The FTSE 100 Index rallied close to 1% earlier today before paring some of its gains before the release of a pivotal US non-farm payroll report.
The non-farm payroll figure, considered one of the best gauges of US job creation, is expected to show the US economy adding 536,000 jobs in May, the most in 27 years, according to Bloomberg’s median estimates. The gain reflects a surge in government hiring of temporary workers. Meanwhile, economists surveyed by MarketWatch anticipate non-farm payrolls to grow by 540,000 in May, including 415,000 Census workers.
Investors will be scrutinising these figures, taking into account prior month revisions and, equally important, changes in private sector job creation. Bloomberg’s survey of estimates indicates that private employment may increase by 180,000 in May. This compares with a 223,000 rise in April. The US unemployment rate, meanwhile, is forecast to drop to 9.8% from 9.9% in April.
I believe the equity market really needs to see a robust non-farm figure later today. Anything mediocre will not suffice, because various economic reports released over the past couple of weeks have shown a slowdown in the pace of the recovery amidst heightened eurozone woes.
Meanwhile, the eurozone government bond market continues to signal that the debt crisis is intensifying. Spanish government bond yields climbed to their highest level in more than a year this morning, while Italian government bond yields rose to their highest level since July. This was despite a bigger-than-expected rise in the year-on-year first-quarter EU GDP figure today. Q1 EU GDP rose 0.6% from year ago, beating expectations.
According to the FT, the government bond yields of Spain, Portugal, Greece, Italy and Ireland have increased by an average of 75 basis points from the announcement of the €75 billion EU rescue package to date. ‘Eurozone government bond yields are rising because there is a realisation that the Greek crisis is not going away’, said Harvinder Sian of Royal Bank of Scotland. ‘Greece will likely face a managed default, which then prompts concerns that other countries such as Spain and Portugal will have to go down the same route.’
It is no wonder that banks have been hoarding money at the European Central Bank. Overnight deposits with the ECB rose to a record high on Thursday. Banks lodged €320.4 billion in the central bank’s overnight deposit facility, up from a prior €316.4 billion. This is a sign that European banks are expecting conditions in the eurozone region to deteriorate further.
By around 11.00am (London time) the FTSE 100 Index was 26.35 points (+0.51%) higher at 5237.53, down from an earlier high of 5261.71. In addition, the broader FTSE 250 Index was 7.72 points (-0.08%) lower at 9793.46.
BP dominated the FTSE leader board this morning, climbing 3.7% to 448.1p after successfully managing to place a cap over the leaking pipe in the Gulf of Mexico in order to stem the oil flow. US Coast Guard Admiral Thad Allen said late on Thursday that the placement of the containment device was a ‘positive development’, but ‘only a temporary and partial fix.’ It would still be some time before the company can confirm that it has worked, Dow Jones Newswires reported. Separately, BP reassured investors that it can pay for the cleanup costs.
Sector peer Shell gained 1.4% to 1866p, while Tullow Oil and BG Group gained 2.7% to 1179p and 1.6% to 1097p respectively. Gains in the underlying commodity also helped oil and gas producers today; July light sweet crude oil futures climbed 0.80% to $75.21 a barrel this morning following an encouraging report from the US Energy Department yesterday, which showed US crude oil stockpiles falling by 1.9 million barrels to 363.2 million last week, substantially better than anticipated.
July natural gas futures traded at $4.681 per thousand cubic feet this morning, a touch lower following a rally yesterday when the US Energy Department unveiled a smaller-than-expected increase in the nation's stockpiles. Natural gas increased by 88 billion cubic feet last week. Analysts polled by Platts had predicted an increase between 90 and 94 billion cubic feet. Investors should keep watch on natural gas, as there has been some talk about the growth in demand for the commodity.
Miners also supported the blue-chip index today, with gains ranging between 0.1% and 2% so far. Financials were also in demand, with the likes of Barclays and Lloyds Banking Group up 0.7% and 0.6% respectively.
Shares of insurer Aviva climbed 0.2% to 339.8p this morning after Goldman Sachs upgraded the company from ‘Neutral’ to ‘Buy’. Goldman also included Aviva to its conviction list and its UK relative value list. ‘In our opinion, Aviva's share price has been disproportionately affected by European sovereign-credit concerns and the potential for a large rights issue in the sector,’ Goldman said. Investors may increasingly look to IFRS-based valuations, which should support Aviva, they said.
Sector peer Prudential was unchanged at 565.5p, paring earlier gains instigated by a broker upgrade. Citigroup today re-started its coverage of the firm with a ‘buy’ rating, after the UK insurer walked away from an agreement to buy AIG’s Asian division.
Looking ahead, the US labour market reports are due for release at 1.30pm (London time) today. It seems as though there’s some caution to kick in before the release of these figures. June Dow and S&P 500 futures were predominantly flat by 11.00am, trading between 0.15% and 0.20% higher.
