With the political negotiations ongoing in the UK and scepticism that the euro zone bail out is simply treating the symptoms but not the disease has left European markets on the backfoot once again. For a change European markets have today become a little divorced from the US with the Dow down by around 0.3% at the time of writing whilst major European markets have been down by the best part of 2%. The UK is the major underperformer due to the added pressure of political uncertainty.


The main UK economic news for today was the publication of industrial production data for March which came in at 2.0% significantly ahead of consensus expectations of a gain of around 0.3%. Manufacturing output managed a 2.3% gain well ahead of the consensus which was looking for a 0.3% gain. This data certainly suggests that the UK recovery is ongoing and we may well see an upward revision to the preliminary estimate for Q1 GDP OF +0.2%.

Expectations are increasing that a Conservative/Lib Dem coalition government will be announced this evening. With world markets looking for the UK deficit t be addressed quickly, this news, if it happens, may well get the UK market off to a positive start tomorrow.

The much anticipated Euro Zone rescue package has been announced and it does seem fairly comprehensive which has provided a much needed relief rally this morning across world stock markets. The situation with Greece has been ongoing but the onset early last week of a real threat of contagion has provided the catalyst for the announcement of a €750bn aid package. This in itself will easily cover the funding requirements of Spain, Portugal and Ireland with €110bn of aid for Greece already agreed. The stabilisation fund will be comprised of €60bn from the EU Commission (countries can draw on this fund rather than borrow from the market), €440bn in loan guarantees (designed to allow sovereign states in trouble to borrow in the market at acceptable rates) and finally a top up of up to €250bn from the IMF. In addition to the above the ECB will now be buying government securities and private debt on the secondary market (this announcement was expected last Thursday after the ECB met).


This is a very major announcement and it does remove sovereign debt default risk and contagion risk in the Euro Zone. It will mean far stricter controls on budget deficits going forward and with immediate cuts required to start bringing deficits into line and to meet the terms of financial assistance we can expect to see some downgrades to Euro Zone growth forecasts for 2010. Undoubtedly this is not something the market is focusing on today and there is considerable relief that the Euro Zone is now unlikely to endure a double dip during 2010 which would have been a serious risk without this aid package.

The UK market today is up with the rest of the world but we still face a second hurdle namely the shape of the next government which remains unknown. UK plc also faces its own deficit hurdle which is likely to start taking the headlines once a new government is in place and we face an emergency budget in a few weeks time.

The Bank of England met today and kept the base rate at 0.5% which was not unexpected and is likely to remain the case for most if not all of 2010.

There is no major economic news scheduled for today in the US and in fact it is a relatively quiet week in the US for economic data with the major news due on Friday when we get retail sales data for April with the consensus expecting a figure of around +0.2%.

We have a fairly busy week for economic data in the UK and Europe with the major announcement being the preliminary estimate for Euro Zone Q1 GDP, due for publication on Wednesday. After the final estimate for Q4 2009 was downgraded to zero from 0.1% the data for Q1 should make interesting reading. On the same day the Bank of England Quarterly inflation report is due for publication and we also get UK unemployment data for March.

Once the dust has settled today all eyes will move to ongoing negotiations over the shape of the next UK government. It is difficult to say if the market is going to continue to build on the gains made today with so much uncertainty over the political landscape. We are monitoring developments and have several stocks that now look interesting and depending upon how the Dow moves this afternoon we may well look to enter our next trade very shortly.

All eyes this afternoon are focused on the UK election result and attention has been drawn away from the all important US Non Farm Payroll data due at 1:30pm. With the formation of a new UK government likely to drag on over the weekend, the employment data in the US is likely to set the tone for trading this afternoon. Brokers are expecting a positive number of between 145,000 and 250,000 with the consensus standing at around 200,000. The unemployment rate is expected to remain static at 9.7%.


We should not forget the huge intraday decline in the Dow last night of just under 1,000 points. Whilst we appear to have a degree of calm this morning with the UK just in positive territory at the time of writing (primarily due to a strong performance from mining and oil stocks) and the Dow futures pointing to a positive start, confidence is extremely fragile, and developments over the weekend in Europe in relation to sovereign debt issues and the formation of a new UK coalition government will set the tone for trading next week.

