The rally in the equity markets moved back on course this week, as market participants were somewhat calmed by the news that the UAE central bank was providing liquidity to back the loans of Dubai World, and that the state owned company had plans to restructure its debt. The news immediately sent investors back into the equity market as the start of the week, causing the Dollar to drop to lower levels.
From a fundamental point of view, the week started off with conflicting economic news after U.S. factory activity unexpectedly grew at a slower pace in November. The Institute for Supply Management reported Tuesday that its index of manufacturing activity for November moved to a reading of 53.6 from 55.7 the month before and 54.2 in September. November’s reading was below the 55.0 index reading, economists had expected to see. One must note that a reading above 50 signals expansion.
In the report, the ISM found continued improvement throughout the sector. New orders, a gauge of future economic activity, came in at 60.3, indicating improvement from October’s 58.5, while inventories continued to shrink, at 41.3, from 46.9 the prior month. Production, meanwhile, came in at a healthy 59.9 after October’s 63.3. Hiring remained a soft area for the factory sector, with the employment index at 50.8, from 53.1 the month before.
The housing sector also showed better than expected results as the forecasting gauge of housing-market activity climbed to its highest level in more than three years in October, thanks to government tax credits that continued drawing home buyers into the market. Construction pending was unchanged in October, at a seasonally adjusted annual rate of $910.77 billion compared to the prior month.
On Wednesday the European Central Bank announced that interest rates would remain unchanged. The Euro was especially volatile but ended Wednesday’s session higher as the markets reacted positively to the ECB’s decision to drop fixed rate repos and scale back emergency measures.
On Thursday, Markit announced that the euro zone’s private sector expanded at its strongest pace for two years in the month of November, with Germany and France leading the recovery. The firm’s euro-zone composite output index, a gauge of private-sector activity including the manufacturing and services sectors rose to a two-year high of 53.7 in November from 53.0 in October.
The week ended on a strong note after strong employment data released by the Bureau of Labor statistics. The Department of Labor announced on Friday that Nonfarm payrolls fell by just 11,000 last month, slowing down from a downwardly revised 111,000 drop seen in October. Consensus estimates were for a drop of 125,000 jobs. The employment rate also dropped to 10% from the expected 10.4%.
Forex
The Dollar/Yen had a turn for the better on Friday as investors began to speculate that the decrease in unemployment could lead the Fed to raise interest rates sooner than expected. Furthermore, news earlier last week mentioned that the Bank of Japan plans to introduce new liquidity measures to combat falling prices. Under the new program, the BoJ will provide JPY10 trillion of three-month loans to commercial banks at a fixed rate of 0.1%. In exchange, banks will provide regular BoJ collateral. The decision was unanimous but the BoJ had come under heavy pressure from the government to cooperate in battling deflation. The USD/JPY surged on Friday, to break trend line resistance at 89.50.
Over in Australia the RBA raised its interest rates for an unprecedented third month in a row and left the door open to further tightening, remaining the most aggressive major central bank in unwinding emergency measures as the economy recovers briskly. The RBA raised its cash rate target by one-quarter of a percentage point to 3.75%, further entrenching its position as the only central bank in the Group of 20 to be raising rates. RBA Gov. Glenn Stevens said the 0.75 percentage point in increases since October represented a “material” tightening, which some analysts interpreted as a sign that further tightening could occur in 2010. Others considered it a sign that the bank will soon pause. The RBA’s policy board next meets Feb. 2, and financial market prices are already factoring in a 44% probability of a further rise at that meeting.
From a technical point of view the AUD/USD also dropped towards the end of the week as the good news from the U.S had a possitive affect on the Dollar. Technically speaking the AUD/USD is now trading within a range, above support of $0.8962.
The Week Ahead
This week a wave of interest rate decisions are scheduled to hit the board including; the U.K, Canada, New Zealand and Switzerland. While investors are expecting a no-change status from most of the banks, the statements which normally accompany the decisions, will be scrutinized by investors.
In addition towards the end of the week, the U.S will have a major impact on the markets, as they are scheduled to release their retail sales figure and U.Michgan Consumer Sentiment. The numbers are expected to show an increase at 0.6% and 68.5 points, respectively.
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The weaker than anticipated ISM Non manufacturing data hammered benchmark indices snapping 3 consecutive days in the money. The weaker than anticipated ISM data which pointed a contraction in the services sector suggested recovery might be bumpy. Stocks also reacted to the statement by Bank of America the US largest bank by assets that it intends to raise $19.3 billion in public share offering to free itself from government ownership. The move ignited a selloff in banks stocks including BoFA as investors feared other government supported banks will do the same thus diluting share holders even further. BoFA eventually edged higher as investors acknowledged the fact that when the bank will be freed of government ownership it will be more flexible and competitive. At the day’s end the DOW fell -0.83% and the S&P was lower by -0.84%.
