Weekly Report for 9th-15th November
Investor’s were cautiously optimistic last week as market participants pushed stocks and various currency pairs higher on the beliefs that global growth has returned to the forefront. The broader market, S&P 500 Index, gained 3.2% or 33 points for the week closing at 1069. The Dow Industrial Average regained ground above 10,000 forming a technical pattern that could spark higher levels. The strong correlation between the dollar and the equity markets continued, and although gold pushed to new all time highs, the majority of the commodity complex lost ground during the week.
The markets started the week on a positive note as news in Asia, US and Europe showed that the manufacturing sector was improving. The readings in all the regions were better than expected and all signaled manufacturing expansion.
On Tuesday the markets continued to remain subdued even after the Reserve Bank of Australia raised its benchmark interest rate a quarter of a point signaling continued strong growth prospects in Australia. Central bank Governor Stevens said that “rates could continue to climb gradually”, words that signaled to the market that inflation was well contained.
On Thursday the markets received additional positive news from Europe which contributed the powerful rally in the equity markets. The European Commission released new forecasts that generally better than its previous releases. The EC now expects the euro zone economy to expand by 0.7% next year. This was a vast improvement, especially as officials previously thought that the region’s economy would contract by 0.1%. One must note that the IMF is less sanguine and forecasts a 0.3% expansion next year, half of what the EC envisions. The EC places this year’s contraction at -4%, while the IMF see it a tad deeper at -4.2%. The EC sees unemployment rising to 10.7% in 2010 and the IMF 10.9% in 2011.
The markets also took solace in the central bank announcements from the ECB, BOE and FED. The underlying theme is that none of the major central banks are in any hurry to remove stimulus from the markets. On Friday, the markets had to absorb a less than gratifying US employment number. The headline number that made the papers was the rise of unemployment to a whopping 10.2% from the 9.8% in September. Economist where expecting a 9.9% figure. Nonfarm payrolls fell by 190,000 last month, with the largest job losses in construction, manufacturing, and retail trade. Economists were expecting a 175,000 decrease. Since the start of the 2007 recession, the number of unemployed has increased by 8.2 million and the unemployment rate has grown by 5.3 percent. Although the equity markets remain subdued, the commodity market, excluding precious metals were hit hard. Crude Oil lost $2.25 to settle at 77.37 per barrel. Gold hit another new all time high settling at 1096 per barrel after India purchased a large quantity of gold from the IMF. With China lurking as an additional bid in the market, gold pushed to new highs on Friday.
The dollar dropped lower this week as currency traders looked at short dollar positions as a way of taking additional risk. Positive fundamental data early in the week pushed the dollar lower against the Euro, Sterling, Yen and Australian dollar.
Forex
The AUD/USD rallied after the RBA tripled its growth forecast in the Quarterly Monetary Policy Statement and made it clear that interest rates could see higher levels in the future. Even though certain investors jumped on the AUD, speculating that rate hikes could come sooner than expected, Governor Stevens sent a direct message to the market on Thursday, warning of a gradual approach. The Australian dollar is currently trading at its highest level in over a week supported by risk-on trading and the encouraging prospects for the Australian economy. The RBA’s 2009 estimate is now 1.75% growth, up from 0.5% at its last forecast in August. For 2010 the central bank sees the economy expanding by 3.25%, up from 2.25% previously. Governor Stevens cited exports and the resources sector as key supports for growth, with China clearly a major influence on the economy. The bank also sees core inflation slowing to 2.25% in 2010 from 3.25% this year, bringing it right into the RBA’s 2%-3% target band. From a technical point of view a break above A$0.9200 on a stronger than expected jobs number this week could see a move back toward the year’s highs around A$0.9330. After testing trend line support early in the week, the AUD/USD pushed to higher levels near .9175.
The pound spiked to $1.66 following the BoE’s announcement that it would raise its asset purchase program by GBP25 billion to GBP200 bln. While the door was left open to further stimulus, the amount was on the lower end of expectations and the comments on the economy were more upbeat with a pickup in activity likely to be evident soon. Even though the U.K is still lacking strong fundamental, the GBP/USD’s current technical pattern, presenting a potential inverse head and shoulders could spark additional buying to the upside.
Week Ahead
This week the market will be watching the EMU Sentix Confidence Index on Monday which will be followed by business condition in Australia on Tuesday. The EMU Zew confidence survey will also released on Tuesday. On Thursday all eyes will be on the Australian Employment Report which will be followed by the EMU Industrial production and US Jobless Claims. Friday’s data will also have a major impact on the markets a Japan is scheduled to release its Industrial Production, while the Euro-zone will release it GDP figure. Analysts are expecting a 0.8% quarterly figure, while the yearly figure is also expected to come out better than expected at -4.8%.
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