Weekly Market analysis - Immediate fears surrounding the Euro-zone as financial risks have eased

Weekly Market analysis

There has continued to be an important easing of immediate fears surrounding the Euro-zone as financial risks have eased, at least for now.  This has triggered an exodus of defensive capital flows from currencies such as Sterling and the Swiss franc. Confidence may remain stronger in the very short term, but there are still very important policy risks surrounding the Euro-zone. Key events for the forthcoming week Date Time (GMT) Data release/event Wednesday January30th 13.30 US GDP (Q4 advance) Wednesday January 30th 19.15 US Federal Reserve policy decision Friday February 1st 09.30 UK PMI index manufacturing Dollar:  The US labour-market data has remained generally encouraging and there should be solid growth in the short term, although sharp downward revisions to some regional indices will cause concern.  The Federal Reserve will maintain a very loose monetary policy in the short term with bond purchases continuing. The Fed will, however, be under pressure to moderate quantitative easing slightly or take a firmer verbal stance if growth conditions improve further. There are still important battles surrounding automatic spending cuts with congressional tensions liable to increase again.  The dollar will gain some defensive support if fears surrounding the Asian growth outlook increase again. The dollar was generally firm on a trade-weighted basis, but the US currency was weaker against the Euro which tended to over-shadow the impact to some extent. There was further discussion of the debt ceiling with House Republicans holding a vote on whether to suspend the debt ceiling issue until the end of May. Approval lessened the immediate default threat which had some impact on underpinning risk appetite. There was a downward revision to the Chicago PMI index, matching a sharp downward revision to the Philadelphia Fed index which caused some unease surrounding the US outlook. The latest US jobless claims registered another decline to 330,000 in the latest week from 335,000 the previous week. The decline to a fresh 5-year low may have been influenced to some extent by seasonal considerations, but here will still be optimism over growth trends. The Markit PMI manufacturing index also increased to 56.1 from 54.0. The BIS stated that quantitative easing would risk being increasingly ineffective and any comments from Fed officials will be watched closely. Euro Structural fears surrounding the Euro-zone will remain lower in the short term. There has been a continuing decline in peripheral bond yields with a series of strong bond auctions.  There will be some uncertainties over the impact of an early repayment of LTRO funds. The growth outlook in Germany has certainly improved, but conditions within the Euro-zone as a whole are still very difficult with peripheral recession continuing while the French economy is continuing to deteriorate. Overall confidence in the Euro could still falter quickly given the underlying growth vulnerability. The Euro pushed higher during the week with further support from gains on the crosses and it broke above the 1.34 level in early Europe on Friday. The Euro-zone data release offered important support with the German ZEW index rising sharply to 31.5 from 6.9 previously and this was the highest reading since May 2010. There was also a decline in yields for the latest Spanish bill auction and the government secured demand in excess of EUR20bn for the latest syndicated bond sale. There was, however, a further decline in Spanish house prices for the fourth quarter, maintaining fears over further losses in the banking sector. The Euro-zone data as a whole recorded an improvement in manufacturing and service-sector conditions according to the flash PMI data. There was a significant improvement in the German economy notably for services and there is likely to have been an improvement in peripheral economies, although still below the expansion threshold. In contrast, there was a further deterioration in the French readings, increasing fears surrounding the French outlook and competitiveness. There was also a rise in Spanish unemployment to 26% for the fourth quarter from 25% which will maintain unease over the Spanish outlook and potential social consequences. The Bank of Spain stated that there was a fourth-quarter GDP decline on 0.6%, confirming an annual decline of around 1.2%. There are likely to be some LTRO repayments over the next few weeks as banks look to repay funds that can now be accessed more cheaply in markets. There could be some positive impact on the Euro, although there will also be concerns that banks in peripheral economies will not be able to repay funds. Yen:  The Bank of Japan has introduced a 2% inflation target and will maintain an aggressive monetary easing. The open-ended commitment to bond purchases is not due to come into effect until 2014 and there will be further concerns whether the central bank will actually deliver on the more aggressive policies. The appointment of new Bank of Japan governor will be watched very closely over the next few weeks.  The underlying economic fundamentals remain weak with a substantial trade deficit undermining the yen directly and triggering demands for a more competitive currency as political pressures continue. The Bank of Japan confirmed another raft of measures to combat deflation. The bank will switch to an open-ended commitment to buying assets next year and will also increase the inflation target to 2% with a commitment to reaching the inflation goal at the earliest possible time. The dollar found support just above the 88 level and rallied steadily as there was solid yen selling on rallies with vulnerability on the crosses. There were further expectations that there would be aggressive capital flows out of Japan, especially into emerging markets through Toshin funds. The overall evidence, however, was still mixed with no evidence of substantial capital outflows at this stage. There was a further Japanese trade deficit for December which took the 2012 deficit to a record JPY6.9trn as exports remained under pressure.  