MarketView for December 6

 

 

Summary 

 

Worries about Europe's debt crisis the major equity indexes ending the day pretty much unchanged on Monday. However, stock futures edged higher after President Barack Obama said he had reached an agreement with Republicans on how to extend expiring tax cuts.

 

Even with a slight decline in the S&P 500, Wall Street is expecting that benchmark index to break out of its recent range and exceed its current intraday high for the year just above 1,227 reached on November 5. Technology shares limited losses, and the Nasdaq advanced on positive brokerage comments on Cisco Systems and Cognizant Technology Solutions.

 

Cisco rose 1.9 percent to $19.43 after Oppenheimer raised its rating on the stock to "outperform," and Cognizant added 0.7 percent to $69.80 after Goldman Sachs raised that stock to a "buy.

 

A drop in the euro limited Wall Street’s advance as the euro and U.S. share prices have moved in a tight correlation recently, with the euro acting as a proxy for debt concerns overseas. Further adding to conflicting sentiment were downbeat comments from Fed Chairman Ben Bernanke, which outweighed his attempts to reassure markets the Fed could potentially boost the planned size of its stimulus efforts if necessary.

 

Key resistance for the benchmark S&P 500 at 1,228 is expected because 1228 is just above the year's high and coincides with the 61.8 percent Fibonacci retracement of the 2007-2009 bear market slide.

 

Looking ahead in equities, Goldman Sachs Asset Management Chairman Jim gave a bullish view on stocks, stating that global equity markets are likely to see gains of up to 20 percent through 2011.

 

Euro Trampled

 

The euro was stepped on hard as it fell sharply against the dollar on Monday as gold rose to a record high and silver hit a 30-year high over fears regarding Europe's sovereign debt problems combined with speculation that the Fed may extend monetary easing. Spot gold prices hit an all-time high at $1,429.40 an ounce, sending silver futures front-month contract above $30 an ounce for the first time since 1980.

 

The euro fell 0.84 percent to $1.3300, its first decline in four sessions, as euro-zone finance ministers come under pressure to find a common approach to ease the region's debt crisis after an 85-billion-euro aid package for Ireland failed to calm markets.

 

Euro-zone finance ministers met on Monday amid pressure to increase the size of a 750-billion-euro ($1 trillion) safety net for debt-stricken members in hopes of halting potential contagion to other countries. However, Germany rejected any such moves and also dismissed a call by two veteran finance ministers for joint euro bonds guaranteed by all governments.

 

Last week, Ireland became the second country after Greece to require an EU/IMF financial rescue. A question now being asked is whether the current and proposed actions by the EU might be interpreted as a sign that the EU is preparing for a possible bailout of Spain. Spain is the euro zone's fourth-largest economy, and trouble there would certainly aggravate market tensions.

 

Stocks and the euro have moved in tandem of late with the euro looked at as a proxy for regional debt concerns.

 

Oil futures posted their highest close in more than two years, gaining 19 cents, or 0.21 percent, to settle at $89.38 per barrel. Oil prices received a boost from Bernanke's comments on Sunday that raised the possibility of more quantitative easing, as well as from a cold spell in Europe and in parts of the United States that created greater heating demand.

 

Treasury debt prices rose, prompted by safe-haven bids after Federal Reserve Chairman Ben Bernanke said on Sunday the Fed may buy more than the $600 billion of Treasury bonds it has committed to purchase, if the economy failed to respond. Yet gains were limited as investors prepared for this week's $66 billion in coupon-bearing supply. Traders have also been selling into strength, either to lock in short-term profits or to unwind earlier positions tied to the Fed's latest quantitative easing program, dubbed QE2.

 

The benchmark 10-year U.S. Treasury note climbed 23/32 in price, with the yield at 2.926 percent. The 2-year U.S. Treasury note rose 3/32, with the yield at 0.429 percent. The 30-year Treasury rose 1-10/32, with the yield at 4.237 percent.

 

The December futures contract for the Nikkei 225 stock index trading in Chicago fell 145 points to 10,175. The dollar gained against a basket of currencies, with the U.S. Dollar Index .DXY up 0.34 percent at 79.654. Against the Japanese yen, the dollar was up just 0.02 percent at 82.65 from a previous session close of 82.620.

