Weekly Market analysis - Fed minutes have injected a greater mood of uncertainty

Weekly Market analysis

Following the drama surrounding the US fiscal cliff talks, monetary and currency policies will remain a very important focus. The Federal Reserve will maintain a very loose monetary policy for now, butt he latest Fed minutes have injected a greater mood of uncertainty and the possibility of a tightening. TheBank of Japan will also be under intense pressure to boost policy further.  The ECB will also consider further action to underpin the economy which will ensure very loose monetary conditions and may serve to lessen the threat of a severe deterioration in risk appetite. Key events for the forthcoming week Date Time (GMT) Data release/event Friday January 4th 13.30 US employment report Thursday January 10th 12.00 Bank of England interest rate decision Thursday January 10th 12.45 ECB interest rate decision Dollar:  The US fiscal deal has eased immediate fears surrounding a disorderly policy tightening. Nevertheless, there will still be a significant policy tightening which will have some impact in curbing consumer spending growth.  The deal was also only a stop-gap measure and there will be further political confrontation surrounding spending cuts and the debt ceiling. There will be uncertainties surrounding the growth outlook and risk conditions. There is a very dovish Federal Reserve committee for 2013, but the latest minutes will spark some speculation that there will be some tightening later in 2013. Net longer-term yields should be dollar supportive for the US currency. After initial weakness following the US budget deal, the dollar found support near 1.33 against the Euroand rallied strongly against European currencies Following the deal to avert the immediate US fiscal crisis, there was a renewed consideration of the longer-term outlook. There were further concerns that the spending issue would have to be tackled again before the end of February and Congress will also have to tackle the debt-ceiling issue with the potential for further tense negotiations. There was some reassessment of risk considerations which also curbed dollar selling. As far as the US data releases were concerned, there was an increase in the ISM manufacturing index to 50.7 from 49.5 which provided some degree of relief. The ADP employment data was stronger than expected with a gain of 215,000 private-sector jobs for December from a revised 118,000 previously. Although there was a higher than expected release for jobless claims, there was greater optimism surrounding the US payroll report. The latest FOMC minutes stated that some members were concerned surrounding risks associated with further quantitative easing, especially as it would make it more difficult to secure an eventual exit strategy. In this context, several members wanted to scale-back bond purchases well before the end of 2013. There was still some degree of caution surrounding the labour market, but there was shift in expectations on potential tightening this year as markets had been primed for a very dovish tone.

Euro

Structural fears surrounding the Euro-zone have eased for now which will lessen the potential for aggressive selling pressure.  There will still be a high degree of unease surrounding the growth outlook and there will also be pressure for the ECB to relax monetary policy further.  The bank will still be uneasy over the prospect of negative deposit rates and there will also be opposition from the Bundesbank.  Any friction within the ECB will tend to undermine confidence in the Euro.  There is also less scope for capital repatriation which will tend to lessen scope for Euro buying and a Spanish aid request would be likely to provide only initial currency relief. The Euro was unable to sustain an initial advance following the New Year break and retreated sharply towards the 1.30 level against the dollar.   Italy’s lower house approved the 2013 budget in parliament and, as expected Prime Minister Monti submitted his resignation.  There were some suggestions that he could stand for election in forthcoming elections, but uncertainty remained high. The final Euro-zone PMI data was slightly weaker than expected with a dip to 46.1 from 46.3 as there was a dip in the German index with an improvement in the Italian index offset by a weaker Italian outcome. The data maintained some degree of unease surrounding the Euro-zone outlook which dampened Euro demand. There was some speculation that capital repatriation associated with the year-end Euro demand to bolster balance sheets had eased. An easing of flows could be significant in triggering a wider loss of Euro support. There was further speculation that the ECB could consider a cut in interest rates at the January meeting, but a higher than expected German inflation reading increased speculation that there would be Bundesbank opposition to any rate cut and there would also be unease within the Council over any move to set a negative deposit rate. Although a surprise decline in Spanish unemployment, provided some relief, there were concerns that the fall reflected longer-term unemployed leaving the labour market rather than any real improvement in conditions.  The German labour-market data was close to expectations with a 3,000 unemployment increase for December. The latest money-supply data recorded an eighth successive decline in private lending which maintained unease over the outlook, but there was a small increase in banking-sector deposits in Italy and Spain which provided some relief. Spain’s admission that it was using social security funds to buy government bonds also unsettled confidence and sparked expectations of a bailout soon. Yen:    There will be intense pressure for the Bank of Japan to engage in further aggressive policy easing with the next policy meeting due in the third week of January.  The government is also planning a further round of aggressive fiscal stimulus in an attempt to ease deflationary pressure. These factors combined will tend to have a negative impact on the yen, especially with a lack of confidence in the Japanese fundamentals. The Japanese currency will still gain some degree of support when risk appetite deteriorates and there will also be pressure for a limited correction after recent sharp losses. The yen remained extremely weak as it dipped to the lowest levels in more than two years against the dollar. Incoming Prime Minster Abe continued aggressive calls for deflation to be tackled and warned that he would look to change the central bank Act which ensures independence if the Bank of Japan fails to meet inflation targets. Expectations that there would be aggressive action to ease deflation risks through aggressive monetary and fiscal policies continued to have a negative impact on the yen.  Weak underlying yen sentiment was offset by pressures for a technical correction following sharp losses and the dollar consolidated above the 87 level with Japanese markets still closed for a holiday. The dollar found strong support on dips and pushed back above 87 with initial support from the stronger than expected US ADP report. There was further buying support following the Fed minutes with a shift in expectations. Japanese markets re-opened following the new-year break which triggered a fresh round of yen selling, particularly with a widening in yield spreads to the highest level since April. The dollar pushed to a fresh 29-month high above 87.75 against the Japanese currency.

