The equity markets headed northbound, making new highs for 2009 last week, as solid earnings and encouraging economic news pushed investors back into riskier assets. The large cap S&P 500 closed the week up 24 points or 2.25%. The S&P 500 Index created a new high for 2009, hitting 1,105 and the DJIA kept its pace, reaching 10,342 points. Equities moves were mainly affected by the currency market last week as large cap multinational stocks that are often affected by Forex fluctuations, led the way higher.
The markets started off on a solid note on Monday, after the G20 showed minimal concern with regards to the weakness in the US dollar. US equity markets surged, with DJIA and S&P up 2.0% and 2.2%, respectively. Financials and industrials outperformed which lead the markets higher. The main message from the weekend G-20 meeting was that governments would maintain and back strong stimulus efforts to those economies which are now moving in the right direction to deal with the current recession.
On Wednesday there was a plethora of economic data out of Asia which stimulated confidence that global growth was on the mend. The impressive retail sales figure (up 16.2% y/y vs. 15.7% expectations and 15.5% in Sept) and industrial production (which accelerated from a 13.9% y/y pace in Sept to 16.1% in Oct vs. 15.5% expectations) helped bolster hopes China will help the global economy to gain further traction. This, combined with the better than expected Japanese machine orders which grew more than twice as fast as expected in Sept, reinforced faith in the recovery. Orders were up 10.5% m/m, much more than the 4.1% expected.
The Equity markets continued to hold onto gains for the week as market participants awaited the Jobless Claims number out of the US, which was scheduled on Thursday. The U.S. Labor Department said in its weekly report that initial claims for jobless benefits fell by 12,000 to 502,000 in the week ended Nov. 7. That was the lowest level since Jan. 3. The previous week’s level was revised to 514,000 from 512,000. Although analysts were expecting a drop to 510,000, optimists were hoping for a fall below 500,000. The result disappointed and resulted in some profit taking, which caused the equity indices to drop and the dollar to rise.
On Friday, the EMU released its GDP which came out slightly worse than expected. Euro-zone gross domestic product grew 0.4% in the third quarter, after dipping 0.2% in the second. This was the first quarterly expansion since the first quarter of 2008. On an annualized basis, the contraction in GDP eased to 4.1% from 4.8% in the second quarter. Economists were expecting the first estimate of third-quarter GDP to show that the economy had expanded 0.6% on a quarterly basis and contracted 3.9% on an annual basis.
Forex:
Even though the Dollar showed relative strength last week, it failed to present any major moves, appearing to be running out of steam. The euro lost ground after failing to sustain gains above $1.5000 and dropped towards the end of the trading week. Even though traders preferred to cash in on recent gains, the currency managed to stay above the $1.4875/85 area (around the 20-day moving average and 38.2% retracement of the recent rally). The Euro zone industrial production data was somewhat disappointing, and increased by only 0.3% m/m in Sept (0.5% exp). On the upside, economic data also showed that Germany’s output jumped 3% in Sept and contributing to the slightly smaller than expected contraction in Germany’s GDP result for the third quarter. Spain’s GDP also showed a better than expected result at -4.0% y/y vs. -4.1%. From a technical point of view, the Euro is now in danger of forming a double top, struggling advance above $1.50. One must note that break below 1.48 could create a downdraft for the EUR/USD and lead to additional selling pressure.
The Australian dollar hit new highs for the year touching 93 cents against the US dollar. Australian home approvals climbed by the most in six months in September, giving the RBA justification to hike rates in coming months. Though the central bank has pointedly used the word ‘gradual’ to describe the movement of interest rates in coming months, improving data continues to underpin speculation of sharper tightening. The AUD/USD finished the week just under multi-year highs.
The pound came under pressure after the BoE’s King, commented after the release of the Quarterly Inflation report. The bank Governor talked about the benefits to the economy of a weaker pound and mentioned that it could help economic growth. He also said he has an “open mind” on bond purchases, suggesting the BoE has not necessarily reached the end of Q/E. The BoE said inflation is still expected to come in below the 2% target for most of the next 3 years before edging higher. The Dovish comments had a negative impact on the sterling sending the cable down after posting hefty gains. Even though, fundamental data is pointing to further weakness, technical levels could hold strong, especially as the Sterling is now trading around prior resistance.
The week Ahead
Next week, a wave of data is going to be released, some of which will have a major effect on the intraday sessions. On Monday the week will start off with US Retail sales and Business Inventories. On Tuesday the market will need to absorb UK CPI and US PPI, Industrial Production and Capacity Utilization. During the week Australian Wage Price Index will be released, followed by UK BOE minutes and the closely watched US CPI figure. The number will be scrutinized by investors to make sure that inflation isn’t showing signs that could hurt economic growth. On Friday the BOJ will announce their interest rate decision. The bank is expected to hold at current levels of 0.1%.
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