Most UK economic news today is being overshadowed by the election result but what we have had so far are house prices for April from the Halifax which showed a decline of 0.1%. We have also had UK Producer Price Index data for April which increased by 0.6% against expectation of a 1% rise. Inflation pressures for inputs within the manufacturing sector remain relatively subdued although the equivalent index for output was actually a little higher than expected for April at 1.4%. Given the amount of slack in the UK economy it is difficult to see inflation gaining much more traction over the coming months.

In Germany, March Industrial Production data has been published this morning which was better than expectations with an improvement during March of 4% compared to consensus expectations of around 1.5%. Apart from the obvious problems that Europe currently faces it is still on course to achieve growth this year albeit sub trend.

We mentioned last night in our special Dow report that some sector valuations are moving to attractive levels and we will be looking for signs of market stability over the coming days before entering into our next trade.

In the US tonight the Dow fell by almost 1000 points before recovering to end the session down 347 points. The primary reason for what can only be described as panic selling was concern over the situation in Greece and the real risks of a similar situation in other European countries, and the contagion risks that this brings with it. Fear has again moved to financial stocks which have already been under significant pressure this week, with fears over the extent of their exposure to the problem countries and the potential impact any debt restructuring or default could have on their balance sheets.


The current correction will need a catalyst to arrest the decline and because the sovereign debt problem cannot be resolved over night this is a story that is likely to create considerable volatility over the coming days. We really need to see additional stability measures being undertaken in Europe and whilst IMF intervention and the austerity measures that must be taken by governments will help, many expected the ECB to announce after its interest rate meeting today that it would purchase government bonds to alleviate pressure on the governments facing funding issues. However this did not happen and the market itself may well dictate the need for an announcement of new measures to prevent the kind of loss of confidence which the Dow indicated tonight.

We believe that from the perspective of equity markets the current shakeout will bring valuations back to more attractive levels and we have already seen some sectors falling back to levels not seen since mid 2009. Our last trade was closed out early on Monday because we felt that the risks of a continued sell off were high in the UK especially with the uncertainty that today’s election brings. This action has enabled us to preserve most of our gains for the year so far and we will be looking to trade again once we have some clarity on the election result and it is clear that the ongoing equity market correction is nearing an end.

Equity market futures are indicating that the FTSE100 will open around 140 points down tomorrow morning although this may well change depending upon how the Dow future moves overnight.

Market sentiment remains very fragile indeed. The European Central Bank is meeting today to discuss the ongoing crisis and how to restore confidence in the euro. Combined with a UK election where the result hangs in the balance, and key US employment data due out tomorrow, there is scope for further significant market volatility before the end of trading on Friday.


What will break the current very negative sentiment is difficult to say. A clear UK election result will certainly help although that is looking doubtful. The Non Farm Payroll data in the US scheduled for release tomorrow will also play a big part in helping to settle investor nerves if consensus expectations (+200,000) are met or indeed exceeded. Disappointment may well leave this correction with further to go.

Contagion risk in Europe is very much in focus and the ECB meeting today may well result in policy measures to help allay fears at the very least, and at the time of writing the ECB has just announced that the base rate will remain at 1%. Contagion risk becomes a reality if there is any possibility of restructuring of Greek debt and this would almost certainly be the catalyst for a much deeper market correction. An announcement from the Euro Zone participants stating that Greek debt will not be forcefully restructured would help to at least allay fears on this issue.

The US ISM Non Manufacturing Index for April came in a little below expectation yesterday at 55.4 against the consensus which was looking for a modest improvement to 56.5 from the March level of 55.4. It is still running at a 3 year high which suggests the US recovery is continuing and is relatively broadly based. The employment element of this index is an area of concern given that it fell to 49.5 from 49.8 in March. This is not necessarily an indication of deterioration in the recent employment trends in the US, but it does demonstrate that we are unlikely to see an upside surprise to the employment data tomorrow.

World markets are being driven by fear over sovereign debt risk and this has certainly overshadowed what has been a relatively good Q1 earnings reporting season in the US. The UK has the added complication of an election tomorrow and no matter what government takes power there will be plenty for the market to worry about given that UK plc has its own debt problems.


At present the real concern now seems to be with Portugal and Spain. There is considerable uncertainty over whether either will be able to grow their way out of trouble given the sub trend rate of economic growth expected over the coming years. A more immediate concern is that Spain faces a real test in July when €16bn of bonds become due. Another question is whether the governments of the countries in trouble will be able to implement and see through the unpopular budget cuts that are necessary. The possibility of social unrest looms if Greece is anything to go by and to what extent this and budget cuts will disrupt the already fragile economic recovery is key. For the time being we are clearly back into fear mode and to what extent equity markets are going to continue to correct is very uncertain especially given that the issues dominating market thinking at the moment are longer term with no quick fix available.

