Most of the major stock indices across the globe finished last week higher, and the Euro STOXX 50 was one of the biggest gainers, showing a rise of 3.8 percent at Friday’s close. Traders are using the current weakness in both the Euro and in regional equity markets to establish long term positions in the early part of the new year. Looking at the sector details, we can see that cyclicals saw some of the most heavy buying activity was directed toward financials, metals and manufacturing companies (all showing a rise of more than 4 percent on the week).
Helping support European banking stocks was optimism related to the Long Term Repo Operation (LTRO) as markets begin to view the current ECB strategies with more credibility and with the expectation that the worst of the debt crisis is now behind us. It still remains to be seen how long this optimism can last but with a 12 percent rally in the Greek equity markets, the investment community does seem to be making a strong statement relative to its longer term expectations.
The financial sector in the Eurozone will continue to be one of the main focuses, especially with European Banking Authority (EBA) capital requirement deadlines occurring into the end of this month. The other main focus is the earnings season in North America, which so far has produced mixed results but still managing to beat most market estimates.
We did see strong results from the four largest US banks but this week, most of the attention will be placed on the technology and consumer staples companies. Some of the bigger releases will come from Apple, Siemens, Conoco Phillips, Johnson & Johnson and Proctor & Gamble. Since Apple tends to get most of the popular headlines, this release will likely cause a great deal of short term volatility, especially given the latest release of the iPhone 4S during the 2011 Christmas season.
Another potential event risk will be seen this week with President Obama’s State of the Union speech. Generally, this event doesn’t do much to move markets but given the current economic climate and the budding election season in the US, there is potential here for a market-worthy surprise. Later in the week, we will also have the next Federal Reserve meeting and Ben Bernanke press conference and this will all be concluded on Friday when we will see the first release of US GDP figures for the fourth quarter of 2011. Market estimates are for this number to come in at roughly 3 percent on a quarterly basis.
The GBP/USD is continuing its impressive hourly rally but we are starting to see some signals suggesting that a turning point is nearby. The MACD reading is rolling back over after hitting the zero line and there is a confluence of resistance levels that will likely hold, at least on first test. The main areas to watch are the 50% Fibonacci retracement of the declines from 1.6160, as this coincides with the 100 day EMA and the daily downtrend line. We look to sell at current levels, with a stop above this resistance targeting a test of the lows at 1.5330.
The FTSE 100 is continuing its slow ascent higher but is coming dangerously close to major historical resistance at 5760. We have been watching this level for a while as it represents the top made last October and the previous breakdown point seen in July. This lends to the argument for establishing short positions with stops above 5790, targeting a move at least 200 points lower. An upside break here, however, would be a very bullish signal longer term.