Sterling There will be mixed expectations surrounding the UK outlook with a divergence in analyst expectations and mixed data. Overall, there is slightly reduced fear surrounding the threat of another slide into recession, especially with some evidence that consumer lending is improving. In relative terms, the UK currency will also gain some support on relative grounds with expectations of loose monetary policies in the US and Euro-zone.  The UK currency will tend to lose ground when risk appetite deteriorates and will struggle to make further significant headway against the US currency. Sterling initially spiked higher against the US currency following the New Year break before hitting strong selling pressure with a retreat to lows below 1.61 . The UK data was significantly stronger than expected with an increase in the PMI manufacturing datato 51.4 for December from a revised 49.2 the previous month which was the highest figure for 16 months. The data also provided some degree of optimism surrounding the UK economy which provided underlying Sterling backing. There was initial Sterling support from an improvement in international risk appetite as the UK equity market tested the highs from mid 2011, but there was a slightly more cautious tone later in the week which pushed Sterling lower. The latest PMI construction report was weaker than expected with a decline to a six-month low of 48.7 from 49.3 the previous month. The data dampened optimism triggered by the stronger than expected manufacturing release and the latest services-sector data will be watched very closely on Friday and will have an important impact on underlying sentiment. Swiss franc:  The National Bank will remain strongly committed to maintaining the 1.20 minimum Euro level in the short-term, especially with a strong determination to protect competitiveness and avert any serious deterioration in industrial conditions. Aggressive policy relaxation elsewhere will maintain the risk that upward pressure on the franc will intensify again as investors look for a safe-haven, especially if the Japanese yen is subjected to further selling. The Euro held relatively steady against the franc, but was unable to hold above 1.21. After finding support around seven-month lows, the US currency pushed to a fresh 3-week high above 0.9280 as the dollar secured wider support. The latest PMI report recorded an increase to 49.5 for December from 48.5 previously. In contrast, the latest KOF index retreated to 1.28 for the month from 1.50 previously which will maintain unease surrounding business confidence and pressure for franc gains to be resisted. Australian dollar The Australian dollar continued to probe resistance above 1.05 against the dollar, but it was unable to sustain the gains and retreated back to below this resistance area late in the week. The currency drew initial support from gains in risk appetite following the US fiscal deal before the mood turned more cautious again as enthusiasm faded. There was a slightly more optimistic tone surrounding the Chinese outlook which provided some support for the Australian currency. The domestic PMI indices were still generally lacklustre amid fears over a further slowdown with a significant deterioration in the services-sector index. Despite potential reserve diversification, the Australian dollar will find it difficult to sustain gains, especially as Chinese economic sentiment is liable to deteriorate again. Canadian dollar:  After finding support on dips towards parity, the Canadian dollar was able to recover ground and move back to the 0.9840 area on a general improvement in risk appetite following the US fiscal deal. The US currency was resilient at lower levels and moved higher as markets turned significantly more cautious while the Fed minutes provided net US support. Even with near-term resilience and optimism surrounding the fundamentals, the Canadian dollar will find it difficult to sustain any significant gains.  ==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Daily Market Commentary - Markets start 2013 in bullish mood

