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12/21 – 12/25 Global Market Outlook Short Version: Must-Know Dominant Forces & Implications




S&P 500, Other Leading Global Indexes, Consolidating on Fear From Sovereign Debt Threat, Despite Bullish News From US, EZ

Rising US Interest Rate Expectation For Mid 2010 A Concern For Stocks

Fed Data Shows Industrial Capacity Utilization Up – But Due to Capacity Destruction, Not More Production (bad for short term employment, may be good for long term GDP when new equipment is ordered)

Rising Weekly Jobless Data Challenges Recent Optimism From the Non-Farms Payrolls Report

Global stocks continue to trade in a narrow range, unable to break near term resistance, but resisting any significant retests of support despite

  • New concerns about global credit from the Euro-zone as Greece gets another downgrade, this time from Standard & Poors, which keeps Greece on credit watch, suggesting possible future downgrades, as no one believes Greece is serious yet about cutting their deficit.
  • Expectations for rising interest rates in mid 2010
  • Year end tax selling
  • The usual concerns about the longer term health of the financial and real estate sectors




Strength in dollar weighed on commodities. However, the energy complex was not much affected due to bullish inventory report and agency upgrades. Precious metals were hit hard with gold price plunging for the 4rd consecutive weeks.

Crude Oil

After the drastic -8.7% selloff in the week ended December 11, crude oil price rebounded, mostly driven by inventory draw, this week. The benchmark contract gained +4.6% to settle at 73.05.

Several positive things happened in energy market.

On Tuesday, the OPEC upgraded its forecasts on global oil demand, anticipating it average at 85.13M bpd in 2010, up +1% from 2009 and +0.08% from previous projection.

The Energy Department's inventory report sent oil sharply higher. Official data showed that crude oil inventory declined -3.69 mmb to 332.4 mmb in the week ended December 12. Although Cushing stocks continued to increase, the build of +0.78 mmb was significantly less than the increases in previous weeks. At the same time, Distillate stockpile drew -2.95 mmb, a decline similar to what was estimated by API but almost 5 times more than what the market anticipated.

Despite the optimistic news, we remain cautious about energy fundamentals as demand recovery in advanced economies remains sluggish.

Natural Gas

Gas price rallied strongly for another week. The benchmark contract surged +12.4% to 5.804 after a +12.6% rise a week ago. The eventual end of injection season and the start of inventory drop increased investors' appetite.

Gold: At Key Support


Gold AVA FX Daily Chart (03 dec 18)

Gold price declined -0.6% to close at 1113.7 last week amid strong rebound in dollar.

Currently holding just above 1103 key support, where there is a convergence of 38.2% Fibonacci retracement and ascending up trend line, as well as minor price support tested 5 times over the past 2 months.

In November, the yellow metal was buoyed by aggressive central bank buying and speculative long positions were pushed to record high levels. However, in December, the theme was changed to sovereignty risk/credit risk. This caused panic sales in risky assets. Although gold has been regarded as safe-haven relative to currency depreciation, demand for gold as a safe haven only occurs when there is deep concern about the dollar or other safe haven currencies. Most of the time, however, it trades as an inflation hedge, which means it is in demand when there is optimism about growth and thus concern about coming inflation.

The sovereign debt threat issues of the past weeks, along with improved fundamental strength in the USD (see below section on the USD), has led to profit taking in gold, and a deep correction of well over 9% from its November high of 1227.

Looking ahead to 2010, gold’s fate will most likely depend on the same forces that fueled its rise: the fortunes of the USD, and central banks' interest in buying gold.

In the long term, renewed weakness in USD, concerns about inflation and erratic global economic recovery should help lift gold price further, though the USD rally could well have legs well into 2010.

FOREX USDThe Dollar, Thin Liquidity, and the Sovereign Debt Threat



US Dollar Outlook: Bullish

-    Events: Monday-Chicago Fed National Activity Index, Tuesday- Final GDP q/q, Existing Home Sales, Wed.-Core PCE Price Index m/m, Personal Spending m/m, Revised U.M Consumer Sentiment, New Home Sales, Crude Oil Inventories, Thurs.- Core Durable Goods Orders m/m, Unemployment Claims, Durable Goods Orders m/m

-    Dollar rising on improving  US growth and interest rate expectations, Euro-zone debt woes raising aversion to risk and the Euro

-    CPI growth raises inflation concerns and rate hike expectations, FOMC suffices for now with slow exit from stimulus

-    The dollar sets up for breakouts against the Euro, Australian dollar, British pound and Canadian dollar



The dollar’s nascent rally in recent weeks has arguably been the biggest single economic news item, rippling through all international asset markets. On a trade weighted basis, it has rallied for nearly three weeks and climbed over 5%, and gained on all majors this past week. More importantly, the advance has tentatively started a real trend reversal. It will evolve from tentative to “confirmed” once the illiquid year end passes and we can better assess true market sentiment. The low liquidity of the coming weeks makes for a highly reactive market that fewer traders and lower volumes can move. Market reaction to the initial Dubai World debt crisis news, clearly timed to take advantage of draining liquidity on the eve of two major holidays (Thanksgiving in the US and the Eid for the Moslem World) vividly demonstrated just how volatile holiday seasons can be. 

