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Daily Market Commentary

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A Global Rally May be Short−Lived

Mon, Jan 26 2009, 22:14 GMT
by Kathy Lien

GFT

A Global Rally May be Short-Lived

For the most part, markets today expressed a tone of relief and satisfaction for global economic events. We have seen the classic pattern of dollar and yen weakness across the board that is quite the mainstay in markets that think the worst is over. However, we are cautioning that this brief level of renewed sentiment may be short lived. In the US the euphoria that was left over from European trading seemed to dwindle in the latter part of the trading day. The Dow finished one of its typical whipsawed trading sessions, falling off of highs of more than 100 to dip in to negative territory. The index did finish in positive ground. This level of uncertainty definitely casts some doubt on the continuation of this renewed confidence in the financial markets.

The True Health of the US Economy

Today presented several factors that helped promote advances in equities and commodity prices. For one Existing Home Sales proved to be a tremendous surprise, showing a 6.5% increase over last month’s dismal -9.4% plunge. In addition, the Leading Indicators also pointed higher, increasing 0.3% over last month’s -0.4%. However, it is unfortunate that the good feelings evoked by these releases should be taken lightly. It is actually quite easy to explain the positive number with negative economic factors. Home sales were boosted by the historic declines in home prices. The leading index was easily improved by the Fed’s measures to flood the financial markets with liquidity. To take even more of the positive implication out of this report, it would be wrong to conclude that the employment situation has improved as to the heavy weight home sales places on the health of the consumer. Most of the largest US companies are forecasting additional rounds of layoffs to ease the strains they face. Specifically, Home Depot will be cutting an additional 7,000 jobs while Sprint-Nextel plans additional layoffs totaling 8,000. In fact, Bloomberg estimates that in total, 72,500 firings were reported today. This is an amazing amount that will surely spell problems for February Non-Farm Payrolls and GDP (expected for release on Friday).

What is the Fed Prepared to Do?

It is never too early to start speculations for potential policy shifts in the upcoming FOMC meeting. Ceremoniously, we will no longer refer to it as an interest rate decision because interest rates will not be changed. However, we are waiting on something more important; a telling factor for continued monetary policy decisions. One possibility is that the Fed announces a target as to the size of its balance sheet. They would therefore be able to present something more concrete to the market as an explanation that they are coming to the rescue. It is very likely that the central bank continues to expand the levels of assets it purchases. Many expect that the Fed will reignite purchases of very long-term treasuries in an effort to push down yields enough to improve long-term borrowing. Regardless of which actions the Fed puts into action, the true face of American monetary policy has changed as a result of the near-zero interest rates.

EUR/USD: EUROPEAN EQUITIES STAGE IMPRESSIVE RALLIES

EUR/USD managed to push higher in an effort to lift off of multi-week lows. Even though the excited state of US equity markets failed to materialize throughout the day, we have seen some impressive rallies in European markets. Exchanges in Germany, France, and Italy all manage to push forward by at least 3.0%. Germany is finishing its drafts of a 2009 Budget that should include a tremendous amount of debt. The country has been quite active in the round of bail-out and stimulus packages, actions that will prove to only bolster the levels of borrowing the country depends on. The advances of similar policies across the Euro-zone should reignite talks about continued credit downgrades for other faltering European countries. If this happens, the momentary strength in the euro will be completely reversed. Today’s trading occurred without the release of any import economic indicators. Tomorrow will reveal if rallies in the euro and European equities are warranted. We are expecting the influential German IFO as well as the EZ Current Account.

