Compass Directions Morning Report Thursday, 15 December 2011
Fears escalated overnight that the European debt crisis is beginning to escalate beyond the control of policy makers and sent the markets tumbling. Credit default swaps on European sovereign debt surged towards record highs while Italy had to pay the high-est yields in over 14 years to successfully sell five year bonds in an auction overnight. The Italian government is scrambling to pass a EUR 30 billion budget plan while Chancellor Merkel stated the obvious by telling her parliament that there is no easy solution to the debt crisis. The EUR crashed through 1.3000 as the credit markets begin to show sign of stress that may cause them to seize at anytime.
As peripheral eurozone bond yields rose, yields on 10 year US Treasuries fell 6 basis points to 1.91% and the USD continues to make strong gains. It appears that the recent moves by eurozone leaders to promote greater fiscal union at this late stage of the crisis is akin to the Americans engaging in peace talks with the Japanese on the eve of Pearl Harbour. In other news, it has been reported that the Fed Chairman Bernanke has told legislators in the US that the Federal Reserve has no plans to assist European banks at this stage. The riskier currencies were punished last night with the Australian dollar losing more than 1% to trade below 0.9900. The AUD was the worst performer overnight, even managing to lose against the beleaguered EUR. The Dollar Index has gained to reach its highest point in almost a year.
Loses on equity markets were rather modest when compared to the moves commodity prices. Eurozone concerns continue to dominate headlines. The S&P 500 has closed the session down 1.13% at 1,211.82 with the index now down 2.5% for the year led by a loss of more than 20% in financial shares. Earlier, European bourses fell with the DAX losing 1.72% to 5,675 while the FTSE fell 2.25% to 5,367 with almost 20 stocks falling for every one that gained on the Stoxx 600. Today, we have the release of the high impact HSBC Flash Manufacturing PMI for China.
Commodity prices plunged overnight as investors fears grew over Eurogeddon. WTI Crude went into free fall losing more than 5% to $94.84 after OPEC decided to increase it production ceiling for the first time in 3 years to 30 million barrels a day despite actual production for November surpassing this number due to rising exports from Libya. Precious metal prices were hammered with gold falling 5.47% to $1,572 while silver collapsed almost 8% to $28.75. Soft commodity prices fell more than 2% while cop-per capitulated losing more than 5%. The CRB index lost more than 3% to 295.29.
GOLD plunged overnight in a rout across the commodity markets. After trading as high as $1,640 yesterday it collapsed almost $80 to as low as $1564. Gold has now broken through its 200 day moving average at $1,618 for the first time since 2008. The major support ban d at $1,580 and $1,600 have capitulated and we have been surprised at the savageness of the move. Critical support is now at $1,535 which is also trend support from $730 to $1,920. A break of this this level will signal a new bearish trend for gold. Only in the last couple of days, the economist Dennis Gartman called the end of the bull market in gold. We are now trading around extremely pivotal levels. Fundamentally, we remain bullish gold but now turn neutral in both the short and medium term until we see confirmation of a bottom or a break of support at $1,535 would represent a very bearish signal. Support lies at $1,560 with resistance at $1,640. We would need to see a break of $1,640 to confirm and bottom and to turn bullish in the medium term again.
AUD/USD hovered around the parity level for most of the London morning as the market waited for someone or some comment out of the Eurozone to start a solid attempt for the markets to break the 1.3000 option barriers. Once this were triggered during the afternoon the heavy tone of the market continued with AUD breaking below the 0.9980 support to fall quickly breaking below the 0.9950 support and heading straight to 0.9900 as momentum sellers won out. Bounces have been limited at best and with a million ideas about how to fix the Euro or more likely save it coming out of Europe the likely extension lower for the AUD is growing in the confusion. New Car Sales and MI Inflation Expectation are due during the Australian late morning and with our expectation that the New Car Sale numbers will be lower than the previous and with the negative lead of the late US session the stars are aligning for more weakness during the coming sessions.
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