Initially announced as a nearly $60 Billion crisis, the figure fell the following week into the twenties. I wondered whether drop was due to error or simply fast profits made on the price swings by insiders.

Most of the Western world will close for the Christmas holiday, but liquidity will fall off well before the actual markets close, as more senior institutional traders exit for vacations early, and will remain low until after New Year’s Day. Sometimes that means quiet trading, sometimes not, as was the case a few weeks ago. However, even under normal conditions, a busy economic calendar and roaring USD rally would  mean potential volatility.

However, the past two years have been anything but normal. Among a number troubling conditions of the toxic combination of sovereign debt troubles, the greater than ever interconnectedness of markets, and now, the Dubai World example of timed default announcements with holiday illiquidity. Those with open positions may wish to stay close to accessible computers.

Potential market drivers include: 

  • Interest rate speculation:  The consensus is growing for a mid 2010 short term rate increase, and this in turn influences speculation about when the USD could start moving up the risk currency rankings. The benchmark US market rate (the three-month Libor) is still falling towards record lows; but its pace has slowed. The USD’s ultra low rates undermined demand for it during this past year as resurgent risk appetite and carry trade favored higher yielding currencies. As we’ve noted before, there are other more likely long term funding currencies, like the Yen. Though the Japanese Libor is trading at a premium to that of the US for now; Japan’s fight against deflation means the cost of financing in the Land of the Rising Sun should be far cheaper in the long run. This past week’s hawkish Fed statement, which kept it moving towards stimulus exit and acknowledges “abating” unemployment (a key block to raising rates) also upped rate increase expectations.


  • Market risk sentiment: perhaps the most likely threat of volatility comes from underlying risk trends. While the appreciation in a number of asset classes can be attributed to risk appetite; in reality, sentiment has been in a holding pattern for the past few months. A clear break from the S&P 500 below its flattening 50 day moving average around 1080 or above 1120 could well generate a significant reaction from the dollar.


  • The big threat-surprise exogenous events: like another debt threat announcement during low liquidity periods. Just an observation-Spain is not known to be an easy place for bulls. Ole!




Along with these major fundamental themes in the background, stay aware of scheduled event risk.

However, if there is going to be any serious market moving event, we expect to come in the form of more sovereign debt news, likely negative and coming from the Euro-zone. Religious beliefs aside, we don’t believe in coincidences, especially when there’s a few fast bucks to be made. As we suggested above, we are really NOT shocked (shocked!) by the idea that Dubai World’s announcement may have been planned to take advantage of draining liquidity on the eve of two major holidays, and suspect that somebody with a few new long dollar or other safe-haven positions had extra reason to celebrate, regardless of nationality. Don’t be shocked if we get another such announcement as Xmas or New Year’s Eve approaches, and don’t say we didn’t warn you.




EUREUR Weekly Outlook:  EZ Debt Threat, EUR/USD Momentum, Illiquidity, Suggest Downside Risk


EUR/USD Daily Chart   AVA FX CHART (image 04 dec 18)


Euro Forecast: Bearish

-    Events: Tues.-Gfk German Consumer Climate, Belgium NBB Business Climate, Wed.-French Consumer Spending m/m

-     EUR vulnerable to more downside risk if more EZ members follow Dubai’s example of springing bad news at illiquid holiday eve moments, given the EUR/USD’s downward momentum

-    S&P downgrade of Greek sovereign debt rating, Austria bank failures, further weakens EUR

-    While drowned out by debt woes, this week’s Euro Zone PMI data shows expansion, may force ECB’s hand

-    Euro/US Dollar very closely linked to gold prices as USD rise weakens gold, EUR dollar hedge appeal



If you’ve read our USD Weekly Outlook, this one is almost a mirror image of it. The EUR is down almost 2% against the resurgent US Dollar, leaving momentum firmly to the downside. Why?

