MONTHLY MARKET INSIGHT

DECEMBER 2013 KEY TOPICS TO WATCH (DEC)

Markit PMI Manufacturing (Nov) (2nd) Eurozone Q3 GDP Final (4th) BoE / ECB Interest Rate Decision (5th) US Q3 GDP Final (5th) US Non Farm Payrolls (6th) US CPI (17th) UK Unemployment Rate (18th) FOMC Monetary Policy Statement (18th) UK Q3 GDP Final (19th)

U.S. FUNDAMENTAL OVERVIEW

November was a subdued month for QE tapering related news with little comment based volatility. As the taper is likely to happen in early 2014, this has been factored into the markets to an extent, with continued asset purchases providing an underlying buying pressure to combat the selling pressure created by new market highs. After a slow start to the month, the S&P 500 was invigorated as a result of comments by the next FOMC chair incumbent, Janet Yellen. An endorsement of the current Fed QE policies signalled to the market that she is likely to maintain this approach (and subsequent market stimulus) at least for the near-term future. The FOMC minutes for November stated that tapering is coming sooner rather than later, which although consistent with forward guidance so far, caused selling pressure amid fears of a December taper. In reality, the unemployment and inflation benchmarks for tapering are still far from allowing a justified reduction in asset purchases before the end of 2013. The upwards movement seen in November was aided by slightly better economic data, despite the government shutdown in early October. Q3 GDP figures came in above expectations and signal that (in output terms at least) the US is experiencing a robust recovery. Consumer conditions are also improved with increased credit, personal income and retail sales. However, manufacturing indicators are still mixed, denoting that downside risk will be present, especially in the aftermath of QE tapering next year. The Nuclear deal with Iran also helped to buoy the markets in November and support the resurgence of the Dollar from Octobers yearly lows and shutdown related devaluation. The remaining Q3 Earnings figures released in November were consistent with the moderate growth of EPS against reduced revenue growth and revised estimates. As a result, the S&P 500 upside has been supported by earnings growth figures in the short-term. The weak demand conditions provide a rationale against tapering in 2013 and present a considerable risk of deflationary pressure after tapering occurs. In essence, the already downward revised Q4 earnings must show a considerable improvement in demand conditions to help to counteract the loss of stimulus and justify the overbought status of the US indices. . Looking forwards, Non-farm payrolls data at the start of the month and the FOMC statement on the 16th are likely to be the market drivers and potential threats to a prolonged bull market. With a continued improvement in fundamentals, there is no reason why a moderate Santa Rally cannot occur as an extension of the uptrend against the overbought status.

S&P 500 (OCT 2013)

1,810.00 1,800.00 1,790.00 1,780.00 1,770.00 1,760.00 1,750.00 1,740.00 1,730.00 1,720.00 1,710.00

Nov 01

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FTSE 100 (OCT 2013)

6,800.00

6,750.00

6,700.00

6,650.00

6,600.00

6,550.00

Nov 29

EUROPEAN FUNDAMENTAL OVERVIEW

The big announcement in the Eurozone for November was the cut in interest rates from 0.5% to 0.25%. This change has been made to revive inflation, encourage increased output (A Q3 GDP figure of 0.1% was poor as expected) and to increase lending by banks. European indices should continue to react favourably to this news, upon the premise of a proactive ECB, improved financing conditions and the lack of US tapering. However, this still outlines inherent weakness in regards to a sustainable economic recovery. As a result, this has made the Euro susceptible to increased volatility over the coming months. This is especially apparent with the focus now on negative interest rates, which the ECB state they are technically ready for. Economic performance remains stagnant, especially regarding PMI indicators which are retracting back towards the 50 mark. This is encouraging for the crisis nations, yet concerning for the powerhouses of the region.

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DAX 30 (OCT 2013)

9,350.00
9,300.00

9,250.00 9,200.00 9,150.00 9,100.00 9,050.00 9,000.00

8,950.00

8,900.00 8,850.00

Nov 01

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Nov 29

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A notable underperformer is France who have a composite PMI score of 48.5 and as a result is shown to be in contraction, in addition to poor export/GDP figures and a credit downgrade to AA. Flawed economic policy measures have done much to ensure that going forwards, France is the biggest risk to the Eurozone recovery plan. After a mixed October, the UK is showing data which supports the outlook of a sustained recovery. GDP figures for Q3 were positive at 0.8% and the service sector has the highest PMI score out of any country (62.5). It is likely that the Bank of England may be the first central bank to raise interest rates in 2014, as a result the FTSE has reacted negatively to the increased possibility of a tighter monetary policy. However, Retail sales have remained weak, as CPI is not being offset by wage inflation, this has hurt major UK retailer Q3 earnings a major component of the FTSE 100. This article does not constitute as investment advice.