Today we take the market temperature and look at where to focus our attention as the week unfolds.
Equities – Pivot area for US S&P500 and Earnings Season kick-off
Last week ended in about as stale a stalemate as possible for equities. Though the key equity market benchmark, the US S&P500 managed an enthusiastic Tuesday rally that took the average just above the 200-day moving average for the first time since a false break last October and before that since late summer, the rest of the week saw a series of “doji” daily candlesticks that suggest a healthy dose of uncertainty on whether this rally is for real. The technical situation is indeterminate despite the 200-day moving average break, as we have important resistance just over head at around 1295 on the index.
Also, US corporate earnings season is set to get underway this week. In the consumer sector, it appears that demand was healthy on solid volumes, but heavy discounting has meant that many US retailers downgraded their earnings forecasts last week. The guidance from capital equipment producers will be particularly interesting due to the expiry of a key US tax accounting incentive at the end of 2011 that likely cannibalized demand from some of this year.
Risk indicators – mixed bag.
Looking elsewhere at the various risk indicators, we note that the VIX is at a five-month low, though it slightly divergent in the sense that the S&P500 went to new highs last week while the VIX only matched its previous low. The divergence is somewhat minimal, but does suggest the rally is on slightly shaky footing. Pronounced VIX divergence is a classic market turning point indicator. Other risk indicators don’t confirm the complacency evident in the VIX, including Junk spreads, Emerging Market bond spreads, and Corporate Credit indices. None of these have shown alarming trends over the last couple of weeks, but neither have they improved from rather elevated levels.
Fixed Income – wake us up when it moves
The major bond markets have gone absolutely nowhere for over two months – i.e., nothing to report, except that it is rather remarkable that bond markets find such a bid in an environment of apparently healthy risk appetite. EU debt auctions this week include the sale of short term bills from France today, Austrian 10-year and shorter bonds tomorrow, German 5-year bonds Wednesday and Spanish 3 and 4-year debt on Thursday. Italy will auction bonds and floating rate notes on Friday. This comes after EU spreads generally widened last week on signs of weak demand, despite the ECB’s involvement
FX – The evolution of the Euro’s behavior
The Euro is clearly the funding currency of choice now for carry trades. We have discussed for some time now that the EUR/USD/risk correlation has been broken by this new status for the single currency. Now, one has to wonder if the Euro becomes outright negatively correlated with risk as a traditional funding currency would. To answer that question, we would need to see risk indictors back on a steep rise (and equities selling off heavily) and to then see whether EUR/AUD goes into squeeze mode after its recent run to record lows. Certainly from a positioning perspective, the heavy EUR/AUD short position is one for the ages.
Elsewhere, the USD needs to consistently work back below 1.0200 in AUD/USD and above 1.0300 in USD/CAD this week to re-achieve top dog status. Risk appetite and commodity prices will inevitably remain the drivers for the commodity currencies.
Commodities
May we refer you to Mr. Hansen’s weekly report and look ahead from Friday.
Calendar – Merkozy and ECB on tap this week
Today, Germany’s Merkel and France’s Sarkozy are to meet to discuss the new “master plan” that so far doesn’t appear to be much of a plan (considering the rising risk of new defectors) or particularly masterful. Story from Bloomberg BusinessWeek. The next EU Summit is on 30 January. Also consider this rather critical look at all of the EU summitry from the Economist. As far as the ongoing EU crisis is concerned, consider the important ongoing debate on Greece and the degree of private sector involvement in Greece’s debt restructuring. EU debt auctions this week.
The week ahead is fairly light on economic data, particularly from the US, with only Thursday’s US Retail Sales report and Friday’s Trade Balance report of note.
The highlight event risk of the week is the ECB meeting this Thursday, which we will preview in the coming day or two. The market remains persistent in the view that the ECB rate will remain at 1.00% as the Credit Suisse year-forward expectations indicator is only looking for 8 bps of easing (so a minority looking for any easing at all). But will Draghi strike out in his own direction here? Consider this article from Bloomberg today suggesting the Draghi may prefer the direction of the Bernanke Fed on rates over the vigilant path of Mr. Trichet: .
The BoE is also set to meet on Thursday, with no expectations for new policy announcements. For a complete look at the economic data set for release this week, please have a look at our calendar.
Asian Note – early New Year distortions
In Asia, the economic activity surveys ticked higher in December and the recent loan data suggests looser credit, but it is agreed that the very early Chinese New Year (23 January – the second earliest possible date) may be causing a rush to squeeze forward production ahead of the New Year. All of the traveling of migrant workers and festivities can disrupt any impression of how things are going in China, so we may not have a proper read on things until we begin to see February data.
