Markets uncertain with a bias towards US growth

US stocks were little changed despite encouraging data releases leading up to the non-farm payrolls tonight.

The S&P 500 closed up 0.12% to 1655 while yields in the 10-year note escalated and closed just below 3%, levels unseen since 25 July 2011. It is clear the bond market is pricing the end of easing on 18 September while the stocks market is unsure. The one thing investors can agree on is that tapering is a good sign that things are improving and we should move towards a normalised monetary policy.

There’s debate over whether the US equity markets have further upside. The QE program has been an experiment that resulted in the S&P500 reaching an all-time high of 1700, and the Dow at 15,658. We are coming to the end of a chapter that needs to be closed. It is also a road untraveled, attributing to skittish behaviour.

Companies hiring

The US data showed companies hiring 176,000 workers in August and fewer people filing for unemployment benefits, with claims dropping 9,000 to 323,000 in the week ended 31 August. The ISM non-manufacturing index was a surprise with activity expanding from 65 to 58.6, at its fastest pace since January 2006.

Nonfarm productivity was revised up to 2.3% in Q2. The Challenger Grey and Christmas release showed job cuts jumped to 56.5%, the same level as in May 2012. The market reaction and the data all point to how much of a dial back it will be.

Asia

There are signs investors’ risk appetite for Asian stocks is returning with data from Bloomberg showing “foreign institutional investors bought $2.2 billion of equities in India, Indonesia, South Korea, the Philippines, Taiwan, Thailand and Vietnam in the week ended 4 September.” This is a contrast with net sales of $1.5 billion in each of the previous two weeks.

Newly appointed RBI central bank Governor Raghuram Rajan, highly regarded by the investment community, restored confidence by outlining plans to bolster the financial industry, making it easier for banks to open branches and lend to non-state sectors of the economy. The RBI will also provide swaps for banks’ foreign-currency deposits, and look at ways of recovering bad loans. The Sensex and Nifty responded by jumping over 2% and the Indian rupee recovered over 1% to 66.115.

In the week ahead investors will be watching the G20, China trade data (8 September), the Bank of Indonesia rate decision (12 September) and South Korea’s BOK rate decision (12 September).

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