So far today in the US we have had the ADP Private Payroll report for April which was in positive territory with the number employed in the private sector increasing by 32,000. This follows a revision to the March data which also gave a positive number of 19,000. A positive result from the ADP should mean a positive number for the Non Farm Payrolls on Friday with expectations running at around the 200,000 mark. At 3pm today we get the US Non Manufacturing ISM data for April with the consensus looking for around 56.5 from the previous reported level of 55.4. At present the economic data seems to be having limited impact with investors eyes firmly focused on European debt.

The Euro Zone Services Purchasing Managers Index for April announced today was a little better than expected at 55.6 against expectations of 55.0, again indicating that growth is continuing. European retail sales for March were unchanged which was broadly as expected.

There is plenty of information for the market to digest this week. It is the busiest week in the economic calendar in the US with both sets of ISM data and the Non Farm Payrolls. In the UK we have the election to contend with on Thursday and with no clear winner in prospect all eyes will be focused on how the market reacts to a hung parliament if it does become a reality on Friday morning.


Over the weekend we had some resolution to the Greek problem with the IMF agreeing to £95bn of loans over a three year period. Whether Greece can meet the set terms is another question.

A new tax on mining companies announced by the Australian government has hit the sector hard this morning and is likely to dampen sentiment towards the sector in the short term.

The pace of US GDP Growth reported on Friday during Q1 slowed to 3.4% from 5.6% in Q4 2009. The risk now is that as the inventory replacement element of growth over the last two quarters fades away and as the fiscal stimulus measures are slowly withdrawn we will see a significant decline in the pace of US economic growth as 2010 progresses.

Yesterday the ISM Manufacturing Index for April was announced and the level of 60.4 was the highest reading in 6 years. Undoubtedly the manufacturing sector in the US is recovering well as evidenced by the news orders element of the index which stood at 65.7 (from 61.5 a month earlier), well into strong growth territory. Also encouraging was the employment element of this index which jumped to a 5 year high of 58.5 from 55.1. However, with manufacturing only a relatively small element of the overall economic picture, the focus continues to be on the service sector and the ISM data for services will be published on Wednesday. This index stood at 55.4 in March and is expected to rise to around 56.5 in May.

Also reported in the US yesterday was construction spending for March which increased by 0.2% against consensus expectations of a decline of around -0.3%. However, this positive result was due to government spending from the fiscal stimulus measures which offset a decline in private spending. As the various stimulus measures are withdrawn this kind of data demonstrates the potential for economic slowdown with a weak underlying picture in the absence of government support.

The main US economic news due for publication today is factory orders for March. In the UK we have already had the publication of the Purchasing Manager Index for Manufacturing for April which was a little better than expected at 58.0 indicating that the recovery is still gaining some momentum. German retail sales for March were considerably worse than expected with a reading of -2.4% against the consensus which was expecting no change.

The market is weak today primarily due to a sell-off in the mining sector following Australia’s decision to increase taxation on resource companies. With the UK election due on Thursday we expect to see some market jitters ahead of this and overall with a lot of major US data due we can expect volatile trading during the next four days.

All eyes today were on the first estimate for Q1 GDP. The data for Q4 showed growth at an annualised rate of 5.6%, and the consensus was expecting a slow down for Q1 to 3.4 with the actual number coming in at 3.2%. This was not far off expectations and is unlikely to unsettle the US market this afternoon. The breakdown of the data did show that US consumer spending contributed 2.5% of the 3.2% last quarter which is the largest contribution since the fourth quarter of 2006 and certainly provides some grounds for encouragement given that the inventory replacement part of the cycle is now coming to an end.

Also today in the US we see the publication of the University of Michigan Consumer sentiment numbers for April with an improvement to 71.5 from the March level of 69.5 expected according to the consensus.

In Europe today we have seen the publication of the CPI for April which was bang in line with consensus expectations at an annualised rate of 1.5% whilst the Euro Zone unemployment rate remained static at 10%.

