Traders seek cues from data as rally fades

By Jamie Chisholm, Global Markets Commentator

Published: February 3 2010 08:27 | Last updated: February 3 2010 14:58

14:45 GMT. The boost to risk appetite from a slew of upbeat global manufacturing reports
showed signs of fading on Wednesday, as investors awaited evidence that the recovery was
also taking hold in service sectors and the labour market.

The FTSE World equity index fell 0.1 per cent and Wall Street gave up 0.3 per cent as the
impetus of recent days dwindled.

Global stocks have this week been able to claw back a decent chunk of January’s losses after
Monday’s reports on factory activity painted the picture of a broad improvement. The
navigation of a number of political issues – such as the reappointment of Ben Bernanke as
Federal Reserve chairman, a perceived toning down in the White House’s bank-bashing
rhetoric, and chatter that the Volcker Rule may not come to pass – has also helped sentiment.

For most developed countries, however, it is services that account for the vast majority of
activity, and surveys of the sector in Europe and the US on Wednesday may be crucial in
determining whether the risk rally can proceed.

So far, the report card reads “could do better” – something for the European Central Bank and
Bank of England to ponder as they prepare to release their latest decisions on interest rates on
Thursday.

The eurozone service sector expanded in January at a slower pace than for the previous
month. But at least it expanded – the fifth consecutive month it has done so. Of some concern,
however, is the divergence within the region. Just as was the case with manufacturing,
Germany and France did well while Spain contracted for the 25th month in a row.

In addition, the UK service sector expanded at its slowest since August. Snow, a phenomenon
apparently peculiar to Britain, was blamed.

But the final piece of the bull-market jigsaw is jobs. Few analysts believe the appetite for
riskier assets can continue without a clear sign that the US workforce is growing again. The
ADP report on private sector employment released on Wednesday showed 22,000 jobs lost in
January, a sharp improvement from the 61,000 cut in December. Thursday sees the weekly
initial claims number and Friday the mother of all data, the non-farm payrolls.

In the meantime, there is still the lurking Gollum of sovereign risk. It will be interesting to see
the market’s reaction to the European Commission’s formal assessment of Greece’s deficit
reduction plan. Will it calm nerves or simply allow the markets to shift their gaze to one of the
other fiscally strapped so-called peripheral economies, such as Spain or Portugal? News of
Spain’s weak service sector will only increase investor wariness.

● Greek government bonds were a bit more popular, as traders absorbed the broadly
supportive comments from the EC about Athens’ budget proposals, though the yield of 6.68
per cent, down 7 basis points, suggested investors remained nervous. The yield spread with
German Bunds tightened to just below 350 basis points, compared to more than 400bp last
week. Portugal’s 10-year yield at one stage spiked by 30 basis points to 4.75 per cent, its
highest since March last year. It was later trading up 20 basis points at 4.65 per cent.

US 10-year Treasury yields were up 4 basis points, to 3.68 per cent.

● European bourses initially reacted to the late portion of Wall Street’s 1.1 per cent rally
overnight, but then pulled back as New York’s new session got off to a poor start. The FTSE
Eurofirst 300 lost 0.1 per cent and the FTSE 100 in London fell 0.2 per cent.

Asia saw good gains, with Chinese stocks in particular putting some miserable recent
performances behind them. The Shanghai Composite, which has been among the worst hit of
major markets of late on fears of monetary tightening, jumped 2.4 per cent, while the Hang
Seng in Hong Kong leapt 2.2 per cent, with resources and mining groups in demand. The
Nikkei 225 climbed 0.3 per cent and the FTSE Asia-Pacific index advanced 1.3 per cent.

● The euro lost its early gains as traders awaited further developments on the eurozone’s
fiscal woes. News that eurozone retail sales had fallen by 1.6 per cent in the year to December
contributed to the single currency losing 0.1 per cent versus the dollar.

The buck rose 0.2 per cent on a trade-weighted basis. “The 22k decline in Jan ADP is the
smallest loss since February 2008, which serves to bolster the US data-driven argument for
prolonged USD gains,” said Ashraf Laidi at CMC.

● Gold breached $1,120, taking its gains to more than $40 since its
close on Friday. However, as the dollar found its footing the
precious metal fell back, and was later up 0.1 per cent at $1,115.

Oil also pared an early advance. After surging 3.8 per cent on
Tuesday, crude added 0.1 per cent to $77.31 a barrel ahead of
inventory data out later.