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By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
The first few days of 2012 saw financial markets kick off on a positive note on the back of surging risk appetite as manufacturing data from round the world showed vast improvements - data showed that the index of Purchasing managers improved in China (50.3 act v 49 prev), India, Britain (53.2 act v 52.3 prev) and the recent institute of supply management showed that manufacturing in the US improved (53.9 act v 52.7 prev).
But the optimism was short-lived and we quickly learned that although it is a new year, the markets are plagued with the same problems - mainly the liquidity issues in Europe affecting nations and their banks alike.
Euro bonds continue to come under pressure
Towards the end of last week, focus shifted to Europe with several key countries beginning their first debt auctions of 2012. Germany auctioned 10 year bonds which even though were oversubscribed by 1.27 times (higher than 1.07 at the previous auction), fell below the 5 year average demand. France conducted a similar auction this past week, and although they were able to sell nearly all of their EUR8bn in debt, the demand for the bonds dropped and interest rates increased. To make matters worse, the story of UniCredit bank selling shares to raise additional capital re-fuelled doubts that banks in the Euro area would need to be recapitalized.
Along with the worsening sentiment in Europe, a weaker economic docket saw markets continue their move downwards - first, the weaker job scenario in Germany (unemployment increased to -22K v -20K prev) coupled with the weaker than expected industrial orders out of the Eurozone (YoY 1.6% act v 3.3% exp / 1.6% prev & MoM 1.8% act v 2.5% exp / -6.4% prev). But perhaps the largest drag on risk moods was the inflation expectations emerging out of Europe - data showed that overall inflation estimates cooled down to 2.8% act v 3.0% as previously projected. With a weakening inflation estimate, investors increased their bets that the ECB would be more likely to cut rates and as a result, the Euro further slipped to move below 1.27 for the first time in 16 months.
Strong US jobs data reflective of seasonal hiring
Across the pond, it was another Non-farm payroll week in the US and although Friday's job report came out much better than expected, the markets will take it with a pinch of salt as Friday's report failed to trigger any kind of rallies in the risk markets and investors instead chose to stick to safe haven assets. The data showed that the change in non-farm payrolls for December increased to 200K act v 150K exp with change in private payrolls increasing to 212K act v 178K exp. Manufacturing payrolls increased to 23K act v 6K exp with the overall unemployment rate dropping to 8.5%, the lowest since February 2009.
On face value the results look good, but a closer look at the numbers show a more troubling picture. Like November's release, we are seeing a strong turnout in the figures due to a bump in seasonal hiring in the US. November & December tend to see inflated jobs figures because of the temp hiring during the holiday season and that's why we had downward revisions to November's results (November's change in non-farm payrolls was revised downwards to 100K from 120K, with private payrolls also being revised downwards to 120K from 140K, and the overall unemployment rate was down from an upward revision to 8.7% last month).
Because of the large number of temp workers entering the labour force and inflating the readings, we expect next month's report to give back a good chunk of these jobs. February's release should be revised downwards to the region of 150K-160K and will paint a more realistic picture of how healthy the US jobs market is. The US participation rate which was unchanged and is still languishing around thirty year lows at 64.0% and more alarmingly, the people not part of the labour force was 7.5 million.
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