20141212 – UP THEN DOWN, THEN..?

Risk sentiment is getting more and more interesting as we head into year-end, perhaps more importantly as we head into the final FOMC meeting of the year. After a strong bounce from a new low of the week yesterday, the S&P 500 promptly reversed in the London evening, and here we are now, making yet another low of the week. From a short term trend perspective, the signs aren’t great, it’s never a good thing to see a chart making lower highs and lower lows, anyone will tell you that’s bearish, and that’s what the S&P is telling us at the moment. Yesterday afternoon, after prices had ranged near the lows, equities impulsively bounced, perhaps inspired by strong retail sales data out of the U.S, but then as news of another collapse in oil prices and what looked like a Democrat revolt in budget discussions, all of the gains – 1.5% of them – were flushed away. And despite lawmakers voting to pass the spending bill and avoid another federal government shutdown in the United States there was no recovery in stock prices.


For oil watchers the price of WTI crude for January delivery is now trading below $60. I haven’t seen a breakdown of the yesterday’s sector performance of the S&P 500 yet, but I’m guessing energy stocks didn’t fare too well! I’m almost afraid of boring you about this.. but the Russian rouble continues its descent into worthlessness – in early September you needed 35 roubles to buy one US dollar, and now this morning after another 2% fall, you would need more than 57 roubles to buy that same dollar. Russia is one of the ten largest economies in the world with a gross domestic product in excess of $2trn, a 60% depreciation of its currency will have serious consequences for the global economy, not least for its major trading partners… think Germany, and think what the secondary impacts will be on Germany’s Eurozone dependents.


As usual the dollar and equities seem to be moving roughly in step, with the US dollar appreciating while equities recovered, and pulled back while the reversal happened. I am keeping a close eye on EUR/USD as I mentioned, but I no longer consider 1.2344 a key level. This is because from the lows on Monday EUR/USD has completed an impulsive move higher, reversed somewhat, and today appears to be moving even more aggressively higher. If we make significant new highs for the week today, which would involve levels well into the 1.25s, I may be forced to reassess what the recent price action means. For now I will say, that there is a chance we are seeing the start of a strong correction in the US dollar, which could see EUR/USD trading into the high 1.20s, it’s too soon to say that with any degree of confidence, but the probabilities are rising… first we need to make a new high for the week, surpassing 1.2496. Please note that this dollar correction is really only versus its major partners, Emerging market currencies are in their own unfolding nightmare.


In China, retail sales positively surprised, while industrial production disappointed. In a way, this is what the leadership wants – a rebalance from investment to consumer led growth, but somehow I doubt this will be welcomed as warmly as should be expected given the decelerating overall growth numbers in China. Emerging markets will continue to get squeezed on multiple fronts. The main ones being:


  • Falling oil prices
  • Slowing demand from China
  • Stronger US dollar augmenting dollar denominated debt
  • Exit of foreign investment funds


Later today we get more employment and industrial production data from the Eurozone; and consumer sentiment data in the United States. We will also get producer price index data, which may be of interest at the margin, to the Federal Reserve. I continue to maintain that oil prices are close to basing for now, but I can imagine bearish sentiment and fear is rampant at the moment. Perhaps it’s worth listening to Mr Buffett who once said something like, “I’m fearful while others are greedy, and greedy when they’re fearful”