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Mixed growth leads to choppy markets

Growth dominates as peripheral European countries show up the big boys.

London
Source: Bloomberg

Strong UK jobs report helped bullish sentiment

Growth has been the play of the day, as the eurozone quandary perplexed markets once more with the flagship German economy suffering against the backdrop of surprisingly buouyant growth from two of the 'troubled' peripheral countries in France and Italy. With German disinflation and Greek deflation, the stage was set for another bad day in the markets. Yet, with the eurozone growing at the fastest rate in two years coupled with a strengthening peripheral area, the bulls have managed to claw back some of this week's losses.

A strong UK jobs report, coupled with a more dovish Mark Carney than usual, played into the bullish sentiment already evident within the markets today. We are now clearly  in a position where interest rates are likely to rise around mid-2016 rather than Q1, with those rises being gradual. The gradual part was always known and has been stressed a number of times, however the consistent delaying to interest rate hikes shows that the Bank of England can be trusted to never stick to its guns. In which case, it wouldn't be a surprise to hear Mr Carney say that the end of 2016 is a target as soon as the next market anxiety arises.

Barratt Developments came out in support of the new Tory majority, with a positive outlook to accompany its trading update. With forward sales a whole 17.9% higher than was the case last year, coupled with rising dividends and a rise in sales, it is clear that the housing sector is booming once more. However, the fact that the company only started paying a dividend again back in 2013, following a five-year hiatus, shows that while it could be in for a good year this sector, much like its underlying product, is highly volatile.

2015 worst consumer spending growth since 2008

US markets have enjoyed a buouyant start to the trading day despite a disappointing retail sales number. The inability to raise consumer spending in the face of an already weak US growth figure for Q1 is a damning indictment of an economy which is supposed to be in the rudest health since 2008. In fact, 2015 so far has seen the worst consumer spending growth since 2008 and this effectively rules out any June rate rise given the US dependancy on consumer spending to drive GDP growth.

With lower gas prices feeding into higher dispensable income, you would think that would translate into spending, yet today's figure points to increased saving which is exactly what the Federal Reserve's ultra-low interest rates aim to avoid.

The impact of a strong dollar came back to the fore today, with Ralph Lauren announcing a net income of $1.41, which is well below the $1.68 seen this time last year. Much of this was attributed to exchange rate effects and while today's earnings were better than many expected, it is clear that the firm will continue to feel the dollar's weight on its back. However, with an additional $500 billion share buyback approved, it is clear that firms are flush with cash right now and for the most part their only options are to dilute shares through a takeover or concentrate shares through a buyback. Generally investors prefer the latter, yet unfortunately CEO's often like the former.

Bull run in crude oil could come to an end

The second consecutive fall in US oil inventories did little to support the price of crude today, with both WTI and brent selling off in response. The resurgence seen over the past two days appears to be waning and given the apparent inability to punch into a new 2015 high, I believe we have seen the end of this bull run in crude oil.

While US inventories are marginally declining, the overall stockpiles are near record highs and once that oil is released onto the maket, there is only one way for the price to go. Perhaps oil stockpiles are falling due to the willingness of producers to sell at this price, rather than due to a notable fall in output.

GBP/USD continues to climb

GBP/USD has continued to climb today following a strong UK jobs report which saw unemployment fall to 5.5%. The upward trend clearly points towards continued strength, with 1.6 in sight. However, given that the last two legs higher have been provided by fundamental factors (yesterday's industrial production figure and today's UK job report), I am also aware that you cannot rely on fundamental announcements to continue providing a boost to sterling.

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