The month ahead

The US Federal Reserve statement in late October that policy would be unchanged should have been no surprise, however the tone emanating from the group was rather interesting. 

Little or no mention was made of the recent US government shut down and the apparent indifference to any ensuing negative effects has helped to confuse markets.

European and US indices succeeded in breaking to new highs last month, and with Q3 earnings in the US done and dusted we can now expect to see any movements in markets restricted to macro releases. The return of the ‘bad news is equity positive’ mode is very likely.

November’s non-farm payrolls, in light of the recent ADP employment numbers, are unlikely to impress, and thus will help bolster any notion that tapering will be delayed until March 2014 at the earliest. Even then one could expect that only a token degree of scaling back of asset purchases will take place.

Crunch time for Europe

Over in Europe, concerns about a banking liquidity crunch and a deflationary climate will surely remain top of policy makers’ lists. The strength of the euro in October was clearly becoming a concern, and there have been calls to suggest that we may see a small cut in the European Central Bank base rate at the next meeting; from 0.5% to 0.25%. Such a step would only really count as temporary reprieve and would be unlikely to solve the underlying issues with the ECB transmission system.

The speculation of such an occurrence has helped to see the single currency take a leg down from its elevated levels against the dollar and the pound. It is almost a certainty that long-term refinancing operations will take place in order to temper a liquidity crunch or a rise in the interbank lending rate.

Many of the key constituents have reported earnings in October so we can look to the macro calendar to help decide on the direction. Services, manufacturing and construction output has, for the most part, been positive of late. Keeping this momentum going will be key to maintaining a bullish sentiment.

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