Sunday, January 23, 2011

Weekly Market Commentary: Skittish markets with many looking for direction

!! Overview !!
Skittish markets with many looking for direction. The Euro rallied to
$1.3569, along with several other major currencies as the Eurozone
sovereign debt issue subsided despite zero results at a finance
ministers' meeting in Brussels. South Africa's rand was this month's
biggest loser, -7% to 7.1350 while the Singapore dollar is at a record
SGD 1.2780. Asian equity indices sold off, some like Jakarta and Seoul
from new record highs, -8.75% and -2.5% respectively, while the
Shanghai Composite lost -2.75%, Egypt -6.3% and Mumbai -7.3%
year-to-date. US Indices inched up to two-year highs while some
European ones are at their best in eight months or so. Commodities
mixed indeed, spot Gold dropping to $1340, Silver $27.10, Platinum
rallying to $1845 and Palladium to $825 per ounce. Spot Brent Crude
hit $100.37 on supply pressures and Nymex Gasoline is up at $2.5192
per gallon. CBOT Corn a record 666 cents per bushel helping CME Live
Cattle to a new all-time high at 112.375 cents per pound. Yields on
the whole have backed up, particularly in the UK and EZ17 (where CPI
is running above target at 2.2%), Schatz at their highest in over
three quarters at 1.30%, with German PPI +5.3%, ten-year Bunds 3.20%
(highest since April).

!! Political And Economic Developments !!
As expected the Polish Central Bank raised rates by 25 basis points to
3.75%, Brazil +50 bp to 11.25%, to curb potential inflation.
Surprisingly Turkey cut their key rate by 25 basis points to a record
low 6.25% in order to discourage speculative inflows, something the
Brazilians are also trying to do. With nominal and real interest rates
among the highest of any nation, caused by laws which favour the
borrower in cases of non-repayment, currency appreciation will remain
the bane of Brazilian exporters.

UK CPI rose a whopping 1.00% in December, almost a record and the
highest monthly increase since 1993, taking the Y/Y rate to +3.7% and
way above the 3.00% ceiling; this is before January's VAT rise to 20%.
RPI is running at +4.8%, close to its highest levels in the last three
decades. Meanwhile Average Earnings increased by just +2.1% in the
year to November because workers have no pricing power. This
combination, called being poorer, explains why December Retail Sales
including auto-fuel fell 0.8% - yes, probably distorted by the snow

A mixed picture of US property: Housing Starts dropped to 529K
annualised in December, well under the previous record low of 798K of
1991 for a series going back to 1959, though above April 2009's record
477K. Meanwhile Existing Home Sales were +12.3% to 5.28 million that
same month taking inventory overhang down to 8.1 months. It is
believed that a 1% drop in the price of a median home to $168.8K,
coupled with rising fixed mortgage rates, tempted many ditherers off
the fence. As likely is the fact that the price of Condos/Coops fell
5% on the month, causing a 16.4% increase in units shifted, of which
roughly one third are distressed sales.

!! Underlying Themes !!
Whirlwind changes in Tunisia will have given oppressive, corrupt
regimes in North Africa and the Middle East cause to look anxiously
over their shoulders. Chronic youth unemployment, cronyism, spiralling
food prices, hereditary political posts and so on can also be found in
many other countries so time to clean up a bit.

!! What To Watch For Next Week !!
Sunday 23rd Portuguese presidential election, legislative and
presidential ones in the Central African Republic. Monday Eurozone
November Industrial New Orders, Japan December Supermarket Sales,
January PMI's for various European countries and the Bank of Japan
starts a two-day rate-setting meeting. Tuesday UK November Index of
Services, December Public Finances, final Q4 GDP, US November
Case/Shiller, House Price Index, January Consumer Confidence and
German February GfK Consumer Confidence. Wednesday Japan December
Corporate Service Price Index, January Small Business Confidence,
Minutes from the Bank of England's January MPC meeting, December BBA
Mortgages, US New Home Sales and the FOMC's interest rate decision
(unanimously expected unchanged at 0.25%) plus the great and the good
meet at Davos though to the weekend. Thursday early Japan December
Trade Balance, UK January Hometrack Housing Survey, CBI Distributive
Trades, EZ17 Consumer Confidence, CPI for the various German states,
US December Durable Goods, Pending Home Sales and Chicago Fed National
Activity Index. Friday Japan December Jobless, Household Spending,
Retail Trade, National CPI, Tokyo January CPI, Eurozone December Money
Supply, US final Q4 GDP and Jan University of Michigan.

!! Positioning And Technical Analysis !!
Interest rates are the key, and if they were to seriously start
trending higher, many investments would no longer be viable. Indices
that are stretched already will suffer first. Mr. Trichet may be
itching to hike (so that he can leave saying he'd put Europe back on
the road to recovery?) but we feel this would only kill off recent
faltering progress. We therefore think rates ought to trend broadly
sideways this year, in bands which are as yet to be established.
Meanwhile the move to generalised US dollar weakness should re-assert
itself slowly, keeping an underlying bid to commodity prices.
Source: ActionForex.Com

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