Dramatic times, but maybe we can see the first considerations about how bad it will be. In FX it’s likely that BOJ will be active and equities are set for a rebound.

This week, the hot topic focus on Hedge Funds as they deleverage, but how much and how long time?

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Global equities:

Nikkei 225 (7.163) Topix (747) Dax (4.187) FTSE 100 (3.704) Dow Jones (8.378) S&P 500 (877) Nasdaq Comp (1.552)

Several of the targets were reached surprisingly fast and the European ones this Monday morning – but aren’t there any good news at all? You might not call them good, but at least indicates a development that might be tough but necessary before a change in equity markets is a reality.

Some economists point at May/June next year as the low, where the recession will fade out, also (as mentioned under EUR/USD) is an US unemployment rate above 10% now possible. It sounds bleak, but the good thing is that people starts to deal with realty and is willing to bet on the end of the downturn.

If you read this weeks Hot Topic I conclude that selling pressure from hedge funds continues, but one day real money will step in as the equity market will be too attractive. Like I wrote in last weeks Hot Topic, it will be a bet on when the recession is over. First rounds of true bets (large volumes) will come in after the corporate earning estimates for 2009 have been released but before a majority believes in an end of the recession. If this bet holds will depend on how the recession develops, if it turns in to a depression, then large selling into a black hole is the result. Otherwise the big rebound is a reality from early 2009.

As mentioned several times has Far East priced a global slowdown more in than other markets plus they have the best fundamental preconditions for a rebound. The US slowdown is steeper than in Europe, but in Europe the crisis have the longest duration.

What to watch out for this week? The US market feels like it might have found some short term support (or at least no panic), so the Monday close is important as it will lead the way for rest of the globe. The Fed rate cut Wednesday is priced in but the US Q4 GDP numbers on Thursday is a market mover. Otherwise are earning reports in focus again. I look at Kraft Foods plus Proctor & Gamble Company on Wednesday, Thursday I have ExxonMobil Corporation and Motorola Inc as the most important ending the week on Friday with the results from Burger King.

The 2009 P/E forecasts for DAX companies are based on an increase in corporate earnings of 20% in 2009.  We all know that it will be a different story. The many earning reports from Germany during this week (SAP

on Tuesday, Bayer and Lufthansa on Wednesday plus MAN on Thursday) are very important. Hopefully we will have the first new indications for 2009 so investors start to get a feeling for the right pricing. Sort of the same picture in UK, but like mentioned under FX the UK economy will underperform and so will FTSE 100.

Short term I think the most important support for Nikkei would be a FX intervention in USD/JPY. The discussed public stimulus packages should be noted and the talk of renewed public purchase of stocks is important as well.

I have the feeling that Far East is short term oversold, but it’s too early to buy despite a possible rebound. The new targets are adjusted to match the 820 in S & P 500 as I regard that index as leading. We could have a global rebound, but the new targets are where I believe we should head before considering buying stock under the current circumstances.

Targets: Nikkei 225 6.683 Topix 697 DAX 3.906 FTSE 100 3.456 Dow Jones (7730) S&P 500 (820) Nasdaq Comp (1489)

China:

Hang Seng (11016) Shanghai B (91) USD/CNY (6,8332)

The China coverage has been longer the last couple of times so I keep a bit shorter this time. Since last week Hang Seng’s meltdown is of course the most severe happening, it feels clearly oversold despite that Hang Seng is fairly different compared to other stock indices. Shanghai B lost 15,7% during the week, which is more than the domestic A market, showing that western investors are reducing in line with the global trend.

I expect Hang Seng and Shanghai B to rebound the coming days so I use Mondays close as the new target. After the rebound a new sell off is likely, but we need to evaluate the markets when we are so far.

Very interesting is how China takes an active role in the global crisis. It underlines how much the Communist Party worries about the domestic economic situation. More examples of how the Chinese middle class is getting squeezed in the housing market as prices starts to drop. Several house owners complain about the dropping prices. Lately, in the city of Hangzhou homeowners stormed the office of a developer because the company sold remaining flats at a discounted

In Hong Kong in seems that the city’s payout welfare check to the elderly people will rise with 30% to HKD 1.000 per month for people over 65 years – will China do the same?

As mentioned several times before, I think it is important to follow all these initiatives as it turns the Chinese economy to a domestic demand driven economy (the new USA).

Targets: Hang Seng 11.000 Shanghai B 90

Currency markets:

EUR/USD (1,2430): Same picture like the last weeks with capital movements as the key driver. The stop loss at 1,3450 last week was ok, but I still have difficulties to convert the bear outlook on equities into the right EUR/USD view. All eyes are still on equities which is natural, but on top we will have negative news from Central- and Eastern European countries plus bad news from the Euro Zone. It’s hard to find any support for the Euro at all, meaning the 1,30 – 1,35 range seems far away right now as negative us fundamentals is totally out of focus. Regarding US are some now predicting an unemployment topping out above 10% and Q4 GDP at minus 4% (annualised). I need to repeat that the economic downturn in US is steeper than in Europe, but other forces are working now (please also see the “Hot Topic”). Many fundamentals this week, but I watch the 50 basis point rate cut from Fed on Wednesday and the US Q3GDP on Thursday (expected -0,5%) as this weeks highlights. The expected intervention in USD/JPY below 90,00 in USD/JPY (please read below) should lead to wild swings in EUR/USD as well. Inflation is not a topic at the central bank meetings these days, so ECB will cut with 50 basis points next week.

Targets: Range 1,2050 – 1,2550.

EUR/GBP (0,8060) – GBP (1,5450): Last week they came – the official bad news from UK about everything just looks bleak. No wonder that the target at 0,8050 in EUR/GBP was reached but I missed how severe the drop in GBP/USD would be due to the Dollar move. There is no reason to believe that Sterling will be supported by anything at all. Right now I think that many sluggish news are priced in GBP, so the targets are sideways for the moment, but Sterling is the weakest of the major currencies.

Targets: EUR/GBP 0,8050 – GBP/USD 1,5500.

EUR/JPY (116,40) – USD/JPY (93,50): Bank of Japan will intervene below 90,00, is my expectation. The G7 statement I read as a support to Japan if they choose to intervene, but BOJ will be alone without other central banks joining the action. The sudden strength of Yen is too much for Japanese exporters and a FX intervention could be positive for Nikkei as well. Bank of Japan can block the market if they want, though it won’t happen but the amounts could be serious. It will impact EUR/USD as well with good swings, but the problem is that BOJ would buy the greenback as well….½ EUR/JPY and ½ USD/JPY could be the solution, but BOJ is traditional not so keen on Euro’s. I change the targets to market levels.

Targets: EUR/JPY 113,00 – USD/JPY 90,00. Both rebound 5 big figures if 90,00 in USD/JPY is reached

Central bank rates

US Federal Reserve Bank: The next cut is on Wednesday this week – 50 basis points.

Bank of England: They have an golden opportunity to follow Fed and ECB with a new cut very soon – also 50 basis points.

European Central Bank: Next cut is on Thursday next week – 50 basis points.

Bank of Japan: BOJ will stay at 0,50% rest of this year.

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