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IG Markets - Trading Wrap

IG Markets - Trading Wrap

It was certainly good to see European markets pushing higher yesterday, and in the case of the FTSE and CAC, making new highs. Momentum in equities remains to the upside and it was good to see traders not show any concern at the SPD victory in the lower Saxony elections. Clearly the reality is that while there are some differences in the fiscal stance between the SPD and Angela Merkel’s CDU party, they have similar views on Europe, with the SPD even having a positive bias on the so-called blue eurozone bond, which hasn’t really had much airtime of late. The moves by the Republican party to extend the debt ceiling for three months next week is also positive and should keep sentiment upbeat for now. Still, with US markets closed, perhaps yesterday’s moves should be taken with a grain of salt, and we now have a firmer focus given the barrage of micro reports, which will be backed by some interesting macro-economic data over the coming days.

Asian markets spent most of the day in a holding pattern, which is understandable given it’s hard to remember an Asian central bank meeting where so much was expected from a bank that has a history of underwhelming. With the Nikkei pretty much a derivative of USD/JPY, it was interesting to see the pair print a bearish outside day reversal yesterday (i.e. trade above Friday’s high and close below Friday’s low), perhaps this will be telling. And while many investment banks will tell you their internal positioning had become quite one-sided across the suite of forex players, it was not really reflected by recent CFTC data or our own retail clients (with only around 60% long going into the meeting). It seems the BoJ initially managed to live up to expectations, but as traders sifted through the details disappointment set in, with many still searching for answers. Firstly while it was priced in that the bank would adopt an inflation target of 2% we still don’t know the time frame or whether this is will achieved in the near or medium term. We also know the bank will move to open ended purchases in 2014, after it has completed the planned ¥101 trillion for 2013, however the bank didn’t expand the asset-purchase program from today, did not increase duration of JGB’s and failed to increase risk assets at all. All-in all from what we have seen thus far they seem to have just about delivered enough, and while USD/JPY came well off its high, the price action in the Nikkei was extremely volatile, and it will also disappoint the bulls is that USD/JPY couldn’t take out the recent high of 90.25.

The ASX 200, like European markets, has pushed to a new high (4802) and although there was a sense of optimism early in the session, traders took profits off the table going into the BoJ meeting and never really came back in afterwards. US futures haven’t really shown any promise, while FX pairs like EUR/USD and AUD/USD broke away once more from their usually strong correlation with equities and futures, holding in a tight range. Cable continues to hold the November 15 pivot low of 1.5824, with traders’ clear preference to sell rallies. We also feel short GBP/CAD could appeal to some on a technical and fundamental basis and believe those looking for a way to express sterling weakness should look at this pair, even ahead of EUR/GBP (which is looking overbought and offers better value around 83.50).

European markets should see modest downside on the open and in some cases could remain virtually unchanged. On the data side the ZEW survey will command attention, with both the current and economic situation sub-survey likely to show improvement. In the US we get reads on manufacturing from the Richmond Fed, with existing home sales likely to show improvement in December to the tune of 1.2%. On the stock side, earnings from US corporates Travellers, Verizon and Johnson and Johnson should be announced during market hours, while Google and IBM should keep traders busy after hours, especially with IBM’s double digit weighting on the DOW.


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