FX Update
The Santa Clause Rally is Fading Fast
12/14/2011
The Santa Clause rally is fading fast. Major indices have fallen in two consecutive sessions following the hype around last week's ECB meeting and EU Summit. The lack of further simulative measures, i.e. QE3, out of the yesterday's FOMC meeting sparked the sell-off which carried forward to the Asian sessions. With a dozen trading days left for the year, it's probably safe to say that equity market will underperform its counter asset classes such as commodity and fixed income, while FX favors the dollar in light of the ongoing European headlines. Year-to-date, the DJIA is the only major index that has a modest gain at 2% (S&P 500 down 4%). Not surprisingly, Italy trails the group at -28%, with the UK's FTSE best at class at -8%. In Asia, China's Shanghai Composite is down 24%, while HK's Hang Seng not far behind at 20%. Japan's Nikkei is down 16% even with its recent uptick.
The US dollar has staged a rally across the board. The euro is inching closer to its year low with rating agencies set to announce further downgrades to European nations and financial institutions. Emerging markets continue to suffer as Indian rupee (INR) at an all-time low after losing 20% in last three months. Indeed, nations are fast cutting their rates to stimulate growth in this challenging environment and that doesn't fare well with their near-term outlook. As an example, Norway's central bank surprised the market by a 50 bps cut and took its krona (NOK) to reach a new low for the year.
Commodities are softer as well. Gold is no longer viewed by investors as safe havens and has become more correlated to the equity performance. The softer emerging markets are partly to blame on the reduced demand on the precious metal. Crude bucked the trend yesterday surging briefly above $100/barrel after some production quota comments, but has reversed course today to hover $97. US and German government bonds remain the safe haven bets. Indeed, even the German bunds have recovered after its lack of demand in an auction two weeks ago. The 10-year note both yield below 2% and the spread is now only 2bps in favor of the US. - Bernard Tsui |
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