Last week world stock markets managed to recover somewhat from the mauling of most of November. On Tuesday and Wednesday alone the Dow Jones and S&P 500 put on 500 points and 60 points respectively. This puts the S&P 500 back in positive territory for the year heading into what is usually a benign festive trading period.
On the currency markets, the Dollar continued to strengthen against the Euro and the Japanese Yen. The Dollar index could be soon breaking its multi month down trend and move up from the 75 area. The US Dollar index is a measure of
the Dollar against a basket of major currencies. This month it hit an all time low of $74.484, the lowest level since the gauge was initiated. This could be bad news for gold bugs and oil investors as the two commodities have been used as Dollar hedges.
The US housing market was again in focus last week, however the bad news is largely already priced in. In the UK though, it is arguable that the problems in the domestic housing market are not fully priced in yet and there may be
worse news to come. Nationwide said the cost of an average home fell 0.8 percent this month, the first decline since February 2006 and the biggest drop since June 1995. Futures markets are pricing in a 10% decline over the next couple of years.
On the back of this, in their appearance before parliament last week, the MPC didn’t rule out a December cut, which buoyed the market. However, a no change verdict is overwhelmingly the most likely decision next week. Retail prices
rose in November at their fastest rate in nearly a year. This is due to retailers passing on the cost of rising supplies and accelerating consumer spending. King added, “We’re trying to balance the risks to inflation with the downside risk if activity slows sharply. The committee’s current judgment is that the most likely outcome is for output growth to slow and inflation to rise, at least for a period.” Given his comments at the meeting, it seems that the MPC may stick to their primary mandate of controlling inflation. 2008 may be a different story.
Fed chairman Ben Bernanke said in a speech in Charlotte, North Carolina late on Thursday that the latest financial market developments “have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity”. Officials must “judge whether the outlook for the economy or the balance of risks has shifted materially.”
The Fed futures market was already pricing in a quarter point cut in the December FOMC meeting, but markets look to have taken this comment as making this more likely and a half point cut increasingly possible.
November is seasonably one of the best months on the US markets and usually marks the start of what is historically the best 6 months of the year for the stock market. This year has certainly bucked the trend with this November looking like it will be the worst November since 2000. However according to The Stock Trader’s Almanac Since 1950 when the Dow was down in November it gains an average of 4.9% over the next two months. In fact, only twice has the December-January period been down following a negative November; in 1967 and 1969.
Next week the aforementioned MPC interest rate statement and the ECB interest announcement are top of the list of market movers. Both Central banks are expected to announce no change verdicts, but as ever it is what is not said that will be of most interest to traders. ECB president Trichet speaks after the announcement. Other top tier announcements include Monday’s US Manufacturing data and Friday’s Non Farm Employment data.
In all, it will be a busy week for global stock and currency markets with so much data being released. The VIX options volatility index actually dropped below its short term moving averages last week which could be an indication
of forthcoming volatility on a contrarian basis.
This coupled with the data heavy week next week, may make a volatility trade the best option. An up or down trade with the triggers set 35 points higher and 60 points lower than the current spot price of the S&P 500 returns 11% over 10 days. You may wish to leave this until later in the week to make the most of the time value, particularly with US Non Farm Employment data not released until Friday.
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