With the final election debate now over the UK election end is now in sight. The prospect of a hung parliament looks ever more likely and to what extent this will impact on the UK market is difficult to ascertain. A repeat of 1974 when a hung parliament caused the FTSE All Share to decline by 21% during the following month is highly unlikely. The truth of the matter is that no matter who wins power the path of the UK economy is unlikely to change much with deficit reduction likely to hinder any attempt at getting growth back towards trend. That is not to say there will not be some form of immediate market reaction but in the very short term at least a correction seems unlikely. Once there is clarity on exactly what the new government’s plans are for deficit reduction and how the rating agencies respond to that might well dictate how the UK market moves over the coming months. A rating downgrade for the UK would be very damaging and this would almost certainly impact on equity valuations especially if gilt yields start to rise.

The market has rallied today in the absence of any further debt downgrades with Ireland now likely to be the next contender for a possible downgrade. There has been some talk of the same happening to the UK but this seems unlikely in the short term. Whilst S&P have placed the UK on negative a negative outlook with reference to the UK’s AAA rating, any change will almost certainly be delayed until after the election and they have seen what measures are going to be put in place to attack the deficit.


A lot of the more defensive stocks are having a difficult time of it at present and most seem to have drifted some distance from their recent highs. Both tobacco stocks are a good example, Imperial and British American Tobacco have reported this week and neither has really disappointed the market but longer term concerns over volumes seem to be dominating investors thinking. Both stocks have sold off and are now underperforming the overall market and there is a similar story with the pharmaceutical stocks. At some stage we would expect these areas to again come back into favour, probably as investors start to move away from the more cyclical areas of the market as valuations start to look full. In the meantime the more defensive areas of the market are likely to find it hard going.

Market volatility is back and the last two trading days has been dominated by fears over sovereign debt risk in the Euro Zone. The downgrade by S7P of Greek debt to junk status BB+ and the downgrade to Portugal's debt by two notches to A- from A+ has increased the fear considerably. The Greek situation is not really new news and the reality is that the Portugal downgrade is the major factor behind the market falls yesterday and today. The question of whether we are facing multiple IMF bail outs is a reality and whilst Greece is the only major contender for this at present other Euro Zone countries cannot be ruled out with Spain and Portugal facing large fiscal deficits. The long term rating for Spain has been cut today by S&P to AA with a negative outlook. As to why they have chosen today to announce this news rather than do so yesterday with Greece and Portugal is a mystery.


What this all means for equity valuations is very difficult to say. Valuations particularly in the US have been looking stretched for some time and this news combined with uncertainty over financial reform in the US has provided the conditions for a sell-off in world markets and ongoing concerns over fiscal deficits worldwide may well dampen enthusiasm for equities during the summer months. However at present we are only dealing with Greece and their economy is relatively small and consequently any impact on world growth will be negligible. The next major news will undoubtedly be the agreement of IMF bail out conditions for Greece which may well improve sentiment in the very short term.

The US consumer confidence report by the Conference Board announced yesterday for April rose to 57.9 from 52.5. Whilst encouraging this index is some way off the more normalised levels of around 100 during periods of sustained economic growth.

All eyes this evening on the statement accompanying the FOMC meeting announcement on the US interest rate. Given how fragile markets have become during the last 24 hours any change in the language of rates remaining low for an extended period could create a further sell off although it does seem unlikely that we will see any change in policy at this stage.

An interesting point that one US market commentator made today is that the gap between recessions is shortening, the US had 10 years between 1990 and 2000, 5 years between 2002 and 2007 and he has predicted that the next one is likely to occur within the next 2-3 years. The point he makes is that when the downturn does come and with rates likely to still be at near historic lows and the availability of any fiscal stimulus short on the ground given the Fed’s $1.4 trillion fiscal deficit. The risk that there is no firepower available to ease the pain next time around is very much real. Added to that with unemployment unlikely to have recovered to more normalised levels the US economy is likely to head into its next recession poorly equipped to ensure a speedy recovery. At the moment this is the last thing the market is going to worry about but eventually the next recession will happen and the state of the Federal Reserve balance sheet may well be a major problem next time round.


World markets have sold off today with the threat of Portugal turning into another Greek situation. We have just heard that S&P have downgraded Greece below investment grade and Portugal by two notches. Sovereign debt risk is here to stay and these headlines are going to keep coming back for some time to come. This in itself may put a cap on the market in the very short term or at least until the market considers the threat from it to have abated. The spread between Portuguese and German bonds widened to 227 basis points today, the largest spread since 1997.

