Markets Indecisive after a Handful of Events

The markets had every reason to extend the trend last week after another round of massive rate cut from four of the world's major central banks. ECB, SNB, RBA cut by 50bps and more impressively, the BoE cut by 150bps. There were extremely poor economic data out of US. But after all, there was no noticeable breakout and the currency pairs as well as the stock markets are still bounded in range. Yes, volatility was high considering almost 3.0 (83.9 to 86.89) swing in the dollar index and over 1000 pts (8673 - 9653) swing in the DOW. But as we've pointed out before, the scale of the prior trend needs to be taken into perspective when looking at the scale of the consolidation itself. And looking at the rally from 75.89 to 86.89 in dollar index from Sep and the sharp fall from 11450 to 7884 in DOW since Aug, the above mentioned range is indeed pretty normal.

The lack of breakout can be attributed to the fact that "the worst" has possibly been priced in by the markets already. More rate cuts are expected from major central banks around the world that could eventually bring everyone into the range of 0-2%. Economic data are expected to continue to reflect recession has started in major economies. Hence, the news are indeed not news. And with the lack of breakout, traders continue to lighten up their positions to lock in profits. That also helped stabilize the markets.

But after fall, recent developments continue to support the view that markets are merely in consolidation. In other words, the trend is not over yet. There are some points to note though. Firstly, the developments in dollar index, EUR/USD as well as Dow argue that the current consolidation might be in form of triangles and choppy sideway trading might continue further for a while before completion. Secondly, the move following triangles are usually exhaustive. Based on the current indecisiveness in the markets as well as the lack of negative surprises that could exceed current market pessimism, markets could set a sizeable turnaround after the next move. Thirdly, note that commodity currencies are relatively firm even though crude oil breached below $60 level last week, the next rebound could indeed be led by them. Fourthly, Sterling is taking over the weakest currency spot as markets expect BoE to cut faster than others and with much chance of adopting the Zero Interest Rate Policy. The pound will likely remain the weaker one.

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Obama won the US presidential election and became the first African-American US president in history. Obama got 53% of popular vote and wong the electoral college by a big margin of 349-159.

Non Farm Payroll report showed -240k contraction in Oct, much worse than expectation of -200K. Sep's figure was even worse after downward revision from -159k to -284k. Sep and Oct together recorded the worse two month slide since 2001. Unemployment rate surged much more than expected to 6.5%, highest level since 1994.

ISM manufacturing index continued the slide that started in Jun and reached 38.9 in Oct, much worse than expectation and was worst reading since 1982. Price paid component receded sharply to 37. Employment component also deteriorated sharply to 34.6. ISM non-manufacturing index dropped more than expected to new cyclical low of 44.4 in Oct. Employment component dropped deeper into contraction region at 41.5.

Construction spending dropped -0.3% in Sep. factory orders dropped -2.5% in Sep. Jobless claims came in at 481K. Q3 labor cost rose 3.6% in US, with productivity up 1.1%. Pending home sales dropped -4.6% to 89.2M in Sep. Wholesale inventories dropped -0.1%.

ECB met market expectation and lowered interest rates by 50bps to 3.25% on unanimous vote even though the possibility of a 75bps cut was discussed. In the following press conference, Trichet said that markets are now facing an extraordinary degree of uncertainty stemming from the financial market turmoil which will dampen demand in the Eurozone. Recent data confirms that growth momentum has weakened. Sluggish domestic demand and tighter financial conditions are expected. Upside inflation risks has fallen and Trichet expects strong CPI declines due to base effects.

European Commission forecasts contraction in the economy for three consecutive quarters. Growth forecast for 2008 was revised down from 1.3% to 1.2%. Also, the EC forecast growth to be a mere 0.1% next year, worse since 1993. Eurozone PMI manufacturing was revised down to a record low of 41.1 in Oct. Services PMI was revised lower to 42.4 in Oct. PPI moderated sharper than expected to 7.9% yoy in Sep. Retail sales dropped -0.2% mom, -1.6% yoy in Sep.

BoE surprised the markets by cutting as much as 150bps to bring the benchmark interest rates to 3.00%, lowers since 1955. Also, this was the largest single cut in 16 years. The accompanying statement acknowledged that there is a "marked deterioration in the outlook for economic activity at home and abroad," and "availability of credit to households and businesses is likely to remain restricted for some time". Risks to inflation is believed to have "shifted decisively to the downside," and now with "substantial risk of undershooting the inflation target". Hence, it's believed that the policy easing cycle is not over yet.

UK PMI manufacturing beat expectation and climbed to 41.5 in Oct. PMI construction dropped more than expected to 35.1 in Oct. Services PMI plunged more than expected to record low of 42.4 in Oct. Industrial production fell less than expected by -2.3% yoy in Sep but manufacturing production fell faster than expected by -2.3% yoy. Nationwide consumer confidence unexpectedly improved to 55 in Oct. Halifax house prices dropped more than expected by -2.2% mom in Oct.

In a surprised move, SNB lowed the LIBOR target rate by 50bps to 1.5-2.5%, with point target of 2.0%, in an unscheduled meeting. SNB said in the statement that the global economic outlook has "deteriorated more severely than anticipated". Much impact is expected to growth which, as SNB said, might even be "negative" in 2009.

Swiss SVEM PMI dropped to 47 but was better than expectation of 45.3. CPI moderated less than expected to 2.6% yoy in Oct. Unemployment rate rose from 2.4% to 2.5% in Oct.

Japan leading indicator rose 0.2% to 89.2% in Sep.

Canadian building permits surprised on the upside, rising 13.4% in Sep. Germany factory orders dropped sharply by -8.0% mom, -2.7% yoy in Sep.

RBA cut overnight cash rate by 75bps to 5.25%, larger than expectation of 50bps cut to 5.50%. In the accompanying statement, Governor Stevens acknowledged turbulence in world financial markets and weakness in major industrial economies around the world. Such "deteriorating international conditions and falling commodity prices" will have a negative dampening influence to the prior rate cuts and stimulus package to boost the economy. Spending and activity in Australia will be "weaker than earlier expected".

Australian retail sales rose a mere 0.2% mom in Sep. Seasonally adjusted sales resulted in a -1.1% mom contraction, worst in three years. House price index dropped much more than expected by -1.8% qoq in Q3, the biggest quarterly decline since 1978. Annual growth rate closed sharply from 8.2% to 2.8%. TD Securities inflation estimation fell for the first time since Feb 2006, by -0.2% mom. Unemployment rate was unchanged at 4.3% in Oct, better than expected 4.4%.

New Zealand unemployment rate rose less than expected from 3.9% to 4.2% in Q3.