Weekly Market Analysis

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Weekly Market analysis

There will be relief that a deal has been reached on Greece, but there will still be unease over the underlying situation, especially with tensions over the debt buyback plans. There will also be wider doubts surrounding the Euro-zone outlook, especially with peripheral economies still trapped in recession. The banking sector will also be an important focus with continuing fears surrounding the threat of de-leveraging. Key events for the forthcoming week Date Time (GMT) Data release/event Tuesday December 4th 03.30 Reserve Bank Australia interest rate decision Wednesday December 5th 09.30 UK PMI index services Thursday December 6th 12.00 Bank of England interest rate decision Thursday December 6th 12.45 ECB interest rate decision Friday December 7th 13.30 US employment report Dollar: Expectations of solid US growth in the short-term will be offset to some extent by unease that there could be a significant slowdown within the next few months. The US economy should still be able to out-perform the Euro-zone which will provide underlying US dollar support.  Yield support will still be limited given expectations that the Fed will maintain a highly expansionary monetary policy, especially with speculation that there could be additional quantitative easing at the December FOMC meeting. Underlying global growth and risk appetite considerations should still provide a solid backdrop for the US currency.   The dollar edged weaker for the week as a whole as gains continued to attract selling interest. The US economic data was generally stronger than expected with consumer confidence rising to a fresh four-year high of 73.7 for November from a revised 73.1 previously.  Although headline durable goods orders were unchanged for October, there was an increase in underlying orders. The Fed Beige Book reported that the economy expanded at a measured pace compared with moderate last time around with weakening in New York attributed to the impact of Hurricane Sandy. There was dovish commentary from regional Fed Governor Evans which tended to undermine dollar demand. There were cautious remarks surrounding the US budget talks from Senate majority leader Reid which had some negative impact on risk appetite as he warned that there had been little progress made so far. The third-quarter US GDP increase was revised to an annual 2.7% from 2.0% which was slightly lower than expected. Jobless claims were close to expectations at 393,000 in the latest week from 416,000 previously while there was a stronger than expected gain of 5.2% for pending home sales. The latest data helped maintain expectations of US out-performance, but was overshadowed by continuing negotiations surrounding the US budget. After a period of greater optimism surrounding a deal, there were much more cautious remarks surrounding a deal with Democrat Senator Van Hollen stating that Congress was not close to a deal while there were also very cautious comments from Republican House Leader Boehner.

Euro

There will be initial relief that the Euro-group and IMF have negotiated a revised austerity package for Greece and immediate tensions have eased. There will also be relief that there has been a decline in benchmark peripheral bond yields. The underlying Greek situation remains extremely weak and the recent deal does very little to address continuing recession within Greece and peripheral economies as a whole.  The German government appears committed to maintaining Greece within the Euro area given the potential banking-sector vulnerability if there is an exit, but the lack of growth and need for expansionary monetary policy will tend to trigger underlying Euro losses.  Even with important fundamental concerns, the Euro was able to maintain a positive tone with firm buying support on dips as it challenged resistance above 1.30. The Eurogroup did eventually secure a deal on Greece early in the Asian session on Tuesday. As expected, there was agreement with the IMF to amend the debt/GDP target to 124% of GDP for 2020 from the previous 120%. There was also a raft of measures designed to provide immediate relief for the Greek debt ratio. There will be a reduction of 100 basis points on the original EUR110bn loan package and a deferment of interest payments. The German government remained firm and there will be no official debt write-downs, but with a hint that the issue could be revisited in 2016. Greece will also have to meet tougher conditions on oversight with total loan tranche payments of EUR43.7bn. Although there was relief that a Eurogroup package on Greece had been concluded, a deal had been expected which limited the scope for any further Euro support. There were still fears surrounding the underlying Greek economic outlook with particular fears surrounding growth. There will continue to be the threat of labour protests and social unrest as unemployment rises further.  Parliamentary approval in countries such as Germany and Finland will also be needed. The latest Euro-zone money supply data was stronger than expected with a 3.9% increase in the year to October, but there was a decline in lending for the sixth consecutive month which maintained fears surrounding the growth outlook. The Spanish retail sales data remained grim with a 9.7% annual decline while the Bank of Spain forecast a further GDP contraction for the fourth quarter. There was some relief surrounding the latest Euro-zone data with a smaller than expected 5,000 increase in German unemployment for November following a revised 19,000 increase the previous month. There was also a larger than expected increase in the latest Euro-zone business confidence index. There was also speculation that Spanish regions would require additional support from central government. There were also further concerns surrounding potential difficulties with the Greek debt buyback programme with some reports that the IMF would consider pulling out of the arrangement. Yen:  There will be further concerns surrounding the Japanese economy with a further deterioration in conditions.  The LDP, which is holding an opinion-poll lead ahead of the December 16th General Election is continuing to pledge a more aggressive monetary policy and higher inflation target which would inevitably weaken the yen.  There will be the threat of substantial tensions with the Bank of Japan and policy may not be implemented. The yen can still gain support when risk appetite deteriorates and there will be increased exporter dollar selling. There was interest in selling the yen on any gains with the US currency find support below 82 with the yen crosses also regaining ground later in the week.. Underlying sentiment towards the economy remained weak with a generally downbeat assessment from key officials. LDP leader Abe announced a slight shift in tone with an insistence that the Bank of Japan has independence in setting goals, backtracking on reported comments earlier in the month. There were continuing expectations that any new government following the December general election would push for a more aggressive easing of Bank of Japan monetary policy. The latest speculative positioning data recorded an increase in yen shorts which will lessen the potential for further aggressive yen selling. The latest industrial production data was stronger than expected with a 1.8% monthly increase, but the PMI index remained weak at 46.5 from 46.9 previously. Core consumer prices were unchanged over the year which will maintain pressure for more aggressive Bank of Japan policies to beat deflation.

