For financial markets, this week really doesn't get going until Wednesday, when both the calendar and trading volume start to return to full strength, so we'll try to keep this weekly preview brief.
We covered the first three listed below in our recent review of last week's lessons for this week. See here for details on these.
1. US DEBT CRISIS ISSUES: FISCAL CLIFF AND DEBT CEILING EXTENSION
For Western markets fiscal cliff and debt ceiling headlines should continue to be prime market movers, with risk asset markets rising on headlines that suggest deficit cutting austerity moves will be avoided, and falling on the opposite news.
In the end, markets expect that there will be deals on both the fiscal cliff and debt ceiling that don't do much damage because they:
- Defer most deficit cutting and so doesn't remove much cash from the US economy
- Get done soon enough to avoid much damage from automatic deficit reduction measures or from another credit downgrade.
Given Washington's performance on the last debt ceiling deal and current fiscal cliff, market calm and confidence appears misplaced.
The big question here is whether last Friday's selloff was a temporary profit taking move or indicative of the start of a bigger loss of confidence and market pullback.
2. ONGOING JAPAN EASING, YEN DEVALUATION
For Japan and risk asset markets more closely tied to it, anticipated further BoJ easing and Yen devaluation are remain the likely big market mover. Both the move up in Japanese stocks and downtrend in the JPY are likely overdone in the near term.
3. US HOLIDAY RETAIL SALES
Late last week markets were pressured by a Mastercard (NYSE:MA) report that confirmed anticipated weak growth in holiday spending. We probably won't have a final picture this week, but any further headlines could be market moving given its importance for US GDP and for exporters that depend on the US consumer.
4. EU CRISIS: DUE BACK IN FOCUS
The only question is when, and what causes the renewed anxiety. We suggest one or more of the following are the cause.
- US fiscal cliff and debt ceiling resolution means markets no longer preoccupied with these issues.
- Sudden spike in risk aversion spikes Spain borrowing costs and no OMT deal ready. Spain remains the weak link and likely source of the next chapter in the EU crisis. See here for details. Remember, nothing has been fixed. Even ECB President Draghi admits that all the EU has done has been to buy time. Meanwhile the EU has just lent more money to those who can't repay their current debt load. Thus far austerity measures have just driven GDP down as fast or faster than debt levels, preventing progress on cutting debt/GDP levels.
- Data gets worse: EU data certainly hasn't gotten better. For example last week Italian bond yields were up, Spain house prices were down, and French Q3 GDP was fell below the modest 0.2% forecasted. This week we get batch of EU manufacturing, services, and inflation data. None by themselves are market moving but if all surprise in the same direction then together they could change market views on the EU
5-8. ECONOMIC CALENDAR EVENTS
With Japan, as well as most of Europe and the US, mostly shut down until Wednesday.
The shortened week and continued absence of vacationing traders mean this week's calendar lacks some of the potency typical of the first week of the month. Here are the top events to watch.
5. CHINA MANUFACTURING PMI REPORTS
Two China manufacturing PMIs Monday and Tuesday are the only events of note until Wednesday.
6. US MONTHLY JOBS AND RELATED REPORTS
While fiscal cliff news packs the most potential market moving energy, the biggest scheduled US calendar event will be US monthly jobs data and the related reports that precede it and hint at its results, including:
- Wednesday: ISM manufacturing PMI, with special attention to the jobs component
- Thursday: ADP Non-Farm jobs change
The ISM Non-manufacturing PMI report, arguably the best predictor of the actual BLS NFP and unemployment rate reports, usually comes out a day or two before, however due to the shortened week it will be released 90 minutes after these.
A surprise either way (~20% variation from the 145k expected) would likely be market moving. The impact of such a surprise on the US dollar however, is not clear. Even a great result is unlikely to accelerate Fed tightening at this stage, given the Fed's prevailing pessimism.
7. FOMC MEETING MINUTES: WORTH WATCHING BUT UNLIKELY TO OFFER NEW INSIGHTS OR HINTS AT POLICY CHANGE
The December meeting is the last one before the composition of voting members changes as the regional Fed presidents rotate in January. That means these minutes are less likely to surprise or suggest any meaningful changes.
8. EU MANUFACTURING, SERVICES AND INFLATION DATA
See section 4 above
9. TECHNICAL PICTURE: RISK ASSET MOMENTUM SUFFERS
The bellwether weekly S&P 500 chart below sustained some technical damage this week.
S&P 500 WEEKLY CHART
Source: MetaQuotes Software Corp, thesensibleguidetoforex.com
03 DEC 30 0353
- The pullback created a second lower high after 2 weeks of indecisive price action, opening the door for a test lower to support around the 1350 area and 50 week EMA (red)
- The 10 week EMA (blue) has crossed below the 20 week EMA (yellow), another sign of a brewing test lower
- Price is now in the double Bollinger band sell zone(bounded by the lower orange and green Bollinger bands), a further sign that longer term momentum is bearish. See here for an explanation of double Bollinger bands
PARTING THOUGHTS: THE BIGGEST QUESTION, BIGGEST RISK for 2013
The key question: As we discussed here, the most important question you need to answer for 2013 is whether or not you believe that the current regime of financial repression, unlimited deficits fueled by money printing can continue to prop up economies and risk asset markets in the US, EU, and Japan.
The key risk: With most risk asset markets near decade highs, they are clearly not pricing in any significant renewal of EU debt crisis issues. We find this surprising given that the EU has done nothing but buy time for solutions it has yet to even begin implementing, assuming it can even muster the political will or consensus.
The US fiscal cliff is a recession risk. The EU remains a depression risk that has not diminished but merely been deferred.
Stay tuned for more on these thoughts in our coming 2013 outlook on the balance of bullish and bearish forces, and what is likely to decide how they play out.
Although much is uncertain, what is clear is that the USD, EUR, and JPY are all likely to lose value in the coming years versus both better managed currencies and hard assets. If most of your wealth is denominated in one of these currencies (or another one subject to similar central bank policies) then you need a plan to hedge that currency risk.Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.