Equities – Pivot area for US S&P500 and Earnings Season kick-off
Last week ended in about as stale a stalemate as possible for equities. Though the key equity market benchmark, the US S&P500 managed an enthusiastic Tuesday rally that took the average just above the 200-day moving average for the first time since a false break last October and before that since late summer, the rest of the week saw a series of “doji” daily candlesticks that suggest a healthy dose of uncertainty on whether this rally is for real. The technical situation is indeterminate despite the 200-day moving average break, as we have important resistance just over head at around 1295 on the index.
Also, US corporate earnings season is set to get underway this week. In the consumer sector, it appears that demand was healthy on solid volumes, but heavy discounting has meant that many US retailers downgraded their earnings forecasts last week. The guidance from capital equipment producers will be particularly interesting due to the expiry of a key US tax accounting incentive at the end of 2011 that likely cannibalized demand from some of this year.
Risk indicators – mixed bag.
Looking elsewhere at the various risk indicators, we note that the VIX is at a five-month low, though it slightly divergent in the sense that the S&P500 went to new highs last week while the VIX only matched its previous low. The divergence is somewhat minimal, but does suggest the rally is on slightly shaky footing. Pronounced VIX divergence is a classic market turning point indicator. Other risk indicators don’t confirm the complacency evident in the VIX, including Junk spreads, Emerging Market bond spreads, and Corporate Credit indices. None of these have shown alarming trends over the last couple of weeks, but neither have they improved from rather elevated levels.
Fixed Income – wake us up when it moves
The major bond markets have gone absolutely nowhere for over two months – i.e., nothing to report, except that it is rather remarkable that bond markets find such a bid in an environment of apparently healthy risk appetite. EU debt auctions this week include the sale of short term bills from France today, Austrian 10-year and shorter bonds tomorrow, German 5-year bonds Wednesday and Spanish 3 and 4-year debt on Thursday. Italy will auction bonds and floating rate notes on Friday. This comes after EU spreads generally widened last week on signs of weak demand, despite the ECB’s involvement
FX – The evolution of the Euro’s behavior
The Euro is clearly the funding currency of choice now for carry trades. We have discussed for some time now that the EUR/USD/risk correlation has been broken by this new status for the single currency. Now, one has to wonder if the Euro becomes outright negatively correlated with risk as a traditional funding currency would. To answer that question, we would need to see risk indictors back on a steep rise (and equities selling off heavily) and to then see whether EUR/AUD goes into squeeze mode after its recent run to record lows. Certainly from a positioning perspective, the heavy EUR/AUD short position is one for the ages.
Elsewhere, the USD needs to consistently work back below 1.0200 in AUD/USD and above 1.0300 in USD/CAD this week to re-achieve top dog status. Risk appetite and commodity prices will inevitably remain the drivers for the commodity currencies.
Commodities
May we refer you to Mr. Hansen’s weekly report and look ahead from Friday.
Calendar – Merkozy and ECB on tap this week
Today, Germany’s Merkel and France’s Sarkozy are to meet to discuss the new “master plan” that so far doesn’t appear to be much of a plan (considering the rising risk of new defectors) or particularly masterful. Story from Bloomberg BusinessWeek. The next EU Summit is on 30 January. Also consider this rather critical look at all of the EU summitry from the Economist. As far as the ongoing EU crisis is concerned, consider the important ongoing debate on Greece and the degree of private sector involvement in Greece’s debt restructuring. EU debt auctions this week.
The week ahead is fairly light on economic data, particularly from the US, with only Thursday’s US Retail Sales report and Friday’s Trade Balance report of note.
The highlight event risk of the week is the ECB meeting this Thursday, which we will preview in the coming day or two. The market remains persistent in the view that the ECB rate will remain at 1.00% as the Credit Suisse year-forward expectations indicator is only looking for 8 bps of easing (so a minority looking for any easing at all). But will Draghi strike out in his own direction here? Consider this article from Bloomberg today suggesting the Draghi may prefer the direction of the Bernanke Fed on rates over the vigilant path of Mr. Trichet: .
The BoE is also set to meet on Thursday, with no expectations for new policy announcements. For a complete look at the economic data set for release this week, please have a look at our calendar.
Asian Note – early New Year distortions
In Asia, the economic activity surveys ticked higher in December and the recent loan data suggests looser credit, but it is agreed that the very early Chinese New Year (23 January – the second earliest possible date) may be causing a rush to squeeze forward production ahead of the New Year. All of the traveling of migrant workers and festivities can disrupt any impression of how things are going in China, so we may not have a proper read on things until we begin to see February data.