Markets Ready For Take-Off

Monday, November 28, 2005

Don't get caught on the wrong foot this week. With the major US indices close to this year's highs, abundant liquidity and expectations that the US GDP figures for Q3 may get revised upward there is a lot of fuel that can drive shares higher after they went basically nowhere during 2005 with voatility falling to low levels not seen in many years. As everybody wants to see a year-end rally happen, positive economic data could deliver the primer it needs for a rally. But do not forget the contrarian perspective: If everybody is positioned for higher prices; where shall the follow-through buying come from? Because of the bullish sentiment it is not out of reach that a rally until Wednesday may fizzle in the second half of the week. Don't get too bearish though as fund managers are sitting on sufficient cash to ignite a rally once the Dow goes above 11,000.
Fed chairman Alan Greenspan is due to talk about fiscal imbalances on Friday and if he steps up his language this could be the spark it needs to set off a correction for the stock market that has only known one direction last week.
The Data Cauldron Is Filled To The Top
The data cauldron is filled with lots of economic data. After a slow start on Monday with existing home sales the week will get hotter with durable goods orders, consumer confidence and new home sales on Tuesday. Wednesday will see all traders tiptoeing. Consensus estimates project an upward revision of Q3 GDP to 4.1% (3.8%) while the Chicago NAPM is seen a tad lower at 60 (62.9). On the speaker's front Bank of Japan governor Iwata can be expected to paint a rosy picture of the Japanese economic outlook as can be expected from Fed governor Susan Bies; if she talks about the economy at all at a S&P conference on Basel I and II. ECB council member Mersch will speak in Luxembourg on Wednesday and traders will look for any hints on the size of the rate move of the ECB that is expected to come on Thursday.
Don't forget Europe. Wednesday will see an onslaught of EU and country data that can be found in the international economic calendar in the sidebar.
Those who still use SoftMicro's Internet Explorer: please scroll all the way down. For consensus estimates on US data surf to Econoday.com.
ECB May Hike Rates By 50 Basis Points
If there is only the slightest uppick in European economic indicators and/or a positive growth outlook from the EU body on Wednesday fasten your seat belts on Thursday. After the ECB has made it clear that it will not enter into a series of rate hikes it can be expected that they raise the leading overnight rate by a 50 basis points to 2.5% on Thursday. A lesser step will not be enough to reduce the ample liquidity in Europe which is reflected in runaway money supply growth. I personally I doubt that even a 50 bp hike will be enough to rein M3 growth. New Eurozone M3 data will be released on Tuesday. If the upward trend has been continuing this will reinforce my expectation of a 50bp hike.
In the US jobless claims, construction spending and the ISM manufacturing survey are the key data on Thursday but the market is likely to discard them, waiting on Friday's employment report instead.
As mentioned before - and worth to put out a second alert - Greenspan will address a Philadelphia Fed conference on the bulging fiscal imbalances. Fed Phildelphia president Anthony Santomero will moderate a panel discussion after that. So expect some more quotes to hit the wires.
In San Francisco Fed president Janet Yellen will speak about the economic outlook on Friday.
Not that I am to give in before the game; but looking at all possible market movers during the coming week I doubt I will be able to blog about it all.
As market participants mostly see only a 25bp hike in the Eurozone the dollar's strong performance could come to a passing halt but I see the dollar supported in the medium term by the expectation that the Fed is still a few steps away from the neutral zone. Strong growth data will underpin this expectation.
Gold To Touch $500 But Due For A Correction
And what about gold which has performed better than all major stock and bond markets? After the run to levels last seen in 1987 I am waiting for a correction. Strong economic data should make room for temporary lower prices and allow late-comers to build up positions around $480. But don't bet the house on gold at these levels. The strong technical support is another $24 lower at $456 an ounce or the old high of this year. A price beginning with a 5 is most likely a signal for profit-taking and at the time of writing this it looks as Monday could be the day where gold takes out the 18-year high. Unless you are a greedy dare-devil don't try to short the best investment since 1973. We are still in the early stages of gold's bull market.

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