Wall Street initially traded higher after US GDP expanded at a faster pace in the fourth quarter and consumer confidence improved. However, protests in Egypt and a technical glitch on the Nasdaq 100 gave investors an excuse to book profits.
US economy grows
The pace of economic growth in the US quickened in the fourth quarter with consumer spending driving the gain. GDP rose to 3.2% on an annualised basis, up from 2.6% the prior quarter. This was slightly below consensus estimates of 3.5% growth but was enough to satisfy investors that the recovery is taking hold. Of particular note from the report was a 4.4% increase in personal consumption, up from 2.4% in the third quarter, the fastest pace since the first quarter of 2006. Exports also jumped 8.5% following a 6.8% rise in the previous quarter.
As the US consumer accounts for around 70% of GDP, any self-sustaining recovery in the US will require consumers to start spending again. According to the Wall Street Journal, final sales, measured by GDP less the change in business inventories, grew at an annual rate of 7.1%, an indication that underlying demand in the US economy is increasing.
Furthermore, the Reuters/University of Michigan Consumer Sentiment survey showed consumer confidence rising more than expected to 74.2 in January, up from 72.7 the prior month. The survey showed that consumers expect the economy to improve this year and that unemployment will fall. Only 22% of respondents expect unemployment to rise this year. Improving consumer confidence bodes well for the US recovery; however, if the economy does not show a tangible improvement on the jobs front then it is likely confidence could deteriorate during the year. The US non-farm payroll report will be released next Friday which will give an indication of the number of jobs being added to the US economy.
US equities
By 3.30pm (London time) the Dow Jones Industrial Average fell 44.88 points (-0.38%) to 11944.95, the S&P 500 lost 6.95 points (-0.54%) to 1292.59, while the Nasdaq 100 retreated 23.12 points (-1%) to 2306.95.
Equities were trending lower this afternoon with social unrest in Egypt and a temporary trading halt on the Nasdaq 100 spooking investors. This saw traditional safe haven assets like gold, the US dollar and the Japanese yen all rise sharply.
Ford plunged 7.56% to $17.37 after reporting fourth-quarter profits that missed estimates. Net income for the quarter was $190 million, or 5 cents a share, down from 25 cents as share a year earlier. Excluding certain one-off items earnings was 30 cents a share which missed expectations of 48 cents a share. The bulk of the drop was due to a $960 million charge related to convertible debt. For the year, profit more than doubled to $6.56 billion and revenue rose 4% to $120.9 billion. Europe remains in a spot patch for Ford after the region reported a $51 million loss, however business in other areas has performed well and they have raised their full-year outlook for 2011.
Meanwhile, Chevron declined 0.62% to $94.16 after missing revenue expectations. Profit for the quarter rose 72% to $5.3 billion, or $2.64 a share, beating the $2.41 a share estimate from analysts surveyed by Thomson Reuters. Revenue rose 11% to $54.03 billion but this missed the forecast of $55.97 billion. Improved refining margins and a $400 million gain from an asset sale bolstered performance in the quarter.
UK equities
The FTSE was trading 61.13 points lower (-1.04%) at 5903.95 and the FTSE 250 sank 70.37 points (-0.61%) to 11547.06.
UK equities were lower today after a survey conducted by the GfK showed a sharp drop in UK consumer confidence. The gauge fell to a reading of -29, the lowest level since March 2009, with the climate for major purchases falling the most. It wasn't a pretty week for the UK on the economic front, with GDP unexpectedly contracting, house prices falling and now consumer confidence plunging. The negativity took its toll on investors and shares retreated this afternoon.
Resources stocks led the declines after Essar Energy, Fresnillo and Rio Tinto dropped 3.31%, 2.47% and 2% respectively. Retailers were also broadly lower following the dismal consumer confidence report. The higher VAT rate could mean a bumpier ride for retailers in the months ahead. NEXT fell 1.78%, Kingfisher lost 1.35% and Marks and Spencer was down 1.22%. Luxury retailer Burberry Group bucked the trend and gained 0.74%.
Forex
The US Dollar Index gained 0.3% to 77.958 after the report from the US Bureau of Economic Analysis showed the US growing at a faster pace. Sterling fell 0.5% to $1.5855 against the US dollar after a drop in UK consumer confidence weakened demand for the currency.
The Aussie dollar was tracking the movement in US equities very closely this afternoon and gained 0.23% to $0.9945 against the US dollar. There have been a number of factors which have been weighing on the Aussie dollar in recent weeks including the costs associated with the floods in Queensland and tightening fears from China. However, the fundamentals underpinning the Australian economy remain strong, and as these worries subside, the pair may retest parity in the short-term.
Looking ahead
On Monday, German retail sales for December are announced at 7am followed by EU CPI at 11am. In the US, core personal consumption expenditures and personal income for December will be released at 1.30pm and the Chicago PMI for January at 2.45pm (all London time).
Tuesday will see the release of manufacturing data including the UK PMI and US ISM Manufacturing survey. Later in the week, the monthly non-farm payroll report is scheduled for release on Friday.