The data tended to maintain negative underlying yen sentiment and Deputy Economy Minister Nishimura sated that the yen correction was not yet over. There were some cautious comments from German Chancellor Merkel who was uneasy over the Bank of Japan becoming so engaged in currency issues and there was some criticism of the government stance to promote a weaker currency. Japan’s core consumer inflation reading was in line with expectations at -0.2% which will reinforce pressure for more aggressive policy action to meet the 2% inflation target and the dollar held above 90. Sterling There will be further concerns surrounding the UK growth outlook which will reinforce fears surrounding the government finances.  There have been calls from the IMF for a change in policy and overall confidence in economic policies is liable to deteriorate sharply, especially after the GDP contraction for Q4. There will be expectations of much-reduced defensive Sterling support in the short term, especially with Euro-zone fears easing and this could have an important impact in undermining Sterling. Sterling was on the defensive during the week with further losses against the dollar and Euro with four-month lows near 1.5750 against the US dollar. The headline UK government borrowing data was broadly in line with expectations. There was an underlying increase of over GBP7bn for the first eight months of the year with generally weak tax receipts. The substantial structural deficit will maintain fears over the UK AAA credit rating. There was also a weak reading for the CBI industrial survey with orders at -20. Bank of England Governor King stated that the Monetary Policy Committee could consider further quantitative easing. There were comments surrounding the bank’s remit with King stating that it was time to review the situation. He was particularly concerned as to how the MPC should balance short-term inflation and growth risks.  The latest labour-market data was stronger than expected as the headline claimant count fell by 12,100 for December to an 18-month low following a revised drop of 8,900 the previous month while the unemployment rate declined to 7.7% from 7.8%. The Bank of England MPC minutes were broadly in line with expectations with a 9-0 vote for unchanged rates and an 8-1 vote not to adopt further quantitative easing.  Some members expressed doubts whether any further quantitative easing would be justified. In contrast, there were further concerns surrounding Sterling’s level. Prime Minister Cameron’s European speech did not have a major impact, although there were some underlying concerns over potential negative implications for the economy if there is a prolonged period of uncertainty. There were further underlying concerns surrounding economy as the IMF called for a shift in fiscal policies and there was also unease surrounding the fourth-quarter GDP release with expectations of a further contraction. Chancellor Osborne was generally very cautious over the outlook, but pledged no change in policies. GDP fell a provisional 0.3% for the fourth quarter. Swiss franc:  Given that the Swiss franc was a key beneficiary of defensive inflows during the Euro-zone crisis, there will be further speculation of a reversal in flows now that Euro-zone tensions have eased. There will be further debate over the merit of lifting the Euro minimum level, although the National Bank is certainly very reluctant to engage in a policy of fine tuning. The Euro was able to secure net gains against the Swiss franc despite seeing a sharp corrective decline from highs above 1.25 and the US currency was broadly resilient. National Bank member Danthine stated that there was no scope to fine-tune the Euro minimum level which continued to dampen speculation over a short-term move to a 1.25 minimum level. There was still expectations that there would be a decline in defensive inflows, especially after the Danish central bank increased interest rates. Australian dollar The Australian dollar was unable to make any impression on resistance levels towards the 1.06 area and dipped significantly weaker later in the week. There was further evidence of position adjustment and an unwinding of long Australian dollar positions Domestically, the consumer inflation data was weaker than expected with a headline 0.2%  increase and a core reading of 0.6% which fuelled expectations of further Reserve Bank interest rates. The Australian dollar is unlikely to make much headway, especially with further rate-cut expectations and the risk of fresh concerns surrounding the Chinese outlook. Canadian dollar:  The US dollar was able to find support at lower levels and rallied strongly during the week.  There was some further unwinding of long positions and the core retail sales data was weaker than expected. As expected, the Bank of Canada held interest rates on hold at 1.00%. In the statement, there was a more dovish tone with Governor Carney stating that, although there was still a case for an eventual policy tightening, the bank was not expecting to reach full capacity until the middle of 2014 which triggered a scaling back of rate expectations which undermined the Canadian dollar. With a more dovish Bank of Canada stance, the US currency broadly resilient on valuation grounds despite optimism surrounding Canadian fundamentals.

