U.S. DOLLAR: LOW LIQUIDITY SWINGS
The lack of liquidity in the financial markets this week finally triggered low volume breakouts in the foreign exchange market. The Australian and New Zealand dollars for example strengthened dramatically against the greenback despite the lack of any Australian or New Zealand economic data. The euro ended the day only marginally weaker against the dollar, but the 0.2 percent decline masks significant intraday volatility. The same is true for the British pound which fell as much as 200 pips from high to low on an intraday basis. The dollar primarily gained momentum during the U.S. session because prior to the NY open, the dollar was actually down against all of the major currencies except for the Japanese Yen. By the end of the day however, it managed to overtake everything except for the Aussie and kiwi.
Global Equity Indices Hit Year to Date Highs
We also found it interesting that many equity indices hit a year to date high today on an intraday basis. Aside from the Dow, Nasdaq and S&P 500, European indices such as the FTSE, CAC and DAX all climbed to fresh highs while Singapore’s Straits Times Index rose to a 15 month high. On a year to date basis, all of the major stock market indices are up more than 20 percent while some emerging market indices such as Brazil are up 80 percent. Although part of the strength can be attributed to low liquidity, the rallies year to date is a clear reflection of the global recovery. Emerging markets also tend to be particularly sensitive to the global outlook and their out performance confirms the broad belief that better times lie ahead in the coming year. Whether this is true remains to be seen but we also believe that the worst is behind us.
Chicago PMI on Tap
Meanwhile according to the latest U.S. economic reports, house prices rose for the fifth month in a row in October. The S&P/CaseShiller home-price index increased 0.4 percent from the previous month on a seasonally adjusted basis, bringing the annualized drop in house prices to 7.3 percent, the smallest year over year decline in 12 months. The data indicates that low mortgage rates and the tax credit continued to support the housing market. Meanwhile consumer confidence rose from an upwardly revised 50.6 to 52.9 in the month of December. Although consumers were less optimistic about the present situation, they grew more optimistic about the outlook for economy for the second month in a row. This increased optimism is in line with the improvements that we have seen in the labor market and the increase in holiday spending. Chicago PMI is the only U.S. report due for release tomorrow and this month the number is particularly important because the other regional releases have been mixed. Manufacturing activity slowed in the NY region but accelerated in Philadelphia and Dallas. The sector’s performance in Chicago will help the market forecast next week’s manufacturing ISM report.
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