David Morris
EQUITIES staged a decent recovery last week, despite the release of further poor economic data from the US, Europe and China. Last week’s trading was a return to the behaviour we became so used to over the past few years, and which has been less in evidence over the last couple of months. This is where bad data is greeted by growing risk appetite, as investors see it as a precursor to further central bank intervention.

Equity market bulls were galvanised by the prospect that the Fed stood ready to offer more stimulus. In fact, Ben Bernanke delayed any such decision to the next FOMC meeting, which concludes on 21 September. He also used his speech at the Jackson Hole Economic Symposium to remind politicians that they bear responsibilities for encouraging the recovery too. Unfortunately, the rancour that exists, and appears to be growing, between Republicans and Democrats makes any worthwhile agreement over fiscal measures unlikely. The choices currently available are far too unpalatable for policymakers ahead of next year’s Presidential election.

So investors will once again focus on potential triggers, which will give the Federal Reserve reason to announce an additional stimulus programme. This could come from an escalation in the European debt crisis. Over the weekend IMF head Christine Lagarde warned of a potential liquidity crisis which could overwhelm Europe’s banks. That would be impossible to contain and would infect the whole global banking system.

We should also keep an eye on Friday’s non-farm payroll numbers. There was a big positive surprise last month with a net gain of 117,000 jobs. This was well above the expectation of 89,000 and the previous month’s data was revised up sharply to 46,000 from 18,000. The current consensus forecast is for a gain of 90,000 jobs. This reflects the disappointing rise in the weekly claims numbers which have struggled to break below the 400,000 level. In his Jackson Hole speech, Ben Bernanke highlighted the fact that economic growth since the financial crisis has failed to take the unemployment rate below the 9 per cent level. As maximum employment is one half of the Federal Reserve’s dual mandate, it is certain that a poor number on Friday will boost speculation that the FOMC will announce further action at their September meeting.