NBF - National Bank of Fujairah

Newletter Issue 26th December 2011

26 December 2011

Overview

The last week of the year begins with a public holiday in most markets, and I take this opportunity to wish you all a Merry Christmas and a Happy New Year! It's been a turbulent year, and certainly a difficult one for many, and while I expect more of the same next year, we do now have a relatively quiet week coming up where hopefully we can all relax. 

Last week saw low volumes being traded, though the thinner liquidity did not see us move significantly in either direction. Markets rebounded a little after the previous week's thrashing, with the S&P closing 3.75% higher at 1265, on the back of further good data. Risk assets generally traded sideways or a little higher on the week, with flows generally dominating movements.

A quiet week coming up with many market participants and others on holiday, but I would remain vigilant. Year end can bring many surprises, and with the year that we have had, anything can really happen. On the data front, we have US Consumer confidence on Tuesday, as well as the Case-Shiller Home Price Index. We also have German CPI on Friday, but I would not expect any data this week to play a key role. Politicians and flows are currently the key, and as always, remain difficult to predict.

Good Luck.

Fridays Closing Levels

Euro Area

The ECB's 3yr LTRO was EUR 489.2bn with 523 banks placing bids for the term funding. Consensus was much lower, between EUR 250bn and EUR 350bn. A large proportion of the LTRO, around 61%, is a recycling of liquidity in the system, with banks shifting maturities from 7day, 3m and 1y repos into 3 years. This leaves the rest, around EUR 190bn, as new liquidity in the system.

EUR reacted positively to this news, trading just below the 1.32 level on Wednesday afternoon, having sold off around 340 pips the previous week. This operation clearly demonstrates the ECB acting as a lender of last resort for banks, and is important to help stabilize the situation and reduce funding risks for banks. However, the problems inEuropestretch beyond the financial sector and markets quickly recognized this and EUR/USD closed pretty much where it closed the previous Friday.

My strategy remains to sell EUR/USD around the 1.32 mark, as long as EUR stays below the 1.34 level. If we break above this, especially in thin markets, we could break all the way to 1.38. Flows will dominate movements into year end.

UK

BoE MPC minutes showed a unanimous decision to hold rates at 0.5% and the Asset Purchase Facility (QE) at GBP 275bn, as expected. I still believe we will see more QE in the first quarter of 2012, so keep an eye out onUKinflation data and GDP forecasts in the first few months of the New Year for signals.

UK Q3 GDP was revised up slightly, from 0.5% to 0.6%, as was widely expected. The detail of the data was slightly better but inventories continue to make a disproportionally large contribution. Next year I believe will be more challenging, with growth expected to be around flat, but at least recession should be avoided.

Despite the challenges ahead, sterling continues to be well supported, and broke out of its recent range to trade as high as 1.5774 before closing at 1.5588 on Friday. I believe we continue to trade in a 1.53-1.57 range, and I prefer to express general bullish/bearish market views via EUR/USD.

US

Although the third estimate of US Q3 GDP was revised slightly downwards, other data was once again positive and stocks reacted positively to this news, while 10y yields rose once again above 2.00%, to close at around 2.03%. Initial claims unexpectedly dipped again, and while these are subject to seasonal volatility, the recent steady downtrend suggests a strong labor market heading into year end.

On Friday, Durable Goods orders came in at 3.8%, much higher than the 2.0% expected, and up from -0.50% previously.

The Dollar Index was slightly down on the week, and after trading as below the 73.00 level in the middle of the year, it is pretty much where it started 2011!

This Week's Data