Equity markets saw a slow drift lower on holiday-thinned liquidity and a general lack of market interest as traders close up shop into the end of the year. One of the main stories was seen with Bank of America (which closed below the key psychological 5$ mark for the first time since 2008) as financial stocks in general are weakening on the widespread belief that EU finance officials do not have a handle on the region’s debt situation. The mostly passive interest in equities at this time of year is keeping the downtrend from gaining momentum but given the lack of any “Santa Claus” rally that many investors had come to expect, the current moves are a little disconcerting.
Overnight, the main macro event was the meeting minutes release from the last Reserve Bank of Australia (RBA) policy decision, which was slightly more hawkish than markets were expecting. Most of the cause for optimism (if we can call it that) was based on the RBA forecast that domestic consumption will remain strong in Australia and shield the nation’s economy from significant external shocks.
The RBA was also charged with the responsibility of explaining its decision to cut interest rates, with the main concern being the potential economic slowdown in Europe. But since the RBA forecasts that exports to its major trading partners will remain strong seems to be a suggestion that this rate cut will not be duplicated in the near term. This should be viewed as a long term positive for the Australian Dollar (AUD) but less for the nation’s equity markets.
Other macro releases were seen in the UK, where the Nationwide consumer confidence report was released for November and while the survey did show an improvement from last month, we are still seeing very low levels compared with historical averages. In Canada, October Retail Sales came in strongly at 0.9% and the numbers from the previous month were revised higher to 0.5%. Consumer data out of Canada has been surpassing market expectations recently, so this should have some impact on interest rate expectations going forward. In the US, housing data also came in positively, with the NAHB house price index improving to 21 (from 19 previously).
The trading environment in general is slowing into the end of the year and this is starting to become evident in the tight trading ranges that are developing in both the equities and currencies markets. This is mostly the case in North American and (to a lesser extent) European markets, but this is something that is likely to continue into the close of the week.
The GBP/USD is making a nice bounce in the short term but when we pull out to the daily charts, we can see some significant resistance areas that should limit gains in the medium term. Essentially, historical Fibonacci and moving average resistances all coincide at roughly 1.5770, so any further upside should meet selling pressure here. We will use this area to start establishing new short positions.
The FTSE has bounces off of some very significant long term Fibonacci support levels, but follow through has been limited and we are viewing this as a dead cat bounce going forward. Our key support comes in at 5280, and a break here should accelerate losses. First resistance comes in at 5330.