As we move towards the end of another trading year, the statement which perhaps frames the financial markets for 2012, was that issued by Mario Draghi, the ECB President, who stated in July that …. “ the ECB will do everything in it’s power to save the euro.” Whether this was just rhetoric, bravado, or actually what he and the ECB truly believed, we will never know, but since then the Euro has risen Phoenix like from the ashes, and closed on Friday testing the 1.3170 region once again, with the euro bears now being squeezed until the pips squeak. Whilst the fundamentals are impressive, with 10 year yields falling in Spain by over 200 points since the summer, the technical picture is equally bullish, with the pair now testing the highs of September on the daily chart, and should this level be breached, then we can expect to see further strength in the Euro against the US dollar, possibly moving towards the 1.3500 level in the first quarter of 2013.
The big unknown of course is the so called fiscal cliff, which has yet to be resolved, and should the worst happen, this could potentially trigger a flight to safe haven status in the US dollar, and consequent gains against the Euro and other currencies. Much will depend on the outcome and resolution by the US Government, but assuming some sort of sticking plaster is applied, then the EUR/USD should continue and extend it’s recent bullish momentum further.
Last week’s stand out news item was the statement from credit ratings agency Standard & Poor’s (S&P) that it may strip the UK of its cherished AAA status within the next 2 years. This followed the statement from the UK Chancellor George Osborne who was forced to mention in last week’s Autumn statement, that Britain’s economic growth has been far weaker than hoped. Despite all this doom and gloom for the British Pound, the currency rose further against the US dollar, closing the week at 1.6167 with a wide spread up bar and adding further momentum to the bullish trend which has been in place since mid November.
From a technical perspective Cable is now poised at an interesting level, and a clear breach of the 1.6200 level, should then see the GBP/USD pair move firmly higher to test the 1.6309 high of mid September.
The three day volume remains firmly bullish and with the three day trend now also transitioned from white to green the longer term outlook is now firmly bullish. So in 2013 we can expect to see further strength for the British pound against the US dollar, but with the same caveat applying as for the Euro!
For equity markets, it’s been an interesting 12 months, with the VIX trading in a relatively narrow range for much of the year and indeed since August has oscillated between 13.50 to the downside and 19.50 to the upside, as risk on, risk off appetite ebbed and flowed with equities finding little firm traction higher.
Even the much vaunted Santa Claus rally has lacked it’s usual momentum, which is no great surprise given the fiscal cliff which now awaits investors in January 2013. This has also been a feature of the associated volumes with many investors and speculators simply deciding to wait on the sidelines, ahead of any decision in early January, with many in the market now closing up early ahead of the holiday period.
The YM futures contract has reflected this clearly on the daily chart, with the rally which began in June, finally running out of steam in early October with a series of isolated pivot highs defining the resistance area at 13,500, before selling off sharply.
Moving to the commodities markets, gold and silver have both attempted to break higher and develop strongly bullish trends, but both have failed to sustain these moves, and are ending the year in a negative vein.
February Gold futures closed on Friday at $1697 per ounce, holding below the psychological $1700 per ounce level once again, and with strong selling volumes on both the daily and the three day chart, the bears were out in force.
Indeed the isolated pivot high of Wednesday added further pressure to gold, and the key level now is in the $1675 to $1680 per ounce region. If this level is breached then expect to see gold move lower to test the $1640 per ounce level in due course, and with the three day trend remaining bullish, the longer term outlook remains negative for gold at present.
Silver reflects a similar picture, with March futures closing at $32.30 per ounce and with a change in trend dot from congestion to bearish, coupled with a change in the heatmap from bullish to bearish, supported with selling volume on the daily chart.
The three day trend for silver remains bullish, so the change in sentiment which is evident for gold, appears to be lagging in silver, but nevertheless, with gold now leading the way, we are likely to see further weakness in silver in due course.
The key technical level here is in the $31.50 per ounce region, and if this is breached then expect to see a test of support in the $30.75 per ounce level, with the possibility of a deeper move in 2013 with silver following gold lower in due course. The significance of the change in trend on the daily chart cannot be underestimated, and with Friday’s close below a potential level of price support, the market is now looking increasingly weak.
Finally oil is ending the year in an extremely well developed area of congestion, with the January WTI futures contract trading in the $85 to $90 per barrel region. This price phase has continued since mid October and is now building to an explosive breakout for the commodity.
The three day trend remains firmly bearish, and with the heatmap also in transition supported with selling volumes in both timeframes, the break is likely to be to the downside. The question now of course as we come to the end of the year is whether this will be in 2012, or 2013, but come it will, it’s just a question of when.
By Anna Coulling