Currency markets – Mr. Trichet will cut but EUR is still a high yielder among G7.

EUR/USD (1,2640): This week the full attention is on ECB on Thursday and the US labour market data Friday. My best guess is that the market expects a 75 basis points rate cut from ECB on Thursday. I think it’s a fair guess where 100 basis points is more likely than 50 basis points if they consider anything else than 75 basis points. The comments will, as usual, be very interesting but hardly anything but sluggish. This might be expected but I think it will move the market anyway – lower within the current range. Mid term it will have an effect that the EUR rate is a high yielding currency among the major currencies when investors start to search for some return on the cash positions.

The US labour market data is the event of the week. Of course it will be a bad figure, we all know that (expected -325k / 6,8%), but fundamentally it is difficult to buy the greenback on the back of these numbers. The worry about the steepness of the US downturn will return. This combined with more people realising a coming problem from the fast growing US public deficit finally leads to a lower Dollar – have a look at the Treasury credit default swap, it widens every day…..

In the first part of the week I expect the current 1,2400 – 1,2900 range to hold, but the EUR/USD New York close on Friday is above 1,3000 going towards 1,3250.

Target: Range 1,2400 – 1,2900 followed by 1,3250.  

 
EUR/GBP (0,8315) – GBP/USD (1,5200): The 0,8250 target in EUR/GBP was reached followed by a nice rebound. I fear that the positive GBP sentiment mainly was based on the rising equity market last week. If that is the case I go for a offered Sterling sentiment this week. The big day is on Thursday where Bank of England will cut rates with 50 – 75 basis points, where 75 basis points is priced in the market. I actually think that the market reaction will be limited confirming that Sterling will enter a range for rest of this year.

The short term move will be to 0,8450 in EUR/GBP but I go for a 0,8100 – 0,8600 range for the rest of this year. Volatilities are high, but in my view it’s more a sign of usual risk takers are unwilling to take new risk than expectations about higher volatility in the underlying cash market. For those who have some risk appetite left, selling volatility with maturity before year end is an option. GBP/USD will move towards 1,5500.

Targets: EUR/GBP short term 0,8450, range 0,8100 – 0,8600 – GBP/USD 1,5500.

EUR/JPY (118,25) – USD/JPY (93,75): When I started on these comments during the weekend, EUR/JPY I judged EUR/JPY to be around 120,75. The views behind the comment are the same.

How many bad news can a market absorb? I don’t know, but Yen should have been beaten up. It’s only due to the well known capital flows that JPY is supported. The bad news out of Japan simply accelerates in speed. Japan is very export dependent so it’s natural Japan is hurt even more than the other major countries. As written under the equity part I continue to be bearish on the stock market which could force further JPY purchase leading to the target in EUR/JPY at 118,50 for the 3rd time. As I go for a stronger EUR, the 118,50 level could be a good entry point for a mid term long EUR/JPY position depending on how the market looks like if the level is reached. USD/JPY trades towards 90,00 followed by intervention from Bank of Japan, this will support the EUR/JPY position further.

Targets: EUR/JPY 118,50 – USD/JPY 90,00.
Equities – What a rebound but based on a partly state owned and weak banking sector…….

Nikkei 225 (8.397)  Topix (827)  Dax (4.570)  FTSE 100 (4.226) Dow Jones (8.829)  S&P 500 (896) Nasdaq Comp (1.536)  

Honestly, the rebound last week of course made me think, anything else wouldn’t be serious.

Last weeks rebound was significant but banks were in the lead. Some very respectable people in the market say that they buy shares in the banks where governments participate because it’s unlikely these banks will go bankrupt. I respect and even agree in that view. But that the banks have a major shareholder called “The State” doesn’t guarantee against bad business – on the contrary. The sector is reducing business globally, many can not pay dividends and more losses will come due to the global recession. I would avoid investing in this sector and I think some had, or will have, the same thoughts – pointing lower again.

