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US GDP disappoints

Last updated 1/27/2012 4:31 AM ET (GMT -5) 2 Comments

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David Morrison

Derivatives Market Strategist, U.K.

Friday 27th January 2012

Headlines

Iran to vote on EU oil export ban

Chart To Watch - France 40 cash (.F40)

Here is a daily chart of France 40 cash index. As you can see, it has enjoyed a strong move to the upside since the turn of the year, along with other global indices and risk assets. Investors have been buying equities on expectations that a deal between Greece and bondholders will soon be reached, and as the US economy has shown signs of improvement. But a correction may now be due given this relentless rally. Certainly, some consolidation would be welcomed now, even by bulls, as it will provide a breathing space and a platform from which to launch a further assault on last year's highs. The key area of resistance to watch for on this chart is between 3390 and 3430, which is not that far from current price levels. There, we have a number of things converging, including the 200-day moving average, the 50% retracement and the October 2011 high. On the downside, support is seen at 3250, which was previously resistance.

GFT Inflation Indices

Most Actively Traded Instruments

Index	Commodity	Equity
UK 100 (.UK100)	Spot Gold (.GOLD)	Barclays (BARC.L)
US Wall Street (.US30)	Spot Silver (.SILVER)	Apple (.AAPL)
Germany 30 (.DE30)	Brent Crude (.BRENT)	Gulf Keystone (GKP.L)

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5733.0	- 62.0	- 1.07
Germany 30 Cash	.DE30	6512.0	- 28.0	- 0.43
France 40 Cash	.F40	3319.0	- 44.0	- 1.32

UK Market News

Asian Pacific stock indices ended mixed overnight. Australia’s S&P/ASX and Hong Kong’s Hang Seng closed up 0.4% while Japan’s Nikkei slipped 0.1%. Shares in Tokyo fell following the release of some disappointing earnings from NEC, Nintendo and Nippon Steel. Markets in China remained closed for the Lunar New Year holidays, but will reopen Monday.

European stock indices turned mixed following a weaker start this morning. Equity traders were watching the EURUSD for direction as politicians made their remarks in Davos about the situation in the eurozone and Greece. The currency cross broke back above the 1.31 resistance as talks of an imminent deal for Athens filtered through the newswires. EU’s Olli Rehn said a deal on Greek Debt Swap was “very close.” Also lifting the sentiment was the fall in Italian benchmark bond yields to below 6%. In addition, expectations were high that the US fourth quarter GDP number, which is due later, will be stronger than expected.

However it wasn’t. The US economy expanded by an annualised rate of 2.8% in the last three months of 2011, disappointing expectations of 3%. This led to a sharp sell-off in equities, although a quick recovery soon followed. But the indices then struggled for directions as we headed into the European close. In today’s other economic news, Spain's unemployment figure passed the five million mark in the last quarter of 2011, with the rate rising to a 17 year high of 22.8% from 21.5%. M3 Money Supply in the euro area increased only 1.6% in December, which was less than 2.2% expected. Consumers and businesses are still deleveraging as they worry about the impact of elevated government borrowing costs. German import prices rose 0.3% on the month, suggesting that inflationary pressures are still high. Meanwhile the Swiss KOF Economic Barometer fell in the negative territory in January for the first time since 2009. It printed -0.17, down from December’s 0.01 and below forecasts of -0.06. There was no UK data scheduled for today.

Big Winners

Big Losers

US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,640	- 94	- 0.73
US 500 Cash	.US500	1,313.0	- 6.0	- 0.46
US Tech 100 Cash	.USTECH	2,456.0	unch	unch

US stock index futures were barely changed this morning, although they recovered from earlier weakness. Yesterday, the major indices pulled back sharply after a strong start following Wednesday's dovish FOMC statement. The Dow tested resistance around the 12,850 area while the S&P failed to hold above 1,325 - previously resistance in April last year. They closed down 0.2 and 0.6 percent respectively; the Nasdaq slipped 0.5%. Investors are asking themselves if stocks are due a correction now given their relentless rally since mid-December. Certainly, some consolidation would be welcomed now, even by bulls, as it will provide a breathing space and a platform from which to launch a further assault on last year's highs.

But there are reasons to fear for a deeper correction. Investors have digested the US Fed's commitment to low base rates and the hint of further stimulus. Now they are wondering if expectations of stronger US growth and decoupling have been overdone. On top of that, many worry that there is too much complacency surrounding Europe's ability to deal effectively with its debt crisis. And any agreement between private Greek bondholders and finance ministers (assuming it happens) does nothing to solve the country's long-term solvency issues. In addition, it could open the door to calls from Portugal and Ireland for similar treatment.