Daily Market Commentary: (Evening Report)

London Market Report

Markets start 2013 in bullish mood

    Market Movers
    techMARK 2,157.14 +0.29%
    FTSE 100 6,047.34 +0.33%
    FTSE 250 12,651.25 +0.31%

London’s blue-chip index was able to build on Wednesday’s massive surge today in the aftermath of the fiscal cliff deal Stateside on New Year’s Day.

Market analyst Michael Hewson from CMC Markets said this afternoon: “While currency markets appear somewhat dismissive of the agreement on the fiscal cliff, equity markets have still managed to hold on to a good chunk of yesterday’s gains, helped by better than expected German and Spanish unemployment data and some extremely robust US ADP payrolls numbers for December.”

Stock markets across the globe rallied strongly on Wednesday after US politicians decided to allow some tax increases on America's wealthiest workers and delay specifics on spending cuts by two months. The FTSE 100 jumped 130 points, or 2.2%, yesterday.

However, despite the strong end to today’s session, the Footsie started out with slight losses early on as investors digested the agreement and what it means for the US economy in the coming months.

Market strategist Ishaq Siddiqi from ETX Capital said today that the agreement “only addressed certain facets of the fiscal cliff”. He said: “Lawmakers will need to kick-off another round of negotiations to compromise on a matter that both Republicans and Democrats are at total opposite ends; longer term spending cuts.”

In other news, the yield on a 10-year UK bond surpassed 2% for the first time since May 2012. The borrowing rate has jumped from 1.83% to 2.07% over the past three days since the fiscal cliff deal, as the demand for safety diminished.

Economic news comes in mixed

Providing some support to stocks early on was the China non-manufacturing purchasing managers' index (PMI) which rose from 55.6 to 56.1 in December, "providing yet more evidence that the turnaround of the Chinese economy is gaining pace with stronger economic growth likely in the months ahead," according to Markus Huber, the head of German HNW trading at ETX Capital.

However, sentiment was dampened slightly after Markit's construction PMI for the UK dropped from 49.3 to 48.7 in December, missing forecasts for a slight rise to 49.5. Nationwide also reported that UK average house prices fell by 0.1% month-on-month in December; forecasts were for no change.

German unemployment increased by 3,000 in December, well below the 10,000 gain expected. Meanwhile, Spain registered its first drop in unemployment in four months in December, down 59,094, much to the surprise of economists who had forecast a 62,000 increase.

Europe Market Report 

European Markets Finished Mixed Following Yesterday's Strong Rally

The European markets ended Thursday's trading session with mixed results. The markets rallied strongly yesterday, due to the 11th hour agreement between Democrats and Republicans to avoid the fiscal cliff in the United States. With the fiscal cliff resolved, investors have now shifted their focus to the U.S. debt ceiling issue.

Banks and miners were among the biggest gainers on Wednesday, but turned in a much weaker performance Thursday. The markets pared their losses, or climbed into the green, following the release of the better than expected ADP private employment data from the United States. Investors will be watching for the release of the U.S. jobs report for December on Friday.

The U.S. reached its statutory borrowing limit on December 31, 2012 and the treasury has begun employing extraordinary measures, giving two months time to the law makers to raise debt ceiling. The debt ceiling would do more damage to the world's largest economy than the fiscal cliff. After passing the deal to avert the fiscal cliff, Republicans said they would press their demand to secure new spending cuts.

