We’ve seen a bear market rally in the US this week on the back of 3 consecutive days of falls in the oil price. Oil has now fallen 11% over the last 3 sessions to be trading below US$130 barrel. That’s been good news for consumer related stocks and airlines which have been sold off heavily this year due to worries about a fall in consumer spending due to high gasoline prices and increasing costs.
Earnings season has taken some attention off oil prices. This week we’ve seen 2nd quarter earnings from JP Morgan, Merrill Lynch, Microsoft and Google to name a few. JP Morgan beat expectations while the rest fell short of market expectations.
Much attention has also been given to Fannie May and Freddie Mac and the government’s 3 step plan to help them out.
In terms of economic data, consumer inflation in June rose by 1.1% which takes the yearly figure to 5%. It was much higher than the 4.5% that the market was expecting.
Housing starts, building permits and jobless claims were all better than expected. The housing numbers however are distorted by a new change in the New York building code which has meant a sharp rise in multi-family starts in the North East.
China’s economy grew slower than expected in the 2nd quarter of 2008. Gross domestic Product fell from 10.6% in the 1st quarter, down to 10.1% in the 2nd quarter. It looks like rising energy costs and rising wages is taking its toll on the economy.
The Bank of Japan kept interest rates unchanged this week. With consumer confidence down as well as growth and rising inflation, the Bank of Japan really doesn’t have room to move on interest rates.
In Australia, the Reserve Bank governor, Glenn Stevens made clear that the current level of interest rates should drive inflation down lower which reinforced the view that interest rates in Australia are on hold for the time being.
We saw German investor confidence reach a record low. The UK jobs report showed that jobless claims rose by 15 500 which is the largest increase in 16 years.
The European Central Bank President, Trichet said that that the central bank is determined to bring inflation down from 4% back down to 2%, maintaining his bias towards raising interest rates.
While markets rallied this week, the big question was whether it was the start of optimism or just a bear market rally? It seems as though the answer is the later with most long traders using this opportunity to exit out of positions and fundamentals certainly not supporting a turn in the markets for the better. Further supporting this is a report issued by the International Monetary Fund on Thursday. It predicts that global growth will slow from 5% to 4.1% in 2009 and then further down to 3.9% in 2009. The key here is for traders to be aware that the volatility isn’t over yet. The markets this week, mainly rallying on the back of a steep fall in oil prices.