The Friday that the market has been waiting for has churned out dissappointing NFP numbers for July. Total non-farm payrolls fell 131,000 against expectations of a 65,000 decline. Private jobs rose less than expected and the acceleration in the improvement of the job markets turned to a pessimistic picture where a risk of the Fed moving to ease policies became closer to reality.
Markets are expecting a policy of further quantitative easing from the Fed via purchase of US Treasuries or mortgaged backed securities to be announced during next week's meeting. This led to a sharp weakening of the dollar against a basket of curencies. Dollar versus Yen declined to 85.03 which triggered market scares of a Japanese central bank tightening, however, against other currencies, the Yen has not strengthened significantly, hence I believe these scares are over-rated (besides in purchasing power terms,the Yen is not considered massively over valued - an entire topic to be discussed in coming weeks)
Financial sector weakened on Friday, but I believe this is the excuse the market has been looking for to catch a breather, and also the chance for funds who missed the last couple of weeks run to put some money into the market next week. Over the rest of August, the risk is to the upside as equities drift up, abeit on low volumes (an interesting article in the FT on Thursday 5-Aug was dedicated to how the move up in Jul and Aug was on low volumes i.e. based on the opinion of a small group of investors).
The next checkpoint will be the September PMIs, the indicator which could be the turning point for the markets as most of Europe return from it's holidays.
Eric Tan,
London
Sunday 8 August 2010
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