Prolonged risk aversion is expected to ensue until Tuesday’s presidential inauguration brings in a temporary feel good rally. Having made their third failed attempt to rise more than 25% since the intensification of the crisis, equities, VIX and the yen are expected to further move in the direction of prolonged reduction in risk appetite (equities negative, yen positive, VIX positive). I warned on Jan.2, that the trio of risk appetite will be constrained near 940 for the S&P 500, $850 for gold (having failed to break its 8-week cycle gains) and 92.50 yen in USDJPY.
The charts below illustrate the relationship between the VIX and the S&P 500, both of which suggest prolonged risk aversion (rising VIX, falling S&P) as the VIX breaks above its 100-day MA for the first time in four weeks and S&P 500 bears the next support of 817. Weekly oscillators for both instruments also confirm further reduction in risk appetite, which could intensify until a possible bottom on Tuesday’s U.S. presidential inauguration. President elect Obama’s speech will likely give a short-term relief rally on the feel good factor resulting from a turning of the page in the White House. Despite the long term concerns of the upcoming fiscal deterioration, Obama’s promised $300 billion in tax cuts will be reiterated during the inauguration, thereby, justifying the next temporary bottom in risk appetite.
The currency implications for the aforementioned pick up in risk aversion is likely to continue boosting the yen at the expense of the Canadian dollar and the New Zealand dollar, two commodity currencies whose underperformance cannot go unnoticed. This weeks S&P downgrade of kiwi credit rating and the impact of a three-week low in oil prices is weighing heavily on NZD and CAD.
The confluence of eights; 8,000 Dow, $800 gold, 800 S&P 500 may prove as just a coincidence, as the Dow is most likely to break below 8000, while the S&P 500 is the least likely break 800 in the short term.
The European Central Bank delivered the expected outcome of cutting by 50-bps, reverting to what is seen as an incremental pattern of easing for now as the central bank is cautious about driving down inflation further below its 26-month low of 1.6%. Anything less than 1.5% annual would be deemed as outside the definition of anchored price stability but it does not necessarily mean an aggressive easing mode. We should also note that Decembers 75-bp cut from the ECB in December was partly to avoid excessive rate differentials relative to the BoE (-150 bps in Nov and 100-bps in Oct) and Fed (which may have signaled to the ECB that it would enter zero % territory later that month).
J.C. Trichet’s press conference suggests a return to incrementalism, rather than the end of the easing campaign, which could extend until rates reach 1.00%.
EURUSD was boosted by higher than expected US jobless claims (524K from 470K) as well as the obligatory post-press conference choppy trading, reaching as high as $1.3239 before retreating towards $1.3050. We reiterate the $1.3030 support remains the trend line support extending from the Nov. 21 low through the Dec. 4 low. Philly Fed and Empire State showed no marked improvement. Tomorrows US figures on industrial production are more likely to trigger market impact than the CPI as production decline seen greater than 1.0% following previous 0.6% drop, while capacity utilization seen falling below 75%.
USDJPY consolidation ensues between 89.40 and 88.60, while staying clear from retesting the upside limit of 90.20. While much talk is being focused on U.S. dollar’s risk-driven gains, USDJPY remains in a negative bias, with the shorts still looking to test the 88.60 support.
Ashraf LaidiChief Market StrategistCMC Markets66 Prescot StreetLondon E1 8HG, UKEmail: a.laidi@cmcmarkets.com