 

Richmond Fed President Concerned

 

The Federal Reserve's QE2 program carries risks and should be reviewed on a regular basis, Richmond Fed President Jeffrey Lacker said on Monday. Lacker, one of the central bank's vocal hawks, said the decision to increase monetary stimulus was based primarily on weakness in the labor market and set a precedent he said threatens future inflation.

 

"The provision of further monetary stimulus at this point in the business cycle is not without risks," Lacker said.

 

"Historical experience, including the inception of the Great Inflation of the 1970s, suggests central banks should be careful not to steer monetary policy off course by targeting the unemployment rate," he said.

 

His comments come a day after Fed Chairman Ben Bernanke, a strong advocate of the policy, told CBS television program "60 Minutes" that inflation fears associated with Fed policy are "way overstated."

 

Bernanke also did not rule out an increase in bond purchases beyond $600 billion if the economy fails to respond. He added that the risk of deflation, a corrosive downward spiral in wages and prices, was receding in large part due to the Fed's efforts to stimulate growth.

 

Lacker, who is not a voting member this year on the policy-setting Federal Open Market Committee, has hinted strongly at his opposition to the November decision to ease.

 

"With many commodity prices spiking, outright deflation is clearly even less of a risk than it was a few months ago," Lacker said.

 

He said inflation is "well contained" and "very close to my own long-term objective," putting him at odds with other officials at the central bank, who are worried about a recent trend of disinflation and dire employment conditions.

 

Contradicting Bernanke's view that the economy is "close to the border" of being sustainable, Lacker argued growth already had enough momentum of its own.

 

Asked about the situation in Europe, Lacker said that, “At this point it looks like the magnitude of the likely fall out for the United States economy is relatively manageable and relatively minor."

 

"If broader, deeper growth effects were to hit Europe, if they were to enter a substantial recession again, bets would be off and there could more substantial effects."

 

Regarding U.S. monetary policy, Lacker said he worries that more aggressive action by the Fed now could lead to a potentially turbulent day of reckoning down the line.

 

"Further balance sheet expansion now could require more rapid balance sheet reduction later on, complicating the withdrawal of monetary stimulus," he said.

 

Hedge Fund Manager Says U.S. Headed for Recession

 

The economy is headed for a new recession, said John Taylor, chairman and chief investment officer of FX Concepts, which should likely benefit the dollar and weigh on commodity prices.

 

"It's a new recession. We're already growing, but the numbers show that the U.S. government is still the primary creator of this growth," Taylor said on Monday. Taylor runs the world's largest currency hedge fund with assets under management of around $8.5 billion.

 

"I would argue that by the middle of next year, we will be in a recession and our fiscal hands will be tied," he said.

 

Taylor has maintained that the Federal Reserve's quantitative easing program, designed as a way to help jump-start the economy, won't necessarily prevent a recession.

 

Banks in a recession tend to demand the repayment of loans, and if the debt is denominated in the U.S. currency -- and in most cases they are -- then investors are squeezed as they scramble to find dollars to repay the debt. That should be dollar-positive, Taylor said.

 

This was what happened in late 2008 when panic in the markets -- precipitated by the collapse of Lehman Brothers -- drove the safe-haven dollar higher against most major currencies.

 

"It's kind of perverse. When the U.S. economy is doing badly, the dollar goes up and when the economy is doing well, the dollar goes down."

 

For now, all eyes are on the euro zone, which is facing a debt crisis. Theoretically, at some point the euro could fall apart, Taylor said,

 

"What Europe has done is not enough. They have to have eurobonds," said Taylor. "You can't lend money to Ireland or Greece. You're just piling on more debt to them, and it's getting harder and harder to repay."

 

Taylor said Portugal could be the next country to seek a bailout after Ireland, with Spain after that. This will push the euro to parity versus the dollar by next year, he forecast. In early New York trading, the euro was down 1 percent at $1.3277.

 

Taylor recommended selling the euro against the Swiss franc, a currency whose economy has fared better than most European countries.

 

The FX Concepts chief was also bearish on commodities, predicting that this asset class will slow down next year as the economy goes into recession. That should be negative for commodity-linked currencies such as the Australian and Canadian dollars.

 

He said the Australian dollar, which has been the best performing currency so far among currencies from the Group of 10 rich nations, with gains of about 10 percent on the year, could slide 15-20 percent.

 

FX Concepts employs several investing strategies. Its global currency program, which invests in both developed and major emerging market currencies, dipped 4.26 percent in November, but its annual return for 2010 is estimated at 12.03 percent.