The Rally Stalls and Comes Down To Support
After two consecutive weeks of gains, the S&P 500 index stalled this week, closing by 2.25%. Most of last week’s trading sessions were characterized by uncertainty as neither bulls nor bears were sure of the upcoming direction. The first few days of trading were characterized by consolidation, which then led to a minor drop. The major event of the week was the US Federal reserve’s interest rate decision, as market participants waited for the announcement, as well as the Fed’s statement mentioning how they would deal with current security purchasing programs. Market participants used Wednesday’s session as a pivot day, pushing the indices higher during morning hours, only to slam them down in the afternoon. Although the news was neither bullish nor bearish, profit taking seized the day. By taking a glance at the chart below one can see that despite the mixed signals going forward, most of last week’s selling pressure was due to profit taking. The bullish engulfing candle started the selling pressure which led the S&P500 back down to close just above support.
Crude oil was hammered during the week, dragging down the entire market and in particular the energy sector. The XLE, an ETF of large energy companies was down almost 3% for the week.
Unlike previous trading weeks, economic data didn’t have as much as a positive affect this time round, showing investor’s that the pace of the economic recovery could be slowing. The week started off with a disappointing Leading Economic Indicators figure, that increased by only 0.6% m/m, compared to a consensus of 0.9%. Initial jobless claims and Existing Home Sales showed a mixed picture on Thursday. Jobless claims released by the Bureau Labor of Statistics showed a decrease of 530k compared to a consensus of 560k. Existing Home sales came in less than expected at 5.1M, compared to the 5.35M homes expected. Furthermore, housing data released on Friday showed that New Home sales were revised down to 4.29K, instead of the 4.4K previously estimated. The one bright spot during Friday’s session was the Michigan Sentiment index which surprised to the upside, with a release of 73.5 compared to 70.5.
Dollar gains on a downbeat equity market
On the Forex market the Dollar was clearly the leader of the week, increasing dramatically against counterparts. The Pound was pounded last week, after BOE’s King mentioned that a weak sterling would help the UK economy’s adjustment process. This statement drove the GBP/USD below $1.60 taking out multiple levels of technical support. The pound will likely face increasing pressure as the UK government has expressed a preference for a weaker domestic currency, stating that the low level of its currency could help its exports.
The Australian dollar was fare better than most currencies against the US dollar, but also came under pressure, affected by the overall momentum in the markets. Furthermore, news headlines also had an impact on last week’s trading week as the Australian press suggested that contrary to what Chinese officials have been saying, the bilateral relationship between the two is still strained. One must note that China is a major consumer of Australia’s raw commodities, something that also has a tremendous affect on the Australian Dollar. Similar to the rest of the currencies, the Australian Dollar lost its steam last week having an affect on all the AUD crosses. The AUD/JPY broke minor trend line support last week dropping to close the week at 77.699. One must note that even though the AUD/JPY could fall to lower levels a strong support level located at 76.5 lies ahead. A break of support could lead this pair down sharply to new support located near 72.00.
NFP Ahead
Next week the markets will start off on a quiet note but volatility will pick up as the week progresses. Tuesday will be headlined by GDP in the UK and consumer confidence in the Euro zone. Wednesday will reveal construction spending in Japan, employment in Germany and ADP employment in the US. Friday’s session will be the major event of the week as the US employment figures are scheduled to be released. Even though the numbers should show an improvement, the NFP index is expected to show job losses for another month, as the U.S economy tries to recover from its recession. Similar to last month’s figure, analysts are expected mixed signals as the NFP result is expected to show its smallest drop, while the unemployment rate is expected to jump to a whopping 9.8%. With the major assets now correcting, some of which located at critical support levels, it will be interesting to see this time round the impact of this result.
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