Market Recap: 1.12.2011

From the always informative Henry Bowe at Goldman

New day, new high in US equities. Financials leading again. GS Wavefronts group has initiated a long German equities trade, "We would emphasize that the fundamental rationale for this trade recommendation is that German equities are a key global cyclical asset that has lagged somewhat. We continue to have a decidedly pro-cyclical and pro-risk bias, looking for opportunities to express that view...Although this trade has started to move already, our constructive bias and robust forward views makes us comfortable that there is still room to run, as German equities catch up and as equity markets more broadly, continue to climb." SPX up 11 at 1286. The DOW up 84 at 11755. The NASDAQ up 21 at 2737.

The VIX finished slightly lower again, -.65 at 16.24 to make two sub-17 closes in the past 13 days.

How do you say ‘squeeze’ in Portuguese? Despite initial weakness following the day’s auction,EURUSD rockets almost two big figures to a high of 1.3144. Serious stops done through the 200d at 1.3071. Mix in a rally in both risk assets and an afternoon rally in US rates, and you have the recipe for a dollar selloff. So USDJPY back below 83 and USDCHF back below 97c. Both USDMXN and USDCAD again make a new cycle low.

The focus of the day was supply- first overnight in Portugal and then theTreasury’sauction of 21b 10y notes.  Portugal issued €1.25 b. of 2020 and 2014 paper with solid bid to covers of 3.2x and 2.6x which was in line with market expectations and allowed for Treasuries to sell of overnight and into 1pm.  The street was well set-up and the auction came 1.2bps through the 1pm level, sparking a rally.  Fast money and real money accounts faded the move and we saw better outright paying is 5s and 10s.

Commodities finished higher across the board again today, with palladium up another +3% and copper and platinum both up over 1.5%.  This morning’s WASDE report was very constructive corn and soybeans, mildly constructive wheat; overall GS remains bullish ags.  DOE stats came out fairly neutral (-117k bbl draw in Cushing, -7.25m bbl draw in PADD III), though strong enough to support a continued rally, as these numbers have yet to include the impact of the Horizon Oil Sands fire and the Trans-Alaskan pipeline leak.  We saw leveraged buying of crude and crude spreads on the back of this data.

Similar to yesterday,credit spreads continued to tighten, driven mostly by the rally in European sovereign credit.  IG tightened another 2 bps to close at 84.35 and HY rose half a point to 103. 5/8.

Tomorrow brings Central Bank meetings from the ECB and BOE (no change expected) and Korea (we expect a 25bp hike).  We also have the Spanish bond auctions, US jobless claims, PPI, and trade balance, and Australia employment.

And an FX recap courtesy of www.talking-forex.com

EUR/USD

The pair finished the session higher on Wednesday largely due to what was dubbed a successful bond auction by the Portuguese debt agency, that's in spite of a sharp increase in the premium which was required to sell off its 2014 issue. As a result, Portuguese officials have spoken out and insisted that strong demand from foreign participants which was a staggering 80% should calm fears of an imminent bailout. Still, given a public pledge by China and Japan to purchase EU bonds means that a possibility of an uncovered auction was always slim and it remains far from clear whether the quietly insolvent Portugal will continue to be able to have an access to primary markets. The move higher was also supported by reports that the European Financial Stability Facility (EFSF) may be expanded. The U-turn by the EU policy makers may alleviate market tension, but it is more likely than not that the plan will not be supported by the prudent lawmakers in Germany and in turn may lead to unnecessary speculation. Going forward the attention on Thursday will turn to the government paper auction by the Spanish debt agency which is yet to face extreme funding pressures but remains at risk of falling prey to speculators and the latest press conference by Trichet post interest rate decision. In terms of technical levels, resistance levels are seen at 1.3070 which is also the 200DMA, psychologically important 1.3100 and then at the 10DMA line at 1.3133. To the downside, support levels are seen at 1.2961/04 and then at 1.2850. 

GBP/USD

Despite a record wide trade deficit, which widened to GBP 8.736bln, the pair finished the session higher as investors embraced a solid bond auction by the Portuguese debt agency which in turn boosted appetite for riskier assets.  The currency also benefited from reports that the EU policy makers are prepared to look into expanding the European Financial Stability Facility (EFSF) which saw the UK banks, known for their heavy exposure to the Iberian Peninsula, post impressive gains. Going forward, attention on Thursday will turn to the release of the UK Industrial and Manufacturing Production reports. Also, despite premature speculation of a rate hike, the MPC at the BoE are expected to leave both interest rate and the Asset Purchase Facility (APF) unchanged. In terms of technical's a major resistance level is seen at 1.5710 which is also the 38.2% Fibonacci retracement level of 1.6300-1.5345 move. To the downside, support levels are seen at 1.5583 and then at the 10DMA at 1.5550.

USD/JPY

The pair finished the session on Wednesday with modest gains and continued to consolidate above 83.00 level, while EUR/JPY touched on a fresh 4-day high following a successful bond auction by the Portuguese debt agency. Going forward, the pair will continue to remain a by-product of investor appetite for EU debt, which faces another test on Thursday with yet another bond auction by the Spanish debt agency. In terms of technical levels, support is seen at 82.93 and 82.31 which is the Ichimoku Cloud Top/Bottom respectively. To the upside, resistance levels are seen at 83.86/91 and then at 84.00.

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