Market buzz
Current Futures: Dow -72.00, S&P -10.50, NASDAQ -7.00
European Trade: European stocks have opened the new trading day in red territory. Earlier tonight, the major Asian indexes finished slightly above the break-even line, helped by a small rally near the closing bell. U.S. futures have continued to trade lower in the overnight session.
As has been the case during the last few days, the U.S. car manufactures bailout plan was the main reason the European markets opened lower. Sources are saying the Senate will reject the bailout plan in its current form, by a small margin. Some further downside action was caused by Goldman Sachs, which downgraded China’s growth forecast again, to 6%, for 2009.
In Europe, the German Dax lost 83.82 points (1.74%) to 4,721.06, while the U.K. Ftse fell 46.21 points (1.06%) to 4,321.07. The major indexes in Europe and Asia are down this year by approximately 45%, more than their U.S. counterparts. In the Asian session, the Nikkei rose 60.31 points (0.70%) to 8,720.55. The Australian S&P/Asx lost 42.70 points (1.17%). Asian shares have advanced for five consecutive days, making it the longest streak seen in the last few months.
Due to reverse money flows, funds running out of the country rather than in, some emerging economies are starting to have big problems. The latest on the list is Russia, which is also one of the biggest economies in the world. Investors have pulled out around $200 billion from Russia in the last period. In order to protect the national currency, the ruble, the Russian National Bank has almost depleted 1/3 of its reserves. The problems the Russian economy faces right now are a consequence of the huge decline in crude’s value and of the Georgian war, which caused some investors pull their money out of the country.
Crude oil is barely moving, after a very volatile U.S. session. Crude oil for January delivery rose $0.60 to $44.40.
Gold advanced in the Asian session, extending the gains seen a day earlier. Bullion for immediate delivery rose $6.30 to $803.20.
Previous Asian trade: Asian markets were sent into the negative territory for the first time in the last few days as some speculate the auto-industry bailout plan will fail in Congress, with a very small difference of votes.
The two big car makers, GM and Chrysler are running out of funds within the next few weeks, the two top executives have said. If the bailout plan is rejected, it might be one of the last chances for the two companies to avoid bankruptcy. About 2 million jobs will be lost for the U.S. economy if the two car manufacturers are left alone to face the credit crunch. Sources have said the bailout plan is set to be rejected in the Senate with a very narrow margin of vote difference. However, the House approved the plan tonight by 237-170 votes.
Currency Overview
Overall, the euro and the pound surged again near the London Open. It looks like the European session is slowly starting to come back to normality, re-establishing its usual pattern. Despite this, the 4-hour resistance areas were just too much for some majors in the overnight session. Most likely, the market will let the U.S. open sort the things out.
In addition, the European session gave another sign of normality. The majors advanced against the dollar, despite U.S. futures running into the red. It is the first time this has happened in the last few weeks.
The Euro (EUR/USD) advanced all the way to TheLFB R2 (1.3165) in the European session, helped by the London open. However, the pair bounced lower, relatively easily, from that resistance area, and fell near TheLFB R1 (1.3090). In the European session, the Euro reached the highest level in six weeks, as the market expects the yield differential to increase again.
The ECB released the data that backs the bank’s decision to cut interest rates by 75 basis points, to 2.50% at the meeting held one week ago. Usually, the market has a weak response to this release, since the data that makes up the bulletin has already been released. It seems that the “risk to the downside” that Mr. Trichet spoke about has already materialized, since the ECB has cut 175 basis points in the last months.
The Pound (GBP/USD) advanced in the overnight session close to 200 pips. Similar to the euro, the pound surged around the London open, however, the pair ran out of stem soon after. The daily chart shows the pair topped near the 20-day moving average, where it also failed a test in recent days.
The Aussie (AUD/USD) is again testing the 50-day moving average, after it advanced 80 pips in the European session. Earlier, during the Asian trading hours, the aussie traded flat, below the neutral pivot point (0.6570). The aussie needed a few weeks to break above the 20-day moving average, so it will not be surprising if the pair takes a while to break the 50-day moving average.
Consumer inflation expectations in Australia dropped off in December to 2.5 percent, which is below November’s reading of 3.3 percent. The unemployment rate in Australia increased by 0.1 percent to 4.4 percent in November, which is slightly below analysts’ forecasts of an increase to 4.5 percent. The unemployment rate increased by 7,900 to 496,000. Employment in Australia decreased by 15.6K for November, which is near expectations of 15.0K. Full time employment increased by 8.8K to 7,695K while part time employment decreased by 24.4K to 3,054K
The Cad (USD/CAD) fell 100 pips, to the 20-day moving average in the overnight session. The pair will need more momentum to continue lower, since yesterday the cad bottomed near the same area. The last time the cad broke and held below the 20-day moving average was a month ago.
The Swissy (USD/CHF) fell during both the Asian and European sessions to the first support area, near 1.1910. The Swiss Franc has strengthened during the last few days, as the market expected the SNB to cut 50 basis points tonight, which was the case.
