Markets turn higher

Economics

This week we expect the US trade deficit for December to slow in line with moderation in oil prices.

Consumer credit should also have slowed during that month. In Europe, German industrial production should have stabilised in December following disappointment in previous months. French industrial production probably consolidated the gain seen in December.

In Japan we expect machinery orders to decline in December after a surge in November. Household spending is expected to have declined in December continuing the year-on-year fall seen in November.

Foreign exchange

The euro broke out of its consolidation range of the past weeks. This suggests further weakness towards 1.2850.

The dollar broke its resistance line over the tops of November, December and January. This is a bullish signal which suggests further gains with 107.25 as objective.

Fixed Income

The Fed increased rates to 2.5%, and again no impact on the US long-term rates. European leading indicators have bottomed out and are giving positive signals for the manufacturing sector in Europe, and again no impact on interest rates.

The technical factors holding interest rates low are still in place; in particular, demand for 30yr paper from pension funds and life insurance portfolios is the theme that markets look at in the current low yield environment.

Equities

After starting the week in a negative tone, caused by nervousness regarding upcoming economic data, markets went higher towards the weekend.

Fourth-quarter earnings reports published last week were in general rather strong, while guidance remained somewhat cautious. We believe markets are in the middle of a pull-back, but the upward longer term trend remains intact.