Fear continued to grip the capital markets last week, even though skepticism only had a major impact on the US markets on Thursday. The equity and commodity markets consolidated and moved higher early during the week just to see trepidation creep in during the second half. On the Forex market, the Dollar gave back some of its recent gains, but found support, which led to nice rally. The Australian dollar, the Euro and the Pound all faced losses as investors fled to the U.S Dollar.
The week started off on a positive note in Europe on Monday, as the market was greeted with better than expected European PMI manufacturing. Euro zone PMI manufacturing, climbed to 52.4 in January which was the highest since January 2008. Regional reports from Germany (53.7 vs. 53.4 expected), France (55.4 vs. 54.7 expected) and Italy (51.7 vs. 51.2 expected) were also stronger than expected. In the UK, the positive PMI manufacturing data was also constructive. The PMI came in at 56.7 in January vs. 53.9 expected.
Over in the US, manufacturing data was very impressive and lifted sentiment at the start of the week. Factory sector activity booked its best performance in more than five years in January. The Institute for Supply Management said its index of manufacturing activity moved to 58.4 in January, the best reading since August 2004, from 54.9 in December and 53.7 in November. Readings over 50 indicate expansion. Economists had expected the index to come in at 55.3. Personal income rose by 0.4% in December, while personal spending rose by 0.2%, according to the Commerce Department. The rise in incomes was more than expected while spending advanced by less than economists had anticipated.
In addition, U.S. construction spending fell in December much more than expected, reflecting commercial real estate weakness and uncertainty over a government subsidy. Spending declined 1.2%, at a seasonally adjusted annual rate of $902.55 billion compared to the prior month. It was the fifth decrease in six months. November outlays were revised way down and October was adjusted way up. Spending fell 1.2% in November; it was originally estimated down 0.6%.
On Tuesday the market had a respectable rally lead by Oil and Oil related stocks. The rally in the petroleum markets were linked to a story in the “Wall Street Journal” that cited the recent potential reduction in floating storage at sea as a potential catalyst for higher oil prices. The expected decrease of 27 million barrels by March combined with the light crude contract holding its 200 day moving average was enough for a powerful short squeeze.
On Wednesday the markets continued to hold steady after, private-sector jobs in the U.S. fell by 22,000 in January, the smallest drop since February 2008, according to a national employment report published Wednesday by payroll giant ADP Inc. The ADP loss is slightly below the 30,000 drop projected by economists. The estimated change of employment from November to December 2009 was revised by 23,000, from a decline of 84,000 to a decline of 61,000. The ADP survey tallies only private-sector jobs, which excludes government workers.
On the Forex market, the Euro had a somewhat muted response to the EC’s official announcement on the Greek stability plan despite the recovery in the Greek bond markets. The European Commission, as expected, backed the plan but introduced more measures to cut the deficit and introduced a compliance monitoring schedule. The first report is due in mid-March with the second due in mid-May.
On Thursday, all hell broke loose. Sovereign debt was the term that struck a bell for investors as European country debt worries spilled over into all asset classes. The equity indexes were hammered with the S&P 500 Index down 34 points or 3% for the day. The commodity markets were also down sharply with Crude Oil losing $4 dollars per barrel and gold losing 40 dollars per ounce. The Euro reached its lowest level since May of 2009. The cost of CDS contracts that insure the debt of a number of euro-zone nations with large budget deficits rose to new highs. The annual cost of insuring €10 million ($13.9 million) of Greek government debt against default for five years rose €26,000 to €423,000.
On Friday the markets seem to stabilize after a better than expected employment report, specifically the large change in the household employment rate. The unemployment rate, calculated using a household survey, fell to 9.7% last month from an unrevised 10% in December, according to the Labor Department. Economists surveyed had forecast the jobless rate would edge higher to 10.1%.
Meantime, nonfarm payrolls fell by 20,000 compared with a revised 150,000 decline in December. Economists had expected payrolls to be flat. The December figure was revised down sharply from an originally reported 85,000 drop.
Forex
The Canadian dollar lost partial strength during the week, up until the surprise Canadian unemployment released on Friday. There were 43,000 more Canadians working in January, according to Statistics Canada, about three times more than what economists were expecting. The unemployment rate fell to 8.3 per cent from a revised 8.4 per cent in December. The results were better than the expectations of economists, who were calling for 15,000 additional people working last month and a jobless rate of 8.5 per cent. From a technical point of view, overall market momentum had more of an effect on the USD/CAD sending it higher towards the end of the week. Even though Dollar strength could persist, the 200 day moving average should provide resistance for the USD/CAD, especially as indicators are pointing towards minor divergence.
The Australian dollar was also hammered after the RBA surprised the market by leaving its benchmark rate unchanged at 3.75% saying it needed more time to judge the effects of the previous three rate hikes. The decision defied the expectations of all economists surveyed and sent 1-month T-bills yields up some 15 basis point. Governor Stevens noted lenders had increased borrowing costs by about 1% compared with the RBA’s 75 basis point of hikes. The RBA also made reference to Chinese moves to reduce the degree of stimulus in their economy and credit conditions in the major countries. To date the AUD/USD is sitting on its 200 day moving average. A close below this level should bring further technical selling in the currency pair.
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