Equity Markets Trade on Thin Volumes during UK Holiday; Gold Bounces Sharply from 1520

Equity markets are seeing declines in volatility and trading volumes as some traders remain on the sidelines during the UK holiday. Friday’s market declines, however, continue to be the main theme as most of the macro data released last week (from all continents) disappointed market expectations. This looks set to continue for the near to medium term, although we are likely to see some instances of corrective rallies.

For most of last week, news headlines out of the Eurozone were not the main driver in this lately monthly bear run. But the direction remains clear in all time zones, with Asian markets trading lower and the Nikkei 225 seeing declines of nearly 2 percent despite the thin trading conditions.

Of course, the main story to end last week was the Non FarmPayrolls figures out of the US, which came in at a dismal 69,000 versus expectations of 150,000. Private payrolls were the main supportive factor (rising by 82,000) but the unemployment rate ticked higher to 8.2 percent. The Underemployment continues to look much worse at 14.8 percent and the combination of all these factors is leading to renewed analyst speculation that we will see another round of economic stimulus in the US, as a means for halting any potentially excessive volatility in equity markets.

The other, more minor, data releases were seen with the ISM manufacturing index, which came in at 53.5. This number was lower than estimates but still indicates expansionary territory and the new orders component of the report was relatively strong at 60.1. This number has shown strength in recent months but the lower reading only added to the negativity seen elsewhere. One of the main beneficiaries in all of the activity was Gold, which rallied after recent declines and part of this came as a result of momentum short covering and a return to safe haven assets.

With markets starting to consider the possibility of additional stimulus from the Federal Reserve, traders can do well do take another look at comments from voting members, as some have suggested that weak employment data is not enough to change the Fed bias toward additional policy accommodation.

Ahead this week,expect choppy trading conditions to continue, as we have central bank meetings in Canada, the UK and the Eurozone, as well as Congressional testimony from Fed Chairman Ben Bernanke.

Technical Analysis:

The AUD/USD is currently seen breaking some critical long term support levels as prices are now trading below the 0.9660 region. Prices saw no significant bounce here to close the week, so additional weakness looks to be in store for this pair. Next major support comes in at 0.9370, and this will be viewed as an excellent contrarian buy zone.

Gold is now seeing a sharp rally off of the 1520 area that we have been watching for some time, and this is now the critical support level to watch going forward. A break here will be a significantly bearish event but at the moment a rise is more likely, with next resistance coming in at 1670. We are currently dealing with daily moving average resistance however, so prices could see some stalling near term.

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