Industrial production climbed in November by the most in a year, a sign manufacturing is bolstering the world’s biggest economy. Output at factories, mines and utilities rose 1.1%, a report from the Federal Reserve showed. A euro-area manufacturing report also reached a 31-month high in December. The S&P 500 this morning has rebounded after its biggest weekly decline since August. The Fed may begin reducing its $85 billion of monthly bond purchases at its Dec. 17-18 meeting, according to 34% of economists in a Dec. 6 Bloomberg survey.
Equities: The MAR14 E-mini S&P 500 (CME:ESH14) has hit another downside target/support level overnight of 1760, but then staged a powerful rally all the way to 1785. The market is now up 17 points, and looking to us at least that a bottom has been put in for this pre-Fed meeting sell-off. 1760 is a very good support level, and buyers obviously liked getting long again once the market broke that level. It will be very interesting to see what the Fed decides to this week with regards to tapering. If the Fed does not taper, we could see an initial bullish reaction in the S&P 500. If they do taper, we anticipate an initial bearish reaction. In the bigger picture, we believe at this point the stock market will have another good year next year, possibly returning to its historical averages of gaining around 7%.
Bonds: The MAR14 U.S. 30-year bond market (CBOT:ZBH14) is up 11 ticks to 130 even. Our story has not changed with bonds. We see a significant downside potential if the Fed starts to taper this week. Longer term we could see the 30-year futures head down and break 120 next year. This is based on technical analysis of a monthly barchart. For now, the 128 level is a key support area, and naturally the bond market will be listening to the Fed’s Wednesday statement closely.
Currencies: The MAR13 U.S. Dollar Index (NYBOT:DXH14) is down 14 ticks to 80.24, still above the key 80 level. We believe the USD has potential to rally above the 80.50 level on Wednesday should the Fed decide to taper. For many key financial markets, Wednesday’s decision will have a huge impact. The MAR14 Euro, however, continues to be strong, especially with the recent strength in Euro region economic data. The MAR14 Euro is up 29 ticks to 137.60. The MAR14 Aussie is down 7 ticks to 89.01. It doesn’t seem to be attracting major buyers even at these sub-90 levels, so the Aussie could potentially head lower from here. The MAR14 Pound is up 12 ticks to 162.93. We believe this currency has some underlying strength, and expect it to stay above 1.60 and possibly approach 1.65.
Commodities: JAN14 natural gas (NYMEX:NGF14) has experienced some profit-taking this morning, and is down $.07 to $4.28, after hitting a low of $4.20. JAN14 WTI crude oil (NYMEX:CLF14) is up $.59 to $97.19, basically trading within the recent $92 to $98 range. FEB14 gold (COMEX:GCG14) is trading at unchanged levels from Friday at $1,235. At this point, we believe gold will be very quiet until Wednesday’s Fed announcement is released. We still would not be surprised to see gold break below $1,200 on a taper announcement. If there is no taper announcement, we expect gold to shoot up toward $1,275.