The Swiss National Bank has cut the interest rate for the fourth time in the last two months, as the tight credit conditions are affecting the economy. The bank has cut the Libor Rate down to 0.50%, corresponding to a 0% to 1.00% target range for the 3 months Libor rate. Until now, the bank has cut 225 basis points in order to help the economy. The previous three cuts were announced in surprise moves, as the Swiss GDP is seen as being negative in 2009.
Some analysts are saying that the central bank is running out of conventional ammunition. The short-term rates for the repurchasing agreements are already at very low levels, leaving almost no room for any further easing policies. As such, the bank might be tempted to approach some new measures, such as buying longer-term bonds or reducing the value of the currency.
The Yen (Usd/Yen) fell 50 pips during the overnight session, down to TheLFB S1 (92.30). The yen has been dragged lower since the Asian session started by the negative S&P future numbers.
Dollar Index Review
Dollar Index: The key for the dollar's movement today was seen as equity markets resumed the rally which stalled on Monday at just over 20% from the Nov. 21 low. Global stock markets were higher in overnight trade as S&P futures advanced. U.S. markets opened higher then moved between a 2.5% gain and a 0.5% loss as traders speculated on the outcome of the automaker bail-out package. The dollar declined against the higher-yielding (for now) euro and Australian dollar but advanced on the yen as risk was bought. The dollar also made a daily advance against the pound. Also hurting the index today was a move lower against the loonie, which came on the heels of a 4.6% increase in the price of crude oil.
Federal Reserve Chairman Ben Bernanke, in a letter released yesterday, rejected the idea that the central bank should provide assistance to automakers, saying that such aid would involve the Fed in “industrial policy,” an area best left to Congress. The letter came in response to a Dec. 3 inquiry from Senate Banking Chairman Christopher Dodd.
By rejecting the idea of lending to an industrial company, Bernanke is deliniating the limits of the Fed’s willingness to act. Those limits had come under question after the Fed rescued Bear Stearns and American International Group but refused to intervene on behalf of Lehman Brothers, a decision which triggered widespread losses and worsened the credit crisis.
“He’s absolutely right to draw that line,” Martin Feldstein, the Harvard University economist who chaired President Ronald Reagan’s Council of Economic Advisers, said in an interview with Bloomberg Television. The Fed is responsible for the “health and stability of the financial sector,” and “it would be a very big departure to start doing auto companies and who-knows-what-else,” Feldstein said. “What the Fed does should be ratified by the Treasury and ultimately by the Congress. If the Congress is telling us right now, ‘No, we don’t want to provide that money to the auto companies,’ then surely the Fed shouldn’t be providing it.”
Bernanke said in the letter to Dodd that the central bank can only lend in emergency circumstances when the financing can “be secured to its satisfaction.”
On Wednesday, the Dollar index lost 35 basis points (-0.41%) to close on 85.487.
DXY The Usd is on over 90% of all currency tickets, and it makes up the value of all synthetic cross pairs. Knowing where the Usd is trading, and what is driving it, is key to sustained success in reading and really understanding the nuances of Forex charts.
Overall: Pressure was brought to bear on the dollar index in recent tests of 88.00, and now most technical signals are revealing that the currencies that make up the index are at 4 hour chart resistance areas, and as such may start to push the Usd towards a test of 80.00. Debt valuations and and forward guidance on growth and interest rates may now weigh on major regions globally through 2009, and although none are fairing much better than the U.S. there are also none that carries the amount of debt that is wrapped up in the dollar. If 80.00 gets tested there will be plenty of eyes watching.
The Financial Review
XLF Introduction: It will be the XLF, the exchange traded fund for the Financial sector, that signals when the equity markets are really making moves that are likely to hold- if the market is buying or selling the XLF they are signaling that they are prepared to be buying or selling risk. Look for a day where over the average 232 million shares are traded on above average price action (+/- 1%).
If you are of the mind (as we are) that financial shares are leading the market it will be very useful to watch how this trades. Average daily trading volume has been decreasing lately and is presently just over 245M.
The Financial Sector: GMAC hasn’t obtained enough capital to become a bank holding company and may abandon the effort, casting new doubt on the firm’s ability to survive. A $38 billion debt exchange by GMAC and its Residential Capital LLC mortgage unit to bolster the company’s finances didn’t attract enough participation, GMAC said today in a statement. That leaves GMAC short of the $30 billion in regulatory capital demanded by the Federal Reserve for the bank conversion, the lender said.
GMAC, the primary lender to GM dealers, has pinned its recovery on becoming a bank and getting access to federal rescue programs. The company would likely go bankrupt by the end of the year if it fails to get TARP access. To obtain bank holding company status, GMAC must raise $2 billion of new capital and have at least $30 billion in total regulatory capital, the company said.
Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.
Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative.
On Wednesday, the XLF fell 0.23 points (-1.75%) to close on 12.89. The volume was light; 155,339,771 ETF’s changed hands against a daily average of 244,284,000