Q. Dear Josh, what do last week’s US non-farm payrolls figures suggest for the country’s economic recovery?
A. Last week’s non-farm payrolls were a blow to investors who had been hoping for the data to show that the US labour market recovery was gaining strength. Payrolls for May only pointed to growth of 431,000 jobs when the market had been expecting as many as 513,000 jobs to be added.
Moreover, private employment data was equally troubling. Private employers only created 41,000 jobs, much fewer than expected and chose instead to increase staff working hours.
The stock market reaction was swift and severe on Friday lunchtime, with a broad-based sell-off causing the FTSE 100 to fall by 90 points within minutes of the announcement. The reasoning behind the sell-off is that the non-farms are a key bellwether of the strength of the US economy.
With both non-farm and private payrolls missing expectations, investors will inevitably be questioning the strength of the labour market recovery and its impact upon wider US growth at a time when the market is hoping for a sustained bounce in consumer spending.
Q. Dear Josh, why has the oil leak in the Gulf of Mexico made BP’s shares so volatile of late and what might the repercussions of the spill be?
A. The shares have been so volatile simply because there is so much uncertainty as to what the final repercussions of the oil spill in the Gulf of Mexico will be. The leak itself is a major ecological disaster and it is only now that they have installed a containment cap over the hole in the wellhead that there may be a light at the end of the tunnel. Up until the end of last week, there seemed to be no end in sight as far as stopping the leak was concerned.
Even now, the installation of the containment cap is not a long-term solution. The longer the leak goes on, the harder it becomes to make an assessment of three potential repercussions. First and foremost, the costs of the clean up, which ratings agency Fitch said could potentially exceed its worst-case scenario of $5bn. Secondly, the knock-on impact that these costs will have on dividends to shareholders.
And thirdly, the political ramifications that may lie ahead for BP in the US, particularly with President Obama’s Democratic Party facing crucial Congressional elections in just five months time.
All of these three factors are making the outlook uncertain for BP and are playing a role in the current volatility of share prices. However, BP’s share price, which had fallen as much as 37 per cent since the leak started, recovered slightly last week as traders hunted for bargains.