Daily Market Reports | Dec 19 2011
By Rudi Filapek-Vandyck
It's probably a fair statement to make, but there are presently, the world around, more questions being asked as to why gold has failed to capitalise on the world's dire prospects than as to why equities have not had the pleasure of a good old Santa rally this year.
Which brings me back to what I have been saying for at least two years now: be careful when making too broad an assumption about gold, the nature of that market has changed on the back of significant inflows of short term oriented funds. While the longer term outlook for gold pretty much lies in the hands of central bankers (buying or selling? More QE or not?) investors should not underestimate the severe impact potential from the mood swings of short term investors.
Equally important remains monetary liquidity the world around. Shrinking liquidity on the back of USD scarcity and banks protecting balance sheets can and will have a significant impact on leveraged investments, such as commodities. Gold not a commodity? Try to explain that to whomever got bombed out of their leveraged up long position this month. Or to those millions of investors who had been buying equities in gold producers on the observation their share prices had not kept pace with the price of the metal, and on the assumption gold would see US$2000/oz either in December or Q1 next year.
Don't bet on it now.
December this year may not have destroyed gold's long term prospects for good, but the damage done to the gold market's psyche is significant nevertheless. All kinds of technical and momentum indicators look ugly post last week's sell-off and who's going to guarantee there will be no more forced liquidation of positions in the days or weeks ahead?
Things are not looking great for equities either. If we adopt a very simplistic approach -above the 200 days moving average is positive (bullish) and below it is negative (bearish)- then things are looking double-negative. Many equity indices the world around are not only trading below the 200MM but also below the 50 days moving average, with volumes remarkably higher on down days.
The longer this remains the case, the more negative it becomes.
US equities had (sort of) a positive day on Friday but only a blind man wouldn't see the lack of conviction in combination with the damage that has been done to the general mood.
As far as the calendar goes, we have Europe, more Europe and probably a little bit extra Europe that will play on investors' minds. Most of it will come unscheduled, such as a pending credit rating downgrade for France. The ECB’s Noyer speaks on Monday to the French debt crisis conference. German Chancellor Angela Merkel will speak whenever she feels like it.
As far as scheduled events go, the calendar starts thinning this time of the year, and that's not a bad thing. In Australia, this week's focus will be on the RBA minutes and little else. Note there are quite a few international experts who adhere a lot of symbolism to the fact that Australia, one of the perceived strongest economies in the world, has embarked on a monetary loosening policy.
It also adds to the picture that "de-coupling" really is a myth. Nomura is already calling for a Chinese hard landing. Others, such as ANZ Bank, believe a hard landing can still be avoided in China, but a swift reversal into stimulus mode is necessary (not happening, say others).
In the US, economists are expecting housing will -finally- contribute positively to growth in Q1 next year, while speculation has it GDP in Q4 (current quarter) is poised for an upward surprise. All this matters little if Q1 and/or Q2 see the US sink into dismal GDP growth numbers again; and that is the all-dominating current market concern. In the coming week, investors will focus on the NAHB housing market index, on building permits and on housing starts data, plus, of course, the weekly jobless claims numbers.
An additional worry for the US is that companies such as Texas Instruments and Intel have recently come out with disappointing and downward oriented guidances for investors. Profit margins in the US are at an all-time high and recent years have witnessed expansion at a much faster pace than GDP growth. But now growth in emerging countries is slowing and the USD is rising, potentially creating a much tougher environment for US profit margins.
December is traditionally a good month for equities and a negative one for the greenback. The fact that this year's December is playing the opposite scenario inevitably brings back memories of late 2008. Back then it was the prelude to more weakness in the opening months of the following calendar year. The Bulls, deprived off their Santa rally this year, will be hoping for a repeat of that experience, because from March onwards we had one of those typical bear market rallies; unexpected, violent and brief, but firmly positive regardless.
Also note that if we don't see a decent rally in the next two weeks, US equities might close the year in the red, which hasn't happened in any third year of the US Presidential cycle since the 1930s. The S&P500 is currently circa 2.5% down for the year.
There is still hope.
(We omit the fact that third years in this cycle usually generate double digit returns in the positive).
Don't forget the Australian market will close at noon on Friday (I doubt you will).
This will be the final Monday Report for the year. I will continue writing Overnight Reports this week until FNArena goes on holidays on Friday until mid-January. Stay tuned though as I will continue using these reports to mix in forecasts and predictions from experts the world around. In case you missed last week's reports, we had both Bulls and Bears spread over four reports, including one living legend.
This week will also see the release of the final Weekly Insights email for the year. I didn't write one last week due to travel commitments. I hope you appreciated the effort that went into each of them over the year past. The underlying tone hasn't exactly been jubilant, especially since mid-April, but such is what can be expected from us in a year like 2011. It's the forward looking analysis that drives us here at FNArena, not the urge to sell or to keep up a positive framework.
We can only hope you do appreciate it and will continue doing so in 2012 (and well beyond).
Thank you all for your ongoing support and encouragement.
For further global economic release dates and local company events please refer to the FNArena Calendar.