Friday, December 30, 2011

Market Week Wrap-up

Course on chart pattern recognition is available now: 

- Trading volumes were extremely light worldwide during the holiday week. US and European equity indices were flat to up slightly on the week, while in Asia markets were flat to down slightly. In any case, 2011 has been a dismal year for equities, with most major European and Asian indices down by double digit percentages. Germany's DAX ended about 15% lower for the year and the CAC 40 declined 17% in 2011, whereas the UK's FTSE 100 index only fell 5.5%. In Asia, the Nikkei 225 closed down more than 17%, while the Hang Seng Index was down nearly 20%. Shares in Hong Kong and China had their worst year since 2008 as concerns about a hard economic landing in China have deepened. On Wednesday, spot gold hit its lowest level in nearly six months, dropping to $1,523, after sliding lower for five days straight days, its longest slump since October 2009. The yellow metal perked up a bit through Friday, closing the week around $1,565. Gold's weakness was blamed on liquidation following steep declines in the euro, prompted by thorny Italian bond auctions and deepening pessimism about Europe's debt crisis. EUR/USD closed out the year only a little lower than where it began last January, around 1.3000. Lawyers are currently drafting a new European "fiscal compact," and all but one of the EU's 27 members will start thrashing out the details at another round of summit meetings early next year. Meanwhile traders are waiting for the major ratings agencies to follow through on their threats to downgrade any number of euro zone member states, most notably France. In the US, there were glints of improvement in regional manufacturing reports for December from the Richmond and Dallas Federal Reserve Banks this week: headline numbers in both were weaker than expected, although the key new orders components showed big sequential gains. The jobless claims numbers sustained the improved results seen in the last few weeks, with the four-week average now at its lowest level since summer of 2008. The Pending Home Sales data showed that the number of Americans who signed contracts to buy homes in November rose to the highest level in a year and a half. Front month WTI crude pivoted around the $100 handle as Iran rattled sabers in the Straight of Hormuz. For the week the DJIA dipped 0.6%, the NASDAQ slipped 0.5%, and the S&P 500 lost 0.6%. For the year the S&P500 ended virtually unchanged.

- There was little in the way of major equity stories this week. Shares of Sears Holding lost nearly 30% of their value after the firm offered a disastrous view of its quarter-to-date comps (down 5.2%) and said EBITDA in the quarter would be less than half of the year-ago amount. Analysts noted that over the last six years, the firm had spent approximately $6 billion buying back shares - compared to capital expenditures of just $3.2 billion over the same period. Computer Sciences Corporation withdrew its FY12 guidance on Wednesday after the UK government's National Health Service revised a contract with the firm and teed up a potential $1.5B impairment. Shares of CSC were down 10% on the week.

- Fixed income markets saw continued moves into ultra-safe havens heading into the new year. For the year, the yield on the US 10-year treasury saw biggest annual drop since 2008, confirming its status as one of the safest of safe havens from the European debt crisis. All-in-all, the 10-year UST returned about 17% for the year, compared to about 10% on German bunds. UK gilt yields declined to all-time lows, with the yield on the 10-year gilt closing below 1.95% on Friday after moving below 2% for the first time in history last week.

- FX trading was subdued through the first half of the week, although the usual concerns about Europe were never far from the surface. Daily deposits at the ECB hit record levels as banks continued to hoard cash. EUR/USD maintained a tight range around the 1.3070 area during the early part of the week, while the absence of disasters in the Italian auctions did little to inspire participants to make any directional bets. By midweek the euro began weakening on a confluence of factors, including jitters reflected in the longer-term yields seen in Italy's the 10-year BTP yield, which were still within striking distance of 7.00% and a disastrous Hungarian debt auction. On Thursday morning, EUR/USD declined sharply and retested its 2011 lows of 1.2858, although it closed out the week slightly higher.

- In the new year, traders will be eagerly waiting for the major ratings agencies to follow through with downgrades of sovereign issuers in the euro zone. Another thing to watch will be the overall range for EUR/USD in the first month of the year. The pair's January trading range has historically indicated the high and the low for EUR/USD for the remainder of the trading year; this phenomenon has held good in nine of the first 12 years of the euro - including 2011 - since the launch of the single currency in 1999.

- The yen strengthened against its major pairs as the week progressed, with dealers citing the release on Thursday of the US Treasury report on currencies as a factor. The report criticized Japan for currency interventions and called on Noda's government to concentrate on improving the dynamism of Japan's domestic economy. In the wake of the report, EUR/JPY tested below the 100.00 level for the first time since June 2001.

- The Chinese Yuan gained 4.7% against the greenback in 2011, compared to a gain of 3.6% in the 2010 period. CNY closed out the year at 6.2940 to the dollar on Friday, marking its first sub-6.30 close since 1993. The Treasury's semiannual currency report called this "insufficient" progress, but again declined to name China as a currency manipulator, electing instead to reiterate that the yuan remains substantially undervalued. Goldman Sachs warned that its outlook on the BRIC countries has become more cautions, amid concerns about capital outflows. In a comment on Friday, the Chinese Commerce Ministry warned that the 2012 outlook for foreign direct investment is not optimistic.