Today we had the first look at fourth quarter GDP, plus a batch of earnings reports. The US economy expanded by an annualised rate of 2.8% in the last three months of 2011, a sharp acceleration from the 1.8% growth recorded in the third quarter. However, because the number was slightly shy of 3% forecasts, a bout of profit taking followed across all risk assets. This led to a lower open on Wall Street. But the weakness was short-lived as the indices managed to turn flat soon after. Meanwhile, GDP Deflator, which is the broadest measure of inflation, rose only by 0.4% in the fourth quarter vs. forecasts of 2%. However inflation expectations were revised up a tad in January, to 3.3% from 3.2% earlier in the month. Consumer Sentiment was also revised higher, to 75.0 from 74.0, which was more than 74.2 expected. Chevron, Ford, Honeywell and Procter & Gamble were among the companies that reported their quarterly earnings today. Only Honeywell’s numbers were forecast-beating.

Technical Outlook - S&P5 00 (.US500)

Here is a weekly chart of the S&P going back to as far as summer 2007. I have plotted on this chart two sets of Fibonacci ratios and a downward sloping trendline. The trend is created by joining the high points of October 2007 and May 2011, and extending it to the right. Interestingly, yesterday’s pullback from a high of 1333.3 (which itself is a psychological number) was touching this extended trendline. But the pullback was probably caused by long-side liquidation rather than speculators initiating short-side trades. Nevertheless it implied selling pressure and as a result the index closed the session lower. This is shown by the small wick on the weekly candle, which may become more apparent if we see another sell-off later today. Beyond this point, the next band of resistance is somewhere around 1370 to 1385. This area marks the May high, the 78.6% Fibonacci retracement of the AB swing and the 127.2% extension of the BC move. Support is seen around 1306/7.

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1732.0	+ 11.50	+ 0.68
Spot Silver	.SILVER	3370.0	+ 27.0	+ 0.80

Precious metals had a quiet start on the last session of the week. Trading was subdued as investors considered the strong rally since Wednesday evening following the doveish outlook from the US Federal Reserve. But prices ticked higher as the morning progressed and buying increased once the US markets opened. The euro strengthened against the dollar as hopes were raised of an agreement between private holders of Greek bonds and European finance ministers. Precious metals rose further following the release of lower-than-expected US GDP Price Index which came in at +0.4% against an expectation of +2.0%.  This is one of the US Fed's preferred inflation measures, and the sharp deceleration again raised the prospect of additional central bank stimulus. Gold is up around 10% this month so far, while silver has soared 20%. So far, pull-backs on profit-taking have been shallow and short-lived, leaving many would-be buyers frustrated.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	11110	+ 25	+ 0.22
WTI Crude Oil Spot	.WTI	99.50	- 0.27	- 0.27

Crude trading was mixed today with prices little-changed in early trade. The first look at fourth quarter US GDP came in below expectations with annualised growth coming in at +2.8% against an expectation of +3.0%. In addition, third quarter GDP was revised down sharply from 2.5% to 1.8%. This took traders by surprise given the recent strength in US data, although the numbers support the cautious outlook over the US economy as expressed by the US Federal Reserve on Wednesday. The news depressed buying interest, although the sharp fall in the GDP Price Index had traders wondering if inflation would now fall significantly below the US Federal Reserve's 2% target rate. If so, then further central bank stimulus seems likely. On Sunday, Iran's parliament votes on whether to halt oil exports to the EU, undercutting the implementation of the EU's own embargo, due to start in July. Such a move would hit Greece, Spain and Italy particularly hard. It would leave these countries rushing to find alternative suppliers, and this concern led to a rally in crude by mid-session.

Looking forward - Monday 30th January

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Comments (2)

moonie

January 27, 2012 at 03:34 PM ET

great column.

dmorrison

January 30, 2012 at 06:51 AM ET

Thanks moonie!

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About The Author

David Morrison has worked in financial markets for over 25 years. He has been instrumental in setting up two spread betting companies. He has managed trading desks and has implemented and run successful risk-management strategies. He has appeared on Bloomberg TV and has written numerous articles covering economics and trading strategies using fundamental and technical analysis. He joined GFT in February 2009 to deliver commentary and research for derivatives products, and trades on his own account.