Forex Market Outlook 1/5/12
It is becoming apparent that the Euro debt crisis is winning the sentiment battle so far this year as concerns over bond auctions in various nations have the markets on edge. The economic data story was mixed overnight, which steered the markets toward risk aversion.
This means that we have early Dollar strength and Euro weakness, with lower stocks and commodities and risk currencies. However, as the Euro is making 15-month lows vs. the Dollar and 11-year lows vs. the Yen, the S&P 500 is holding up fairly well. So it is possible that the normal risk-on/ risk-off correlations we discuss are beginning to break down, and markets are definitely bifurcated based on which trading session is dominant.
Case in point, yesterday the markets were lower for the majority of the morning as the US session opened, but once the European market closed stocks ended up finishing the day positive. This is indicative of the fact that the risk in the market is coming from Europe which is no surprise, but it almost seems as though the market here was just waiting for Europe to close in order to begin the party. So pay attention to the time-zone implications of trading in the markets and how they react as each session closes.
Overnight, Asian markets began the sell-off after Australian trade balance figures came in lower than expected as exports to China were lower by 16%. Speaking of China, they also lowered the reference rate for the Yuan, marking the biggest decline since November. The performance of Services index in Australia came in at 49, which was better than last month but still showing contraction rather than expansion.
But perhaps the biggest news of the morning so far was the French bond auction that saw yields rise on a bid-to-cover that was lower than average. There is great concern that France will receive a credit downgrade from their AAA status, which is likely a reason for lower demand. It seems to me that countries that are not Germany are going to have further problems issuing debt. While the bond vigilantes may not be aggressively shorting issues at this time, demand is weak so that may be a benign way of pushing yields higher. In other words, why would investors buy today if they believe yields will be going higher? Because Euro leaders have not come to a complete solution, this is likely going to drag on for some time.
In addition to these funding problems, the Greek PM stated that Greece may face an economic collapse as early as March and the Italy’s PM said that the EFSF is woefully under-funded. Add in some lower Industrial New Orders figures and slightly higher PPI, and the situation is starting to worsen in Europe.
Here in the US, employment data is starting to filter in over today and tomorrow and so far the numbers look great. The big news of the morning is the ADP employment change, which showed a gain of 325K jobs vs. an expectation of 175K jobs. This is a blowout number and could be the start of real employment gains. The Challenger Jobs Cuts figures were also positive after being negative last month.
The initial jobless clams figures came in as expected showing 372K newly unemployed so this number is improving, albeit slowly. US stock futures have improved off of their lows of the morning on these employment numbers so it is possible that the market pattern I discussed above could occur again today.
However, while we cannot extrapolate better Non-Farm Payrolls at tomorrow’s release, these numbers are a great start and it is likely that expectations for NFP have been revised higher. I discussed the other day though how these numbers could be distorted due to seasonal hiring and end of the year book-balancing, but this is the type of data that we need to see to continue to improve the economy.
The power struggle between the negative Euro debt crisis and the positive US economic data will continue to be the story going forward until more clarity emerges. For example, this December ADP number is the highest of 2011, but December’s number has been the highest of the year for the last 3 years in a row. The numbers then begin to slowly decline throughout the following year.
If this is the pattern that we follow this year then things may not be improving as we hope. But if we begin to show improvement next month and going forward, then we may be able to catch an economic tailwind that can overshadow the problems in Europe. If not, then it could be more of the same for 2012. Stay tuned!