An extremely volatile week that saw European equities rise sharply by the end of it, as US ones faltered over the five days, largely reflecting changing expectations of future monetary policy in both regions. The S&P 500 ended the week down 2%; in contrast the Stoxx 600 finished the week just over 4% higher. European equities were initially rocked on Thursday by the actions of the Swiss central bank as it announced the removal of its currency peg with the euro. As investors digested the news they saw the move by the Swiss central bank as confirmation that the ECB are preparing to announce a quantative easing at Thursday’s rate setting meeting. Trying to further defend their currency against the continuingly weakening euro would become too painful under those conditions.
US equities were not helped as the week went on by some weaker than expected earnings reports from the several of the leading banks, in particular JP Morgan and Citi alongside some mixed economic data. A flattening yield curve is never good for banks profits as the business model relies on borrowing short and lend long.
Falling commodity prices, which have been making many of the recent headlines, also managed to bounce by the end of the week. The recent volatility in asset prices has been attracting investors back into gold in particular; the price of gold finished the week at $1280 and ounce, as rise of about 5% on the week. The volatility index (VIX) rose unsurprisingly, closing the week just above 20 having reached 23 earlier in the week. Treasuries continued their rise as 10-year yields in the US fell back to 1.84%.
The week ahead will be entirely focused on what the ECB will do on Thursday at their rate setting meeting, Their has to be room for some disappointment as the Sunday papers report that Germany still has issues with the structure of any plan to introduce quantitative easing. US equity markets are closed on Monday for Martin Luther King Day. On the macro front it is a relatively quiet one in the US, as earnings will once again dominate. On Tuesday IBM, Johnson and Johnson and Morgan Stanley are ones that will make the headlines.
On Tuesday we get the announcement of the fourth quarter GDP for the Chinese economy. Expectations are for a number just above 7%. In the UK on Wednesday we get the minutes from the last rate-setting meeting, expectations are for the voting to remain at 7-2 in favor no change.
Equity markets may well continue to be volatile into Thursday’s meeting and possibly after, depending on what comes out of the meeting. The following weekend the Greeks go to the polls, the result of which will also be eagerly awaited.
We have decided that as from tomorrow the blogs will come out Monday, Wednesday and Friday to ensure that they remain fresh and not repetitive.