Key Events to Focus On This Week
- Australian retail sales
- China’s trade balance
- UK official rate
- European Central Bank (ECB) rate decision and press conference
- China’s Consumer Price Index (CPI)
Key Events Last Week
- China’s manufacturing Purchasing Managers’ Index (PMI) stabilized at 50.6
- UK manufacturing PMI surged to 51.4
- Institute for Supply Management (ISM) manufacturing PMI rose to 50.7
- Federal Open Market Committee (FOMC) December minutes show that the Federal Reserve (Fed) had some discussion on Quantitative Easing (QE) withdrawal
- U.S. Non-Farm Payroll (NFP) expanded 155,000 jobs
“Risk” might be still preferred in the short run since no fears materialized in 2012
Equities and risk positions’ holders had a great celebration in December 2012 as various indicators together supported a “risk rally mode.” More importantly, it was the right time to price out “fears in 2012” since none of them materialized at the end of the year. Below are summaries of fears we saw in headlines throughout the year:
1) China’s hard landing
2) Euro Zone break up
3) U.S. Fiscal Cliff
For the Chinese economy, every indicator suddenly turned positive in the 4th quarter, which was also the period for the decade leadership transition. Besides that, the domestic benchmark equity index rallied around 15% in December. The fear of a hard landing lasted for nine months and vanished naturally.Source: Bloomberg, FXPRIMUS Click the image to enlarge
In the Euro Zone, everything holds well and we continue seeing the power of Outright Monetary Transactions (OMT), although the European Central Bank (ECB) has not spent a single dollar on the program. The Euro and equities in the region rallied in the last month of the year. It was contributed to largely by the “fear position” in the middle of the year and adding “buy positions” at the end of the year, as they realized that “2012” is merely a movie.Source: Bloomberg, FXPRIMUS Click the image to enlarge
In the United States, risk appetite generally extended, although the Federal Open Market Committee (FOMC) meeting worried traders that there might be some withdrawal within the year. We also saw some Greenback strengthening in the past few days. However, evidence on whether it’s a profit taking action or pricing out the QE effect is far from enough, if merely judging from here.
From the Dow Jones index performance in the past few days, we can see equities traders ignoring the FOMC minutes and extending the celebration of the deal made on Fiscal Cliff.Source: Bloomberg Click the image to enlarge
European Central Bank (ECB) may leave benchmark refi-rate unchanged at 0.75%
In Europe, the market will focus the ECB’s rate decision and press conference. There is significant Euro downside if the ECB decides to cut the rate. However, the possibility is extremely low.
There isn’t too much a rate cut could do to help the current Euro Zone situation. I expect the region might continue to stay in recession for at least the first half of the year. The good news is that there is no important news from the currency bloc.
The ECB saved the Euro last year, not the fundamentals. We still might not be able to see progress on structural reforms, and topics may stay on confidence picking up or lowering. Before European Stability Mechanism (ESM) kicks off or real fundamentals change, the Euro’s rally will cap somewhere and face some headwind to break the 1.33 level against the USD.
Nikkei 225 – upward momentum maintained on “ultra loose monetary policy”
The Nikkei 225 Index made a more than a 20% rally in the past two months as the market expected more monetary stimulus from the Bank of Japan (BoJ). The inflation target could rise to 2% from the previous 1%. The index beat all major indices in December, including the Shanghai Composite Index.
Some Bank of Japan top members could be replaced by March, thus there is a higher chance more fiscal stimulus will be implemented. The Yen was depreciated to 88.15 against the USD. The current price seems enough to meet the inflation target, although there was a 10% rally.
In the Nikkei H1 Chart, the near term support stays at 10,615. The 1st resistance is at 10790 and 2nd resistance is at 10850.Click the image to enlarge
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Previous Market Brief of the Week: Market Brief of the Week for 10 December 2012: Last Round Of 2012 Global Purchasing Managers’ Indexes (PMIs)