The Week Ahead

Submitted by Nic Lenoir of ICAP

Nothing much has changed since Friday. CIT's bankruptcy has been made official, but apparently it's pretty good news. I could not come across one article that viewed it as a bad thing, as certitude funding/financing is pretty much guaranteed for the lender. ISM this morning should confirm/invalidate the strong pick up in PMI last week. The $1Tr. question remains whether the government induced bounce in industrial production worldwide can last. Will administrations remove accommodation, and if so has the consumer recovered enough to pick up the slack. Beyond these considerations remains the obvious truth that the system remains overleveraged and it will at some point blow up. Roubini discussed it this weekend in a FT article, and it's a topic we have covered at length as the short-USD carry trade has brought nations as fragile as Venezuela to issue debt in USD.

Facing uncertainty, risky assets corrected last week and are getting cloe to key levels. EURUSD is leaning on the support of the daily trend channel, and AUDUSD has bounced on the identical support. S&P & Dax Futures are in the process of completing a 5 leg impulse from the tops. The 100-dma should be the near term support for the Dax, along with 1,012/1,020 for the S&P future. On a rebound we would like to see 1,070.5 and 5,600 hold to remain in a bearish dynamic. If numbers don't surprise on the upside 1,041.50 should be resistance in the short term as we exhaust the move lower testing around 1,018.

Observe carefully 0.9190 in AUDUSD and even more carefully 1.4860 in EURUSD. Both resistance if broken trigger a double bottom pattern, especially clear on the EURUSD. A clean break there would indicate traders should probably get long for a possible return of the carry trade.

10Y Treasury futures we recommend watching closely the 117-20/119-02/07 range. If risky assets bounce/consolidate we should test 117-20, and based on overall risk appetite we will either go break test 120-20, or test 113-15. Much will depend on macro-economic data and central bank activities to withdraw/inject liquidity. Unlike most people who argue that there is still a lot of money to be deployed which will keep a bid behind this market for the next 6 to 12 months, we feel there is a risk that people who are actually in the green for the year may find incentive to protect what they earned, and on the heels of a 60% rally there is little rush to jump in and buy into a small correction going into year end. The lack of volume throughout the entire rally since March means any sizable profit taking could seriously challenge the progress made to date.

Good luck trading,

Nic