GBP/USD: CREDIT CONDITIONS PROVE TO BE DIRE

GBP/USD is finally making some effort to pull out of the recent hole it finds itself in. Reaching the pivotal quarter-century low in the pair should start to strain the BoE and the UK government on how to respond to the devaluation. However, the answer as to how they are affected by it seems a little unclear. While some argue that a weaker pound is beneficial to companies that depend on international markets; others believe that the severity of the decline will limit the Britain’s competitiveness on a global scale. It is important to keep in mind the reaction by government officials in the wake of extended pound declines. As another detrimental factor that the BoE will continue to struggle with will be the availability of credit. We learned today that banks reduced loans for potential home-buyers by almost 50% from last year. This report clearly reflects the sheer inability of the government to successfully reduce fears of the banks. Even after a second round of banking bail-outs and stimulus plans to reduce the amount of toxic assets on the balance sheets of the banks, home loan rates only declined modestly. The two-year home loan rate is still at an incredible disparity with the rate that the BoE uses to target monetary policy. The fact that the rate has been cut to a three-century low at 1.5% has produced only minimal relief for the vital lending sector.

USD/CAD: CAD STRENGTH SETS IN FOR THE FOURTH STRAIGHT DAY

USD/CAD is the big mover among commodity currencies in today’s trading. The CAD has strengthened for an impressive fourth straight day, as the prospects for commodity prices are beginning to change. In the commodities markets, the big story is the advances in gold, which is currently seeing a three month high with a gain of nearly 1.50%. The metal has been gradually regaining its reputation as the true safe haven for the legions of risk-adverse investors. It seems that the dollars status as the secure vehicle of choice is beginning to wane as US fundamentals are concerning. In Canada, we are expecting the 2009-2010 Annual Budget, which should entail the use of a lot of debt. It is most likely that spending projects on infrastructure and other fiscal stimulus will be used as an attempt to boost the economy. However, such policy agendas are not without their opponents. If we do not see a large spending increase, it is likely CAD traders will be disappointed. Despite the holiday in many Asian countries, New Zealand has managed to produce a wealth of data. Credit Card Spending continues to falter as the report falls to -3.9% from -0.9% a month earlier. We are now seeing some of the worst consumer credit situations in New Zealand’s history. The Performance of Services Index had a bit more to offer in terms of positive implication; the number surprised to the upside at 38.0. However, the figure has been in the contractionary state for the past nine months. Activity in Australia will be depressed until tomorrow’s Producer Price Index, NAB Business Conditions, and Westpac Leading Index.

USD/JPY: 87.00 REMAINS THRESHOLD FOR JAPANESE INTERVENTION

Trading in USD/JPY maintains itself within a tight range on trading holiday in many Asian countries. This directionless trading also has fundamental reasoning in the fact that traders are unsure as to the possibility of continued equity rallies and the possibility for a Japanese intervention. In fact, there are many market factors that are acting as negating forces on any prospect for currency movement. For the last week, we have all been intently listening to any talk about a Japanese foreign exchange intervention. It is likely that 87.00 areas will be the threshold for the possibility of such action. However, the talk about Japan’s plans to combat their recession does not stop with the chance of an intervention. It has also been speculated that a nationalized Japanese bank plans on buying equity stakes in a variety of Japan’s struggling firms. Although this plan will exclude financial companies, it should provide a confidence booster for the businesses operating in the country. Once more, we also will be keeping an eye on the BoJ Monetary Meeting Minutes, expected for release later today. There is an inherent possibility in discovering continued plans by the BoJ to buy an ever-expanding range of Japanese assets.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be our currency pair in play on many important economic releases expected for tomorrow’s trading. The important German IFO, which covers expectations, business climate, and current assessment, is expected at 4:00 am ET or 9:00 GMT. The Euro-zone Current Account will be released at the same time. The US will release Consumer Confidence at 10:00 am ET or 15:00 GMT.

The technicals on EUR/USD price action are very bullish at the moment. Prices finally managed to exit the Bollinger band sell zone, after remaining in our sell zone for eleven trading days. This could provide a foundation for further advances in the pair. Resistance stands in the way of continued rallies at 1.3225 or the 23.6% retracement from mid-December highs to yesterday’s low. The most immediate support is located at yesterday’s low of 1.2765. Of course, if this level should be breached, there is the multi-year low at 1.2228 that should support further declines. However, the break out of the sell zone was very significant and may result in a continuation of today’s rally.

Published on  Mon, Jan 26 2009, 22:17 GMT