Daily FX & Market Commentary - Markets Climbed On U.S. Economic Data

Daily FX Commentary: (Morning Report)

EUR/USD 

The Euro holds near-term positive tone, as recovery from 1.3255, retraces over 76.4% of corrective 1.3400/1.3255 pullback. Despite gains being interrupted by 1.3376/1.3332 pullback, where 10 day EMA contained dips, hourly structure remains positive and keeps focus at near-term key barrier at 1.3400. However, lack of bullish momentum on 4h chart requires caution, as failure to extend to 1.3400, would risk further hesitation and return to initial 1.3332 support and more significant 1.3300 level. 

Res: 1.3376, 1.3386, 1.3401, 1.3485 
Sup: 1.3332, 1.3316, 1.3300, 1.3284 

GBP/USD 

The pair breaks again below strong 1.6000 support, also daily Ichimoku cloud base and yesterday’s fresh low at 1.5974, after recovery attempt was capped by initial resistance at 1.6030 zone. This confirms negative near-term structure, as fresh weakness next target at 1.5960, Fib 76.4% of 1.5826/1.6380 rally and increases risk of test of psychological / 200 day MA support at 1.5900. On the upside, day’s high at 1.6038, also Fib 38.2%, offers good barrier and only clear break here would delay immediate bears. 

Res: 1.5985, 1.6000, 1.6016, 1.6038 
Sup:1.5954, 1.5900, 1.5882, 1.5826 

USD/JPY 

Recovery rally from 87.78, yesterday’s low, nearly fully retraced corrective 89.66/87.78 descend, as gains extended to 89.55 so far. Near-term price action hesitates ahead of previous high, as hourly studies reach overbought zone, however, improved 4h chart situation, see the upside favored for now. Any dips should be ideally contained above 89.00 zone and 20 day EMA, to keeps bullish bias intact. 

Res: 89.55, 89.68, 90.00, 90.39 
Sup: 89.21, 89.00, 88.66, 88.40 

USD/CHF 

The pair remains congested within 0.9300/50 range, following repeated failure to sustain break above 0.9345, Fib 61.8% of 0.9511/0.9109 descend. Rather neutral tone is seen on hourly chart, while 4h structure remains bullish, however, approaching overbought zone requires caution. Clearance of 0.9355 to open next targets at 0.9381/0.9400, possibly 0.9430, 200 day MA, while slide below near-term range floor and 55 day EMA at 0.9290 zone, would be an initial signal for stronger corrective action of 0.9109/0.9353 rally and would expose 0.9260, Fibonacci 38.2% retracement level. 

Res: 0.9353, 0.9381, 0.9400, 0.9430 
Sup: 0.9317, 0.9300, 0.9284, 0.9260 

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Daily Market Commentary: (Evening Report)

London Market Report

Stocks boosted by upbeat US data

    Market Movers
    techMARK 2,201.42 +0.76%
    FTSE 100 6,132.36 +0.46%
    FTSE 250 12,847.61 +0.66%

Following a subdued morning session, stocks across Europe raced into positive territory on Thursday afternoon on the back of some decent economic data Stateside.

Better-than-expected US housing starts and jobless claims figures lifted the mood this afternoon, prompting a strong start on Wall Street, as investors shrugged off some disappointing fourth-quarter earnings from banking heavyweights Bank of America and Citigroup.

However, as market strategist Ishaq Siddiqi from ETX Capital explained: “Markets on both sides of the Atlantic leapt higher with market participants moving out of the sidelines to build positions, latching on the positives; solid Spanish auction which propelled the euro and eased peripheral bond yields;expectations of strong China data due in the early hours of tomorrow morning which is supporting commodity prices at the moment and the fact that we have had some relatively upbeat earnings from Europe, particularly out of the UK retailers.”

Europe Market Report 

European Markets Climbed On U.S. Economic Data 

The European markets finished in the green on Thursday, after the release of some better than expected economic data in the United States. The surge in U.S. housing starts and the larger than expected decrease in weekly jobless claims provided a boost to the markets in the afternoon. Investors will be watching for the Chinese fourth-quarter GDP data, which is scheduled to be released tomorrow.

