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The equity markets headed northbound, making new highs for 2009 last week, as solid earnings and encouraging economic news pushed investors back into riskier assets.  The large cap S&P 500 closed the week up 24 points or 2.25%. The S&P 500 Index created a new high for 2009, hitting 1,105 and the DJIA kept its pace, reaching 10,342 points. Equities moves were mainly affected by the currency market last week as large cap multinational stocks that are often affected by Forex fluctuations, led the way higher.

The markets started off on a solid note on Monday, after the G20 showed minimal concern with regards to the weakness in the US dollar.  US equity markets surged, with DJIA and S&P up 2.0% and 2.2%, respectively.  Financials and industrials outperformed which lead the markets higher. The main message from the weekend G-20 meeting was that governments would maintain and back strong stimulus efforts to those economies which are now moving in the right direction to deal with the current recession.

On Wednesday there was a plethora of economic data out of Asia which stimulated confidence that global growth was on the mend.  The impressive retail sales figure (up 16.2% y/y vs. 15.7% expectations and 15.5% in Sept) and industrial production (which accelerated from a 13.9% y/y pace in Sept to 16.1% in Oct vs. 15.5% expectations) helped bolster hopes China will help the global economy to gain further traction.  This, combined with the better than expected Japanese machine orders which grew more than twice as fast as expected in Sept, reinforced faith in the recovery. Orders were up 10.5% m/m, much more than the 4.1% expected.

The Equity markets continued to hold onto gains for the week as market participants awaited the Jobless Claims number out of the US, which was scheduled on Thursday.  The U.S. Labor Department said in its weekly report that initial claims for jobless benefits fell by 12,000 to 502,000 in the week ended Nov. 7. That was the lowest level since Jan. 3. The previous week’s level was revised to 514,000 from 512,000.  Although analysts were expecting a drop to 510,000, optimists were hoping for a fall below 500,000.  The result disappointed and resulted in some profit taking, which caused the equity indices to drop and the dollar to rise.

On Friday, the EMU released its GDP which came out slightly worse than expected.   Euro-zone gross domestic product grew 0.4% in the third quarter, after dipping 0.2% in the second. This was the first quarterly expansion since the first quarter of 2008. On an annualized basis, the contraction in GDP eased to 4.1% from 4.8% in the second quarter. Economists were expecting the first estimate of third-quarter GDP to show that the economy had expanded 0.6% on a quarterly basis and contracted 3.9% on an annual basis.

Forex:

Even though the Dollar showed relative strength last week, it failed to present any major moves, appearing to be running out of steam.  The euro lost ground after failing to sustain gains above $1.5000 and dropped towards the end of the trading week. Even though traders preferred to cash in on recent gains, the currency managed to stay above the $1.4875/85 area (around the 20-day moving average and 38.2% retracement of the recent rally).  The Euro zone industrial production data was somewhat disappointing, and increased by only 0.3% m/m in Sept (0.5% exp). On the upside, economic data also showed that Germany’s output jumped 3% in Sept and contributing to the slightly smaller than expected contraction in Germany’s GDP result for the third quarter.  Spain’s GDP also showed a better than expected result at -4.0% y/y vs. -4.1%. From a technical point of view, the Euro is now in danger of forming a double top, struggling advance above $1.50.  One must note that break below 1.48 could create a downdraft for the EUR/USD and lead to additional selling pressure.

The Australian dollar hit new highs for the year touching 93 cents against the US dollar.  Australian home approvals climbed by the most in six months in September, giving the RBA justification to hike rates in coming months. Though the central bank has pointedly used the word ‘gradual’ to describe the movement of interest rates in coming months, improving data continues to underpin speculation of sharper tightening.  The AUD/USD finished the week just under multi-year highs.

Pound came under pressure after the BoE’s King, commented after the release of the Quarterly Inflation report. The bank Governor talked about the benefits to the economy of a weaker pound and mentioned that it could help economic growth.  He also said he has an “open mind” on bond purchases, suggesting the BoE has not necessarily reached the end of Q/E.  The BoE said inflation is still expected to come in below the 2% target for most of the next 3 years before edging higher.  The Dovish comments had a negative impact on the sterling sending the cable down after posting hefty gains. Even though, fundamental data is pointing to further weakness, technical levels could hold strong, especially as the Sterling is now trading around prior resistance.

