Volatility jumped higher at the end of the week, after state owed Dubai world requested to postpone its debt paybacks. Once the news hit headlines Wednesday evening, it immediately caused panic, as the amount of global lenders who are expected to be affected by the situation is still not known. Dubai world is a government owned holding company that is at the center of Dubai’s thrust to diversify its economy into property, leisure and investment, both locally and globally. The news hit the equity markets hard having an immediate impact on the Dollar and the Yen. Both the currencies soared as investors rushed into safe-haven, exiting riskier assets, such as equities.
The S&P 500 index lost 19 points on Friday and finished the week settling at 1091.5, unchanged for the week. The week started on a bright spot and seemed to be heading for a positive week which would have created solid returns for the month of November. Market participants were greeted with positive news on Monday after the Euro-zone showed improving data. The markets remained firm on Tuesday and Wednesday as traders absorbed a plethora of economic data. On Wednesday the US Commerce Department released better than expected housing data. New-home sales unexpectedly climbed in October despite bad weather and uncertainty over a big tax credit for first-time buyers. Sales of single-family homes increased 6.2% to a seasonally adjusted annual rate of 430,000. Economists surveyed estimated a 1.0% drop to a 398,000 annual rate.
Jobless Claims also had an impact on the trading week as the numbers showed that initial claims for unemployment benefits declined by 35,000 to 466,000 in the week ended Nov. 21. It was the lowest claims figure since September 2008. The four-week moving average of new claims, which aims to smooth volatility in the data, also fell, by 16,500 to 496,500.
Over in Europe, business and consumer confidence in the 16 countries that use the euro continued to improve in November, while capacity use in the manufacturing sector rose for the first time since the onset of the financial crisis. A monthly survey by the European Commission showed Friday that the overall Economic Sentiment Indicator, or ESI, for the euro zone rose sharply to 88.8 from 86.1 in October. The increase in the ESI was stronger than expected, with economists surveyed last week having forecast it would increase to 88.1. It was the eighth straight month in which sentiment improved.
The dollar remained on the defensive side up until the FOMC minutes, which released were somewhat negative for the Greenback. According to the minutes, policy members showed little doubt, regarding interest rates but there appeared to be a more widespread debate about whether to extend Q/E. Prior to the minutes, it appeared that Bullard was alone in favoring an extension but in fact other members showed signs that they may be in agreement. He noted that low rates could encourage excessive risk but described the dollar’s decline as orderly suggesting there is no need at this juncture to react to the weak dollar. Opinions were split on the economic outlook even before the jump in unemployment rate. The Fed did raise its growth forecasts for GDP growth but the minutes suggested that members were split as some saw growth and inflation risks as balanced and others saw downside risks to inflation given subdued growth. The forecasts and debate occurred prior to the last employment release.
Forecast changes: GDP growth in 2010 of 2.5-3.5% (2.1-3.3% prior), in 2011 of 3.4-4.5%, inflation in 2010 of 1.3-1.6% (1.2-1.8% prior), in 2011 of 1-1.9%, and unemployment in 2010 of 9.3-9.7% (9.5-9.8% prior), in 2011 of 8.2-8.6%.
On individual pairs the EUR/USD broke through strong resistance during mid week to hit a high of $1.5140. On Friday, the EUR dropped but managed to find support during the session bouncing throughout the intraday session off its 50 day moving average at $1.4827 and trend line support.
Over in Asia, economic releases out of Japan continued to be bullish for the Yen. Japan’s exports had a third consecutive monthly gain in October which took the annual pace of decline to the slowest in a year. Exports dropped 23.2% from a year earlier, after a slump of 30.6% in September, beating expectations of a 26.8% drop. On a seasonally adjusted basis, exports rose 2.5% from a month earlier, the third consecutive gain. The figures emphasized the strength of the recent rebound.
Furthermore, exports to Asia fell 15% from a year earlier, an improvement from the slump of 22.2% in September. Despite the good news, one must note that much of this improvement is down to stimulus measures around the world. Investors remain skeptic about the current strength questioning whether demand will continue grow as support measures fade out.
The Yen presented the most movement for the week, increasing to a 14 year high. The high level of the Yen immediately raised concerns as current rates will weigh on the country’s exports. Japanese officials immediately expressed their concerns, stating that they might intervene if the Yen continues to strengthen.
After dropping throughout the week the Pound bounced higher on Friday, driven by global momentum and backed by Governor King’s testify to the Treasury Select Committee. King’s comments on the economy and inflation weren’t out of line with prior statements. The Governor warned inflation could pick up sharply in the short term but that spare capacity would act as a counterweight to medium term inflation. King, as well as fellow MPC members mentioned that the economic recovery is underway although growth is still fragile.
The Week Ahead
Next week the markets will be watching Japanese housing starts and Canada’s GDP result, followed by the RBA interest rate decision on Tuesday. Wednesday brings EMU Producer Prices and US ADP Employment followed by the Fed Beige Book. One must note that the Beige book is often watched by economists as this report, which is published eight times a year, contains anecdotal information on the economic and business conditions of 12 different districts.
Thursday and Friday will be the height of the week as the Euro-zone will release its GDP, which will be followed by the ECB’s rate decision. Even though no rate change is expected, investor’s will scrutinize Trichet’s words, trying to determine future trends. The finale of the week will be the NFP and Unemployment result. One must note that the current rate is now a double digit number, therefore a higher unemployment figure, could be devastating for the current rally.
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