Tip:
Highlight text to annotate it
X
We were correct in anticipating a deeper fall in global stock markets last week.
Obama's win in the US presidential election kicked start a round of steep selloff in equities
markets, as focus has now turned to the so-called fiscal cliff.
The Dollar and, to a larger extent, the yen benefited from risk aversion and jumped across
the board.
Most major currencies were lower, including the Euro, which was weighed down by uncertainties
regarding the situation in Grease and outlook of the Eurozone economy.
The Kiwi was the weakest currency on poor job data, followed closely by the Canadian
dollar.
However, we were wrong in predicting weakness in the Aussie, as it was in turned supported
by the Reserve Bank of Australia's decision to keep rates unchanged, and then an impressively
strong employment report.
Technically, we'd like to point out that the DOW Jones is pressing a trend line support
as well as the 55 week exponential moving average.
That is, we could at least see a rebound in near term and that could limit the strength
of the dollar and yen, or even trigger a notable pull back.
Meanwhile, in the currency markets, price actions in European majors since October are
viewed as corrective.
The corrections in Euro U-S Dollar British Pound U-S Dollar and U-S Dollar Swiss Franc
look a bit stretched and thus, we'd tend not to chase the current move.
Instead, we'll start to focus on a reversal signal.
A similar picture is seen in yen crosses as we'd prefer to see a decisive break of 100.14
in Euro Yen and 124.72 in British Pound Yen before abandoning our bullish view.
Quickly after being re-elected as U-S president Obama has started public negotiation with
House Speaker Boehner on the issue of the fiscal cliff.
Obama emphasized that the election results showed that the majority of Americans agreed
with his "balanced" approach.
That includes pushing the top tax rate up from 35% to 39.5% and a tax cut extension
for people earning less than 250,000 dollars.
Meanwhile, Boehner's Republicans advocate an approach which avoids a tax hike and spending
cuts by overall entitlement spending and tax code.
Obama is set to meet with House Democratic Leader Pelosi, Senate Majority Leader Reid
and Senate Minority Leader McConnell on November 16th.
And it should be noted that should there be no agreements made before the end of the year,
there would be a 607 billion dollars in automatic spending cuts and tax hikes to take effect
in January.
>
In Europe, the European Central Bank left the main refinancing rate unchanged at the
November meeting.
President Draghi signaled that the 17 nation bloc's economic outlook has weakened.
Yet, policymakers appeared to have no intention to add further easing measures to contain
the deterioration.
One reason we believe is the unchanged inflation outlook.
Meanwhile, the central bank viewed current interest rates as appropriate and 'accommodative'
enough for the current situation, citing negative real rates as an evidence of this very easy
stance.
In the European Commission's autumn forecast, it said that recession in the 27 state E-U
and 17 state Eurozone would be deeper than originally expected.
The EU economy is expected to contract by .25% this year and grow .5% in 2013, downwardly
revised from prior projections of 0% growth in 2012 and 1.3% growth in 2013.
The Eurozone economy is expected to contract by .4% in 2012 and grow a mere .1% in 2013,
downwardly revised from prior projections of 1% growth in 2013.
Meanwhile, eleven Eurozone states are expected to miss their deficits targets for 2013, including
Spain, France and Italy.
Overall, the Commission also warned that Europe's "economy continues to deal with a difficult
post- financial crisis correction," and "the distress in more vulnerable member states
has progressively started to affect the remainder of the union."
Meanwhile, "the experience of the past two years shows that reversals of sentiment can
happen very rapidly if the implementation of measures falters."
Also, a few points to note from the report is that Spain's economy is expected to contract
by 1.4% this year and next.
That's much worse than the Spanish government's projection of .5% in 2013.
The French economy is expected to growth .4% in 2013, just half of government's projection
of .8%.
Germany's growth forecast in 2013 was also lowered sharply to .8%, down from prior projection
of 1.7%.
Separately, E-C-B President Draghi warned that the debt crisis is beginning to impact
the region's largest economy.
He noted that "Germany has so far been largely insulated from some of the difficulties elsewhere
in the euro area. But the latest data suggest that these developments are now starting to
affect the German economy,"
In Grease, the parliament approved the new austerity program with 153 votes in favor
over a total 300 seats, which was positive news.
But also, it's reported that Eurozone finance ministers would not make a decision on releasing
Greece's bailout fund this week.
Instead, they'd wait for a final report from the troika instead.
A draft version of the report would be available for Monday's Eco Fin meeting, but that's believed
to be insufficient for making the decision.
And, it's believed that November 26th would be the possible date to finally sign off the
release of the 31.5 billion euros tranche of bailout funds to Greece.
Spain finished 2012 financing by selling 4.8 billion euros in bonds.
That included sale of 731 million in 20 year bonds, the first longer term issue in 18 months.
The auctions were considered smooth and successful and beat the treasury's target of 3.5 to 4.5
billion.
Overall, the results also argue that there is no immediate need to seek a sovereign bailout
and activate the ECB's OMT at this moment.
The Bank of England kept rates unchanged at .5% and maintained the size of the asset purchase
program at 375 billion pounds.
No details were released and focus will turn to the inflation report to be released on
November 14th, and minutes to be published on November 21st.
The Reserve Bank of Australia left the cash rate unchanged at 3.25% in November as the
upside surprise on inflation has led to the pause.
The central bank also delivered a more optimistic tone in the statement regarding Australia's
economic outlook.
While policymakers continued to view that the mining boon would peak next year, they
would now likely adopt a more reactive approach than a proactive one.
We retain our view that the RBA would cut interest rates again in December.
New Zealand employment unexpectedly dropped .4% quarter on quarter in Q3, dropping for
the second straight quarter, and pushed unemployment rate to 13 year high of 7.3%.
The Kiwi tumbled as markets are raising the bets of rate cuts by the Reserve Bank of New
Zealand.
Chance of a 25 base points cut in December as implied by interest-rate swaps rose to
above 20%.
Though, it's noted by some economists that there should be enough evidence for the Reserve
Bank to cut rates by the end of the year, but they could possibly wait for another quarter
of weak data before acting.