The market action in equities today was on the zany side, with markets first moping about the implications of Google possibly pulling out of China at the open, only to rocket higher later in the day on positive outlooks from other companies. Banks somehow managed to do well despite the threatened fees on the largest banks by the Obama administration. In other markets, the US Treasury auction of 10-year notes went very well, with a bid to cover at the highest level since last July, but yields nonetheless settled several bps higher on the day as risk appetite found its stride in the US equity trading session. As for commodities, huge builds in US crude oil and product inventories saw crude prices collapsing under 79 dollars per barrel before they recovered into the close in line with risk appetite elsewhere.
The FX reaction to the proceedings was rather muted: EURUSD took out stops in Europe on the high side before the market began to fret drastically wider spreads on Greek debt ahead of tomorrow's ECB meeting, which must see Trichet formulating new rhetoric on how the ECB plans to address this situation. GBP also benefited relative to the weakness in the Euro. Curiously, both NOK and CAD ignored the precipitous fall in crude oil and rallied later in the day, perhaps on hopes that the recovery in the gold price today and risk appetite elsewhere are leading indicators.
The Fed's Beige Book was hardly interesting reading, with a larger number of Fed districts now reporting signs of improving economic conditions, though the weak employment picture remains rampant. Comments on the holiday spending season suggested that 2009 saw an improvement on 2008, but was "far below" the rate of spending for the 2007 holidays. 2008 results certainly offer a low bar as the world was undergoing a traumatic shock last year during the holidays, so a lack of a strong rebound is a testament of still very weak consumption patterns. The official Advance US Retail Sales results are set for release tomorrow - with only a modest increase expected.
Technical and other developments
USD - the USD Index is closing the day lower, though it has recovered from the worst levels on the day, which actually represented new three-week lows.
USD - the USD Index is closing the day lower, though it has recovered from the worst levels on the day, which actually represented new three-week lows.
EUR - relatively weak today after recent attempts at consolidation. Tomorrow's ECB likely sets the stage for the next couple of weeks.
Chart: EURUSD
EURUSD failed to maintain altitude at new multi-week highs today as tomorrow’s ECB meeting looks like the trigger for either another attempt higher for a larger consolidation scenario toward 1.4800 or for a fall back into the recent range.
EURUSD failed to maintain altitude at new multi-week highs today as tomorrow’s ECB meeting looks like the trigger for either another attempt higher for a larger consolidation scenario toward 1.4800 or for a fall back into the recent range.
CAD - is the market seeing something we are not? Suddenly, risk appetite seems far more important than interest rate spreads or a steep crude oil sell-off. An ugly reversal on the daily candlesticks today that sets a higher bar for CAD bears.
GBP - rallying supposedly on the Guardian article about inflation we discussed this morning - but real rate expectations have hardly budged, leading us to believe that some of the action, especially in EURGBP, is about position adjustments ahead of the ECB meeting tomorrow and possibly a reaction to the bounceback in bank stocks today.
Looking ahead
Watch out for the Australian employment report tonight. Our unscientific guess is that the risks are skewed to the downside with this report. In the past, this indicator often shows a tendency toward wide month to month oscillation. The last three months in a row have been relatively strong, so a downside surprise, simply on data noise, would seem more likely than a tremendous upside surprise.
Watch out for the Australian employment report tonight. Our unscientific guess is that the risks are skewed to the downside with this report. In the past, this indicator often shows a tendency toward wide month to month oscillation. The last three months in a row have been relatively strong, so a downside surprise, simply on data noise, would seem more likely than a tremendous upside surprise.
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