Riskier assets did not fare well this week with the equity market, the commodity markets selling off and the dollar rallying. All the trepidation came to a head on Friday, after JP Morgan announced that although earnings were very strong, the future might have a number of pot holes. The S&P 500 lost its earlier gains and closed the week with a loss of 1%. The negative U.S session had a direct impact on the Forex market and sent the Euro was down 0.5 of a big figure for the week, after a retracement of almost .015 on at the end of the week.
The beginning of the week started on a strong note. On Monday China announced a 17.7% year-over-year surge in exports, which was better than expected. The news is reflective of the potential strength in its major trading partners. One must note that while headlines are focusing on exports, their imports are as important. Imports surged almost 56% year-over-year showing that the emerging market is holding up despite the global downfall. Imports from Australia and Malaysia, for example, have doubled.
The PBOC (Bank of China) made a number of moves that targeted rate tightening last week. First, following up last week’s 4 basis point (BP) tweak of 3-month bill rates, the PBOC sold benchmark 1-year bills at 1.8434%, an 8 basis points increase from the rate that has prevailed since August. In addition, the PBOC has been draining liquidity from the banking system to reduce access money within the system. On Friday the bank sold CNY200 billion 28-day bills in what appears to be the largest repo operation since 2004. China also raised reserve requirements on the nation’s large lenders by 50 basis points (half a percent), the first increase since 2008. All these operations now seem to be pointing to a tightening bias.
Also in Asia, Japanese exports recorded their smallest annual decline in 14 months in November, more evidence of the recovery in global trade. That helped widen their current account surplus for the fourth straight month. Exports fell 7% from a year earlier, after a 24.6% drop in October, while imports dropped 18.2%. The surplus widened 76.9% to 1.1 trillion yen ($11.9 billion). Exports to Asia actually recorded their first annual gain since November 2008, attesting to the strength of the recovery in the region. Japan’s merchant confidence improved for the first time in three months in December. The Cabinet office’s index climbed to 35.4 from 33.9 in November.
On Wednesday US data caught the headlines due to the release of their Beige Book. According to the FED, U.S. economic conditions continued to improve slightly at the end of 2009, but weak labor and real estate markets are keeping activity low. In its latest beige book report, the Fed said 10 districts reported some increased activity or improvement in economic conditions, while two, Philadelphia and Richmond, reported mixed conditions. The beige book is a summary of economic activity prepared for use at the central bank’s next policy setting meeting Jan. 26-27.
On Thursday U.S. retail sales fell in December unexpectedly, signaling restraint by consumers during the holidays as the economy wrestles with high unemployment. Retail sales declined 0.3%, the Commerce Department reported. Economists surveyed forecast a 0.5% increase.
November sales, however, were adjusted upward, to a 1.8% increase from a previously reported 1.3% gain. October sales also rose strongly, up 1.2%. Excluding the car sector, all other retail sales in December fell 0.2%. Economists expected a 0.3% increase.
On Friday, the markets were required to absorb a wave of data. U.S. consumer prices continued to rise at a moderate pace in December 2009 from the previous month, indicating that a soft economic recovery is keeping inflation contained. The seasonally-adjusted consumer price index rose just 0.1% last month, following an unrevised monthly 0.4% increase in November. The core CPI, which strips out volatile food and energy prices, also advanced by 0.1% in December, after a flat reading in November. Industrial production rose 0.6 percent in December as unusually cold weather helped energy utilities offset a small drop in manufacturing.
The mixed picture from Friday’s report by the Federal Reserve shows that the economic recovery remains uncertain, as consumers and businesses were reluctant to spend, to spur the production of more factory goods.
From a technical point of view the S&P 500 Index was able to hold it double support trend line, despite Friday’s sell-off session.
Forex
The Australian dollar held onto relative strength last week after Australian job creation was stronger than expected in December. Job growth increased for the fourth straight month, and is fanning speculation about further RBA rate hikes. Employment rose by 35.2K from a month earlier, more than three times the median economists’ estimate of 10K with part-time jobs jumping 27.9K. Additionally, the jobless rate fell to 5.5% from 5.6% in November. The AUD/USD is now trading at major resistance, receiving support from its secondary trend line. Monday’s session could lead this pair to either direction, with a break of either trend line signaling an entry.
Other pairs were also hammered by Friday’s data, sending the Dollar higher against counterparts. The EUR/USD dropped severely during the session and completed wave B or its Elliot wave pattern. A break below trend line support could lead this pair to lower levels.
Week Ahead
Next week the markets will be watching the Japanese Industrial Production on Monday, followed by Consumer Confidence on Tuesday. Also on Tuesday will be UK Consumer Prices and UK Construction Output. Consensus estimates for CPI are for a Y/Y gain of 2.9%. In addition the EMU ZEW survey and the BOC interest rate decision will have an impact on the intraday session. On Thursday, the day leads off with Japan Leading Economic Index, which is followed by the US Leading Indicators and the Philadelphia Fed survey. On Friday, EMU PMI leads off followed by EMI Industrial Orders.
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