Compass Directions Morning Report Monday, 28 November 2011
As pressure mounts on the new Monti administration in Italy to speed up the passing and implementation of austerity measures and bond yields hit another Euro-record high in an Italian bond auction on Friday, it appears that the IMF may be preparing to lend Italy up to $800 million as the country’s debt crisis worsens. La Stampa reported that the loan, which would require Italy to pay between 4 to 5 percent interest, would allow the country breathing time of up to 18 months to implement reforms without having to seek refinancing. Italian six month yields hit 6.5% up from 3.5% at an auction only a month ago while the 2 year yields rose more than 50 basis points to almost 8%. The EUR is traded to as low as 1.3213 on Friday before bouncing strongly this morning on the back of the IMF news to open up the Asian session above 1.3300.
In a week that saw the European debt crisis take a turn for the worse after a disastrous German bond auction and the American Federal Budget “supercomittee” failed to meet a deadline to present a proposal to cut the federal deficit, the USD was the big winner as it gained against all the majors. In more bad news for the Eurozone, Fitch cut Portugal’s rating to junk and Moody’s did the same for Hungary. There is now increasing speculation that France and Germany are working on budgetary measures that may induce the ECB to intervene more decisively to halt the spreading debt contagion. The Dollar even man-aged to rise against the Japanese Yen and is currently trading at 77.60. The Australian dollar continues to struggle amid the global financial turmoil but managed to rise strongly this morning tracking the EUR on the back of the IMF news. There has been a short squeeze of more than 100 points which has seen the little Aussie battler open up above 0.9800 this morning.
Equity markets closed the week down. There wasn’t much thanksgiving for stock traders as US equities recorded their worse Thanksgiving week of trade since 1932. The S&P 500 lost 4.7% for the week, down 0.27% for the week to close at 1,159 and is down for 7 consecutive days. After early session gains, the index dropped after S&P lowered Belgium’s credit rating and Reuters reported that Greece is demanding bigger haircuts on its debt from private investors. The biggest losers for the week were energy produces which fell 6.2%. Earlier in Europe, stocks actually gained in the last session of the week with the DAX higher by 1.19% to 5,493 while FSTE rose 0.72% to 5,165.
Commodities eased slightly as the equity markets closed the week lower. Crude managed to make modest gains, rising 0.62% to $96.77 as geopolitical tensions in the Middle East remain at elevated levels. Precious metals fell with gold down 0.61% to $1,688.50 while silver lost 2.73% to $31.10. Soft commodities started trade lower after the Thanksgiving holiday with coffee and soybean futures falling more than 1%. Copper lost 0.26% while the CRB index lost 1.28 points to 305.45. A data free Monday will most likely see the Asian markets focus on the news developments over the weekend. The news surrounding the possible IMF action in Italy may act to stem further losses in Asian markets.
GOLD moved modestly lower in offshore trade but ultimately markets were thin due to the Thanksgiving day holiday in the US. We will see the return of the US tonight and liquidity will return today so we should see a push higher as positive news flow over the weekend out of Europe sees the USD decline in early Asia trade and we have not seen any strength in the AUD and Euro for sometime now. Gold finished the week out at $1,688. A base is clearly forming right now around $1,675 and with some early USD weakness we expect equities to rebound today and for commodities to find some support after a week of miserable declines. Gold will be a big winner if this occurs today and we would be a buyer of dips towards support at $1,675 looking for a move back to $1,700 and then $1,711. The latter is key for gold in the short-term and a break though $1,711 signifies a bottoming has occurred and we can look for a move back to $1,750 initially. Stops on short-term longs must remain just below $1,665 for now until the break higher occurs. Below here we could still see declines target $1,600 before the next big leg higher as major support sit down here.
AUD/USD continued to test the Asia session lows around 0.9670 by the time of the US as the market looked to continue the risk off tone as Italian Bond auctions were again weak at best with reports that the Greeks were to change their wanted 50% write offs to 75%. This on top of reports that the $1 Trillion EFSF would unlikely get the funding required in the current market conditions. However, during the US morning the pair squeezed higher in a pattern that we have seen when the US is on holidays with the price getting to 0.9775 before being capped and resold back down to 0.9715 to close out the week. Early Monday morning buying on an Irish Times article that the EFSF rules are ready for approval has seen risk sentiment increase and the AUD trade above 0.9800. We will ride out this spike for the moment and not turn the shot term bias back to bearish yet. If we where to see the momentum waning in the high 0.9800s this afternoon we could possibly change that.
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