Moody's Investors Service said it expects further fiscal measures in months ahead to lower future budget deficits, which are necessary if the negative outlook on the government's bond rating is to be returned to stable.

The Euro Stoxx 50 index of eurozone bluechip stocks lost 0.34 percent, while the Stoxx Europe 50 index, which includes some major U.K. companies, added 0.67 percent.

The FTSE 100 of the U.K. climbed by 0.27 percent and the SMI of Switzerland surged by 2.90 percent. The DAX of Germany fell by 0.29 percent and the CAC 40 of France decreased by 0.34 percent.

Germany's unemployment rate remained unchanged in November, data released by the Federal Statistical Office showed Thursday. The adjusted unemployment rate, which is based on the calculation concept of the International Labor Organization (ILO), remained unchanged month-on-month at 5.4 percent in November. In November 2011, the jobless rate was 5.6 percent.

Germany's unemployment increased in December, but the increase was less-than-expected, as the economy likely entered a contraction in the fourth quarter of 2012. The number of unemployed rose only 3,000 in December, following an increase of 5,000 a month ago, the Federal Labor Agency said Thursday. Economists had forecast an increase of 11,000 for December.

Spain's unemployment decreased for the first time in five months in December as service providers increased their head-counts during the holiday season, giving rise to hopes that the country might emerge from recession in late 2013, latest data showed Thursday.

The number of unemployed persons decreased 1.2 percent from the previous month to around 4.85 million in December, the Labor Ministry said.

U.K. construction sector contracted at the fastest pace in six months in December, driven mainly by a steep reduction in housing activity, data from a survey by Markit Economics and the Chartered Institute of Purchasing & Supply (CIPS) showed Thursday.

The seasonally adjusted purchasing managers' index (PMI) for the construction sector dropped to 48.7 in December from 49.3 in November, hitting the lowest level since June. Economists had forecast the index to rise to 49.5.

U.K. house prices declined in December as demand and supply conditions in the housing market remained weak, a survey by the Nationwide Building Society showed Thursday. House prices declined 0.1 percent month-on-month in December, after recording no change in the previous month. Economists had expected prices to remain flat in December.

US Market Report

Stocks Roughly Flat After Moving Lower At The Open

After moving modesty lower at the open, stocks have moved back to the upside over the course of the trading day on Thursday. Buying interest has remained subdued, however, leading to a lackluster performance on Wall Street.

The major averages are currently turning in a mixed performance, with the Dow just below the unchanged line. While the Dow is down 5.09 points or less than a tenth of a percent, the Nasdaq is up 2.94 points or 0.1 percent at 3,115.20 and the S&P 500 is up 1.21 points or 0.1 percent at 1,463.63.

The choppy trading on Wall Street comes on the heels of the substantial rally that was seen in the previous session, which came amid news of a last-minute fiscal cliff agreement in Washington.

With the strong gains on Wednesday, the Dow and the Nasdaq reached their best closing levels in well over two months, while the S&P 500 reached a three-month closing high.

Profit taking contributed to the initial weakness, although traders seem reluctant to make any significant moves ahead of the release of the Labor Department's monthly jobs report on Friday.

An upbeat report on private sector employment may have helped to lift stocks off their lows, with payroll processor ADP reporting stronger than expected private sector job growth.

ADP said private sector employment increased by 215,000 jobs in December following an upwardly revised increase of 148,000 jobs in November. Economists had expected employment to rise by about 150,000 jobs.

On the other hand, the Labor Department release a separate report showing that initial jobless claims climbed to 372,000 in the week ended December 29th, an increase of 10,000 from the previous week's revised figure of 362,000.

Jobless claims had been expected to climb to 363,000 from the 350,000 originally reported for the previous week.

Other Markets In overseas trading, stock markets across the Asia-Pacific region moved mostly higher on Thursday, adding to yesterday's gains. Hong Kong's Hang Seng Index rose by 0.4 percent, while Australia's All Ordinaries Index advanced by 0.8 percent. The markets in Japan and mainland China remained closed. In the bond market, treasuries have moved modestly lower, extending the sharp downward move seen over the two previous sessions. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is up by 2.1 basis points at 1.86 percent. ==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.