The poor non farm payroll numbers and the suing of US banks by the US government regulator took down equity indices in the US and Europe on the last trading day of last week. Equity indices in the US and Europe fell by 2% to 3% on Friday the 2nd of September 2011. The US employment data came in worse than expected with no jobs added in August against market expectations of job addition of 68,000. Unemployment rate was unchanged month on month at 9.1%. The poor job numbers raised prospects of economic growth falling off sharply in the US. US growth forecasts have been revised downwards by 50bps to 100bps by economists and the lack of job growth corroborates the expectations.
The lawsuits filed by the US Federal Housing Finance Associations against banks that packaged and sold mortgage securities under false claims will add to the volatility in the markets. Banks could potentially face USD billions in losses on the back of the lawsuits. Banks capital adequacy is coming under scrutiny due to the lawsuits.
Manufacturing data across the world came in at lows adding to worries on economic growth. Germany, China, India all saw manufacturing data for August come in at two year lows. Brazil, which was raising rates until last month, unexpectedly cut policy rates in August to ward off growth worries. Brazil is still not out of the woods on inflation, which is running at over 7%, but policy makers are focusing on the effect of lower economic growth in the developed world on Brazil.
Markets will now start speculating on what the US Federal Reserve will do in their September 20th and 21st meeting. This speculating will keep markets volatile in the coming weeks.
Domestic markets saw short covering taking up broad indices by over 6%. Nifty option implied volatility dropped while Nifty near month futures added open interest in the market rally. The euphoria may be short lived given global market volatility.
In the currency markets the USD gained over 2% against the Euro on the back of increasing worries on the Eurozone economy after a weak manufacturing data. The INR gained against the USD in sympathy with rising equity indices. The Euro will continue to trend down against the USD as debt worries in the Eurozone gain hold. The INR will gain against the USD as domestic equity indices outperform US indices.