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Markets going nowhere in a hurry so far in thin holiday trading

Fri, Nov 28 2008, 08:22 GMT
by John Hardy

Saxo Bank

Japan small business confidence plunges to lowest level in history of survey, but JPY sees little reaction.

HEADLINES

• New Zealand Oct. Building Permits fell -21.9% MoM vs. +11.1% in Sep. 

• Japan Nov. Nomura/JMMA Manufacturing PMI fell to 36.7 from 42.2 in Oct.

• Japan Oct. Jobless Rate fell to 3.7% vs. 4.2% expected and 4.0% in Sep.

• Japan Oct. Household Spending fell -3.8% YoY vs. -3.3% expected and -2.3% in Sep.

• Japan Oct. National CPI out at 1.7% YoY as expected

• Japan Oct. Industrial Production fell -7.1% YoY vs. -6.6% expected and +0.2% in Sep.

• Japan Oct. Retail Trade fell -0.6% YoY vs. -1.0% expected

• UK Nov. GfK Consumer Confidence rose to -35 vs. -37 expected and -36 in Oct.

• Australia Private Sector Credit Growth was +9.7% YoY vs. 9.5% expected and 10.0% in Sep.

• Japan Nov. Small Business Confidence fell to 35.1

• Japan Oct. Housing Starts out at 19.8% YoY vs. 30.0% expected

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Sweden Q3 GDP (0830)

• Sweden Oct. Retail Sales (0830)

• EuroZone Oct. Unemployment Rate (1000)

• EuroZone Nov. CPI Estimate (1000)

• Switzerland KOF Swiss Leading Indicator (1030)

• UK Nov. CBI Distributive Trades Report (1100)

• Canada Q3 Current Account (1330)

• Canada Oct. Industrial Product Price and Raw Materials Price Index (1330)

• US Nov. NAPM Milwaukee (1500)

• Australia Nov. AiG Performance of Manufacturing Index (Sunday 2230)

• China Nov. Manufacturing PMI (Monday 0100)

Market Comment:

Our warnings about potential volatility here as we come into month end during thin US markets have so far proved unfounded, as markets have barely moved over the last 24 hours despite a flurry of very ugly data out of the EuroZone yesterday (cratering November confidence levels) and Japan overnight (we looked at household spending, industrial production and small business confidence - we're note sure what that strange jobless rate number is all about). The tendency remains for equity averages to tick higher and risk aversion generally showing signs of fading slightly, though nothing looks convincing so far. Still, beware the end-of-month fix today, which could create a bit of hectic activity. US markets are open for a half day of trading today. The "Thanksgiving Surprise" of 2006 happened on a Friday, when EURUSD zoomed through 1.3000 for the first time in a long time. Though looking at the context of the 2006 move, it had been preceded by a very large move on Wednesday of the same week that was clearly applying pressure to the key 1.3000 resistance level. By strange coincidence, the 1.3000 level is also in play here two years later, and it appears that Euro is working itself into an either/or situation again.

We have made our bearish view on the EUR fundamentals clear, but let's see if the market is listening...any attempt back through 1.3000 and 1.3080 would put the bearish view on hold until/unless a strong reversal appears. 1.2800 is needed for the bears to get a better technical argument for a further fall. With the ECB meeting next week and EURUSD tracking interest rate differentials relatively well again, we will get a resolution to this soon. Continued attempts by equities to rally and a hawkish ECB would probably send the pair on another wave higher. Our preferred scenario, however, has the ECB finally forced into a more dovish stance, perhaps surprising on the rate cut size (as the overnight rate should clearly have been 125 bps lower than it is currently at least a month ago) and the broader market rolling back over into risk averse mode. In the medium term, we can't conceive of any scenario that spread between European 2-year rates and US 2-year rates (currently around 109 bps vs. 200 bps in mid September and lowest daily close at 90 bps in late October) from shrinking further towards parity.

Next week sees a whole slew of central bank announcements and important economic data. The major US data includes the two major ISM surveys and the employment report on Friday, which unfortunately looks like it will be an absolutely terrible one, considering that consensus payroll expectations are already lower than at any point during the 2001 recession. The BOE, ECB, RBNZ and RBA will all announce rate cuts next week as well. More on those next week.

Chart: USDCAD

USDCAD is a pair we are watching with interest these days with the BCE takeover thrown into chaos. The technicals are caught between conflicting bullish and bearish signals, but a resolution may be coming soon. The pair continues to find support above the 21-day moving average, but needs 1.2420+ for a short term technical break higher to get technical arguments for a rally in gear. Above that, it needs 1.2670+ to remove the idea of a structural double top. To the downside, a close below the 21-day MA could setup a move toward 1.2000/1.1800, though this is not the preferred scenario.

Published on  Fri, Nov 28 2008, 08:25 GMT