Daily Market Reports | Dec 20 2011
By Rudi Filapek-Vandyck
The Dow ended down 100 points at 11766, the S&P fell 1.2% to 1205, and the Nasdaq lost 1.3% to 2523.
In the ongoing saga otherwise known as "Europe", euro-area finance ministers were meeting in Brussels today to discuss E200bn in additional funding through the IMF and the mechanics of a fiscal compact. In line with the recently established tradition, it would appear the outcome has once again disappointed, with European Union financial ministers unable to reach an agreement to raise the ceiling on funds for the region's planned bailout efforts. The immediate impact of this is being felt across financial markets worldwide.
Both the euro and the Aussie are lower in early Asian trading. The former is battling hard to stay above 1.30. US equities' losses steepened in the last two hours of today's session. Bank shares are leading the broader market lower, with Bank of America shares dipping below US$5 a share for the first time since March 2009. Has it all been just one gigantic mirage?
If 2011 hasn't been all that great for you thus far, maybe you can still feel a little sympathy for Warren Buffett who reportedly is now down a very uncool US$1.5bn on his earlier investment in Bank of America?
Meanwhile, the global economic fall-out continues to expose the weaker members of the economic community, with Dutch-owned Swedish auto manufacturer Saab filing for bankruptcy.
The other ongoing saga known as "US politics" remains stuck in no-man's land after the US Senate passed a two-month extension of the payroll tax-cuts on Friday, but John Boehner, the speaker of the House, went on record today stating the House won't approve it. The payroll tax cut extension expires at the end of the year and, according to CNN News, it is worth roughly US$1,000 a year for an average US family.
A French bond auction went surprisingly well despite a credit rating downgrade for neighbouring Belgium by Moody's on Friday and despite widespread expectations for a downgrade of France by S&P, potentially as early as this week. This has raised speculation that maybe investors were keen in buying French bonds now that they're still rated AAA?
Belgium and France (plus Luxembourg) are still in the process of saving Dexia from the corporate graveyard.
Yesterday, the world was relieved of delusional Supreme Dictator Kim Jung Il whose state-controlled media in North Korea proved unable to hide the fact that he too was, in the end, merely mortal. It's not good manners to speak evil of the dead, but in this case an exception is warranted, in my opinion: good riddance!
Of course, with the Supreme Dictator gone, all kinds of scenarios are possible and thus financial markets have just received another item to worry about (the tiny landmark happens to claim nuclear weapons). Yet another reason in favour of the USD, mutter FX strategists the world around.
As far as US economic data are concerned, the NAHB survey increased 2 points in December to 21 from a November level that was revised down by 1 point. The survey has increased in three straight months now (by a cumulative 7 points), providing enough optimism for economists to predict the US housing market is slowly turning a corner.
It has to be pointed out though, even with this three months' improvement, the homebuilders’ survey and other US housing indicators remain depressed by historic standards (the long-term average for the homebuilders’ survey is 49).
Bloomberg has been publishing some scary insights into Chinese debt, suggesting the situation is more opaque and far more troublesome than official sources are willing to concede.
The USDindex strengthened to 80.34.
Gold continues to tough it out, closing below US$1600/oz for the fourth session in a row. Technical market analysts at Barclays, who found themselves at the wrong end of the gold trend this month, have now moved to a Neutral view for the immediate outlook of the precious metal.
The team at Barclays in London observes the recent sell-off in gold has cleared the 200-day average, which has underpinned gold's uptrend since 2009. This, say the analysts, signals a deeper than initially anticipated down move. The analysts are seeking refuge on the sidelines for now and state it will require a break below support in the US$1530/oz area to make them bearish. Their initial target on a break below US$1530 is near US$1400.
Silver's March futures lost a whopping 2.7% to US$28.87/oz.
EUR/USD has dipped below 1.30 in early Asian trading, while the Aussie is trading around 0.9952. Metals trading on the LME was pretty much directionless with weakness prevailing, and that was before yet another disappointment from Europe was leaked via Dow Jones News. Crude oil is equally finding it difficult to show clear direction. Last night's session saw minor losses for both WTI and Brent futures.
SPI futures are indicating another negative opening for the Australian share market today. The early indication is for minus 10 points or 0.34%.
Global asset manager Russell Investment Management is of the view that we will see a lot of the same themes impacting on risk appetite and on financial markets in 2012. While acknowledging it is notoriously tricky to predict exact outcomes of political processes, strategist Andrew Pease still anticipates positive investment returns for the year ahead as a whole for equities, albeit in a moderate fashion.
Russell Investments has selected four key themes that will dominate the global landscape in 2012 and the first one is, in my view, the all-dominating one: deleveraging in Developed economies will result in lower standards of living, high unemployment, lower returns and higher volatility for financial assets. We are going to read and hear a lot about this for years to come.
Two side-elements of the ongoing deleveraging process have been selected as key standout features by Russell: one is the risk that things might end up pear-shaped in the euro-zone, which nobody wants, and the other is the square root shape of the economic recovery in the US. Russell proudly states it made the forecast back in 2009 and sticks with it today; the US economy will flatline for years to come.
Theme number four is what will ultimately cause the turnaround at some point in the year ahead: the re-emergence of the US and emerging economies in Asia as the growth engines for the world. It'll happen, predicts Russell, once this Europe-led downturn has run its course and allowing companies use the opportunity to lift earnings and sales.
Jim O'Neill, Chairman of Asset Management at Goldman Sachs, also lined up his thoughts for next year and they are equally worth repeating:
– we won't be talking about Europe as much as we did this year, but it certainly won't look like it at the beginning of the new year
– EUR/USD is more likely to fall to 1.10 than to rise to 1.50
– JPY/USD is more likely to surge to 100 than to fall to 60
– EUR/CHF is more likely to surge to 1.40 than to fall to 1.00
– it remains a possibility that the US will continue to surprise to the upside next year (maybe the BRICs will do so too)
– Europe can still easily surprise to the downside, in particular in the early stages of 2012
– the S&P500 is more likely to be at 1400 this time next year than below 1000
– China won't have a "landing", it will simply continue to travel
– four more countries will join the BRICs; Mexico, Indonesia, South Korea and Turkey (new acronym MIST)
Finally, the Australian team of market strategists at Goldman Sachs updated their projections for the local share market this week. Their base case scenario is for a bottom in Q1, then a stabilisation in Q2 and a recovery from mid-year onwards. Targets for the S&P500 are 3950 (3 months), 4100 (6 months) and 4500 (12 months) respectively.
Goldman Sachs has maintained a keen focus on commodities throughout 2011 and the team's preferences for the short term are mineral sands, iron ore, thermal coal and gold. In the medium term things should start to brighten for copper, met coal, PGMs and zinc.
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