Stock Markets See Volatile Weekly Close as Fiscal Cliff Concerns Continue
Stock markets experienced some unexpected volatility into the close of the week on Friday as investors looked to assess the latest progress of the budget talks in the US. As market trading volumes slow down into the holiday sessions, economic data is having only a limited impact on prices. Alternatively, a majority of the price movement is being dictated by “end of the year” position squaring and short term changes in the general tone of the Fiscal Cliff discussions. The S&P 500 closed the week above 1430 (after hitting daily lows of 1395), the FTSE 100 managed to regain the 5900 level (closing at 5940), and the German DAX finished higher at 7635.
Historically, trading volumes see major reductions into this part of the year, and there tends to be an accompanying slowdown in stock market volatility during these periods. This year, however, might be an exception as there is still a great deal of uncertainty with respect to the ways budget negotiations in the US will conclude. Thus far, the S&P has posted gains of 15% this year but continued optimism for this index will require evidence of progress in these budget talks, as it is unlikely there will be anything else that sways investor sentiment in the coming week.
Euro area Stocks and Currency Push Higher
In Europe, both stock markets and the Euro currency itself continue to see bull runs, with commonly traded pairs like the EUR/USD hitting highs of 1.33 before reversing lower. Commonly watched stock indices (such as the DAX, CAC, and IBEX) have benefitted from Greek loan optimism and European stocks as a whole posted gains for the fifth week in a row.
This is the best string of weekly performances in 4 months, and the benchmark index for the region, the Euro Stoxx 600 is now trading above 280. This index has seen a massive 20% rally since the yearly low posted in early June, aided largely by the bond buying stimulus programs that have been proposed by both the ECB and the US Federal Reserve.
In other currency news, CFD traders should watch for the market reaction to the latest proposal from the Bank of Japan, which announced it will expand its asset purchase program by nearly $1 trillion in domestic currency. Stimulus programs of this type tend to be negative for the domestic currency (in this case, the Yen), and this is likely to push prices in currency pairs such as the USD/JPY much higher through the first half of 2013.
Price activity in the DAX stock index posted some critical breaks of resistance last week, with its first break above 7630 since the beginning of May 2011. The latest rally has been sharp and short term indicator readings are now in oversold territory, so we will likely need to see some downside correction before prices are again able to push higher. Longer term, the bull target now rests at 8230, which is a double top from the end of 2007. Shorter term, wait for a drop back to 7480 before getting into buy positions.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.