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The Week In Hindsight, 14 December 2013

Once again global equity markets fell in tandem with each other throughout the second week of December as concerns mounted over the potential for tapering to begin at next week’s FOMC meeting.

Concerns have grown following a volley of better than expected economic data that has seen the US unemployment rate fall to the 7% threshold at which the Federal Reserve has previously stated it would consider tapering. The improvement in the unemployment rate comes amidst a surge in payrolls growth, better than expected retail sales data and a budget deal in Washington.

The concerns over US monetary policy threaten to see equity markets close out the year in a state of weakness. This follows a year that has seen $8 trillion of new inflows drive many markets into unchartered territory while others continue to threaten new peaks.

DOW JONES

US AND EUROPEAN INDICES OCTOBER – DECEMBER. FTSE 100 IN RED 

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FTSE 100 EXTENDS LOSSES, FURTHER DOWNSIDE IMMINENT AHEAD OF FOMC

The FTSE 100 closed the week lower on Friday following its longest run of back to back weekly losses since 2008. The downside in UK equities comes despite the continuing economic recovery, improving investor sentiment as well as some positive earnings results and trading updates from the home builders.

Moving into the week ahead monetary policy is likely to remain the predominant concern and could help to drive global indices lower still. This is despite earlier consensus estimates among banks and brokerages that the Federal Reserve will hold off on tapering.

Barclay’s Capital, Goldman Sachs and Nomura all see the Fed holding off until March while Capital Economics, independent macro analysts, see the FOMC beginning a gradual reduction in the pace of asset purchases next week.

Regardless of the eventual outcome, UK and European markets are likely to remain under pressure throughout the week ahead.

Our view remains that the beginning of the tapering process is not necessarily the death knell for global equities. This is for the obvious reason that the beginning of a tightening in policy conditions heralds a cemented recovery in the US economy and a brightening outlook for the rest of the world economies.

For this reason we would expect the uptrend in developed market stocks to continue following an initial correction and adjustment period.

Barclay’s Capital stated on Friday that internal expectations are for rates to remain low into 2016 due to unemployment holding stubbornly above 7% until the close of 2015. Such expectations echoed elsewhere across the industry should continue to support UK stocks and continue to encourage yield seeking behaviour long after the tapering process begins.

FTSE 100