Given that the coming week appears to share the same key characteristics of the past week:
- Extremely low liquidity, as senior institutional traders have left underlings in charge with orders to just mind the store and call them if anything serious occurs.
- Lack of scheduled major economic events of last week
many analysts appear ready to write off the coming week as likely to be equally meaningless in gauging market direction. Thus the extremely thin pickings one finds on virtually all sites regarding the outlook for the coming week.
Moreover, illiquidity makes for unpredictable, volatile markets in which the usual indicators and trends become less reliable. Thus as noted in recent posts, we urge traders to enter new positions this week only with very clear trading plans and justifications for why the probabilities and rewards justify the risks. Otherwise, if you must scratch your trading itch, use the time for reading and gaining skills. Or just catch up on other things, like family and friends.
Beware the Three Key Dollar Driver Events
The past month’s USD rally has shaken every global asset market. Commodities are priced in dollars, and most forex trading involves pairs that include the dollar, so it’s no surprise that major dollar moves ripple through these markets, and thus shake stocks as well.
Here are three kinds of events, all of which have fed the past month’s USD rally, that could make this week volatile and worth watching, or even trading:
- A fear or optimism inducing event, most likely involving a sovereign debt trouble/resolution announcement.
- A major positive or negative surprise regarding US employment or consumer spending (nothing major scheduled, though Tuesday’s CB Consumer Confidence and Wednesday’s Chicago PMI might offer clues).
- An event causing significant change in expectations regarding the Euro.
Again, given the lack of schedule US jobs or spending data, new news about debt trouble in the Euro-zone, though unlikely, is the most likely cause of any tectonic market shifts, with the primary result being more upside for the USD, as both a safe-haven currency and prime beneficiary of a falling EUR.
While we suspect that odds favor a quiet week, the very nature of the above surprise events is, after all, surprise.
Thus keep stop orders on all open positions and try to check the markets a few times a day just to be safe.
The bellwether S&P 500 held above 1120 at week’s end and so too did the other major indices, making modest gains to close at fresh 52-week highs following a holiday-shortened session Thursday. Great news by itself, but the gains were in extremely light volume, so can’t really say much about them. How low?
In the US, a total of 287 mln shares traded on the NYSE Thursday, a fraction of the one year average of 1.4 bln. Buying interest was broad-based, with nine of the 10 sectors posting a gain. Tech outperformed with a gain of 1.0%, while healthcare underperformed, closing near the unchanged mark.
There was a dearth of corporate items, but there were two key economic releases.
Existing home sales were better than expected, but new home sales disappointed. Stocks kept rising through it all.
On a positive note, weekly initial jobless claims dropped by a larger-than-expected amount to 450,000 from 480,000 in the prior week. This beat the consensus estimate of 470,000 and was the lowest level since fall 2008. While the labor market remains weak, the trend in jobless claims has been heading in the right direction. That’s all we really expect at this stage.
Separately, November durable goods orders climbed 0.2% month-over-month, which was worse than the economist consensus of 0.5%. But durable goods orders excluding aircraft rose 2.0% month-over-month, which was better than consensus of 1.1%. The latter data point also saw a positive revision to a decrease of 0.7% compared to the original reading that showed a decline of 1.3%.
Conclusion for Stocks
Like all asset markets in the coming week, the odds favor quiet range bound trading unless we see one or more of the above “dollar-driving” events. Because all commodities are priced in dollars and most forex trade involves a USD pair, market could get very volatile, including stocks.
Currently trading around $78, the February contract is hovering around the highest level in 3 weeks. After plummeting to as low as 68.59 on December 14, the black gold has rebounded steadily as falling inventory levels from developed economies suggest demand recovery, and provided the needed excuse for traders to buy with oil at short term oversold levels. However, we cannot confirm that crude oil has resumed its uptrend from 33.2 (January 2009) until price can trade sustainably above 80. On monthly basis, December will be a volatile month but with little gain or loss. While inventories are declining, overall supplies remain high relative to demand a year ago, though the recent data suggests refineries will need to boost production in the near future if current consumption rates continue.
Natural gas gained on the week too. The market sentiment has turned after gas inventory dropped in the past 2 weeks. Later today, the US Energy Department will probably report that gas storage declined -171 bcf to 3395 bcf in the week ended December 18.