Things were going great for the EUR just 3 weeks ago. Then came the “Cry from Dubai,” which, as we warned, reminded markets of the “ there is no such thing as one cockroach theory,” and everyone started thinking about where else there might be sovereign debt risk. The rating agencies woke up and started looking deeper at the current suspects (most prominently in the Euro-zone (EZ)), the media started asking questions. To paraphrase Claude Raines’ famous line as the Chief of Police in the classic film Casablanca, markets were “shocked, shocked (!), to find there has been gambling going on!” Credit ratings of Greece and Spain were downgraded, other suspects like Portugal, Ireland, Italy, and Latvia were mentioned.

As expected, the “Sovereign Debt Threat” overrode some bullish economic data this past week. Standard & Poor’s joined Fitch Ratings and cut Greece’s sovereign debt rating to a single notch above junk status. Combined with news that Austria nationalized its sixth-largest bank, and still fresh memories of Spain’s recent downgrade, developments in Greece helped sink the euro to fresh lows against the dollar and other currencies.

Bullish Manufacturing and Services PMI data, along with optimistic German IFO Business Confidence numbers simply got drowned out by the much larger concerns about EZ debt and its ramifications. CFTC Commitment of Traders data now shows that Non-Commercial traders have gone net-short the Euro for the first time since May, and the sharp shift in sentiment suggests more downside in the weeks ahead.

However, three straight weeks of declines nonetheless leaves a real chance for a short-term bounce, and a holiday-shortened week of trading may produce especially choppy price action for the Euro/US Dollar pair.

JPYJPY Weekly Outlook: Improving Yield Expectations For USD vs. JPY Boost USD/JPY


USD/JPY Daily Chart   AVA FX Chart (05 dec 18)


Yen Outlook: Bearish

- Events: Sun.-Trade Balance, Mon.-All Industries Activity m/m, BoJ Monthly report, Tues.-BoJ Gov. Speaks, BSI Mfg Index, Monetary Policy Meeting Minutes

- Bank of Japan Remains Dovish, Keeps Policy Unchanged, while US sounds slightly more Hawkish

- Japanese Firms Look to Record Spending Cuts in the Fourth Quarter

GBPPound Breaks Downward Ahead of BoE Minutes, Final 3Q GDP Report


GBP/USD Daily AVA FX Chart (image 10 dec 18)


Pound Forecast: Neutral/Bearish As It Too Feels USD Pressure

- Events: Tues.-Current Account, Final GDP q/q, Wed.- MPC Meeting Minutes, BBA Mortgage Approvals

- More GBP Downside Likely, As Retail Spending Contracts in November, along with Public Sector Borrowing Rising at Record Pace, and expected dovish MPC Meeting Minutes

- U.K. Employment Unexpectedly Improve

- U.K. Consumer Prices Top Forecast

CHFFranc Vulnerable To SNB Intervention On Euro Weakness




Franc Outlook: Bearish

- Events: Tues: Trade Balance

- USD Driven EUR Weakness Prompts SNB Intervention Expectations, USD/CHF Soars

- SECO Raises Its Growth Forecast to 0.7% from 0.4% for 2010

- Industrial Production Improves by 3.4% for Consecutive Quarter


CADDownside Risk Ahead of Retail Sales Data


USD/CAD Daily AVA FX Chart  (08 dec 18)


Canadian Dollar Forecast: Bearish

-    Events: Mon.- Core & Retail Sales, Wed.- GDP m/m

-    Canadian Consumer Prices top Forecast, but USDCAD rallies As USD, Debt Threat Override News, Rising Oil Prices

-    US Dollar/Canadian Dollar may continue range trading

AUDAre Signs of Failing Stimulus An Ominous Sign For All?


AUD/USD Daily AVA FX Chart (06 dec 18)



Australian Dollar Outlook: Bearish

- Events: None of Note

- Australian Dollar Drops as Disappointing GDP Weighs on Rates Outlook

- Meeting Minutes Show RBA May Pause Interest Rate Hikes in February

- Data Shows Aussie Economy Grew From Stimulus Alone, And Is Not Growing On Its Own. If This Signals Failure of Keynsian Stimulus to Spark Recovery in the BEST Economy of the Developed World, What Does That Signal for the Rest of the Developed World?

Key Point: If this economy, the biggest success story thus far among the developed economies, can’t be saved by massive stimulus, what does that suggest for the rest of the developed world? If Keynesian spending doesn’t do the trick, then are governments out of bullets?

NZDQ3 GDP The Key Event This Week, Barring Major Sentiment Shift


NZD/USD Daily AVA FX Chart (09 dec 18)


New Zealand Dollar Outlook: Neutral

- Events: Mon.-Credit Card Spending, Current Account, Tues.-GDP q/q,

- New Zealand Services Expands the Most Since November 2007

- Business Confidence Weakens For Second Month

- Underlying Risk Appetite Has Yet to Break