Stocks Climb on Earnings, Currency Pairs Present Surprising Movements
Global equity markets soared last week, after strong earnings releases in the United States led the benchmark S&P 500 index to new highs for 2009. The S&P 500 rose 16 points or 1.5% during the week, while the Dow Industrial index broke the psychological 10,000 level. European indices such as the DAX and the FTSE made new highs for 2009, while Asian equity markets posted solid weeks after previously retracing from high level.
The markets started on a positive note on Monday, following the prior week’s rally in the equity markets. The market leveled off on Tuesday prior to a wave of global economic releases and numerous earning releases from large caps. On Wednesday the markets shifted into high gear, after strong earnings numbers from Intel and JP Morgan (Tuesday evening and Wednesday morning respectively).
The markets also welcomed strong Retail sales on Wednesday which, excluding sales of autos and food sales, increased 0.5%. It was a welcome sign of consumer activity especially after one of the deepest downturns in history. The headline number fell 1.5% in September with the end of the “cash for clunkers” program, but consumer spending rose in many categories, lifting hopes that the economic recovery is gaining momentum at the start of the holiday shopping season.
Global Economic Data Continues to Show Improvement
Also on Wednesday, Japan’s central bank held fast on interest rates, in an effort to spur lending and bolster the corporate-debt market. The ‘no change’ statement came despite recent improvement in the world’s second largest economy. BOJ Governor Masaaki Shirakawa indicated that the central bank is still leaning towards stopping the purchasing of corporate debt as scheduled at the end of the year, though no formal decision was announced on the issue after a two-day policy board meeting.
In the United Kingdom, the number of people claiming unemployment benefits hit its highest level for more than 12 years in September, but the monthly rise was smaller than expected, hinting that the labor market may have seen the worst. The number of people claiming Jobseeker’s Allowance benefit in September totaled 1.63 million, the highest level since April 1997, the Office for National Statistics said.
The euro zone saw its fourth straight monthly increase in industrial output in August, providing further confirmation that the region’s severe recession ended around the middle of 2009. Industrial output in the 16 countries that have adopted the euro currency swelled 0.9% in August from July. The production data eased worries that the euro zone might slide back into contraction later this year or next, though some economists warned that growth would likely slow once government stimulus programs run their course.
The Pound Climbs Higher, USD/CAD at major Support
It was an interesting week for the sterling, climbing dramatically higher against the U.S Dollar. The Bank of England had a positive effect on the Sterling last week as Paul Fisher released an optimistic view on the UK’s situation, sending the GBP/USD six big figures higher for the week. Fisher said that the central bank may pause in its QE (quantitative easing) program and mentioned that he has confidence that the program is working as hoped. This came after a positive surprise in the jobless numbers. Even though the fundamentals for the pound are still negative, with interest rate differentials favoring other currencies, investors preferred the undervalued currency driving it up for the week. Next week’s Bank of England’s minute may ruin the party as analysts are expecting the bank to lay low for the moment and let its recent policy leak through the system.
From a technical point of view the GBP/USD bounced off trend line support and has now headed into range. Even though a minor trend line lies ahead, one could expect consolidation on this pair around current levels.
Similar to the British pound, the Japanese yen reversed during the course of last week. The BoJ’s upgrade of the economy this week (the government assessment was more pessimistic) does not alter the view that BoJ rates will remain extremely accommodative for an extended period making the yen a primary funding currency. The USD/JPY broke above its downtrend line (around ¥89.90) drawn off the dollar’s Aug peak, after establishing a base around ¥88.00 causing the 5 and 20 day moving averages to cross to the upside. Yen losses are likely to shake out momentum traders that took advantage of the yen’s August and September rally. With the yen uptrend abating, momentum traders, who pay to be long yen against higher yielding currencies, are likely to trim positions triggering further yen losses. A break above ¥91.70 could present a long position to ¥92.90.
The Bank of Canada is scheduled to meet this week and is expected to stick to its previous statement; leaving rates unchanged thru mid-2010. Concerns about C$ strength are unlikely to lead to an intervention, especially given limited potential for intervention success. Even though the chart is trading on weekly support, further Dollar weakness together with rising oil prices could lead this pair lower in the long term, to test support level 2.
The Week Ahead
Economic data will continue to have an effect on the intraday sessions this week. In the U.S the market will be watching construction output in the EMU and US NAHB housing index, two events that could cause movement. Tuesday will also be an interesting day as the Bank of Canada will announce their interest rate decision. With Australia paving the way, recently raising rates, the markets could be in for a surprise.
Furthermore, the second half of the week should be exiting as the US beige book, UK retail sales and Canadian retail sales are all expected to be released. Friday’s session will be influenced by the big man’s comments (Ben Bernanke), mentioning the Fed’s outlook.
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