The major focus of investors’ attention over the coming week is likely to be the FOMC interest rate meeting decision on Wednesday and the first estimate for US Q1 GDP due out on Friday. The former is unlikely to result in any change in current policy or the interest rate but as always the accompanying statement is what will receive all of the attention. It does seem unlikely that there will be any change in the language of keeping rates low for an extended period but at some point it will change and inevitably there will be a market reaction to it. For the time being it is safe to assume no change on all fronts. The first estimate for Q1 GDP will make for interesting reading. The final estimate for Q4 2009 was 5.6% and the consensus is looking for a number around the 3.4% mark.


Also in the US this week we have two consumer confidence readings, tomorrow the Conference Board announces its first estimate for April and after the final reading of 52.5 for March the consensus is looking for 53.5. On Friday the University of Michigan announces its second sentiment estimate for April, the first showed an unexpected decline to 69.5(its lowest level in 6 months) from 73.6 but the consensus is expecting a reversal back up to around 71.0. It is interesting to note that under more normalised economic conditions with steady growth this index fluctuates around the 100 level.

In Europe the main event will be the publication of inflation data on Friday for April and the unemployment rate for March. For the former the consensus is expecting no change from the annualised figure of 1.45 reported for March. The unemployment rate is expected to remain at 10%.

In the UK the election rolls on towards what looks like a hung parliament whilst the only economic news worthy of mention that is due for publication this week is the CBI Distributive Trades Survey (an indicator of short-term trends in the UK retail and wholesale distribution sector) for April which is expected to show an improvement to around 16 from the previous level of 13 reported in March.

We have several companies on our monitored list reporting this week and we start off tomorrow with Imperial Tobacco.

The first estimate for Q1 UK GDP has been disappointing with a reading of just 0.2% and this compared to consensus expectations of a figure around the 0.4% mark. This miss has been partially blamed on the bad weather earlier in the year which hampered economic activity but whichever way you argue it is difficult to escape the fact that the UK continues to bump along the bottom and growth for the full year looks on course to be around the 1.0% to 1.5% mark.


Yesterday the downgrade of Greek debt by Moody’s following the publication of a higher than expected budget deficit for 2009 did not help the market whilst in the UK the PSNBR was slightly less than forecast for March bringing the overall total borrowing for the year to £152.8bn compared to the budget estimate of £166.5bn.

In the US today we have had durable goods orders for March which excluding transportation were up 2.8% over the month following a revised 1.7% gain in February. The headline index including transportation fell 1.3% whilst the consensus was expecting a 0.4% gain. Overall the ex transportation figure is the one to focus on and this will be viewed positively by the market especially following the upward revision to the February data. New home sales in the US during March were strong with the rate of 411,000 on an annualised basis compared to expectations of a rise of 330,000. Not too much can be read into this number given that a lot of this increased activity is due to buyers completing before the expiry of the home buyer tax credit.

The market at the time of writing has recovered all of the losses made yesterday. This week we day traded Tesco following their results with a small net gain on the day. Next week we will be focusing on the results of GlaxoSmithKline and the tobacco stocks, Imperial Tobacco and British American Tobacco.

The market has sold off today with bad unemployment data not helping with sentiment. Unemployment has risen to a 15 year high and in the three months to February a further 90,000 people lost their jobs bringing the total number of people unemployed to 2.5m. The claimant count actually fell by 32900 but that was primarily due to training schemes taking people off the dole.


The minutes of the latest MPC meeting were published today and there was no indication of any likely change in policy for the foreseeable future. There were some comments to suggest a degree of unease over the future path of UK inflation and that was before the CPI data yesterday which was considerably worse than expectations. Overall though with so much excess capacity in the economy there is still unlikely to be much in the way of medium term inflationary pressure and rates are likely to remain on hold for most if not all of 2010.

The Greek debt situation keeps coming back to haunt the market with growing concerns over next month and the fact that the Greek government needs to raise €10bn next month. The FTSE100 fell back by 60 points today and seems to now be struggling to make headway above 5800.

UK inflation is the main headline of the day with the annualised CPI moving up to 3.4% against expectations of 3.1%. The increase was primarily due to increased petrol prices. The news today has provided sterling with a boost against the pound and the dollar. However, it is still difficult to see inflation expectations moving much higher from these levels and whilst it is not inconceivable that the MPC will increase the interest rate before the year end, the level of slack in the economy will continue to place a heavy downward pressure in the medium term and the recent short term factors such as petrol and the vat hike will fade away. There is of course the real possibility that VAT will go up with a new government.


No major economic data has been scheduled in the US today and with little for the market to focus on the UK has recouped a lot of its losses from Friday and Monday.