The week Ahead

Next week, a wave of data is going to be released, some of which will have a major effect on the intraday sessions.  On Monday the week will start off with US Retail sales and Business Inventories.  On Tuesday the market will need to absorb UK CPI and US PPI, Industrial Production and Capacity Utilization. During the week Australian Wage Price Index will be released, followed by UK BOE minutes and the closely watched US CPI figure. The number will be scrutinized by investors to make sure that inflation isn’t showing signs that could hurt economic growth. On Friday the BOJ will announce their interest rate decision. The bank is expected to hold at current levels of 0.1%.

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Stocks Climb on Earnings, Currency Pairs Present Surprising Movements

Global equity markets soared last week, after strong earnings releases in the United States led the benchmark S&P 500 index to new highs for 2009.  The S&P 500 rose 16 points or 1.5% during the week, while the Dow Industrial index broke the psychological 10,000 level.  European indices such as the DAX and the FTSE made new highs for 2009, while Asian equity markets posted solid weeks after previously retracing from high level.

The markets started on a positive note on Monday, following the prior week’s rally in the equity markets.  The market leveled off on Tuesday prior to a wave of global economic releases and numerous earning releases from large caps. On Wednesday the markets shifted into high gear, after strong earnings numbers from Intel and JP Morgan (Tuesday evening and Wednesday morning respectively).

The markets also welcomed strong Retail sales on Wednesday which, excluding sales of autos and food sales, increased 0.5%. It was a welcome sign of consumer activity especially after one of the deepest downturns in history.  The headline number fell 1.5% in September with the end of the “cash for clunkers” program, but consumer spending rose in many categories, lifting hopes that the economic recovery is gaining momentum at the start of the holiday shopping season.

Global Economic Data Continues to Show Improvement

Also on Wednesday, Japan’s central bank held fast on interest rates, in an effort to spur lending and bolster the corporate-debt market. The ‘no change’ statement came despite recent improvement in the world’s second largest economy.  BOJ Governor Masaaki Shirakawa indicated that the central bank is still leaning towards stopping the purchasing of corporate debt as scheduled at the end of the year, though no formal decision was announced on the issue after a two-day policy board meeting.

In the United Kingdom, the number of people claiming unemployment benefits hit its highest level for more than 12 years in September, but the monthly rise was smaller than expected, hinting that the labor market may have seen the worst.  The number of people claiming Jobseeker’s Allowance benefit in September totaled 1.63 million, the highest level since April 1997, the Office for National Statistics said.

The euro zone saw its fourth straight monthly increase in industrial output in August, providing further confirmation that the region’s severe recession ended around the middle of 2009.  Industrial output in the 16 countries that have adopted the euro currency swelled 0.9% in August from July. The production data eased worries that the euro zone might slide back into contraction later this year or next, though some economists warned that growth would likely slow once government stimulus programs run their course.

The Pound Climbs Higher, USD/CAD at major Support

It was an interesting week for the sterling, climbing dramatically higher against the U.S Dollar. The Bank of England had a positive effect on the Sterling last week as Paul Fisher released an optimistic view on the UK’s situation, sending the GBP/USD six big figures higher for the week. Fisher said that the central bank may pause in its QE (quantitative easing) program and mentioned that he has confidence that the program is working as hoped. This came after a positive surprise in the jobless numbers. Even though the fundamentals for the pound are still negative, with interest rate differentials favoring other currencies, investors preferred the undervalued currency driving it up for the week. Next week’s Bank of England’s minute may ruin the party as analysts are expecting the bank to lay low for the moment and let its recent policy leak through the system.

From a technical point of view the GBP/USD bounced off trend line support and has now headed into range. Even though a minor trend line lies ahead, one could expect consolidation on this pair around current levels.

