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S&P Index Closes At Highest Level Since June 2008

The Australian equity market is pointed to a flat start to the trading day after US stocks finished mixed although the SP Index (see above chart) finished the week on its highest level since June 2008.

The Dow finish the Friday night session down 13 points to finish the trading week at 12961 while the SP500 index gained 2.28 points and closed at 1365.74

On the economic front, the US consumer sentiment index gained to 75.3 in February, this is its best level in almost a year while new home sales declined 0.9 per cent in January to a seasonally adjusted 321,000-unit annual rate.

The euro has continued to trade to the upside against the majority of its trading counterparts as the agreement on the second bailout for Greece reduces investor’s concerns that the regions debt crisis will worsen. The EURUSD traded up from overnight lows of 1.3358 to as high as 1.3490.

The AUDJPY rose for the eight consecutive weeks as RBA Glenn Steven’s commented that the monetary policy is about right reducing speculation that there will be further interest rate cuts in the near future. AUDJPY traded up from overnight lows of 86.09 to recent highs of 87.08.

WTI crude oil traded up from overnight lows of 107.98 to settle at 109.77 a barrel, recording its fifth weekly gain as investors fear that the cuts in Iranian supply will have an ongoing effect in Europe.

The Volatility Index, widely considered the best gauge of fear in the market finished the week at 17.31.

Article source: http://feeds.actionforex.com/~r/ActionForexall/~3/M--DQKFFJHE/

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ECB Caution To Support Dollar Base

Commodity currencies were unable to hold gains last week despite a very favourable background which suggests that the US dollar overall has formed a base even though position adjustment eventually pushed the Euro to 2012 highs. The week ahead will probably not be a game changer, but actions from the ECB and Fed will give crucial evidence into likely monetary policy trends during the next 2-3 months and the extent to which central banks will pump liquidity. This, in turn, will be vital in determining relative yield attractions for the Euro and dollar as well as global risk appetite. Most likely, risk conditions last week were as good as they will get, but a very aggressive ECB and dovish Fed would certainly postpone the day of reckoning.

The second ECB long-term repo operation (LTRO) on Wednesday will inevitably be a very important focus during the first half of the week. Following the first huge EUR489bn operation in December, there is little doubt that there will be very strong demand again this time around with most estimates around EUR500bn, although some have been as high as EUR1trn.

The injection of funds has certainly had a powerful impact on the markets and has been crucial in stabilising the banking sector. The action has also boosted liquidity which has encouraged risk appetite and driven equity markets higher. The ECB will be looking for a continuation of this process this time around. The central bank will, however, need to be extremely careful as it will risk provoking further discontent within the German Bundesbank. The German behemoth remains extremely uneasy over all aspects of ECB policy with opposition to lower interest rates and the peripheral bond purchases. Tensions will be eased by the fact that the bond purchases have been scaled back to zero in the latest week, but an overly-aggressive repo operation would risk renewed stresses with key officials.

Any figure above EUR500bn would provide support to risk appetite, at least in the very short term, but would also increase fears that medium-term Euro stability was being sacrificed in order to save the banking sector and a slightly more cautious ECB tone looks likely which would curb risk appetite.

The overwhelming impression is that markets would like to stop talking about Greece and move on, but it will still be an unavoidable issue over the forthcoming week as political tensions continue. The initial focus will be on Germany as parliament will need to vote on the Greek loan deal. In a similar vote in September, there were 15 rebels in the coalition which gave Chancellor Merkel 315 votes compared with the 311 required to avoid relying on opposition support.

A latest opinion poll recorded a high degree of scepticism within the German population as a whole with 62% opposing a new deal while 33% were in favour while in a similar poll in September the poll was 53-43%. The popular opinion will certainly put increased pressure on the collation members and Interior Minister Friedrich has already suggested he may vote against.

There is still a strong probability that the government will win a vote as the opposition will vote in favour, but this would certainly put important stresses on the coalition and could easily cause it to collapse. The Greek parliament will also vote on further austerity measures during the week and there will inevitably be the risk of failure given the very high degree of internal opposition.

As far as economic releases are concerned, there are significant US releases throughout the week, although it is doubtful whether they will have a major impact on market direction. The two most important releases are likely to be consumer confidence on Tuesday and the PMI manufacturing releases on Friday. Last month’s consumer confidence reading was much worse than expected and another disappointing reading this time would increase unease surrounding the US structural outlook. Although consumer confidence is often a lagging indicator, sustained weakness would suggest that underlying household finances are in worse shape than expected.The PMI data on Friday should show another solid expansion and any deterioration would also increase suspicion that momentum is starting to slow.

The testimony from Fed Chairman Bernanke is likely to overshadow the data release with key congressional testimony on Wednesday and Thursday. Bernanke will outline the economic outlook and markets will be on high alert for hints on monetary policy. The recent data tone should encourage the Fed chief to take a more optimistic outlook on the economy and downplay the prospect of further quantitative easing.

A more dovish Fed tone would certainly support risk appetite in the short term and undermine the dollar, but it would also ask important questions as to why the Fed is not more upbeat and would tend to increase fears that the US and global economies still face extremely daunting challenges.

China’s official PMI index will be released on Thursday and will be very important for global risk appetite. Comments from government officials suggest reduced confidence in the growth outlook and any slide in the PMI index back to below the 50 level would trigger further unease over the growth outlook as the hard landing takes shape

Article source: http://feeds.actionforex.com/~r/ActionForexall/~3/OI9cni7a4JQ/

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