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Stocks up on US payrolls

Last updated 2/3/2012 11:57 AM ET (GMT -5) 0 Comments - Add your comment

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David Morrison

Derivatives Market Strategist, U.K.

Friday 3rd February 2012

Headlines

Chart To Watch - FTSE (.UK100)

We have seen a strong rally in equities today thanks to robust economic data from both sides of the pond. US non-farm payrolls trounced even the most optimistic forecasts, coming in at +243,000 vs. + 150,000. In addition we had strong Services PMIs from both the UK and US, which added further to bullish sentiment. The data releases have caused the FTSE to break above the 5785/5800 resistance area, clearing the way for a potential rally to 6070. That level ties in with the July 2011 peak and the 127.2% Fibonacci extension of the August-October rally.  It is currently trading just shy of 5900, a level which was last seen back in August. On the downside, the 5785/5800 area should offer support now.

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GFT Inflation Indices

Most Actively Traded Instruments

Index	Commodity	Equity
UK 100 (.UK100)	WTI Crude Oil (.WTI)	Vodafone (VOD.L)
US Wall Street (.US30)	Spot Silver (.SILVER)	Xstrata (XTA.L)
France 40 (.F40)	Spot Gold (.GOLD)	Barclays (BARC.L)

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5896.0	+ 100.0	+ 1.73
Germany 30 Cash	.DE30	6761.0	+ 106.0	+ 1.59
France 40 Cash	.F40	3424.0	+ 48.0	+ 1.41

UK Market News

Asian Pacific markets closed mixed on Friday following a lacklustre session on Wall Street overnight. Investor sentiment was cautious ahead of US nonfarm payrolls and as Greek PSI debt talks went unresolved for another week. Hong Kong’s Hang Seng eked out a gain of 0.1%, while Japan’s Nikkei fell 0.5% and the Australian S&P slipped 0.4%. The Shanghai Composite outperformed peers as it gained 0.8%.

European stock indices were little changed at the open. Traders were unwilling to establish any bold positions in equities ahead of the US non-farm payroll release and on confusion about China’s willingness to help out the euro area. Premier Wen Jiabao said that while China is willing to fight the debt crisis, it has neither the ability nor the intention to "buy Europe." Nevertheless stock indices soon shot higher after the UK Services Purchasing Managers’ Index came out much stronger than expected.

The UK Service PMI jumped to 56.0 in January from 54.0 in December, trumping forecasts of 53.5. This is the index's highest reading since March 2011, boosted by “marked and accelerated” rise in rates of activity and new business, according to Markit. Employment in the sector rose at its sharpest pace in nearly four years thanks to a record jump in confidence. In addition, overall input costs eased a little which helped with margins and improved profitability in the sector. It follows a similar improvement in manufacturing PMI we saw on Wednesday, so the recovery prospects at the start of 2012 look a lot brighter than in the fourth quarter of last year when the economy contracted 0.2%. Meanwhile the Final Services PMI in the eurozone was 50.4 in January, down a tick from initial estimates of 50.5, but still better than December’s 48.8. Retail Sales in the zone fell 0.4% in December following a similar decline the month before.

In the afternoon we saw the release of US nonfarm payroll and Services PMI, which were both better than expected. As a result, stock indices rallied strongly. The FTSE 100 rose 1.5%, supported by firmer banks and miners. Admiral Group (ADML.L) was the standout winner, up 8%, after the firm announced an extension of its existing UK car reinsurance partnerships with several foreign reinsurers until 2014. Today’s rally comes after the stock plunged more than a quarter in November when Admiral warned about its profits. BT (BT.L) was another strong performer after the telecoms giant reported solid quarterly earnings and raised its forecasts.

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US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,848	+ 139.0	+ 1.10
US 500 Cash	.US500	1,343.0	+ 17.0	+ 1.29
US Tech 100 Cash	.USTECH	2,527.0	+ 32.0	+ 1.28

US stock indices ended mixed yesterday. The S&P (+0.1%) and Nasdaq (+0.4%) posted slight gains while the Dow (-0.1%) edged lower. There were a handful of mixed earnings reports and a decline in jobless claims, but traders were waiting for today’s non-farm payroll release. Overall, US equities continue to attract buyers although volumes are low. Volatility, as measured by the VIX index continues to fall, suggesting that investors are increasingly sanguine about the outlook for stocks. This could be called complacency, given that Europe still faces a solvency crisis, although bullish investors would describe it as "climbing the wall of worry."

