Two things you can’t avoid in 2011

If the UK consumers and retailers have had their toughest Christmas in years – someone forgot to tell the equities markets, who’ve pushed the FTSE over 6,000 for the first time since June 2008.

2010 proved to be a solid year for equities, with the index of European stocks gaining 9% over the year. The German market significantly outperformed other areas of Europe, with a 16% advance on the Dax in 2010. Of course, there were losers – with the wooden spoons going to Italy, Spain and Greece.

Psychologically, 6,000 is a big landmark for the FTSE. The index hasn’t been at this level since four months before the Lehman collapse – and, of course we traders all love round numbers.

So, the question being asked by market pundits is whether we’ll see 7,000 before 2011 is out?

The bulls are stamping their feet

7,000 would be a new record for the FTSE, which hit its highest ever level of 6930 at the end of 1999.

There’s no shortage of optimism in the markets at present.

Nick McLeod, co-manager of the BlackRock UK Income Fund, had this to say:

“We believe now is an exciting time to be investing in UK equities. The global outlook for 2011 looks attractive, with government stimulus packages particularly in the US and other developed markets set to bolster GDP growth and help drive global stimulus into the year ahead.

“The UK stock market has a significant level of international exposure with around 80 per cent of FTSE 100 turnover coming from overseas – allowing investors to gain access to a broad range of markets with the security of investing in UK businesses.

“We expect continued growth in emerging economies during 2011, from which we believe UK businesses will benefit, and we add to this a potentially improving US outlook.”

And Deutsche Bank analysts predict the FTSE finishing just under the 6,900 level, with a year-end target of 6,880.

Hold on a minute …

Of course, it’s worth noting that December is traditionally a positive month on the FTSE – and that January is traditionally a poor month. So perhaps we shouldn’t be getting too excited just yet.

The markets do look very bullish, and I’d personally regard any weakness on the FTSE as a buying opportunity – there’s little standing in our way between 6,000 and 6,400.

BUT, there’s also not a lot of support in the other direction – a break below 5520 could see us back to 5100, and then down into the 4,000s again.

So, what will be the big driving forces of the markets in 2011?

Two factors that will be rocking the markets in 2011

Number one: Commodities are probably top of the list. These are the primary products that developing countries will be demanding as they grow: the oil, the metals, the wheat, even the orange juice.

Commodities are tangled up in the economies of every country – some more than others – affecting imports, exports and currency value.

I’m hoping over the coming weeks to bring you some exclusive reports on commodities in general – and oil in particular.

Number two: The other thing that traders will be hearing a lot about over the coming year are the US non-farm payroll numbers.

Even if you’re not one of the brave traders who tries to profit from the big swings these figures bring – none of us will be unaffected by what’s going on in the US labour markets.

What the non-farm numbers mean to you

Non-farm payroll data is probably the most consistently significant economic announcement. It comes out on the first Friday of each month and reveals the previous month’s unemployment rate, job growth and payrolls. As the name implies, it doesn’t include jobs in the agricultural sectors, which are highly seasonal.

These numbers are very important to economists and traders because they provide a strong indicator for consumer spending, and – in turn – for economic growth and inflation. The total non-farm payrolls account for around 80% of the workers who produce the entire GDP of the US, so these numbers also affect the Federal Reserve when they come to set interest rates – and make decisions on fiscal stimulus.

And if you’re tempted to trade the data

The release of non-farm payroll data comes hand in hand with significant volatility in the markets. Most traders avoid this kind of unpredictability – this is best left to those with considerable experience, access to live prices, strong stomachs, and deep pockets.

Trading data is usually based on the comparison between actual figures versus expected figures.

If non-farm payrolls are rising and actual figures beat expectations, it is a good indication that the economy is growing, and so means positive news for the US dollar.

By contrast, if the actual data is lower than estimates, it’s bad news for the US dollar.

These moves tend to be fast and furious – with the action all over within five minutes. Where the dollar then heads for the rest of the day is – well – anybody’s guess, although there will usually be something of a correction, which is another way that traders can pick up profits on these moves.

Non-farm numbers: the long view

Personally, I don’t have the stomach for non-farm data (as it happens), but that doesn’t mean that these employment figures are irrelevant to me.

Let’s take a look at what’s coming at us at 1.30pm today …

Last month’s figures were +39,000 jobs, which was well below the forecast of +143,000, and goes to show just how wrong the estimates can be.

This month’s forecast is +140,000 – which looks wildly optimistic given the way things turned out last time. However, economists don’t just pull these figures out of the air (well, I’m assured that they don’t), and a number of studies and surveys show good reason to be positive about jobs growth.

Add to this the stacks of positive economic data that the US have been churning out over the holidays, and the Federal Reserve will, without doubt, be considering putting the breaks on its QE programme.

We could be about to see the value of the US Dollar take some sharp upward moves, so keep your eyes on the payrolls over the coming months …

Until next week,

Mark Rose

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