The Christmas rally began a little early with the markets finishing the holiday shortened week on a strong note. The S&P 500 finished the week above resistance closing with a weekly gain of 2.18%. Global equity markets made new highs for 2009 with the Nasdaq composite leading the charge finishing the week up 3.4%. The dollar index started the week off on a positive note, but retraced much of its gains on Wednesday and Thursday.
Movement started on Tuesday as the National Association of Realtors said that sales of existing homes rose 7.4% in November from October to a seasonally adjusted annual rate of 6.54 million units, which is the highest rate since February 2007. Buoyed by a tax credit for buyers and low interest rates, sales were 44% above November 2008’s figure, when fears over bank failures were near their peak. The median sales price last month was on existing homes was $172,600, up from $172,200 in October, the first monthly increase since June. Also of note was the release of final 3rd quarter GDP in the US. The government revised downward its earlier estimate of the economy’s third-quarter growth rate to a lackluster annualized rate of 2.2% from the earlier estimate of 2.8%. Inventories were drawn down faster than previously believed, could mean more robust growth in the current 4th quarter.
Despite the better than expected housing data, one must note that the sector is still showing mixed signals. On one hand, prices have firmed up mainly for middle class homes in areas with short commutes, where investors and first time buyers are scrapping for bargains on foreclosed houses. On the other hand, prices of higher end homes are likely to keep falling, because of a glut in supply and greater difficulty of getting loans for such properties.
Another closely watched measure of home prices, the S&P/Case-Shiller Home Price Index, also is improving. Its national index rose in the third quarter of 2009 from the prior quarter, its second consecutive quarterly increase. That index is down about 28% from its peak in the second quarter of 2006.
Across the Atlantic, the Office for National Statistics reported that the British economy contracted a greater than expected 0.2% in the third quarter, showing that the economy is still in dire straits. The outcome thwarted expectations of a more favorable revision to the third-quarter output number, and came as a disappointment for Prime Minister Gordon Brown’s government. To date, he is looking for a solid economic bounce to help him at the upcoming elections. The data also signaled that that the British economy has contracted for six straight quarters, even after most other industrialized economies have returned to growth. In its final estimate of third quarter gross domestic product, the ONS also said the savings ratio rose to 8.6%, its highest level since the first quarter of 1998 – a clear indication of caution among consumers, who tend to save during a recession.
On Wednesday, the minutes of the Bank of England’s Monetary Policy Committee showed a unanimous vote to leave interest rates at a record low and press on with its previously announced £200 billion ($319.52 billion) bond-buying program. The results, which were in line with economists’ expectations, suggest there is unlikely to be any change in the bank’s policy stance until February when it presents its next quarterly inflation report. While the inflation rate would probably rise in the near term, there was a substantial degree of spare capacity in the economy, it said. However, the bank said there were “exceptional uncertainties” over the outlook for inflation and activity growth. The BOE left its benchmark Bank Rate at 0.5% for a tenth consecutive month on Dec. 10 and said it was sticking to its £200 billion bond-buying target, a process known as quantitative easing. The BOE aims to anchor annual inflation at 2% over the medium term.
Back in the U.S, the Commerce Department reported Wednesday that personal income increased 0.4% while spending last month increased by 0.5%. A key gauge of prices suggested inflation wasn’t yet threatening. Also on Wednesday, New home sales plunged to their lowest in seven months during November, a bigger than expected drop and a sign the housing market recovery will be rocky. Sales of single-family homes decreased 11.3% to a seasonally adjusted annual rate of 355,000, according to the Commerce Department. The level was the lowest since 345,000 in April. The plunge wiped out much of the gain made in the new home market since the January bottom. Economists surveyed by Dow Jones Newswires estimated a 1.2% drop to a 425,000 annual rate for November. New home sales, unlike sales of existing homes, are recorded with the signing of a sales contract and not the closing.
Forex
After being pounded, the EUR/USD managed to find stability last week, despite additional news from Greece. Moody’s official noted that “We put Greece under negative outlook, which means that over the next 12 to 18 months, there is a more than 50% probability that we’ll downgrade them again.” European bonds initially sold off on the downgrade as well as the Euro. Towards the second half of the week, the EUR/USD bounced off its 200 day moving average and began to potentially create a bottom.
New Zealand showed a much weaker GDP figure, coming out at 0.2% q/q, half the expected 0.4%. This underscores the notion that the RBNZ will not be hiking aggressively this year, as the NZ recovery is clearly lagging that of Australia. From a technical point of view, the NZD/USD is still in correction mode, and is trading above is secondary trend line support.
The week ahead
Next week is a relatively light week, but one must note that historically the markets tend to move 2% on light volume. On Tuesday market participants with be watching Japanese Industrial Production. On Wednesday, the main release is U.S Consumer Confidence, and on Thursday traders will keep an eye on Chicago PMI, prior to the New Years Day Holiday on Friday.
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