Similar to the British pound, the Japanese yen reversed during the course of last week.  The BoJ’s upgrade of the economy this week (the government assessment was more pessimistic) does not alter the view that BoJ rates will remain extremely accommodative for an extended period making the yen a primary funding currency.  The USD/JPY broke above its downtrend line (around ¥89.90) drawn off the dollar’s Aug peak, after establishing a base around ¥88.00 causing the 5 and 20 day moving averages to cross to the upside.  Yen losses are likely to shake out momentum traders that took advantage of the yen’s August and September rally.  With the yen uptrend abating, momentum traders, who pay to be long yen against higher yielding currencies, are likely to trim positions triggering further yen losses.  A break above ¥91.70 could present a long position to ¥92.90.

The Bank of Canada is scheduled to meet this week and is expected to stick to its previous statement; leaving rates unchanged thru mid-2010.  Concerns about C$ strength are unlikely to lead to an intervention, especially given limited potential for intervention success. Even though the chart is trading on weekly support, further Dollar weakness together with rising oil prices could lead this pair lower in the long term, to test support level 2.

The Week Ahead

Economic data will continue to have an effect on the intraday sessions this week. In the U.S the market will be watching construction output in the EMU and US NAHB housing index, two events that could cause movement.  Tuesday will also be an interesting day as the Bank of Canada will announce their interest rate decision.  With Australia paving the way, recently raising rates, the markets could be in for a surprise.

Furthermore, the second half of the week should be exiting as the US beige book, UK retail sales and Canadian retail sales are all expected to be released.  Friday’s session will be influenced by the big man’s comments (Ben Bernanke), mentioning the Fed’s outlook.

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Rate Decisions Spark Further Buying

Global equity markets rallied significantly last week, as optimism about global growth returned to the markets.    The Dow Industrial average finished the week at 9864 reaching a 52 week high, two years after reaching an all time high of 14,198 points.

The S&P 500 Index (the broader market) rallied 46 points or 4.6% to settle the week at 1,071.  Optimism began early in the week after the Institute for Supply Management reported that its index of nonmanufacturing activity jumped last month to 50.9, from 48.4 in August, while its business activity/production index hit 55.1, from 51.3.  These positive results pushed the S&P 500 up 15 points or 1.5% at the start of the week, showing investors that the U.S economy is slowly crawling out of its recession. One must note that a number above 50 is classed as a positive sign and will often point to expansion.

Positive news continued to grip the market at the beginning of the week as the Reserve Bank of Australia increased its benchmark interest rate to 3.25% from 3.00%.  The surprising news pushed the US equity markets and Dollar counterparts higher, with DJIA and S&P rising 1.4% and 1.4%, respectively. On the Forex market the Australian Dollar soared higher reaching a weekly high of $0.9098.  European markets rose too, as DJ Euro Stoxx 50 ended up 2.7%.

On Wednesday night and Thursday the US markets received two surprises as Alcoa announced positive earnings and Jobless claims declined.  Net third-quarter profit for the aluminum giant was $77 million, or 8 cents a share, compare to expectations of a loss of 9 cents a share.  On Thursday jobless claims decreased by 33,000 to 521,000. Economists were expecting a decrease of only 11,000.

Positive Economic News is Bad for the Dollar

The dollar continued to trade on the defensive side, as currency traders were forced to digest a wave of economic news.  Following the RBA rate hike, the Australia dollar showed significant gains against the greenback.  This was compounded on Thursday after the Australian Economy also showed extremely strong gains in employment.   From a technical point of view the Australian Dollar has presented a phenomenal come back, breaking all Fibonacci levels, heading higher. Even though a pullback could take place, the current angle of the trend is signaling that this pair could be headed for its previous high.

The Canadian dollar set a new high for the year around C$1.0565 against the US dollar, using the unexpectedly strong Ivey PMI as a catalyst.  At 61.7 (vs. 56.2 exp), the Sep PMI report, showed the strongest result since July 2008.Despite the positive number one must note that the index is not seasonally adjusted and September tends to be a strong month regardless of economic conditions.