Today, trading was very quiet first thing, although news of a jump in UK services PMI and disappointing Canadian employment data, led to some trading activity. But the nonfarm payrolls report blew away even the most optimistic forecasts. It came in at +243,000 and the previous month’s number was revised up slightly to +203,000 from +200,000. In addition, the unemployment rate fell to 8.3% from 8.5% previously. Job growth was well above the consensus expectation of 150,000 jobs and the unemployment rate was also better than the 8.5% reading expected. 

There had been some concern that the data would disappoint given last week's poor fourth quarter GDP reading, and Wednesday's disappointing ADP private payroll number. As a result, index futures shot higher following the report. Later in the afternoon we saw the release of ISM Non-Manufacturing PMI, which also surprised to the upside. It printed 56.8, up from 52.6 in December and above forecasts of 53.1. Today’s only disappointment was Factory Orders, a leading indicator of production. Following a rise of 1.8% in October, it rose 1.1% in December, below expectations of  a 1.5% increase.

Technical Outlook - GBP/USD

Here is a daily chart of the GBP/USD. Today we saw the release of UK services PMI, which was much stronger than expected, as well as robust US nonfarm payrolls and ISM Non-Manufacturing PMI. Under normal circumstances, the data releases would have been supportive for this high-beta FX pair. But surprisingly, USD firmed up, which resulted in a sell-off in GBP. However cable may yet close in positive territory after it ran into strong support at 1.5750, which was previously resistance. Going into next week, if GBP/USD can consolidate after its recent gains it has the potential to break higher. The key area of resistance beyond that level is 1.60, which is not only a psychologically-important number, but also ties in with the 50% retracement of the April 2011-January 2012 down swing. But keep an eye on the 200-day moving average, which lies around 1.5950. and if cable moves back below 1.5750 then we may see a sharp sell-off as speculators start liquidating their long positions.

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1741.0	- 18.0	- 1.02
Spot Silver	.SILVER	3380.0	- 52.0	- 1.51

Precious metals were little-changed in early trade today and markets were quiet ahead of the US non-farm payroll report. But trading volumes soared on a much better-than-expected jobs report which saw payrolls rise 243,000 on an expectation of a 150,000 gain. Equities flew higher on the news as investors reacted to the strongest sign yet that the US economy has turned a corner. However, gold and silver fell sharply on the news. As we have become accustomed to a positive correlation between risk assets, these moves were confusing. However, a possible explanation is that investors in precious metals now doubt that the US Federal Reserve will be able to justify further stimulus following such strong data. This makes sense when considering how much gold and silver rallied after the dovish FOMC statement last week. Meanwhile, equity investors are now convinced that the US economy is recovering strongly, and can continue to do so without further Fed intervention.$1,750 and $34 remain key levels for gold and silver respectively.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	11320	+ 116	+ 1.04
WTI Crude Oil Spot	.WTI	96.86	+ 0.52	+ 0.54

In common with other commodity and equity markets, trading in crude oil was subdued this morning, ahead of the US non-farm payroll release. Both WTI and Brent contracts gapped higher as payrolls rose by 243,000, well above the 150,000 expected. Although this news reduces the likelihood that the US Federal Reserve will engage in an additional round of quantitative easing, investors now believe that the US economy is recovering anyway. This suggests that demand for oil should pick up and support prices. However, WTI lagged Brent once again with the Brent premium widening to $16.50. Brent has now broken above its downward sloping trend-line, while WTI is testing support at $96.60 - the 23.6% Fibonacci retracement of the October 2011 rally. US inventories are rising, particularly those of gasoline as consumers cut back on car use. Meanwhile, the stand-off between Iran and the West is keeping the price of Brent well bid.

Looking forward - Monday 6th February

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About The Author

David Morrison has worked in financial markets for over 25 years. He has been instrumental in setting up two spread betting companies. He has managed trading desks and has implemented and run successful risk-management strategies. He has appeared on Bloomberg TV and has written numerous articles covering economics and trading strategies using fundamental and technical analysis. He joined GFT in February 2009 to deliver commentary and research for derivatives products, and trades on his own account.