UK and Europe
Shares in Europe added to early gains after the US employment report eased concerns of a slowdown in the US economy without increasing chances of a faster pace of rate increases by the Federal Reserve.
Major averages in both the US and Europe have shown a third successive week of gains. The strength in equities is largely thanks to oil prices being back close to where they started the year, but Friday’s gains were reinforced by the biggest rise in the fix for the Chinese yuan in three weeks.
The stabilisation of the Chinese currency, as well as efforts this past week by authorities in China to bring down excess capacity in its commodities industries helped miners lead gains on the FTSE 100. Anglo American (LON:AAL) led the UK index with near double-digit daily gains in hot pursuit from sector-peers BHP Billiton (LON:BLT), Glencore (LON:GLEN) and Antofagasta (LON:ANTO) as industrial and precious metals benefitted from a slide in the US dollar.
Shares of the London Stock Exchange Group PLC (LON:LSE) lost over 1% on profit taking after a strong set of full-year results that saw revenues rise 78% and helped the company raise its dividend by more than expected. LSE’s good results increase the chance of a bidding war between rival exchanges and are helping shares stick to the near 40% gains since February 9.
Shares of WPP (LON:WPP) slid back from early gains to finish lower after generally well-received full-year results after the advertising giant issued a typically cautious outlook.
US
Stocks in the US made a positive start Friday, taking out some key milestones including 2000 in the S&P 500 and 17,000 in the Dow but hit a wall shortly afterwards when a mixed unemployment report left uncertainty over the next move in interest rates.
The US created 242,000 jobs in February, higher than the 195,000 consensus estimate and the unemployment rate remained at 4.9% but average earnings shrank -0.1% against expectations of a rise of 0.2% m/m.
The wage weakness in February is overstated by the month-over-month figure since it reflects the overstated strength in January due to state-instructed minimum wage increases that kicked in at the start of the calendar year. The March reading on wages should normalise, but by then it will be too late for the Fed’s March meeting. Nonetheless, the year-over-year figure has declined from 2.5% to 2.2% and if the Fed is being truly data-dependent then, based on wages and the implication for inflation there is no justification for hiking rates in March. Assuming the Fed won’t hike at a meeting without a press conference, it’s now on to June.
FX
The NFP was the ultimate driver of the FX market on Friday. The dollar initially popped on the higher than expected headline number of jobs created but dropped as markets interpreted the negative wage growth to mean the Fed would hold off on raising rates at the March meeting.
The euro picked up strength after a report suggested a lack of consensus at the ECB before its policy meeting next week. The report from MNI cited ECB sources as saying the central bank was ready to make further cuts to the deposit rate but that there was indecision over other unconventional measures that could be taken to address the ongoing low inflation. The ECB appears to becoming more aware of excessive market expectations with one source suggesting people were looking for the ECB as a solve-all for everything including hiccups. There could be a genuine lack of consensus or this could be an effort by the ECB to rein in expectations in order avoid the kind of disappointment seen after it eased policy in December.
Commodities
Gold continued its break-out of a three-week old triangle consolidation pattern that began on Thursday. On Friday gold reached a new 13-month high, reaching towards $1280 per oz as the dollar dropped following the non-farm payrolls report. Gold makes for an uncomfortable running mate with equities. Gold began its rebound at the start of the year as a haven from turmoil in equities, so its ongoing strength would suggest a belief that the move higher in equities is unsustainable.
Some volatility has come out of the oil market in the past few days as the May contract for Brent crude has teetered around $37.50 per barrel, the peak reached in the last rebound in January. Having failed to sustain below $30 per barrel in February, a break above $38 would be a decisive victory for oil bulls.
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