retail sales in the US. Expectations stand at around a 0.9% improvement during November with the number dropping to 0.5% if you exclude auto sales.