Trading volumes in Asia trailed off to close the week as investors pack up shop before next week’s Lunar New Year holiday in China. Given the large number of position closings, it looks as though western traders are taking this cue as well and taking some risk off of the table before the end of today’s trading session.
We will, however, see some significant economic data, so if these numbers do surprise markets, the lower volumes to lead to increases in volatility. In terms of economic earnings reports, the big number today will come from General Electric (GE) and this will likely get the majority of the market’s attention as there will be no European bond auctions to help give some direction in DAX trading and in the Euro.
Yesterday, the HSBC manufacturing PMI report (which generally differs from the official numbers reported by the government) showed a slight rise in productivity to 48.8 (after printing 48.7 for the previous month) but even with this higher reading, the sub-50 print is still indicative of contraction and shows that this year’s economic conditions are seeping into all sections of the globe. The reaction today, however, was relatively muted, as the lower trading volumes did little to push prices in equity markets.
Looking ahead, the key event risks will come with the earnings report from GE and the US Existing Home Sales figures, which were expected to show a strong rally into the end of 2011. Part of the rationale for this is that Pending Home Sales (which provide earlier data for sales of existing homes) are seen as a leading indicator for the Existing Home Sales report, typically by one to two months. Pending Home Sales have risen more than 13 percent in the last quarter so there is a clear possibility that today’s Housing data will surprise to the upside. Currently, the consensus estimate is calling for a rise of 5.2 percent for the month of December (to a total figure of 4.65 million unit sales). An increase of 4 percent was seen during the month of November.
We will also have data today out of the UK and Canada, with Retail Sales and Inflation figures scheduled for release. Retail Sales in the UK are expected to show an increase of 0.7 percent while Canadian consumer prices are expected to show declines. While this market expectation for UK Retail Sales seems weak, it will likely still be viewed as encouraging, given the sharp from that was seen in November. Canadian consumer prices are expected to have dropped 0.2 percent for the month, which would bring the yearly CPI reading down to 2.7 percent, and reduce market expectations for additional interest rate increases this year.
The long term downtrend in the EUR/USD remains in place but prices did manage to see some nice gains overnight. We are coming into levels that will soon be viewed as strong selling opportunities in longer term time frames but we will wait for an additional rise to the 1.32 region before accepting that bearish bias. Shorter term indicator readings are starting to show positive momentum, so we think this bull run has more room to extend.
The S&P 500 extended its gains overnight and made fresh highs above the 1310 area. Prices are essentially bouncing off of the mid point of the uptrend channel we have been discussing here and as long as prices hold above the psychological 1300 area, our bias is to the topside. Hourly indicator readings support this bullish bias.