There was a slight divergence in riskier assets last week as the US equity markets where able to rebound from their recent large selloff, while the Euro was punished for the lack of action by European countries. Commodities found ground and were able to rebound slightly, as both the petroleum complex and gold were able to attract some investor interest.
The markets started the week on the defensive side as the prior week’s selloffs continued to weigh on investors’ minds. In addition, the U.K came into focus on Monday as market participants were forced to absorb weekend news that was not favorable to the sterling. There are now two major things that are weighing on the: Politics and economics. The risks of a hung parliament have been highlighted in the latest polls, and have spooked market participants. One must note, under the US presidential system, a divided government is sometimes seen as a positive development in terms of checks and balances. This does not hold in a parliamentary system where a hung parliament spells policy paralysis and confusion.
In terms of economics, the disappointment over Q4 GDP and debt issues continued to linger on the markets throughout the week. Even though many are comparing the U.K’s situation to those of Greece and Spain, there is still one important difference between the UK and euro zone members that is often lost in the polemics. The UK is a currency issuer while Greece and Spain are not.
On Tuesday the market started to rebound as the Euro rallied together with the equity markets. Market participants pushed the markets higher as they were anticipating positive comments from European officials on Thursday. On the economic front, Germany reported a better than expected December trade surplus but while the data looks good on the surface at EUR16.7 bln, it underscores a key source of tension in the euro zone. Officials from the major countries have long discussed the need to address global imbalances. These imbalances also exist within the euro zone itself. The German commitment to its export sector has enabled the country to export roughly 40% of its GDP (roughly in line with China). However, its successful hyper-competitiveness also forces other countries such as Greece to run trade deficits. The German seasonally adjusted trade surplus narrowed just EUR0.3 bln from EUR17.0 bln in November led by a 3.0% m/m gain in exports (vs. 1.1% in November), more than offsetting a 4.5% gain in imports (after a downwardly revised -6.5% drop.)
In contrast to Germany, the UK unexpectedly recorded a wider than expected trade deficit in December despite the weakness of the pound. The December visible trade deficit widened to GBP7.23 bln vs. GBP6.7 bln expected and from GBP6.8 bln in November. Additionally, the trade deficit with non-EU countries deteriorated despite evidence of growth in China and the US. The non-EU deficit widened to GBP3.5 bln from GBP3.1 bln. Imports from non-EU countries jumped 7.6% as aircraft orders and oil rose. Still, on the export front, the ONS reported that total exports in 2009 fell by the most on record or 9.5% y/y.
On Wednesday the markets consolidated as investors awaited an impetus to move the markets forward. The US released its trade data which showed that the deficit widened in December, by more than expected. The deterioration was largely a function of oil imports. Simply put, the US imported oil products at higher prices. The non-energy deficit was largely steady at $16.7 bln from $16.5 in November.
On Thursday the market rebounded on news that EU leaders pledged they would back Greece. The S&P 500 Index rallied 10 point to 1078 and the Dow moved up 106 points to solidly reclaim the 10,000 level. Euro-zone countries pledged to support Greece through its debt crisis, but stated that they don’t need to provide financial support right now. The Euro initially rallied early in the trading day on the back of the news, but was not able to hold on to its gains throughout the trading session.
In addition, Chinese inflation data captured headlines on Thursday, but even more importantly loan data that showed new Yuan loans surged in January, supported the PBOC’s recent decision to tweak bill rates and tighten reserve requirements for some banks. New Yuan loans more than tripled to CNY1290 bln in January from CNY3798 bln in December likely reflecting a surge in borrowing ahead of perceived tightening later this year.
After Thursday’s bounce, the markets retraced on Friday. China’s Central Bank raised its reserve requirement by a further 50bp (to 16.5% for big banks). It is the second time the central bank has tightened its monetary policy this year. The move came as a surprise to many. The PBOC move was also released only a couple of days after the January trade figures confirmed a positive contribution to growth from external demand, but the surplus was actually weaker than expected, at $14.17bn (from $18.4bn) with export growth running at 21% y/y (from +17% y/y). While the economy is expected to expand by almost 10%, today’s policy decision confirms the strong commitment to moderate buoyant lending growth. This could have a negative effect on the global markets, dragging them lower.
Forex
Economic growth in the euro zone slowed in the final quarter of 2009. Combined gross domestic product in the 16 countries that use the euro rose by a weaker than expected 0.1% in the fourth quarter from the previous quarter, and was down 2.1% on a year-to-year basis, according to the European Union’s statistics agency Eurostat. In the third quarter, GDP rose by 0.4%.
The Euro was punished on this news as well as the lack of specific action from European leaders, but managed to hold on around prior support. From a technical point of view the EUR/USD is now flirting with prior support. Even though this chart is over extended a clear break to the down-side could lead to lower levels.
The Australian Dollar surged after Australian employers added the most workers in more than three years in January. The number of people employed rose 52,700 from December, more than three times the 15,000 median estimate of economist surveyed. The jobless rate fell to an 11-month low of 5.3 percent from 5.5 percent, the statistics bureau said in Sydney today. When observing the chart below, one can see that the Australian Dollar rallied after the employment figures, but is now trading on major resistance.
Daily Forex Market Analysis provided by eToro
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