Asia reacts negatively to poor US leads

The S&P clearly bucked the trend of rallying on the first day of the new year, although volumes were below average and the selling was more a function of profit-taking after some strong window dressing into year-end than anything fundamental.

In fact, most of the news flow I took out of last night was actually positive, with manufacturing in the US, Germany (and the Eurozone as a whole), Italy and even Greece improving. Only France went backwards and as I have written a number of times, continues to play into my view that long DAX/long CAC should continue to work.

Traders and investors are going to look much more closely at organic growth in an economy and how that transcends into company earnings, or less dovish monetary policy at a central bank level for their investment case this year and thus being long the DAX still makes sense against the CAC. It’s worth keeping in mind that growth in Germany is hardly inspirational, so money managers will focus on German companies with strong offshore distributions.

A huge week for traders next week

The real money comes back to work next week and what a week it will be. Forget about price action yesterday (and today) in Asia, Europe and the US.  With the bulk of the investment community coming back to work on Monday they have the prospect of positioning for the US reporting season, the monthly Chinese data drop (fixed asset investment, retail sales, CPI and trade balance), Janet Yellen’s Senate vote (Monday), FOMC minutes, ADP private sector payrolls, services ISM, non-farm payrolls report and 3-, 10- and 30-year US treasury auctions in play.

The US payrolls report will be especially interesting as consensus stands at 190,000 and the market just simply isn’t prepared to see 140,000 jobs created (i.e. a low number). The roadmap for this year is generally looking for an end of QE later this year and a greater focus on the Feds forward guidance. A weak jobs number is something that just isn’t expected and therefore could cause heightened volatility. Especially when all signs (CBOE put/call ratio, investor’s sentiment, VIX etc.) point to a market that has never been more complacent.

China once again subtracting from sentiment in Asia

Asia has been offered, with China getting sold more than 1% after its service sector survey grew at a slower pace on the month. This also seems to be the key driver of the trend break in USD/JPY, highlighting the pair’s sensitivity to risk sentiment. The ASX 200 is rounding out the week down 0.7%, with losses broad based and only the telco sector in positive territory. Gold stocks once again the stand out, with many breaking short and medium term downtrends. BHP has lost 1.3% and once again shows that the cluster of November highs around $38.20 just can’t give way and supply continually comes onto the market on moves above $38.00.

The AUD/USD is not finding too much upside despite further consolidation in iron ore, copper and gold. For the first time in a long time, EUR/USD is starting to look actually quite vulnerable and is trading below the 61.8% retracement of the November to December (1.3295 to 1.3894) rally at 1.3666 – a close below here today could signal a move to 1.3524 is on the cards.

On the other hand, AUD/USD is consolidating and is trading sideways. I’m neutral on the pair; although a closing break of 0.8955 (the 38.2% of the sell-off from 0.9167 to 0.8820) would be the line of pain for the shorts, while a daily close below 0.8865 would provide a bearish signal from a momentum perspective.

Gold eyeing $1250

Gold has been widely talked about on the floors again today for a few different reasons. Firstly, it has to be said that unlike developed market equities, sentiment towards the metal is shot to pieces and if 2014 is going to be a better year for contrarians then long gold could be a good trade.

From a short-term perspective the market is fairly excited about next week’s rebalancing of the Goldman Sachs Commodity (GSCI) and Dow Jones/UBS commodity index, which ultimately mean gold’s weight in the index needs to be re-balanced from 8.58% to 11.53%. As a result over a million ounces of gold will be bought. Traders are clearly buying in anticipation of that event on January 6.

It is also worth highlighting that longer-term investors are noting inflation expectations are moving higher. Both five and ten-year inflation expectations are still well below the actual bench market treasury, thus positive real yields are still in play (i.e. inflation expectations below the benchmark bond), but if we do see the global economy rebound this year and inflation expectations do ratchet up faster than the underlying bond yield, then we could go back to negative bond yields – the perfect breeding ground for gold appreciation. Key resistance kicks in at $1250 and a move through here will clearly be welcome from the gold bulls.

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