The recent tailwinds in the market shifted to headwinds last week, as riskier assets were hammered down to lower levels. Equity markets and commodity markets lost value while the Dollar gained in value. The S&P 500 Index declined 3.9 % in one of the worst weeks for the markets in the past 12 months.
The markets started off on a positive note on Tuesday, retracing prior loses. Bank of Japan Gov. Masaaki Shirakawa reiterated Monday that the central bank will maintain its very accommodative monetary stance in order to prevent deflation from worsening economic conditions. This statement helped to push the markets higher.
The dollar rallied and equity markets reversed their course on Wednesday, after China requested banks to cut back on lending. The Lending curbs appear aimed at slowing the pace of credit growth after some banks issued a heavy supply of credit at the start of the year (perhaps in anticipation of tighter conditions later in the year.) According to recent lending data, banks issued CNY1.1 tln of loans in the first half of Jan with the four largest Chinese banks accounting for almost half (or CNY500 bln.) The new regulation is aimed at restricting credit growth to CNY7.5 bln ($1.1 tln) this year and will require certain banks to hold extra reserve requirements for the next few months.
Over in the U.S housing data weighed on investor’s sentiment. Housing starts slid by 4.0% from the previous month to a seasonally adjusted 557,000 annual rate in December, according to the Commerce Department. Economists surveyed had expected starts would dip by 0.2% to an annual rate of 573,000. Furthermore, Wednesday’s data showed building permits in December jumped 10.9% to a 653,000 annual rate. Economists had expected permits to rise by 0.2% to a rate of 590,000. In addition to housing data the US producer price index for finished goods was released on Wednesday. PPI rose a seasonally adjusted 0.2% on the month in December, according to the Labor Department, after increasing an unrevised 1.8% in November on the back of surging energy prices.
On Thursday the markets continued to face pressure as the Chinese government reported that its economy expanded 8.7% in 2009, surpassing the 8% target Beijing had set early last year. The number exceeded analyst’s expectations, which were hoping for a 5% growth figure. Growth in the fourth quarter of 2009 was up 10.7% from a year earlier, reflecting the recent recovery in global trade and a continued surge in domestic property and infrastructure. In addition, the US president Barack Obama stated on Thursday that he wants to see proprietary trading removed from commercial banking company. He said that no commercial bank could own a hedge fund or a private equity fund. This news perpetuated the selloff in the equity and commodity markets as well as riskier currencies.
Forex:
The Pound was hit hard this week, despite mixed news on the UK economy. U.K. annual consumer-price inflation increased by its greatest ever amount from the previous month in December, due to the comparison with a cut in the sales tax, a sharp fall in oil prices and pre-Christmas sales in late 2008. Inflation spiked to 2.9% in December, well above the Bank of England’s 2% target and analyst expectations of 2.5%. Jobless claims fell more than expected (-15.2K vs. -4.6K exp in December) and the November data were revised to -10.8K from -6.3K. While seasonal factors may have contributed to the improvement in the data, the claimant count rate remained unchanged at 5.0% – this news adds to the view that the UK economy picked up in Q410. The BoE’s Agents summary of business conditions also showed some signs of strength. UK December retail sales rose just 0.3% m/m compared to a consensus forecast for a 1.1% gain and after falling -0.3% in November.
From a technical point of view the GBP/USD is still trading in range. Even though the chart presented selling pressure during the second half of the week, the price could find support around prior levels.
A double bottom is formed on the US dollar vs. CAD, USD/USD after the Bank of Canada (BOC) decided to leave their benchmark interest rates unchanged. The BoC kept its pledge to leave rates unchanged until the middle of 2010. That may have disappointed some looking for the central bank to drop the pledge after core CPI rose 1.5% y/y in November. In fact, the BoC noted that Canadian dollar strength could exert downward pressure on inflation in addition to acting as a significant drag on growth. The BoC lowered its GDP forecast for 2010 to 2.9% (from 3.0%) and said it expects production to remain below full capacity and inflation to remain below its 2% target until Q3 2011, in line with the October MPR.
The week ahead
Next week the markets will be watching the Bank of Japan as it makes its interest rate decision. Analysts are expecting the bank to hold as its economy continues to mend the recent downfall. Also on Tuesday the UK will release its GDP result, followed by US Consumer Confidence. On Wednesday, Australian consumer prices leads off, followed by US New Home Sale and the Fed and RBNZ interest rate decisions. Up until the Fed’s decision we expect the markets to trade steady. Most investors will be focusing on the fed’s speech rather than the decision itself which isn’t expected to change. On Friday is the EMU Employment rate. The market is expecting a rate of 10%. This is followed by US GDP.
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