Last week was a terrible week for riskier assets. Fears in the market about Greece’s fiscal situation continued to reek havoc on European bonds, currencies, commodities and the equity markets. At one point, Greek 10 year yields moved up 51 basis points in less than one day, as investors preferred to shift their money out of the country’s government bonds. Furthermore, the underlying fear that China is moving toward an interest rate tightening policy, continued to weigh on the equity markets, which pushed the S&P 500 down 18 points or 1.65% for the week. Volatility also returned to the market. The VIX volatility index reflected investor fear by rising from 22% to 28% by mid week.
The week started off slowly with the first bit of economic data coming out from the US. Existing-home sales plunged in December, dropping lower than expected after three straight increases that were fed by the US government’s tax credit. Home sales on existing houses fell by 16.7% to a 5.45 million annual rate from an unrevised 6.54 million in November, according to the National Association of Realtors. On the positive side of the report, inventories of homes shrank, and prices rose year over year for the first time in more than two years. The main culprit for the drop in sales was the expectation that the home buyer’s tax credit would not be renewed in December. Economists expected an 11.6% decrease in sales during December, to a rate of 5.78 million. One must note, before the big drop last month, sales had gone up three straight times. For all of 2009, there were 5.16 million home sales, up 4.9% from 4.91 million in 2008. Furthermore, it was the first annual sales gain since 2005.
The markets continued to be on the defensive side throughout the week even after the UK economy emerged from six quarters of recession in Q409. UK GDP rose to a positive 0.1% q/q, less than the expected 0.4%. Details suggest that the softer than expected report stemmed from gas and electricity use. Germany’s January IFO continued its uptrend, rising to 95.8 (95.1 exp) from 94.6 with current conditions (91.2 vs. 90.4 in December and 91.3 expected) and expectations (100.6 from 98.9 and 99.1 expected) components also gaining. French household consumption jumped 2.1% m/m in December (0.6% expected) boosting the annual rate to 5.9% (3.8% expected), the sharpest year-on-year gain since mid-2000 led by a sharp rise in auto sales (9.1% m/m) and durables (4.3%).
Market participants where again put on their heel when S&P cut the outlook for Japan’s credit rating but affirmmed its AA status. It expressed concern about the outlook for fiscal policy. The other rating agencies responded with Fitch and Moody’s affirming their stable outlook. The S&P news quickly took the attention away from the BOJ meeting, which results were a no change in rates or QE measures.
On Wednesday the FOMC (Federal Open Market Committee) announced that interest rates would remain low for an extended period. Even though there weren’t any major surprises the interesting news out of the meeting was that there was one decent. Kansas City Fed President Thomas Hoenig dissented from the decision. Mr. Hoenig is now concerned the stimulus pumped into the system to fight the crisis, may stoke inflation.
Friday started off with EU inflation and employment figures. The annual inflation rate in the 16 countries that use the euro rose to an 11-month high of 1% in January, while unemployment hit an eleven-year high in December. The inflation reading from European Union statistics agency Eurostat is the highest since February last year, but it undershot the 1.3% penciled in by economists. The rate of unemployment for the EU, rose to 10% in December from a revised 9.9% in November. The figure was below expectations and also indicated that although businesses continue to cut costs, they are doing so at a slower rate. Throughout Friday’s session the market focused on the U.S GDP. The U.S. economy surged at the end of 2009, a larger-than-expected gain, which was driven by slower inventory liquidation rather than consumer spending. Gross domestic product rose a seasonally adjusted 5.7% annual rate October through December, the Commerce Department said Friday in its first estimate of fourth-quarter GDP. Economists were expecting a 4.8% GDP growth during the fall. GDP has gone up two straight quarters, rising 2.2% in the third quarter after a year of contraction. In all of 2009, GDP fell 2.4%.GDP rose 0.4% in 2008 and 2.1% in 2007.
Forex
The dollar experienced buying across the board last week as traders continued to unwind short dollar positions, and new traders looked for a safe haven. The dollar index rallied 1.5%, and touched levels not seen since last July. The index will probably test the 200 day moving average which is currently near 80.5.
The Euro continued to slide as investor fear of the Greek fiscal situation pushed to the EUR/USD below 1.40. This pair is now sitting on its 200 week moving average after plummeting below its 38.2% weekly Fibonacci level.
The Week Ahead
Next week the market will be watching the Australian Housing Price Index on Monday, follow by UK PMI and US ISM, Personal Income and Spending. On Tuesday the Australian interest rate decision leads off. The consensus is for a 25 basis point increase to 4 percent.
On Wednesday EMU PMI and Retail Sales lead off followed by US ADP Employment. The consensus is for private job losses of 84 thousand jobs. On Thursday both the BOE and EMU make their interest rate decisions. Friday the markets will be watching the US employment report, and the Canadian employment report.
Major Economic Events
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