What to look for in the week ahead
- Markets consolidate before The End of the World
- Greek problems get worse before they get better?
- The euro hinges on Spain
- Japan ’s economy still in a ‘very severe’ state
- The Loonie may see weakness ahead
- Key data and events to watch next week
Markets consolidate before The End of the World
This past week saw most major asset markets and currencies essentially consolidate around recent lows following the sell-off in the first half of May. Incoming data, however, continues to suggest increasing sluggishness in the major economies. In the US, housing data weakened further, both the Philadelphia and Empire manufacturing indexes declined, industrial production flattened, and the index of leading indicators dropped for the first time in 10 months. In Europe, in addition to the on-going peripheral debt saga (see below), the ZEW outlook survey of investors and analysts declined more than expected for Germany and the Eurozone as a whole, while on Friday, the Bundesbank warned that German growth would likely moderate after the strong surge at the start of the year. Japanese 1Q GDP also declined by more than expected and 2Q prospects are not much better (see below). Overall, between weakening data in major economies, deteriorating debt conditions in Europe, the debt-cap debate in the US and the looming termination of QE2, we think the environment continues to lean toward risk aversion and we would expect commodities, stocks and JPY-crosses to resume their declines, likely propelling the USD higher in the process. (But if the End-of-the Worlder’s are right, it won’t really matter after Saturday anyway.)
Looking at next week’s data calendar, there aren’t any reports that on their own seem sufficient to provoke a surge in risk aversion, so we would anticipate either a steady drip of weaker data to eventually see recent lows tested, with a break below serving as confirmation, or another week of choppy consolidation. Spanish elections over the weekend could provide a spark of Euro-specific negativity (see below), and the steady drip of Greek travails could also take a further toll. There is a G-8 meeting at the end of next week, but at the moment currencies do not appear to be high on the agenda. On the charts, we will be watching to see if the USD index can break into its daily cloud, which it tested several time this past week. The base of the cloud drops to 75.55 to start next week, and declines to below 75.00 later next week (price last at 75.47). EUR/USD has dropped inside its cloud, with the cloud top rising to between 1.4263 and 1.4359 as a source of resistance next week. The base of the cloud is mostly steady between 1.3975 and 1.4039 next week as a support/potential breakdown area, again highlighting the significance of the 1.4000/50 area overall. Overall we prefer to use remaining strength in the JPY-crosses as a selling opportunity in anticipation of heightened risk aversion.