The Dow Jones Industrial Average rallied sharply higher at the start of the trading day, as robust economic data out of Asia suggests the continent has been immune to Europe's turmoil.
This is a rather premature assumption at this juncture, however, because it suggests that China and co can continue to shoulder the global economic recovery. Unfortunately there's a risk that this view may backfire if the market suddenly starts to anticipate additional monetary tightening across Asia, so tread carefully.
Official data released today confirmed that China's exports surged 48.5% last month. The information was initially leaked by Reuters yesterday, who cited anonymous sources. There were encouraging reports from other Asia-Pacific regions as well today, with unemployment rates in both South Korea and Australia falling and GDP growth in Japan accelerating more than expected in the last quarter.
By 4:15pm (London time) the Dow Jones Industrial Average was up by 231.79 points (+2.34%) to 10313.04 and the broader S&P 500 traded at 1081, representing a 25.31-point (+2.4%) increase.
Resource shares were among the best performers this afternoon, with Freeport-McMoRan Copper and Gold surging 4.7% to $63.62 a share, Southern Copper Corp rallying 5% to $29.66 and Alcoa climbing 3.5% to $11.18.
US-listed shares of BP rallied 8.8% to $31.78 this afternoon after plunging to a 14-year low yesterday on concerns about the costs associated with the Gulf of Mexico oil spill.
Gains in the US banking sector were not as strong, however, with the likes of Citigroup, Bank of America, JPMorgan and Morgan Stanley up between 0.5% and 2%.
A special US congressional panel is scheduled to take place later this afternoon, so there's clearly an element of caution on the part of investors, which helps explain why the sector hasn't exhibited any stellar gains so far today.
US economic data released this afternoon was somewhat mixed. The US jobless claims data suggests the labour market has not been recovering as fast as it should be, leaving economic growth vulnerable to downside risks in my opinion.
A Labour Department report released today indicated that number of Americans claiming first-time jobless benefits, initial jobless claims, fell by 3,000 to 456,000 in the week ending 5 June. Bloomberg's median estimate pointed to a drop to 450,000.
However, the four-week moving average, a more accurate gauge that smoothes out weekly volatility in the data, increased by 2,500 to 463,000 for the week ending 5 June. This clearly indicates that the US labour market hasn't been recovering fast enough, confirming yesterday's comments by Fed Chairman Ben Bernanke.
'The economy will continue to recover at a moderate pace,' Bernanke said yesterday in testimony to a House Budget Committee hearing. The rebound is 'not as fast as we would like,' he continued, and the outlook is for 'only a slow reduction in the unemployment rate over time.' [1]
On a positive note, the total number of people continuing to receive jobless benefits, continuing jobless claims, declined by 255,000 in the week ending 29 May to 4.46 million, the lowest since December 2008. Bloomberg's median estimates pointed to a drop to 4.64 million.
A separate report released today showed the US trade deficit widening to the highest level in more than a year in April, after exports declined at a faster pace than imports. The deficit rose by 0.6% to $40.29 billion from a revised $40.05 billion the prior month.
The Bank of England and European Central Bank monetary policy decisions were in focus as well today.
The Bank of England offered no surprises, maintaining the size of its bond purchase programme at £200 billion and keeping interest rates at a record low of 0.5% in order to assist economic growth. Investors wanting to learn more about today's interest rate decision should look out for the central bank's minutes, scheduled for release on Wednesday 23 June at 9:30am, London time.
I have occasionally come across views suggesting that the BoE may have to raise interest rates in order to lower domestic inflationary pressures and support Sterling against the Dollar.
The UK's inflation problem has been predominantly driven by a weak Sterling. If you're a manufacturing company importing raw materials from the US it is going to cost you relatively more, so you're likely to pass that cost on to the consumer to maintain your profit margins.
It therefore stands to reason that an interest rate hike would lower the inflationary problem. But this is short-term thinking because you can never tighten monetary and fiscal policy together without severely damaging growth.
Given the deficit problem, the emphasis over the next year will be on fiscal austerity, and until those policy measures begin to ease it's highly unlikely that we will see any rate hikes by the BoE, or by the ECB for that matter.
As anticipated the ECB kept interest rates unchanged at an all-time low of 1% today, and ECB President Jean Claude Trichet said the central bank will extend its offerings for unlimited cash to ensure there was ample liquidity in money markets. He also said the central bank will continue to acquire government bonds for now in order to ease tensions in the money markets.
Trichet surprised the market, however, by raising Eurozone growth forecasts for this year and lowering them for 2011. He expects growth in the Eurozone economy to expand by around 1% this year compared with a previous forecast of around 0.8%. Due to weaker domestic demand, he said, growth in 2011 will be 1.2%, lower than earlier projections of around 1.5%.
Meanwhile, New York University professor Nouriel Roubini this afternoon said the ECB should consider slashing interest rates to zero and expand its bond purchases in order to offset the slowdown within the Eurozone region.
The Euro and Sterling both traded broadly higher this afternoon, with EUR/USD up 1.19% to $1.2122 and GBP/USD nearly 1% higher at $1.4673.
Source: [1] Bloomberg News (10 June 2010)
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'Spread Betting News 10 Jun 2010', Article by IG Index, last update: 10-Jun-10
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