Consolidation across the Board
‘Directionless’ was the best way to describe how the equity markets acted last week, as the major indices bounced back and forth in a volatility week of trading. Most equity traders were whipsawed by the week’s movements, as the markets pushed higher and then dropped towards the end of the week. The benchmark S&P 500 index finished the week down 0 .75% or 8.8 points, while the leading Nasdaq closed with a loss of 0.82%. From a technical point of view the major equity indices have now seemed to have run into strong resistance, a level that is creating extremely choppy trading.
US, European and Asian stocks climbed on Monday after the Bank of Japan said the economy has strengthened in all nine regions. The central bank’s regional report came out after policymakers upgraded their view of the economy for the second month. Despite the good news, the market was on the defensive side on Tuesday and Wednesday as weak economic news outweighed strong earning numbers. US Housing starts increased 0.5% in September to a 590,000 seasonally adjusted annual rate, the latest piece of data to show that the housing market is slowly stabilizing due to low prices and government tax credits. Furthermore, the Labor Department reported that wholesale prices for finished goods fell 0.6% in September, while the “core” measure that excludes volatile food and energy prices fell 0.1%, a sign that despite the current recovery, producers still have little leeway to raise prices. One must note that the Housing number where worse than expectation, and the PPI number created a fear of deflation, during the trading week.
The markets rebounded on Thursday after strong earning numbers from Caterpillar, helped to drive the indices higher. Furthermore, the Beige book, released on Thursday, helped to boost sentiment, as the report showed a recovering situation. Even though, U.S. consumer spending was weak in most parts of the U.S. during late summer and early fall, leaving unexciting prospects for economic growth into the rest of 2009, a report showed on Wednesday that its 12 districts indicated either stabilization or modest improvements from depressed levels in many sectors of the economy. Furthermore, reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered.
The markets retreated on Friday, even after strong US existing home sales. Home re-sales increased by 9.4% to a 5.57 million annual rate from 5.09 million in August. Consensus estimates by economist expected a 5.5% gain in sales during September, to a rate of 5.38 million. The level of 5.57 million is now the highest since 5.73 million reported in July 2007.
Data released across the globe also had an effect on the week, showing a slow recovery. A blow to the UK market came in the form of extremely weak GDP. The U.K. economy saw a record sixth straight quarter drop between July and September, confounding economists’ expectations that a deep recession was coming to an end. In its preliminary estimate Friday, the Office for National Statistics said that output fell 0.4% in the third quarter from the previous one and was 5.2% lower from the year-earlier period. Economists were expecting the U.K. to grow by 0.1% in the third quarter, a number which would have been the first three months of growth since the start of 2008.
Currency Pairs Get Stuck For the Week
The currency market, similar to the major equity averages hit a wall of resistance last week, as a mixed week on Wall Street had its affect on tradable assets. Even with strong fundamental news the EUR/USD could not break through the $1.50 zone. As shown on the chart below, the EUR/USD is now trading around strong resistance.
The euro-zone economy grew at the fastest rate since the end of 2007 in October, according to a survey of purchasing managers at manufacturers and service providers Friday. Markit Economics said the composite Purchasing Managers Index — a measure of private-sector activity — rose to 53 in October from 51.1 in September. One must note that a reading above 50 indicates an expansion. Last week’s number was the third straight month in which the PMI indicated that private-sector activity grew, and it was the highest measure since December 2007.
Moving on to the GBP/USD, this pair had a nice run during the middle of the week, as the Dollar lost further ground. UK house prices continued to show signs of revitalization with Rightmove reporting further gains in October. Across the UK, prices rose 2.8% from a month earlier, the seventh gain in the past nine months. Friday’s session presented the most movement, after the U.K’s GDP number showed a decline of .4% for the quarter. The sterling was hammered and erased all of its prior gains.
The minutes from Australia’s Reserve Bank policy meeting on October 6th emphasized the prospect of further rate hikes in coming months. The minutes described the previous policy with rates at 3% as ‘very expansionary’ and, crucially, ‘possibly imprudent,’ strongly reinforcing the sense that the central bank is firmly on a hiking agenda. The minutes pointed out that even though inflation was due to fall in the coming year, the ‘trough’ was significantly higher than the bank had expected. Policymakers welcomed the strength in the currency for its possible contribution to keeping a lid on inflation. This news continued to effect the bull trend in the AUD/USD.
The Week Ahead
Next week market participants will be watching numerous economic indicators. On Monday, Australian PPI is scheduled to be released, followed by US Consumer Confidence and Japan’s Retail Trade on Tuesday. Wednesday the US has on its list Durable Goods and New Home Sales. Market participants will be watching to see if the New Home Sales number match Existing Home Sales improvement, released on Friday. On Thursday the US will release GDO which is followed by EMU IFO and UK Housing Prices on Friday.
In addition to all the standard news, investors will deal with 2 rate decisions, from the New Zealand bank and from Japan. Both banks aren’t expected to make an surprise announcements.
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