This week of course, the financial markets are really only concerned with one event – no, not whether President Obama gets to keep his job – it’s far more significant. It’s in China, where the 18th Communist Party Congress begins and where we are likely to see a signficant transfer of power in the world’s second largest economy, from President Jintao to a much younger leader in XI Jinping. Coupled with a change in virtually all the senior personnel within the party, this is truly a change of huge significance, not in the short term, but certainly over the next few months. Indeed the markets have been prepared for this change for several years, so that this week’s events in China will have a muted impact on the market, but as we move into 2013, expect to see more vociferous voices expressing views over the currency peg in due course, no doubt raising tensions once again between the US and China. So what of Obama – well the chances are he will survive and live to fight another day, having received a boost in the polls from his handling of last week’s hurricane and good news on Friday with better than expected data in the Non Farm Payroll release – it will be interesting to see the corrected figures when released ? But by then it will all be over!
Whilst it is impossible to forecast the effect of the election on equity markets, this week sees some more tangible releases around the world which are more likely to have quantifiable and predictable outcomes, including interest rate decisions in Australia, Europe and the UK. The stand out day for markets last week was on Friday, as the US dollar surged higher on the US dollar index, breaking out of an extended period of sideways price congestion on the daily chart, and coupled with a well defined double bottom, the US dollar looks set to strengthen further this week. If this is the case, then we can expect to see many of the principle commodities fall as a result. Gold in particular is looking very weak having broken below key support in the $1700 per ounce region and now looks set to test support in the $1620 area. Silver is also following a similar path lower, having also broken out of congestion and we may see an extended trend run lower over the next few weeks to test the $27 to $28 per ounce region in due course. Oil too is looking extremely weak as it tests the $84 per barrel price level, and if this is breached this week as expected, then crude oil may test the $78 per barrel level once again.
Moving to the currency markets, the key decision for next week will be in Australia and whether the RBA are likely to continue cutting interest rates again by a further 0.25%, and the key driver here will be inflation. Currently inflation is within the bank’s target of between 2% and 3% so there is no real need for them to cut again, and with the recent CPI release, this now seems increasingly likely that rates will remain on hold for the time being. However, as has been seen on many other occasions in the past, the RBA likes to cut and then cut again, and with uncertainty now looming in China, its closest and largest trading partner, this could prompt a further cut. My view is that they will hold and take a wait and see approach next month.
Moving to Japan, the BOJ will be heaving a sigh of relief as the Japanese Yen climbed above the psychological 80.00 level once again against the US dollar, and now looks set to test resistance in the 80.75 area on the daily chart. A clearance at this level will then open the way to a further move higher later in the week, and given the deep price congestion now below, bullish momentum looks set to remain firmly in place for the pair, with a possible test of the 82.00 region in due course. Fundamentally of course much will depend on the success of the BOJ in driving further inflation into the Japanese economy with a further round of quantitative easing ( I’ve lost count of where we are in the number – is it 20 or 21 ? ), which could bring the current move higher to a temporary halt.
Finally moving to equity markets, where are we heading this week? Well, Friday’s price action added further bearish momentum across the major indices, which all fell sharply and testing key price levels once again. December YM futures broke below the key 13,000 level ending the week at 12993, and if the recent price floor in the 12950 area is breached then expect to see the index move lower to test support in the 12850 area on the daily chart. There is a firm platform of price congestion in this area, which could provide the require springboard for a bounce higher back towards 13,000 and beyond once the US election is over. However, with sustained selling now clearly evident in the longer term timeframes, it will require significant buying volumes to reverse the trend. Perhaps an Obama victory will the catalyst? Or perhaps some good news from Europe ? All we can say with any certainty is that the price charts with volume will reveal the true picture, and tell us for certain where the markets are going next!
By Anna Coulling