On Thursday after Canadian employment grew by 30,000 jobs, the Canadian dollar made new highs for the week.    The CAD/USD broke through recent tight range of 1.0630 – 1.1125, and is now presenting enough momentum to test the parity level.

Over in the Euro-zone, ECB President Trichet’s post-meeting press conference left little doubt that the ECB will leave both conventional and non-traditional policy measures unchanged well into 2010. To date the bank wants to ensure that the euro zone’s economy returns to a healthy state, characterized by proper economic growth. Even though Trichet stressed on the importance of the U.S Dollar following the ECB’s rate decision, his comments eventually led to a euro relief rally, as it became apparent that the ECB remains on a very low rung of the intervention ladder.  While the euro has since pulled back below $1.4740 with further support around $1.4680, the fundamental picture has not changed with new euro buyers likely to emerge on the pullback.

Gold and silver lead the charge this week in the commodity markets.  Gold hit a new all time high at $1067, while silver also hit a 2009 high at $17.91.  A strong technical breakout along with the growing demand for an inflationary hedge, pushed precious metals higher during the course of the week.  The moves gained momentum after the RBA increased its central bank rate, especially as gold and silver are known to be the best instruments to use as an inflationary hedge.

The Week Ahead

This week a wave of global economic data will be released, some of which traders will need to keep an eye on.  After a bank holiday on Monday in the US, Tuesday will start off with National Australia Bank’s Business Conditions (Sep), Consumer Price Index, Retail Sales in the UK, and the Zew survey of economic sentiment in the EMU.  On Wednesday eyes will turn to retail sales in the U.S and EMU Industrial Production.  Europe and the U.S will take center stage on Thursday as both are expected to release inflation data.  The week will end with Canada in the spot light, scheduled to release its Consumer Price Index.

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The Rally Continues, Gold Comes Back Into Focus

Numerous events had an effect on yesterday’s session, driving Wall Street and the major currency pairs higher. The Bank of Australia surprised the markets, increasing their central rate from 3% to 3.25%. Gold jumped above the $1000 mark and rumors that the Dollar might lose its status as a major currency in the oil trade, helped to push the indices higher.  The S&P500 closed the session with a gain of 1.37%, while the Nasdaq finished higher by 1.77%.

The trading day started on a positive note, as the RBA mentioned that they expect the Australian economy to return to a normal state during 2010. The bank took certain measures against future inflation, raising their central bank rate.  The RBA finished their speech by mentioning that with inflation now around stable levels and growth likely to be close to trend over the year ahead, they feel that it is now time to start to remove the stimulus provided by monetary policy from the markets.

Even though all the Australian Dollar crosses felt an impact from the bank’s decision the AUD/USD showed the most movement, continuing higher within its recent trend. After bouncing off trend line support last week, the AUD/USD climbed during yesterday’s session reaching the middle of its current channel.

Gold Climbs to new Levels.

The buzz of the day was Gold, reaching an intraday high of $1042.32. Already during mid-day, European hours, this hot commodity broke its prior minor range and headed higher. Within a matter of a couple of hours, Gold broke all resistance levels and climbed higher. Gold finished the day around its highs and held at $1040 during the overnight session.

From a technical point of view Gold has now breached its prior high formed in early 2008. When taking a glance at the weekly chart below one can see that even though this commodity is trading around high levels, indicators aren’t yet pointing yet to an overbought situation. According to some analysts including J.P Morgan, Gold could see higher levels in months to come due to the current situation. With the Fed expected to keep interest rates at low levels, investors are now heading out of the U.S Dollar, rushing to counterparts, which include Gold.

Market Data to Watch Out For

Looking forward, today’s session will be characterized by investors preparing for tomorrow’s interest rate decision. Even though the markets are expecting a ‘no change’ statement from both the banks, recent actions by the RBA have shocked traders, showing them that anything can happen.

GDP is scheduled to be released shortly in Europe and is expected to show a -0.1% figure. In addition, Australia will continue to shake the market, releasing their employment figures later on during the trading day.

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