Weekly Financial Market Review (July 2012 week 1)
Equity markets and high yielding currencies finished lower on the week as economic data out of the US showed that the national labor market remains sluggish. The Non Farm Payrolls report for June was the main event and with the monthly addition of 80,000 jobs coming in below analyst estimates, stock markets and high yielding currencies sold off to close at their daily lows. The national Unemployment Rate was another disappointment, as it showed no progress from the previous month at 8.2 percent.
In some cases this sell-off was more extreme than others, and the value of the Euro against the US Dollar fell below the previous lows for the year. The EUR/USD forex pair is now trading at 1.2260 and this latest drop is leading many technical analysts to forecast sub-1.20 lows as a possibility into the end of 2012.
ECB Sets Interest Rates at Historical Lows
Trading markets in North America were closed for a portion of last week in celebration of the July 4th holiday but even with this reduced trading activity there were many events present to guide sentiment. Prior to the NFP release, the European Central Bank elected to reduce its cash rate to a new historical low of 0.75 percent. This, of course, is a negative for the Euro currency as this reduces the carry value against funding currencies like the Yen and this downside pressure was exacerbated by later comments from ECB President Draghi who suggested that the interest rate decision is likely to have only a moderately positive impact on 2012 growth figures.
Elsewhere, interest rate decisions were also seen in China, where the central bank (the People’s Bank of China) also lowered rates in order to encourage foreign investment prospects and infrastructure development. Normally, dual rate reductions like this would be a large positive for markets but since we are only seeing lackluster commentary from central bank members and little evidence of progress in the economic data, investor confidence remains bearish.
Looking ahead, the main driver of sentiment is likely to be the earnings results from corporations and more analyst estimates are expecting a negative performance relative to the previous quarter. If this does wind up being the case, there is an increased likelihood that we have already seen the top in stock markets this year.
The month of June was strongly positive for the S&P 500 and global equity markets as a whole, but there is starting to be technical evidence that suggests the latest rally to 1370 will be the end. Specifically, the downtrend line drawn from the yearly highs at 1420 coincides nicely with the 1370 level and the bearish indicator readings suggest that a test of the psychological level at 1300 is in the cards. A break of 1300 would be extremely bearish and accelerate losses to target a test of 1265. An upside break of 1370, however would reverse this bias, so stop losses can be placed in this area.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.