Market Themes This Week: Tight Range-Bound Trading, Look Out for Wild Cards

Cliff Wachtel submits: USThe most significant story last week was not the tax cut deal, which was already old news. The really big story was that the Fed announced Tuesday that it was not planning any changes to its bond buying program. Bond bulls had hoped that, in view of the slide in US bonds prices, the Fed would attempt to at least talk up bonds if not explicitly announce increased bond buying to keep US bond yields low. Rising bond yields cause higher rates for a variety of debt, especially mortgages, and thus threaten the US recovery. What makes this event so significant is that rising US bond yields drive up USD demand because USD investments now pay higher yields. Combined with EU troubles, that hit the EURUSD with a double – whammy. It also pressured other major currencies like the JPY, against which the USD is the prime counterpart. EU Recent credit downgrades to Hungary, Ireland, Portugal, as well as warnings of further downgrades to Spain and Belgium, kept yields on PIIGS and other EU sovereign and bank bonds rising and added further pressure to the EUR and risk assets in general. Spain and Portugal both held bond sales, and both saw weak demand and higher rates, undermining nascent confidence that the ECB was supposed to be making sure these auctions went smoothly, no matter how many bonds they had to buy themselves. If that trust in the ECB continues to be undermined, then Ireland, Portugal, and Spain may soon see themselves locked out of global credit markets and utterly dependent on the ECB and EU/IMF aid. Coming Week Themes Low liquidity from a shortened week means that barring some major surprise we’re likely to see another week of tight range bound trading in most risk asset markets. However, low liquidity means high volatility if we do get major surprises, either from the below highlight events or from the EU, Korea, China, or other sources of wild card events. Highlights By Currency Zone In Chronological Order United States Monday – Nov. Chicago Fed Activity Index Tuesday – ABC Dec. 19 Consumer Confidence Wednesday – MBA Dec. 17, Mortgage Applications 3Q GDP, Personal Consumption, GDP Price Index, & Core PCE, Nov. Existing Home Sales, Oct. House Price Index Thursday – Nov. Durable Goods Orders, Personal Income, Personal Spending, & New Home Sales, Weekly Jobless Claims, Dec. Final U. of Michigan Confidence Survey Euro-zone Sunday – German Finance Ministry Nov. Monthly Report Monday – Oct. ECB Euro-zone Current Account, Dec. Advance EZ Consumer Confidence, German Nov. Producer Prices Tuesday – German Jan. GfK Consumer Confidence Survey Wednesday – German Nov. Import Price Index, German IFO Dec. Business Climate Survey, EU Entry Negotiations with Croatia United Kingdom Monday – Dec. GfK Consumer Confidence Survey Tuesday – Nov. Public Finances Wednesday – Bank of England Minutes, 3Q Final GDP & Total Business Investment, 3Q Current Account Thursday – Nov. BBA Loans for House Purchase Japan Monday – Oct. Final Coincident & Leading Indexes, Nov. Tokyo & Nationwide Department Store Sales, Nov. Convenience Store Sales Tuesday – Oct. All Industry Activity Index, Nov. BOJ target rate Wednesday – Nov. Trade Balance, BOJ/cabinet office monthly Economic Report, Nov. Supermarket Sales Canada Monday – Oct. Wholesale Sales Tuesday – Nov. CPI, October Retail Sales Thursday – Oct. GDP Australia & New Zealand Monday – New Zealand Nov. Performance Services Index Tuesday – New Zealand Nov. Net Migration, Australia Oct. Conference Board Leading Indicator, RBA Dec. Minutes, New Zealand Nov. Credit Card Spending Wednesday – New Zealand 3Q Current Account, Australia Oct. Westpac Leading Index Thursday – New Zealand 3Q GDP Friday – New Zealand Money Supply M3Complete Story »