Compass Directions Afternoon Report Tuesday, 6 December 2011
Markets have fallen today as risk aversion rose with Standard and Poor’s putting 15 European nations including France and Germany on watch for possible ratings downgrades. Furthermore, the Asian Development Bank said in a report released today that Asian economies are facing “much greater downside risks” because of the increasing likelihood of recession in both Europe and the US. The report called for increasing flexibility in the way officials manage policy to meet the demands of increasing uncertainty in the markets. Risk aversion rose and the EUR traded as low as 1.3360 today.
The Australian dollar has fallen more than one cent from its days’ high after the RBA rate decision. The bank reduced rates by 0.25% as expected to 4.25%. Economists expect that there will be further easing in Australia with some forecasts of a further cuts totalling 1% over the next year. The banks cited “considerable turbulence” and difficulties in “financing conditions” across global financial markets. Governor Stevens stated that “together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased” The AUD is closing the Asian session at 1.0170.
Stocks fell gradually throughout the Asian session. The MSCI Asia Pacific is down more than 1.2% with seven stocks falling for every one that rose. Declines across Asian bourses were greater than 1%. The Hang Seng has fallen 1.51% to 18,890 while the Nikkei is lower by 1.22% to 8,590. The ASX 200 has closed the day down 1.48% to 4,257 with the market seeing the rate reduction from the RBA as a sign that the Eurozone debt crisis is having a growing impact on Australia’s economy. There is now speculation that the Australian GDP data to be released tomorrow may be weaker than expected.
Commodity prices fell as jitters over Europe dominated the investor psyche. WTI crude fell 0.51% to $100.48. Precious metals have fall-en with gold lower by 1.09% to $1,715 while silver lost 1.3% to $31.95. Soft commodities were broadly lower while copper fell 1.95% Overnight we have the release of the UK HPI, Swiss CPI and the Canadian rate decision.
GOLD continued to struggle in Asia today as a negative lead this morning out of Europe coupled with an interest rate cut in Australia lead profit takers back into the markets as the AUDUSD crumbled taking Copper prices with it. It was clearly a risk off day but we see this move lower in gold as being short lived as support levels continue to hold above $1,700 and we must be patient as prices will rebound just as quickly as they fell. Gold traded in a $1,708-24 range and finished the session weaker by 1.20% at $1,713. We are going to remain bulls in the short-term as key support levels remain intact and it is clear that this move has been overdone and we should have been slightly more patient in waiting for a pullback before getting long again. We will wait for a bottom to form and this should be confirmed by a break back above $1,727 and then $1,735. As long as support in the $1,690-$1,700 region holds then we remain a short-term buyer of dips. The interest rate cut in Australia today was the real trigger for a fall as the AUDUSD drove commodities lower but we expect European and US markets to hoover this up and push prices higher. We did break through $1,711 support today but only marginally and we have subsequently bounced off the level so watch the AUD and US equity futures for guidance of when to get in and remember to keep stops just under $1,700 as below here we could see extended declines. The markets are changing from day to day with news flow so we must take more structures MT views for now with wider stops to steer clear of getting stopped out in the short-term.
AUD/USD opened the morning session with the tone managing to remain quite buoyant despite the negative US afternoon tone of the majors. However, as the day wore on with the majors remaining heavy and weaker Australian Current account giving a negative prelude to the RBA announcement as the pair moved down to 1.0240. A 0.25bp cut to see official interest rates to 4.25% has taken the bear market lower with 1.0210 easily giving way as the price fell to 1.0180. As we write the pair has extended down to 1.0165 and is looking more than likely for the 1.0155 support to break. A break of the pivot will have momentum names entering during the London morning smelling blood in the water and we could very well be on the road to parity. Anymore negative tones out of the Eurozone will only heighten the decline and as they say “Don’t try and catch a falling knife”. 1.0085 is the next level of support under 1.0155. Topside selling should be seen between 1.0230/50 if there manages to be a bounce.
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