14^th January 2011

Macro-events overview

Developments in the Eurozone debt crises this week

The latter half of this week has seen euphoria enter the markets on the back of easing fears regarding the Eurozone debt crises. Peripheral debt yields have witnessed solid retracements from their recent highs and peripheral stock indices, such as the Spanish Ibex and the DJ EuroStoxx 50, have surged higher since dipping sharply lower on Monday.

Thoughts from the trading floor

There have been several macro news factors that have hit the markets this week to help stabilise the ongoing issues in the Eurozone:

1. On Monday evening the Japanese government released a statement which reassured investors that they are looking to invest in the European Financial Stability Facility (EFSF). This helped markets stabilise after sharp risk aversion trading seen on Monday morning. The previous week also saw China making several statements to this effect.
2. There has been talk emanating from the European Commission that steps are being taken to expand the EFSF, with the Core Eurozone countries being asked to increase their contributions. However, several leading German politicians have expressed concerns over this.
3. Wednesday saw Portugal successfully sell their debt to the markets, a very positive event for the peripheral markets. Spain also managed to successfully sell its debt yesterday.

These Factors have helped stabilise the markets this week. However, we are still far from reaching a logical conclusion to the debt crises. Almost certainly we will see peripheral markets under pressure again during this quarter. At that point, bulls will need to see China and Japan turn their rhetoric into action and come to the aid of the Europeans. However, such aid will likely be required to save Spain rather than Portugal as it seems as though the market has already entered an end game with regards to Portugal’s fate.

Bull View

The bulls will look for the markets to brush aside concerns over the next 2-3 months. With global support for the Eurozone likely, should the peripheral markets start to disintegrate again, bulls need a period of stability so that the politicians and governing bodies can work out a system for extra market support.

Bear View

The bears will remain wary of these measures being put in place to aid Europe. The fact that every time further support is provided to Europe more has to be done at some later stage reveals that the markets lack long-term confidence.

Futex View

We continue to favour the bears. We believe that the Eurozone crises will enter the start of the end-game at some point during the first half of this year.

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Thoughts from the trading floor

The technical outlook for the market favours the bulls currently. Since the break higher at the end of March, the market has traded largely sideways, however this has technically allowed the ‘overbought’ signals to dissipate whilst the market has held on to the majority of its gains. The market is now poised to continue its up-trend. Strong technical support between the 345.00 to 355.00 area underpins the short-term bullish strength of the market. Another leg higher in the coming days should be enough to see it through the 368.00 recent top. Bears have been backed into a corner. Gains through the 368.00 level will spark further covering of shorts and thus will need to be protected. Ultimately bears will have to see the market back below the 345.00 to 355.00 level before they can start to shake out over extended longs from the market.

Copper, as with other commodity markets, has a historically had a very strong negative correlation with the USD. We have however seen a stark change in correlation in recent weeks. Although the USD index has traded higher over recent weeks, the market has selectively chosen to concentrate largely on the USD against key commodity currencies, such as the Aussie and the Canadian Dollar. This is primarily due to the heavy weighting of the Euro in the USD Dollar index. The steady downtrend of European currencies against the USD has distorted the index as it continues to remain under-pressure against the major commodity currencies.

The one major factor which has held back the industrial commodities from rising sharply, in line with other risk trades, over the last 2 weeks has been the continued chatter over further monetary tightening by the Chinese authorities. Talk of an upward revaluation of the Chinese Renminbi remains the major underlying fear of markets closely linked with Chinese consumption. With the Chinese GDP and inflation numbers suggesting that recent curbs in loan growth by Chinese authorities has failed to make a significant impression, chatter over an imminent revaluation have held back the Copper markets as well as Chinese stocks. However, if we do not get any tightening of policy in the next 2-3 weeks, we may see the market “climb a wall of worry” and rise regardless. This is backed up by the technical outlook for the market.

Bull View

The bulls will be hoping that this over-optimism (or ‘bubble’) can continue. For this to happen, Chinese markets must remain strong and the USD must weaken against the major commodity currencies. They hope that neither the Chinese nor the Fed remove excess liquidity support from the markets.

Bear View

The bears will see the current trend in commodity markets as over exuberance. The uncertainties surrounding the precarious fiscal uncertainties of some major global economies and the threat of imminent liquidity removal will keep bears interested in the medium term. Also the strong trend higher in major commodities of late may lead to a similar situation as we saw in the Summer of 2008, where high commodity prices hurt a fragile global economy battling the credit crunch.

Futex View

We continue to back the bursting of the bubble hypothesis. Globally markets seem to be going through this positive feedback loop created with cheap liquidity. We continue to look for further weakness in industrial commodities, as they seem fundamentally over-valued, especially in-light of the speculative drive up we saw in commodities on the back of USD carry trade. The Aussie/USD is the best correlated currency pair for industrial metals.

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