Market Recap: 12.1.2010

The rally that began overnight – Chinese PMI and a dramatic rally in European sovereign credit – was propelled further by yet another round of impressive US data. ADP significantly better with solid positive revisions and ISM a touch better as well. Another Santa Clause rally? December is good month forstocksafter all. That might actually be the pain trade too with positions having been cut so dramatically. SPX close up 26 at 1206. The DOW closes up 250 at 11256. The NASDAQ closes up 51 at 2549.

The VIX fell -2.18 vols to end the day at 21.36, erasing all of yesterday’s gains.

Today’s lesson in FX: EURUSD is a very sharp toy. 1.2970 the low overnight => 1.3137 LDN high as sovereign credit rips tighter => failure above 200d => 1.3046 => 1.3183 as a ‘US official’ says the US is considering a larger IMF contribution to the IMF rescue fund => 1.3095 as the WSJ reports the US is NOT considering a larger contribution. Elsewhere, USDJPY takes back yesterday’s losses – tech buying and US fixed income selling off. ZAR continues to trade like a champ. ZAR TWI reaches three year high. TRY though, waswhere we saw the biggest buying interest. Despite solid gains across the board, EM flow elsewhere waslight. The appetite to add to risk is still rather limited, it seems.

The rates market sold in the general risk-on move
finishing 8 to 17 bps weaker with the belly underperforming.  Despite the 8.17bn Fed buyback in the 7yr sector, the market continued to trade heavy throughout the session.  Flows were relatively light in our franchise business and much of the move down was futures led.  Tomorrow brings another Fed buyback in the 8-10yr sector but the market seems to be more concerned with other asset classes.

In commodities, energy was unsurprisingly bid despite moderately bearish DOE stats (builds in crude and gasoline, draw in distillate) and spreads tightened.  Flow-wise, we saw leveraged selling of Brent spreads and Nat Gas (GS announced a new bearish NG forecast).  Industrial metals outperformed precious following strong China PMI.  Copper finished up +3.2%, while palladium gained +4.25%.  The big story in ags was wheat, which gained over +7% on concerns of excessive rainfall affecting Australia’s harvest.  Inflation continues to be the key theme, particularly given the UN’s announcement today that world food prices are the highest in 2 years.

US credit gapped tighter overnight following positive China data and stronger European sovereign credit.  Volumes were dominated by street names racing to cover short risk positions driving spreads much tighter.  IG dropped 4 bp’s to 95.50 and the price of HY rose 1.1875 points to 99.8125.

Tomorrow brings GDP for the Euroland and Switzerland, retail sales for Australia and Switzerland, and Brazilian IP. The ECB also meets tomorrow, with an expected announcement on its full allotment policy.

And currency detail from Talking Forex:

The EUR pared some of its recent losses against the USD on Wednesday amid speculation that in order to preserve stability in the Eurozone the ECB may be prepared to expand its bond buying program to EUR 2trl. The move higher saw the pair clear the 200DMA at 1.3126 and is now on target to test the 10DMA at 1.3347. Going forward however, there is a risk that should Thursday’s press conference by Trichet fail to meet market expectations; EUR may come under renewed selling pressure. In terms of downside support levels, the 1.3000 and 1.2950 levels are expected to contain any near-term selling. Also worth noting is that the Spanish debt agency is due to auction EUR 1.75-2.75bln Oct-13 bonds on Thursday, the outcome of which is expected to be the main driver behind the price action during London hours.
Similarly to the EUR, GBP gained against the greenback which fell around 0.5% on the back of press reports which suggested the ECB may be prepared to expand its bond buying program and also refrain from returning back to competitive style ECB auctions just yet. Also worth noting is that Wednesday’s PMI data suggested the sector was growing more strongly than expected, underpinning the view that the BoE was right to refrain from expanding its Asset Purchase Facility (APF). Still, gains were somewhat muted and the pair failed to break any key levels which suggests that the Bearish pattern remains in place. In terms of technical levels, support is seen at 1.5550/30/00 and then at 1.5490. However should the pair continue on its upward trend, it is expected to face strong resistance at the 100DMA at 1.5716.
The pair finished the session higher and more importantly consolidated above 84.00 following solid Chinese manufacturing data, as well as on speculation that the ECB stands ready to announce further policy easing measures in order to ease pressure on the EU-bloc. In terms of technical levels, immediate resistance is seen at 84.40/50, which once breached will open the door towards 85.00. To the downside, support is seen at 83.70/40 and 83.00.

Compiled by Goldman, Talking Forex and Zero Hedge


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