Forex Market Outlook 1/3/12
Buy Buy Buy! At least that’s how the New Year is starting out, as the markets are decidedly risk-taking mode after the shortened holiday trading sessions. Global financial markets are set to open higher, led by stocks and commodities. The fact that markets couldn’t rally higher to end the year may bode well for the start of 2012, but will it continue throughout the year?
The short answer is not likely, but I will say that economic conditions appear to be improving albeit slowly and there is still great global risk emanating from the Euro debt crisis. There is also bound to be further political unrest around the globe, and already it has started with Iran who had new economic sanctions imposed upon them by the US over the weekend. This has caused them to increase their threats of shutting down the Straits of Hormuz, which is a major conduit for global oil supplies. This has caused oil prices to shoot up here in the US and it is now trading close to $101.50. Should this situation continue to escalate, we could see much higher oil prices which could have a major affect on inflation.
However the markets are reacting more favorably to positive economic data that has been released so far this morning and looking forward to data here in the US late this morning.
Here’s what we have so far. Chinese Non-Manufacturing PMI data came in much better than expected, posting a gain of 56 vs. last month’s 49.7. Recall that anything over ‘50’ means expansion, below means contraction so this was seen as a big plus for the Chinese economy. This has helped push the Aussie and the Kiwi higher to 3-week highs and the Aussie also was buoyed by its own manufacturing data that also showed expansion vs. last month’s contraction.
This kicked off risk appetite that then followed through to the European session as Germany reported a much better than expected employment report. Unemployment fell by 22K vs. an expectation of 10K and the unemployment rate fell to 6.8% from 6.9%. This is also a positive as the Euro zone needs Germany to continue to thrive in light of the other issues surrounding the region. The debt crisis is going to continue to be the major headwind in the market and I would not be surprised if the Euro zone looked different by the end of the year. Whether or not Greece will leave the economic union will be a major question that will likely need to be answered some time soon.
But for now the markets are content to push higher and meeting between Sarkozy and Merkel next week may provide more clarity on what the expectations are for members going forward.
In the UK, PMI figures came in better than expected at 49.6 vs. an expectation of 47.3, but they were not able to eclipse the magic ‘50’ number to show expansion. This was however seen as a major positive and both the Pound and UK stocks have traded higher.
Later this morning we are expecting the US ISM manufacturing figures, which are expected to show expansion in the 53-range. The market has high hopes for the US economy as the data appears on the surface to be improving so we may find ourselves in a situation where the market now expects the data to beat the expectation.
This Friday will also bring the Non-Farm Payrolls (NFP) report which will show how many jobs the US economy has added. Right now the expectation is for 150K, but my guess is that the market may be expecting closer to 200K as we near the end of the week.
One of the “problems” however with the data we are seeing now has a lot to do with holidays and the change of the fiscal year. This can cause outliers and exaggerated figures, which may not be indicative of the “real” health of the economy. For example, sometimes seasonal hiring and reclassifications can show distorted NFP figures in January so some economists don’t put much emphasis on them. That’s not to say that the markets won’t though as we almost always get major volatility from Friday’s release.
There is also a thought that the better than expected manufacturing numbers we are seeing could be a function of companies replenishing inventories as they get rid of last year’s merchandise to make room for the new. With the better than expected shopping figures from the holiday’s last month, I will be keeping an eye on retail sales figures to start the year to see if the consumer is suffering from exhaustion.
So essentially not much has changed from the end of last year, though with the start of this New Year there is seemingly a sense of optimism that things can get better. Last year was interesting to note that US stocks finished the year flat, yet the Japanese yen was the best performing currency. The latter would normally suggest risk aversion so it’s a credit to US stocks that they were able to hold levels. In other words, stocks could have been much higher without the Euro debt crisis keeping risk at a premium.
There is much to be excited about for 2012 and today’s action is a god start. But let’s not get ahead of ourselves just yet, as this could be a long year.