Risk sentiment wained last week sending equities and commodities lower, whilst Spanish bond yields climbed, as investors moved away from riskier assets and into safe haven, with the principle fundamental catalysts being weak economic data in Europe, and equally strong data in the US, raising the prospect of the FED reducing the QE3 program sooner rather then later. This negative sentiment was given a further boost with weak earnings for many of the blue chip stocks, including Apple, Intel, Microsoft and of course Google, with mining stocks and utilities adding further weight to the bearish mood. In addition, the NQ index moved lower, testing the 2,655 level, and should this level be breached then we can expect to see a further decline in the short to medium term.
Indeed, with technology stocks generally considered to be a leading indicator for an economy moving from recession into early recovery, adding further negative sentiment. Finally of course, as we move towards the final week before the US election, the markets are becoming increasingly nervous about the so called ‘fiscal cliff’. Japan is also facing it’s own fiscal cliff in the form of the budget, which could cause the world’s largest debtor sink deeper into the financial mire towards the end of November.
The VIX of course jumped several points higher last week to test the 20 level on Tuesday, before pulling back in the later part of the week to close at 17.80. The pivot was duly validated, but with our trading indicator remaining firmly bullish, and with a change in trend on the three day chart, the outlook for the VIX remains bullish. As such we can expect to see further weakness for equities and other risk assets in the week ahead.
Amongst the principle commodities, gold, oil and silver, all sold off during the week, with WTI oil futures testing the $85 per barrel region, and gold probing the $1700 per ounce level, having broken firmly below recent sideways price congestion. Silver followed gold lower in a similar pattern to close at $32.10 per ounce on the December contract. All three commodities now look increasingly bearish and with risk sentiment now draining away, expect to see all these move lower during next week’s trading session. Copper has also broken out of a sustained period of sideways congestion on the daily chart, with the December HG futures contract closing the week at 3.5600 and with selling volumes on both the current and longer term charts, the base metal looks set to move lower this week to test the 3.5000 region in due course.
Moving to Europe and the Euro, what has become clear is that the markets appear to have become inured to the sovereign debt crisis issue. The reason for this is the statement from President Draghi earlier in the year, that the ECB would do ‘whatever it takes to save the Eurozone’, taking some of the sting out of the current crisis in Spain. Despite rising this week and closing at 5.6%, they still remain firmly below the notional line in the sand of 7%. All of this ofcourse is against a backdrop of worsening unemployment in Spain which rose to 25% in Q3. The EUR/USD moved lower once again last week, easing back through the 1.3000 level once again to end the week at 1.2937 in the spot FX market, testing key technical support in the area once again. The fundamental driver for this weakness was largely due to the PMI numbers, but provide we see the pair hold above the 1.2860 region this week, then expect to see a bounce back above the psychological 1.300 region in the sort term, and longer term a test of the 1.3500 level towards the end of the year.
Moving to the British pound, the currency received a huge boost from the GDP data which sent Cable back above the 1.6000 level to end the week at 1.6091 in the spot market. From a fundamental perspective the BOE Governer suggested that further quantitative easing may be applied in due course, although this is far from certain given the positive news in the industrial sector, and next week’s OCtober PMI data may be pivotal for the sterling. The market is expecting a number close to 48, a further decline from last month’s figure of 48.4 and if this is correct, then the UK economy may be weaker than many had forecast or indeed could consider possible. The next meeting of the BOE on the 8th November will be crucial.
Finally in the Far East Japan continues to grapple with increasingly difficult financial issues, not least of which is the budget, but the Bank of Japan will have been pleased to see the Japanese Yen weaken, moving back above the 80.00 region on the daily chart before closing in the spot market at 79.64. Nevertheless the medium term outlook remains bullish, and provided we see a break and hold above the 80.50 level then this should provide a further platform of support for the next leg up to test the 83.91 level in due course.
By Anna Coulling