As we head into a new year it seems most likely that the same factors that have driven market moves in 2012 will also do so in 2013, with political factors once again likely to remain the focus of most investment decisions.
The partisan actions, or inaction, of politicians on both sides of the Atlantic is once again likely to be partially offset by supportive Central bank policies designed to protect markets from the worst of this political paralysis and stupidity.
While equity markets celebrate the fact that US politicians decided not to commit an act of self-harm to the US economy, there does appear to be an element of irrational exuberance to the markets sharp rally, given that a number of significant factors remain unresolved, not least that the matter of $110bn of spending cuts has merely been delayed a couple of months, while the subject of an increase to the debt ceiling also needs to be addressed.
As such we could well see a drift back lower to fill the gap seen between last years close and this year’s open as the New Year hangover starts to kick in.
In Europe the economic data as we head into 2013 is no better than it was at the end of 2012 with the manufacturing sector in Germany in particular a cause for continued concern, given its position as Europe’s most important economy. The broader Eurozone measure showed particular weakness with new orders sliding back and the employment components also showing continued weakness, raising concerns about continued rises in unemployment, particularly in Germany where data due out this morning is expected to show that unemployment in December rose by 11k and closer to the 7% level.
The pain in Spain is also set to continue with December unemployment set to increase by another 62.5k, down slightly from the 74k rise seen in November, but pushing the number of unemployed much close to the 5 million mark, and further above the 25% level.
In the UK the surprise rebound in manufacturing PMI in December to 51.4, from 49.1 and the first expansion since last May, has raised expectations that Q4 may well avoid a contraction, and as such fears of a possible triple dip recession.
Having said that the main drag on GDP over the past twelve months has been the construction sector which has as a result of North Sea oil problems acted as a significant drag on the economy. Expectations for construction PMI for December are fairly low, with expectations of a rise to 49.6 from 49.3. Given that the highest reading in this sector since July has been 50.9 it would be a major surprise if this sector showed a similar rise to the manufacturing sector.
The Bank of England also publishes its latest quarterly report into credit conditions which could give some clues to the success or otherwise of the funding for lending program over the past quarter.
Despite the noise and market froth surrounding the fiscal cliff over the past few weeks, one of the bright spots in the US economy has been the slow improvement in the unemployment data, with weekly jobless claims showing significant falls in the past few weeks, and while some of this could well be seasonal, the recent growth in ADP and non-farms data has been encouraging.
This week’s jobless claims are expected to show a rise to 356k from 350k, while the December ADP report is expected to show a 134k jobs gain, up from November’s 118k rise.
The ADP report is also likely to be used as a gauge for tomorrow’s December payrolls report which showed a sharp rebound in November.
The strong number in November made it all the more surprising that the Fed was as aggressive as it was at its December meeting, particularly in respect to its low rate guidance.
The rollover of operation twist into more traditional US treasuries buying was largely expected, however it was surprising that the Fed acted in the way it did with respect to targeting the unemployment rate, and today’s publication of the December FOMC minutes could well indicate that this decision was particularly divisive.
EURUSD – the break out of the sideways channel the euro has been in for the past 2-3 weeks with resistance at 1.3310 and the support at 1.3155, suggests we could well see a 155 point move towards 1.3000, if this morning’s move is sustained.
Trend line support from the 1.2660 lows also comes in at 1.3100. Longer term support from the 1.2045 lows comes in at 1.2945.as well as the 200 day MA at 1.2780.
GBPUSD – the cable ripped out a series of stops above 1.6310 posting a 16 month high in the process, before slipping back sharply to close below the key 1.6300 level, and posting a Doji for the second day in a row. A close above 1.6310 targets a move towards 1.6500.
Support can be found at 1.6180 and at last week’s low at 1.6065.
Major trend line support comes in at 1.5930 from the 1.5270 lows, the 200 day MA at 1.5900 as well as 1.5660.
EURGBP – last weeks bearish engulfing candle has seen the single currency slip back sharply from its 0.8225 highs and we could well see a test towards long term trend line support at 0.8070 from the 0.7755 lows.
This remains a key support, a break of which could well see a push towards the November lows at 0.7960.
USDJPY – last weeks close above the 200 week MA for the first time since December 2007 has seen the US dollar surge beyond its 2011 highs and is currently encountering some resistance at 87.50 which is 61.8% retracement of the down move from the 2010 highs at 95 to the lows at 75.30. A close beyond 87.50 opens up a move to the 90.00 level.
Pullbacks should find support between 84.90 and 85.50 where we have the 200 week MA.