The ECB said in its monthly bulletin that the Euro-area economy will begin a gradual recovery later in 2013 because of the accommodative monetary policy, together with significantly improved financial market confidence and reduced fragmentation.

The International Monetary Fund on Wednesday decided to release the next slice of bailout money to Greece after the euro member successfully carried out a bond buyback and passed further budget measures to ease the country's debt load.

After announcing the Executive Board's decision to disburse EUR 3.24 billion to Greece, IMF Managing Director Christine Lagarde said "the program is moving in the right direction" though it encountered a delay in implementation due to political crisis initially.

Lagarde said Wednesday that Greece has made progress with structural reforms, which is reflected in recent actions to reduce non-wage labor costs and reform the product market. "However, much more remains to be done to achieve the critical mass of reforms needed to boost productivity and lower prices."

Separately, the IMF granted EUR 838.8 million loan disbursement to Portugal, under a EUR 78 billion bailout package approved in 2011. IMF Deputy Managing Director and Acting Chair Nemat Shafik said that Portugal has made "considerable progress in fiscal and external adjustment."

The Euro Stoxx 50 index of eurozone bluechip stocks increased by 0.51 percent, while the Stoxx Europe 50 index, which includes some major U.K. companies, added 0.19 percent.

The DAX of Germany climbed by 0.58 percent and the CAC 40 of France rose by 0.96 percent. TheFTSE 100 of the U.K. advanced by 0.41 percent and the SMI of Switzerland gained 1.64 percent.

Euro area construction fell further in November, data released by Eurostat, the statistical office of the European Union, showed on Thursday.

Construction output declined a seasonally adjusted 4.7 percent year-on-year in November, after falling a revised 3.3 percent in October. Building construction fell 5.3 percent, while civil engineering output declined by 3.3 percent.

A leading indicator of the Spanish economy increased for the third successive month in November, indicating that the pace of contraction in the Spanish economy may ease in the near term, data from a survey by the Conference Board showed Thursday.

The leading economic index increased 0.5 percent month-on-month to 103.7 in November, marking the third monthly growth in a row. The largest contributions to the index came from the order books survey and Spanish contribution to Euro M2.

US Market Report

Stocks Mostly Higher On Upbeat Economic Data 

Stocks have moved mostly higher over the course of the trading day on Thursday after moving roughly sideways in recent sessions. The markets have benefited from a positive reaction to upbeat employment and housing reports.

The major averages are currently posting notable gains, near their highs for the session. The Dow is up 67.62 points or 0.5 percent at 13,578.85, the Nasdaq is up 16.08 points or 0.5 percent at 3,133.62 and the S&P 500 is up 6.92 points or 0.5 percent at 1,479.55.

With the gains on the day, the Dow and the Nasdaq have reached three-month highs, while the S&P 500has risen to its best intraday level in five years.

The strength on Wall Street is partly due to the release of a report from the Labor Department showing that initial jobless claims fell to a five-year low last week.

The report showed that jobless claims fell to 335,000 in the week ended January 12th from the previous week's revised figure of 372,000. Economists had been expecting jobless claims to show a much more modest decrease to 368,000.

With the much bigger than expected drop, jobless claims fell to their lowest level since the week ended January 19, 2008.

Buying interest was also generated by a separate report from the Commerce Department showing a much bigger than expected increase in housing starts in the month of December.

The Commerce Department said housing starts jumped 12.1 percent to an annual rate of 954,000 in December from the revised November estimate of 851,000. The increase lifted housing starts to their highest annual rate since June of 2008.

However, a negative reaction to quarterly results from Bank of America (BAC) and Citigroup (C) has helped to limit the upside for the markets, with the financial giants down by 3.7 percent and 2.9 percent, respectively.

Bank of America reported fourth quarter earnings that fell year-over-year but exceeded analyst estimates, while Citigroup reported much weaker than expected fourth quarter earnings.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Thursday. While Japan's Nikkei 225 Index inched up by 0.1 percent, Hong Kong's Hang SengIndex edged down by 0.1 percent.

Meanwhile, the major European markets all moved to the upside on the day. The French CAC 40 Index jumped 1 percent, while the German DAX Index and the U.K.'s FTSE 100 Index advanced by 0.6 percent and 0.5 percent, respectively.

In the bond market, treasuries have come under pressure on the heels of the upbeat economic data. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, is up by 4.7 basis points at 1.871 percent.

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