A disappointing start to the week as equity markets in Europe reacted negatively to a number of factors. Firstly the slightly disappointing economic data from the Far East as Japan confirmed that their economy went into recession in the third quarter. This news, along with China reporting weaker than expected import export data for the month of November, meant the resource sector in London once again took the brunt of the selloff.
Secondly in the UK the upcoming general election in May is going to become more of a focus. As was the case with the Scottish vote earlier this year, the bookmaker is the best opinion poll for the likely outcome one can get. At present the odds on a no majority by either party are 5/2 on, with Labour 7/2 against to get an overall majority and the Conservatives running third at 9/2 against. If the odds continue to suggest that neither party will win an outright majority, and as the relationship between the Liberals and the Conservatives becomes more strained into the election, investors both domestic and international, may start to concern themselves that a political stalemate could exist in the UK for a period of time after May as neither of the main parties win enough support to form a government. On the positive side the FTSE 100 in particular is made up largely of global companies meaning that political concerns will hopefully drive sentiment rather more than company profitability.
Friday saw equities around the globe rally on the strong economic data from the US, ignoring the moves in the bond market. As the papers were full over the weekend of the possible change in interest rate sentiment post this report, investors may want to take a moment to see if the bond market sell off continues before committing fresh capital into the year-end. Our view remains squarely that despite the strengthening US economy the concerns that still exist with Asia and Europe in particular will mean that the Federal Reserve will remain cautious before make any move on interest rates.
Finally last week we wrote a piece pointing out how lower oil prices could feed consumers in two ways, firstly lowering the costs for example on fuel, but also as companies reaped the benefit of lower raw material costs they may be inclined to start to raise salaries. On Friday in the US we may have had some sign of that effect as average hourly earnings rose more than expected.