Morning Report: March 26, 2012

Markets closed on positive note despite a week that was dominated by news of slowing manufacturing growth in Europe and China that points to a slowdown in global growth. European services and manufacturing output fell more than expected while new homes sales in the US fell for a second month. The negative data was offset by continued signs of improvement in the US labour market with jobless claims falling to four year lows. Rising concern over the outlook for Spain has seen peripheral bonds yields pressured higher yet the EUR was able to gain in New York trade to close at 1.3270.

Fed Presidents Bullard and Lockhard have made comments at a two day conference in Washington for central bankers that highlights a shift against further stimulus for the US economy amongst members of the Federal Open Market Committee. There appears to be less likelihood of central banks globally adopting further asset purchases, otherwise known as quantitative easing, given the recent public statements from central bankers. However, further easing cannot be discounted as continued improvement in the US economy is far from assured. The USD lost ground on Friday with the Australian dollar making a strong late recovery to trade at 1.0470.

Equity markets retreated last week on global growth concerns with Asian markets suffering the biggest weekly losses for the year with fears of a hard landing for China weighing on investor sentiment. The S&P closed 0.31% higher at 1,397 but recorded its first weekly lose this year. The index has risen for four consecutive months to record its longest run of monthly gains since September 2009.

The withdrawal of the Bats Global Markets IPO after errors on their own computers kept the stock from trading, dominated headlines in the US. However, the NASDAQ managed to record its sixth straight weekly gain on surging Apple shares. European stocks made modest gains on Friday but also posted a week of losses after strong gains in the previous weeks on optimism over Greece.

Commodity prices recovered from losses over the week with the CRB index closing 2.2 points higher at 314.47. WTI crude oil prices spiked higher by 1.4% to $106.90 on news that Iranian oil exports will drop by more than 300,000 barrels a day this month as sanctions tighten.

Precious metals recovered as market sentiment improved with gold rising 1.2% to $1,662 and silver surged 3% to $32.25. Soft commodities were broadly higher and copper gained 1.2%. Today, we have the release of the German Ifo Business Climate Survey, US pending homes sales data and speeches by both Federal Reserve Chairman Bernanke and ECB President Draghi.

Gold finished last week flat after continuing on from Thursday's rebound on Friday night to finish the day around 15 dollars up at 1661, as the US dollar headed lower. As we expected, gold has showcased short term upward momentum after a major false break on Thursday, forcing weak gold shorts to exit.

There hasn't been much on the news front last Friday, a reconsideration of Thursday's weak Chinese and European PMI is probably what drove the euro up within its trading range thus pressuring the USD. Again, the rebound in gold could still be sustained but aggressive traders may short the precious metal at current price levels now that it is close to the upper boundary of the trading range, with a strict stop loss around 1670 and targeting 1630 which is around last Thursday's low.

Another strategy is to buy gold expecting it to rise through the trading range triggering more short stop losses along the way.

Compass Direction
Short-Term   Medium-Term
NEUTRAL      NEUTRAL


AUD/USD was choppy during European and US trade as the markets could not get a good handle on the tone of the markets. Commodities rallying and better European Debt yields only muddied the waters with following comments about a reduced likelihood for the need for QE3
in the US.

After breaking into the mid 1.04’s during the European morning profit taking and cross order flow took the price back towards 1.0375 before the equity and commodity markets rallied taking the AUD along with it. There is a lack of Asia session data today and with a positive lead from the NY markets, a test of the topside resistance does look increasingly likely. However, we see the topside being limited by corporate orders and speculative names.

If the price manages to break the 1.0480 resistance selling into the next level of resistance, 1.0505 looks a better opportunity at present. 1.0395 is increasingly growing in importance with a break and extended decline below 1.0330 needed to keep the bearish bias in the markets.

Compass Direction
Short-Term  Medium-Term
NEUTRAL     BEARISH