American jobs data comes in higher than expected, while also easing fears that US bond buying could end soon
It may be less than three weeks ago, but May 22 seems a lifetime away in terms of the stock market.
That was the time global markets reached levels not seen for decades, with the FTSE 100 at its highest since the dotcom boom in 1999 and the Dow Jones Industrial Average hitting an all time record. Markets had been buoyed by central banks around the world taking action - through low interest rates, quantitative easing and bond buying - to boost the flagging global economy.
But since the May peaks, the prospect of these emergency measures being reined in has begun to unnerve investors.
In Japan, the Nikkei 225 slumped into bear market territory - meaning a 20% decline from its recent peak - on fears that its quantitative easing programme and plans by new prime minister Shinzo Abe to encourage borrowing and spending would not be effective at generating sufficient growth.
A mixed picture of data from around the world last week added to the uncertainty facing investors. Germany's Bundesbank cut its growth forecasts for the country on Friday a day after weaker factory orders, while the recession in the eurozone continued with a 0.2% fall in GDP in the first three months of 2013. There were also worse than expected growth figures from Australia.
Meanwhile a report from the International Monetary Fund admitting errors in the treatment of Greece's bailout reminded investors that the eurozone crisis is far from over, while European Central Bank chief Mario Draghi unsettled markets by unveiling no new measures after its monthly meeting.
But the week ended on a brighter note. US non-farm payroll figures announced on Friday showed a rise of 175,000 jobs in May, just good enough to ease concerns about the state of the world's largest economy but not so good that the US Federal Reserve was likely to end its bond buying programme in the immediate future. James Knightley at ING said:
We see the risk being that [the Federal Reserve's] quantitative easing tapering comes later rather than sooner. The current consensus according to Bloomberg is that the October Fed meeting will be the point QE starts to be slowed. We think December looks more likely at this stage, although we acknowledge even then there are issues given Bernanke may well be on the verge of stepping down from the Fed at that point. Consequently, there is no guarantee that tapering will start before year-end.
So the FTSE 100 finished another volatile week at 6411, up 75.88 points on the day following the US jobs data but down 113 points on the week and more than 6% below its May peak.
David Jones, chief market strategist, at IG said:
With the central banks, particularly the US Federal Reserve, having pumped so much money into the system in recent years there is still the nagging concern that although the QE tap may not be switched off, the flow could well be reduced in the months ahead. This is widely accepted to have acted as a somewhat artificial support for stock markets – so traders are bracing themselves for the potential of sharp sell-offs again as this uncertainty continues.
In a sign that the top of the market could indeed have been reached, a variety of investors decided to cash in profits during the week. Japan's Sumitomo Mitsui Banking Corporation disposed of half its 1.3% shareholding in Barclays at around 308.5p a share, raising around £260m. Sumitomo paid around 296p a share for 169m shares in 2008 as part of a number of fundraisings by Barclays amid the financial crisis. Barclays closed 4.5p higher at 307.8p on Friday.
Defence group Cobham, down 7.5p at 262p, fell back after an institutional investor sold a stake of 3.6%, or 39.1m shares. The shares were offered to institutions at around 273.5p a share.
Moneysupermarket.com added 8p to 203p. Earlier in the week founder Simon Nixon - who moved to a non-executive role in April - sold an 18.5% stake in the business, raising £200m in cash.
Fund management groups came under pressure, with Aberdeen Asset Management down 7.1p at 415.7p amid concerns about the effects of the market slump - particularly in Japan.
Earlier in the week Aberdeen fell back following a poor weekly performance from another fund group, Man, up 0.8p at 94.9p. On Friday analysts at Bank of America Merrill Lynch moved their recommendation on Aberdeen from neutral to underperform, and cut their price target from 475p to 410p. Merrill's Jonathan Richards said he believed Aberdeen's growth would slow in the near term:
Organic inflows could slow significantly from consensus expectations. With the stock up around 20% so far this year, the valuation premium to peers looks unwarranted.
Extreme moves in Japan and China [are] creating headwinds. With the introduction of a more activist Japanese central bank and weaker-than-expected Chinese economic figures, volatility in the Asian sphere has increased. Aberdeen's performance has been strong historically, but deteriorated recently, with an increase in third quartile-ranked funds.
Housebuilders proved a bright spot. A raft of upbeat news - including a positive start to the government's Help to Buy scheme and a rise in prices in May as reported by the Halifax - buoyed the sector last week, and on Friday Bellway added to the optimistic mood. It said its performance since the start of its second half had been encouraging, with strong demand for new homes. It said visiter numbers and reservations were above expectations. On Help to Buy it said:
Help to Buy continues to gather momentum...The board is therefore hopeful that this initial momentum since launch can be maintained as more lenders begin to offer this product.
The board is encouraged by the gradual improvement in market conditions and is hopeful that this will facilitate further organic growth through geographical expansion.
The update lifted Bellway by 19p to £13.34, and helped push Persimmon 31p higher to £12.05. Barratt Developments was 10.2p better at 316.1p while Berkeley was up 38p at £21.41.
Severn Trent soared 50p to £20.70 after the Borealis consortium raised its bid for the water company from £21.25 to £22. Pennon, tipped during the week as a possible target for a Far Eastern infrastructure fund, added 6.5p to 672.5p.
Elsewhere BT added 11.1p to 312.8p as Barclays moved from equal weight to overweight and lifted its price target from 300p to 360p.
Among the mid-caps troubled insurer and boiler repair group Homeserve was 8.4p higher at 274p on renewed speculation of possible private equity interest.
The company is still awaiting the outcome of an FSA investigation into mis-selling, and nearly a year ago it was forced to deny speculation it was in talks with possible bidders.
Finally building materials group Travis Perkins rose 26p to £15.30. Next week sees the latest quarterly reshuffle of the FTSE indices, and analysts believe Travis is in line to move up from the mid-cap index to the FTSE 100.
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