Oil a threat to equity outlook

Economics

US manufacturing business and consumer confidence sentiment are expected to slow in January (Philadelphia Fed and University of Michigan indicators).

Consumer price inflation should have eased month-on-month in December in line with lower gasoline prices while core inflation remains unchanged. In Europe we expect French consumer spending growth in December to have given back some ground.

The Bank of Japan should keep monetary policy unchanged and may stick to its economic assessment that economic recovery continues despite some setbacks at the end of last year in its monthly report.

Foreign exchange

Euro/Dollar: The euro is trapped between support at 1.3025 and resistance at 1.3300. As long as 1.3025 is not taken out to the downside, the euro may still try to reach next resistance at 1.3420 before the downtrend resumes.

USD/JPY: The dollar tried to break out on the lower side of its consolidation triangle, which was a bearish signal, but the currency went back into this consolidation, negating the immediate bearish outlook.

Fixed Income

Despite relatively healthy US data and heavy government bond issuance in Europe, bond yields moved lower this week.

The continuous rise in the US trade balance deficit, the USD slide and the steep rise in Chinese FX reserves, increased fears of stronger foreign buying of US Treasuries and eurozone (EZ)government bonds, leading to lower bond yields and flatter yield curves.

Oil prices up are also seen dampening medium term growth prospects, which is not helpful for our short duration stance.

Emerging market debt (EMD) hard currency spreads stabilised over the week, and credit spreads were stable despite the increasing worries on US auto manufacturers' credit outlook.

Equities

Last week markets continued the pull-back seen the week before. The earnings season got into full swing after Alcoa did the traditional kick-off on Monday.

Although it is probably still too early to draw major conclusions, it seems like the majority of companies is able to surpass analysts' expectations.

Nevertheless, some warnings from majors like AMD, STMicroelectronics and UPS kept investors worried. Intel and Apple reported stellar earnings reports, but this was insufficient to drive markets higher.

Upward pressure on oil prices remains a main threat. We believe that the pull-back is not over yet. Therefore we remain a bit cautious.