Gold rose above 1100 as the USD retreated. After climbing +0.7% to 1094 Wednesday, the benchmark contract for the yellow metal extended gains to 1106 in European session Thursday. However, it will probably record loss for a 4th consecutive week, indicating correction of recent rally to record high at 1227.5 (December 3) is still underway. After breaking above 2008-high at 1033.9 in October, rally in gold futures accelerated. Gold was driven by aggressive Asian central bank purchases in November, the surging +15% during the month. The 2 months’ relentless rally had brought gold to overbought territory, that was ripe for correction given even a slight excuse.
In fact, markets got reasons aplenty.
- The late November announcement of a possible bond default by Dubai World, followed by
- Strong US non-farm payrolls and then consumer spending data that spurred speculations of earlier Fed rate hike, followed by
- Credit rating downgrades to Greece and Spain, with others threatened by the suddenly awakened ratings agencies
These combined to feed a sharp, long overdue rally in the USD, as a mountain of short USD positions had to unwind all at once, with predictable selloffs for gold, oil, and any Forex counterparts to the USD
Conclusions for Key Commodities
Medium-term (1-3 months) outlook for gold and all other commodities remains dependent on the dollar’s movement. If employment and spending figures for December, due out in early January, surprise the market to the upside, the dollar will likely move higher. This is likely negative for gold and other commodities, unless inflation numbers start threatening. Nothing supports gold (energy too) like inflation fears, which could balance or even outweigh a USD rally’s effect.
Main themes/events of the past week included:
- It was the first losing week for the USD in over a month since Dubai World first brought sovereign debt threat to the forefront of economic concerns. Heightened fear about the wellbeing of international credit markets and the euro, along with positive US economic news, sent the dollar up over 5% in the past month.
- The immediate cause for the pullback came on disappointing US New Home Sales data, about 11% below last month and nearly 20% below forecasts. The drop probably reflected payback of previous increases as buyers had thought the first-time buyer tax credit would expire on November 30. While the nominal shortfall was more than covered by the prior day’s better than expected Existing Home Sales, the later calculation period for New Home Sales makes this figure more recent and thus indicative of a coming drop in existing home sales next month. Because housing is at the heart of jobs, spending, and was a leading sector into the current crisis, this result dampened rising expectations for US stimulus exit and rate increases.
- Growth in spending and income was also less than expected. Personal spending rose +0.5% in November which growth in October was also revised down to +0.6%. Personal income grew +0.4%, compared with consensus of +0.5%, from +0.3% a month ago. Also a negative for rising USD expectations.
- Given the USD’s recent fast climb, this disappointing housing and spending data provided all excuse needed to spark profit taking on long USD positions.
- Illiquid, quiet trading that led most analysts to write off the past week as largely meaningless, with an implied expectation of more of the same next week, which will be even lighter on news, and equally illiquid.
Arguably, the key event for the coming week, certainly the most popular, is called Bank Holiday. Except for Tuesday, every day this week has one or more major currency’s local economy on holiday, with markets expected to be extremely thin towards the end of the week as traders head home for New Year’s vacations.
Major Scheduled Events Include:
- Sunday: JPY-Retail Sales y/y, Prelim Industrial Production
- Monday: JPY- Average Cash Earnings
- Tuesday: USD-CB Consumer Confidence, S&P/Case-Shiller Housing Price Index y/y
- Wednesday: CHF-KOF Economic Barometer, USD-Chicago PMI, Crude Oil Inventories
- Thursday: AUD- Private Sector Credit m/m, GBP Nationwide HPI m/m, BoE Credit Conditions Survey, USD-Unemployment Claims
- Friday: CNY- Manufacturing PMI
As noted above, however, the week cannot be written off in advance, given the possibility of announcements involving one of the above mentioned “dollar drivers.” There are also a few scheduled events which could move markets.
Any pro-USD surprises could resume the USD rally and concomitant pullback in its forex counterparts, especially the EUR, GBP, and JPY. All of these have seen their fundamentals regarding rate increase expectations and/or stimulus deteriorate in recent weeks relative to that of the USD. Ditto the AUD, which typically pulls the NZD and CAD along.
Author's Disclosure: No Positions