The Week In Hindsight; 17 Jan 2014

Despite mixed messages from earnings announcements, western markets remained close to previous peaks this week following strong performances from retail sales figures in the UK and the US.

Office for National Statistics data declared, on Friday, that UK retail sales rose at their fastest pace for nearly nine years during December. The survey showed the sector expanding at a rate of 2.6% against expectations for year on year growth of just 0.5%.

On the other side of the Atlantic, US retail sales also increased ahead of expectations. The more remarkable feature about the US retail sales announcement was that most of the expansion came from the core retail sales measurement.

This is by far the more gage of the main street consumer as it strips out expenses on big ticket items such as auto-mobiles.The news is another positive step for the global economy and a clear indication that the current recovery taking place in the west still has the legs required to go further.

Despite the positive economic data, corporate earnings kept markets away from new highs. Mixed results from the financial sector were the principal cause for concern this time around.

Investors were less than impressed by announcements from Goldman Sachs and Citi-Group which saw their respective stock prices drop immediately after announcing results. Although it was not all doom and gloom on Wall Street, this was as both Wells Fargo and Bank of America Merrill Lynch topped expectations.

In the UK the FTSE came under pressure early on Friday morning as one of its key constituents, Royal Dutch Shell, announced that it had missed analyst expectations by quite some distance. The company cited supply issues in Nigeria along with production costs as among the reasons for the under performance.


Inflation and Interest Rate Outlook – UK and US

UK inflation fell during December to touch noses with the Bank of England’s target for the first time in four years, partially dispensing with growing expectations of a sterling interest rate rise later in the year.

US inflation data also showed consumer price pressures remained weak throughout December. This prompted Ben Bernanke to reassert that policy conditions shall remain accommodative the entire time that this trend persists.

If policy makers are intent on keeping rates at record lows, even as various economic recoveries advance, they are yet to convince the corporate world. This is as recent data is believed to have instigated a rush by multinational companies to cover their funding requirements for the months and years ahead, while borrowing rates remain at current levels.

The French energy giant, EDF, opened the books this week for a new bond issue. The company intends to raise £2.5 billion from a rare 100 Year sterling bond paying a coupon of just 6.12%. The duration of the bond is greater than the company’s lifespan to date and comes as part of an attempt to lock in long term investment funding before interest rates begin to rise.

Wells Fargo, the US based bank, also tapped bond markets for $1.5 billion to cover funding requirements for the foreseeable future. This follows a $5 billion issue in the summer of last year.

Outside of earnings releases, the next major events for the UK and US economies are UK Unemployment numbers due on the coming Wednesday while Thursday and Friday see existing home sales numbers and the weekly unemployment claims number released in the US.

FTSE 100 with Dow Jones Overlay