The final week of 2009 was characterized by light volumes and year end positioning, resulting in a flat week for equity and treasury markets. The unusual scheduling of three treasury auctions (2-, 5-, and 7-year) in the closing week of the year did not seem to upset the markets, even though the two shorter dated auctions were lackluster. Despite the US dollar maintaining its stronger tone, crude oil futures gained all week, retesting the $80/barrel mark. The data highlight for the week was a better than expected December Chicago Purchasing Managers Index, hitting its highest mark since May of 2007. The day after the release, however, the December PMI reading was revised down from 60 to 58.7 in an annual recalculation based on seasonal factors (but still the best reading in two years). US equity markets slipped fractionally for the week, thanks to a late day sell off on Thursday, leaving the DJIA down 0.9%, the Nasdaq off 0.7%, and the S&P500 lower by 1.1%. For 2009, major European bourses were up better than 20%, while the DJIA gained 19%, the Nasdaq rocketed up 44%, and the S&P500 added more than 30%.
Some tech stocks gained ground ahead of the Consumer Electronics Show (CES) in Las Vegas next week. Apple stock rose as several analysts raised their price targets for the stock as speculative buzz over the "iTablet" computer continued to grow. Google also traded higher ahead of the CES, as the software giant is expected to make more inroads in the smart phone market with its upcoming Android based Nexus One device.
The revelation that a Nigerian man linked to Al-Qaeda attempted to blow up a US airliner on Christmas Day sent the stocks of airport security device manufacturers higher all week. OSIS gained over 20%, ASEI was up about 9%, and LLL rose 3%.
International trade felt a ripple this week on as the US International Trade Commission approved new duties of up to 15.8% on Chinese steel pipe used in oil production. China had no immediate reaction, but in the past has weighed in with counter tariffs shortly after new US trade duties were proposed. US steel pipe manufacturers saw modest gains after the ITC decision.
Japan's sovereign credit rating was in the cross-hairs this week as two credit rating agencies chimed in on the sovereign rating of debt-laden country, just as the Yen fell to its lowest level against the greenback in three months. S&P said the sovereign rating could be cut if fiscal policy steps do not stabilize and gradually diminish debt levels, while Moody's noted that the sovereign rating hinges on Japan's medium-term fiscal consolidation and deficit reduction plan. Despite the increased scrutiny by the rating agencies, the Japanese administration remained upbeat for much of the week. Looking forward to the start of the next decade, Japan's 10-year growth strategy draft projected nominal annual GDP growth of over 3%, reaching Â¥650T by 2020, with jobless rate seen in the 3.0-3.9% range. Japan's ailing finance minister Fujii said that a double-dip recession is not likely, expressing confidence that the economy will grow next year. Also on Monday, Japan's Industrial Production growth for the month of November came in at its highest level since May, rising 2.6% month over month.
The dollar was poised to post its first monthly gain against the Euro currency since June as it looked to build upon its recently found momentum that has been aided by rising US yields. The shifting outlook for US interest rates had pushed the dollar to a two-month high against the yen and GBP pairs. Overall the market conditions kept most participants on the sidelines due to the year-end factor, but that did not exclude choppy, sporadic price action best exhibited by the GBP in the latter part of the shortened trading week.
One of the key points next year will be the Chinese Yuan (CNY) as the Yuan currency ended 2009 weaker against the USD by 0.1% compared to the CNY appreciating by over 7% in 2008. China reaffirmed support for Yuan levels, as well as concerns about asset bubbles this week. Early in the week, China's Premier Wen said the government will not yield to foreign pressure to appreciate the yuan, stating that a stable yuan is a positive factor for the international community. Wen added that the government might take measures to reduce speculation in the property market by implementing certain taxation measures. Moreover, Peoples Bank of China adviser Fan Gang commented that China's macroeconomic policy should be flexible in order to maintain economic stability, but also "vigilant" for asset bubbles and hot money inflows in 2010. According to the latest fx reserves figures released by the PBoC, inflows rose by about $37B to $2.8T by the end of November, with $16B in excess of the trade surplus and FDI aggregate seen as the "hot money" intended to gain from the rising value of the yuan or property.
In other currency action this week, dealers were questioning whether the recent trend of rising and widening yields would continue to benefit the dollar as the greenback appeared to be at a crossroads and struggling to garner additional strength. CFTC data noted that currency speculators have gone long the USD for the first time since May. The week ended on an optimistic note in regards to the Eastern Europe emerging markets attributed to rising risk appetite stemming from press speculation that Turkey had reached an accord with the IMF.
- In specific currency pairs:
- GBP/USD suffered early in the week after some adverse press reports that political and budget strife could erode the pound next year. GBP/USD tested 1.5860 before a sharp 400+ pips end-of-week reversal sent it back above the 1.6230 level with vague M&A flows related to Cadbury attributed to a good portion of the move. - USD/JPY Dealers noted that the carry-related theme seemed to be unfolding in this pair. The spread between the US/Japan 10-year bonds hit a fresh two-year high in favor of the dollar. Dealers noted good buying interest from fund managers in the pair but the momentum was initially stymied by the emergence of Japanese export orders layered towards the 92 handle. However, the pair garnered enough momentum to hits its best level since early Sept as it approached the 92.70 level - CHF currency was firmer against the majors and aided by the Swiss consumption index hitting its highest levels in 14-months. EUR/CHF cross moving back below its pre-March intervention level of 1.4850.
Happy New Year!!
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In weekend U.K. press reports, it appeared as though the British government was letting it be known that PM May would be taking a herd line on Brexit ("Hard Brexit") in a major policy address on Tuesday. Markets worry about the risks inherent in Britain making a clean economic break with the EU and have marked the GBPUSD down sharply in pre-market trade.
Trading should not start in earnest this week until Tuesday due to the Martin Luther King Holiday Monday in the U.S. The rest of the week sees a calendar chock full of potentially market-moving events. See calendar above.
On Friday, January 20 at about midday ET. Donald Trump will be inaugurated as U.S. President. His inaugural will be carefully combed for any items related to economic policy.
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