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- 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.
TradeTheNews