Sterling

There will be further doubts surrounding the UK economic outlook with speculation that the economy will contract again in the fourth quarter. The Bank of England certainly remains very cautious over further quantitative easing, especially with bond-purchases coupons allocated to the Treasury, but will consider further action if the economy deteriorates again. There will be further concerns surrounding the fiscal outlook and fears that any further deterioration will prompt a credit-rating downgrade. The appointment of Carney as next Bank of England Governor should provide some degree of Sterling support. Sterling proved resilient against the dollar as dips to below 1.6000 attracted support. There was surprise surrounding the Treasury announcement that Bank of Canada Governor Carney had been appointed to be the next Bank of England Governor from July 2013.  Given Carney’s strong reputation, the announcement provided Sterling support. There will, however, be the risk of friction with existing MPC members. The second estimate of third-quarter GDP growth was unchanged at 1.0%, although there was a downward revision for the year-on-year figure to -0.1%. There was a rise in third-quarter investment which will have some positive impact on sentiment. There was a stronger than expected CBI retail sales reading of 33 for November from 30 previously and retailers were generally optimistic surrounding the crucial month of December. There was also a stronger than expected consumer confidence reading with the index pushing to an 18-month high of -22. The current Bank of England Governor  was generally downbeat over the outlook with particular reservations surrounding Euro-zone prospects which had deteriorated further and King also stated that further quantitative easing was a possibility. Swiss franc: The National Bank will remain strongly committed to maintaining the 1.20 minimum Euro level in the short-term, especially with competitiveness still a very important issue. There was, however, a stronger than expected GDP reading for the third quarter and there will be reservations over maintaining the peg if capital inflows intensify again. Nevertheless, the dollar should be able to find solid support around current levels. The dollar was generally on the defensive against the franc during the week with a test of support near 0.9250 while the Euro generally drifted weaker. The third-quarter GDP report was stronger than expected at 0.6%. There was an improvement in the latest Swiss UBS consumption report which, allied with broadly stable unemployment numbers, will maintain optimism that domestic demand can support the economy as a whole. There will still be pressure for competitiveness to be sustained given vulnerability in the export sector. Bank Chairman Jordan reiterated that the Euro minimum level would be needed for the foreseeable future which had some impact in curbing franc demand.

Australian dollar

The Australian dollar tested resistance levels towards 1.05 against the US currency with some support from a improvement in risk appetite, but was unable to break higher and drifted slightly weaker with a sharp dip when gold prices fell. There was speculation that the Reserve Bank of Australia could cut interest rates at the December meeting which currency demand to some extent. The Australian currency will recover ground if the Reserve Bank does not cut interest rates next week, but it be very difficult to sustain gains given the fundamentals. Canadian dollar: The Canadian dollar was able to resist a further test of support beyond parity against the US currency and pushed towards the 0.99 level where US support was robust. The Canadian currency retreated briefly following the announcement that Bank of Canada Governor had been appointed as the next Bank of England Governor. Oil prices also had a generally soft tone during the week. Even with near-term resilience, the Canadian dollar is likely to weaken gradually, especially with growing unease surrounding the global growth outlook.