The November car sales numbers released from Japan and Spain this Monday morning shows even worse drops than in October. Very symptomatic for the global demand that only will be helped slightly by some Christmas shoppers. That’s over in 3 weeks time, and I fear that Q1 will be ice cold.

The rate cuts from Bank of England and ECB on Thursday are priced in the market. The big event in the stock market is also the labour market data on Friday (expected -325k / 6,8%). Very bad numbers are expected, where some would claim that a “not as bad number as expected” will lift shares. Maybe, but I just have difficulties to believe that investors are happy to buy stocks with ongoing worsening macro economic data.

One thing I noticed, is that the lows in November in US and Europe were lower than the lows in October. But in Japan and Hong Kong the lows in November were above the lows in October. Maybe just a coincidence, but the turnaround will happen in Far East first when it happens.

My expectation is lower share prices in general by the end of this week.

I have adjusted the targets for Dow Jones and Nasdaq Comp accordingly to the new S & P 500 target at 656.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (6185)  S&P 500 (656) Nasdaq Comp (1191)

China – The Friday package a usual, but the Monday version the world be more aware of.

Hang Seng (14.109)  Shanghai B (110)  USD/CNY (6,8600)

It seems to be a new habit among Chinese senior politicians to announce a new support package for the whole economy or the financial markets on Friday’s. This Friday it was meant to cheer the stock markets due to a report from Xinhua News Agency.

China’s national pension fund (China’s National Council for Social Security Fund) should plan to increase its investments in listed stocks. It plans to take strategic stakes in China Development Bank and Agricultural Bank of China. I doubt this can make Chinese equity investors more confident and it was more or less expected from some market participants.

Again it more shows how concerned the Chinese leaders are for a sharp downturn. This became very clear last Thursday as Mr. Zhang Ping, Chairman of the National Development and Reform Commission, warned against a coming decline in economic activity. He stressed that the government needs to take “forceful” measures to change the current slowdown. He directly mentioned excessive production cuts, factory closures and massive unemployment leading to social unrest.

The Communist Party seems deeply worried about this risk. Factories close down every day around in China and the unemployment is rising, but I fear that the Communist Party knows economic data that we don’t know……..

Mr. Zhang also gave some more details on how the RMB 4000 billion big economic rescue package will be used:

RMB 3000 Billion will be spent on infrastructure. The RMB 1800 billion goes to railways, roads and airports. Another RMB 1000 billion of the 3000 is allocated to disaster reconstruction particular in the Sichuan province, hit by a serious earthquake in May.

 RMB 370 billion China will use on rural development and RMB 40 billion health and education. More details will follow when they are released.

From another source I have heard that many hotels in Beijing around the government offices who handle these funds are fully booked. Province government officials have rushed to Beijing to apply for the funds.

A lot of work is done to change and push the domestic part of the Chinese economy. It will succeed one day, but as mentioned I am afraid that the economic truth is more unpleasant than we are aware of.

This was repeated by President Hu Jintao over the weekend, where he confirmed the worries of too low growth to meet the needs from a growing population.

Very coincident USD/CNY jumped to 6,8600 and even higher. The reason was said to be the bad PMI number Monday but we are talking about a small devaluation to support Chinese exporters. As mentioned for some weeks ago, G20 will have a more than a difficult job because all countries just want to export more in a world with less demand……..

A long term thought that investors should consider. The Chinese government is doing a big effort to develop the Chinese consumers as a part of changing the economy to a domestic growth story. It most likely also means that the Chinese people develop an opinion about their life as a whole. Ask Mr. Gorbachev if he succeeded in creating a system with free and liberal market economy but without a free political system………

Hang Seng proved to be more influenced by the global stock market environment, whereas Chinese mainland stocks are dominated by domestic China news. I think it will continue so this week as well. I see no reason to change the targets despite the current positive sentiment for global equities.

Targets: Hang Seng 11.000     Shanghai B 90

Peter

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