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World Week Ahead: An Apple a day

Monday 8th September 2014

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The global equities rally appears set to continue, bolstered by weak US jobs data and an unexpected commitment from Europe’s central bank to go all-in to bolster the euro-zone’s flagging economy.

Stimulus, in the form of both record low interest rates and the buying of countless billions of assets by the Federal Reserve, has underpinned the current bull market.

While weaker-than-expected jobs data for August, released on Friday, did not alter views that the US labour market is gathering steam, it did help to alleviate concern that the Fed would start raising interest rates early in 2015. 

Non-farm payrolls rose 142,000 last month, the lowest monthly gain this year, after increasing by 212,000 in July.

“It promotes the argument of keeping rates lower for longer,” Alan Gayle, director of asset allocation for RidgeWorth Investments in Atlanta, told Bloomberg News. “It supports [Fed Chair Janet] Yellen’s more measured moving away from tightening.”

Indeed, Fed Bank of Boston President Eric Rosengren advocated patience.

“Despite the improvement in labour markets over the past year, today’s employment report was somewhat disappointing, with the increase in payroll employment of 142,000 jobs being below expectations, and the unemployment rate declining to 6.1 percent but in part because 64,000 Americans dropped out of the labour force,” Rosengren told the New Hampshire and Vermont Bankers Associations Annual Conference on Friday.

“My primary message is that significant slack [in the labour market] remains, and thus monetary policy needs to be patient in removing stimulus,” Rosengren said. 

The Fed has previously flagged it might end its monthly bond-buying program, currently at US$25 billion, next month.

In a Reuters survey on Friday, nine of 17 primary dealers, the banks that deal directly with the Fed, said the US central bank's first rate increase would occur in the second quarter of 2015.

That compared with an August survey in which six of 19 dealers had expected such a move.

"This jobs report is effectively meaningless for Fed policy,” Drew Matus, an economist at UBS in New York, told Reuters. “It’s one weak month, but the trends still look healthy.”

Reports set for release this week include the NFIB small business index, due Tuesday; wholesale trade, due Wednesday; weekly jobless claims, due Thursday; and import and export prices, consumer sentiment, and business inventories, due Friday. Retail sales for August also will be released on Friday.

Last week, the Dow Jones Industrial Average rose 0.23 percent, the S&P 500 added 0.22 percent, while the Nasdaq Composite Index eked out a 0.06 percent gain.

Apple on Tuesday is widely expected to unveil two new bigger iPhones and a smartwatch at the same venue Steve Jobs used to introduce the world to the MacIntosh computer in 1984. Shares in the company, which have risen 42 percent so far this year, dipped back below the US$100 mark last week in the wake of security concerns linked to the iCloud.

On Friday, China’s biggest e-commerce company, Alibaba, filed papers in the US for an initial public offering which would raise US$21 billion. It will begin a roadshow for its US-listing this week.

On the geopolitical front, questions remain whether a truce reached on Friday between Ukraine and pro-Russian separatists will last. The West has imposed more sanctions on Russia. 

"With respect to the ceasefire agreement, obviously we are hopeful but based on past experience also sceptical," President Barrack Obama told a news conference, after a NATO meeting to review the situation.

In Europe, the Stoxx 600 rose 1.6 percent last week. On Thursday, the European Central Bank cut its main interest rates and announced it will start buying assets to help bolster the struggling euro-zone economy. That will also help European stocks, analysts say. 

"European equities have returned 8 percent so far this year, recovering strongly from the recent summer sell-off as bad news — weaker macro data — has quickly become good news — more ECB liquidity," Citi equity strategist Jonathan Stubbs wrote in a note, according to Reuters.

"European equities are ... no longer cheap in absolute terms, but still super cheap relative to other asset classes, such as credit,” Stubbs said.

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