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Bernanke warns on fiscal deficit

Last updated 2/2/2012 12:39 PM ET (GMT -5) 0 Comments - Add your comment

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David Morrison

Derivatives Market Strategist, U.K.

Thursday 2nd February 2012

Headlines

Chart To Watch - XSTRATA (XTA.L)

Our featured chart is Xstrata, and we focus on its 10% rise today. Glencore is in talks to acquire the 66% of the Swiss miner it doesn't already own, in a deal worth around $80 billion. The merger could be completed before Xstrata releases its earning on Tuesday. The news caused the stock to jump above its 200-day moving average at £11.30. It is now testing resistance at £12.50, which marks the 61.8% Fibonacci retracement of the run down from December 2010 high to October 2011 trough. But the big question is whether this merger warrants such a rally in the miner's stock price or not? So far investors believe that it does. This is very different from the various attempted mergers between mining conglomerates that we have seen in the past. After all, Glencore is primarily a commodities trader, not a miner. But such a sharp price move makes it difficult to trade, so it is worth watching what happens next.

GFT Inflation Indices

Most Actively Traded Instruments

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

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5797.0	+ 6.0	+ 0.11
Germany 30 Cash	.DE30	6660.0	+ 43.0	+ 0.65
France 40 Cash	.F40	3378.0	+ 11.0	+ 0.31

UK Market News

Asian Pacific markets closed higher overnight in response to strong global rally yesterday. Sentiment was lifted after manufacturing data showed activity in Australia, China, Europe and the US picked up slightly in January. However concerns about debt crisis in the euro area lingered as there was still no deal for Greece and its bondholders. Nevertheless the Shanghai Composite rallied 1.9%, Hang Seng put on 2% and the Australian S&P/ASX gained of 1%.

The Nikkei (+0.8%) underperformed slightly after Sony warned it was heading for a worse-than-expected $2.9 billion annual loss.   In addition, concerns were raised after Hirohide Yamaguchi, Deputy Governor of the Bank of Japan, dismissed calls (notably from Finance Minister Jun Azumi) for taking action against the yen’s continued rise vs. the US dollar. The USDJPY has been falling towards record lows in recent days after US policymakers last month said they were looking to maintain ultra-low interest rates until late 2014.

European shares were slightly lower this morning following strong gains yesterday. The major indices were stuck in a tight range as the markets waited for some news to encourage fresh buying or selling. On the FTSE, there was support at 5765/70 (previously resistance) while the upside was capped at 5800/5, which was the January 26 high.  There was, however, a burst of activity when China’s Premier Wen Jiabao said his country was looking at ways of helping out the eurozone and following a successful bond auction in Spain. But the buying quickly petered out as we headed toward midsession. Traders were looking forward to the release of US Jobless Claims in the afternoon following the poor UK Construction PMI. That showed a bigger-than-expected fall of 1.8 points, dropping to 51.4 in January from 53.2 in December. Economists had expected a reading of 52.8.

Meanwhile it was a mixed day in terms of company news. Deutsche Bank (DBKGn.DE) undershot estimates, swinging to a pre-tax loss in the fourth quarter as costs linked to peripheral sovereign debt surged. There were also weaker-than-expected results from heavyweights Royal Dutch Shell (RDSa.L) and Unilever (ULVR.L). However, Smith & Nephew (SN.L) and Compass Group (CPG.L) posted positive results, while talks of an $80 billion merger between Glencore (GLEN.L) and Xstrata (XTA.L) provided additional support. Xstrata rallied 11% and Glencore gained 6%.

Big Winners

Big Losers

US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,700	- 16	- 0.13
US 500 Cash	.US500	1,325.0	+ 1.0	+ 0.08
US Tech 100 Cash	.USTECH	2,496.0	+ 8.0	+ 0.32

US stock indices kicked off the first trading day of the month in bullish fashion yesterday, following on from strenght in January. The Dow closed up 0.7%, the S&P rose 0.9% and Nasdaq ended 1.2% higher. Sentiment turned positive after manufacturing data showed activity in Australia, China and Europe picked up slightly in January. The US’s industrial sector also improved, although not by as much as the economists were hoping for. Concerns about the euro area lingered however as there was still no deal between Greece and its bondholders.

Us stock index futures were little changed today as the market took a breather following yesterday’s strong rally. European stocks were also flat due to weaker than expected earnings results from heavyweights Deutsche Bank, Royal Dutch Shell and Unilever. However M&A activity involving Xstrata and Glencore, as well as news that Facebook has finally filed paperwork for a much anticipated IPO, kept sentiment positive. Also providing support was data showing a 12,000 fall in unemployment claims last week, which was better than expected, although there was a small revision in the previous week’s number.

Unemployment claims came in at 367,000 last week compared to 379,000 previously (initially estimated at 377,000). Economists had expected 373,000. Preliminary Nonfarm Productivity showed an annualise rise of 0.7% in the fourth quarter on forecasts of 1.0%, and the third quarter number was revised lower to 1.9% from 3.1%. Preliminary Unit Labor Costs also rose in the quarter, by 1.2% vs. 0.9%.

Facebook’s statements showed it earned a net income of $1 billion in 2011 and revenue of $3.7 billion, with the latter representing an 88% increase from the previous year. Most of its revenues were from ad sales, but "payments and other fees" skyrocketed 425%. Still, many analysts believe the social networking firm’s anticipated $75-100 billion valuation is overstated. Meanwhile quarterly earnings from Kellogg, Mastercard and Sara Lee were better than expected while the numbers for Dow Chemical, Merck and Viacom disappointed. Shares in Abercrombie & Fitch and Ann plunged after the clothing retailers said their quarterly results will be lower than expected.

Technical Outlook - France 40 cash (.F40)

Here is another look at the daily chart of France 40 cash index. On Friday, we highlighted the 3390-3430 range as a key area of resistance. Here, we have a number of things converging, including the 200-day moving average, the 50% retracement of the Feb-Sep 2011 sell-off, and the October 2011 high. As you can see, the index has today retreated slightly after testing the 200-day moving average. So we may see some sort of correction now following the relentless rally in January. A poor showing of US nonfarm payrolls tomorrow could give traders an excuse to sell. Support is seen at 3260/50, which was previously resistance.

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1756.0	+ 12.50	+ 0.72
Spot Silver	.SILVER	3407.0	+ 40.0	+ 1.20

Gold managed to pop above $1,750 in early trade today.  But it then fell back sharply as the euro lost ground on disappointment over the lack of progress over the Greek bond swap negotiations. Gold and silver then rallied after Chinese premier Wen Jiabao said his administration was considering greater involvement in the two European bailout funds - the European Financial Stability Facility and the European Stability Mechanism. This helped to lift the euro which boosted both gold and silver. But Mr Jiabao went on to say that Europe "must rely on itself" and suddenly traders woke up to the fact that actions speak louder than words, and so far China has held off from any substantive support for Europe. Precious metals retreated again, only to soar following the release of Fed chairman Bernanke’s prepared testimony to the House Budget Committee. Gold and silver surged through resistance at $1,750 and $34 respectively. If they can hold above these levels through to the end of the week, then further gains look likely.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	11170	+ 8	+ 0.07
WTI Crude Oil Spot	.WTI	96.14	- 1.50	- 1.54

By today’s mid-session, Brent crude was in positive territory while WTI was down just under 1%. This divergence has been a feature of the oil market recently, and so far this week WTI crude has fallen around 3% while Brent is effectively unchanged. This takes Brent’s premium over WTI to around $15 at current levels, which is up sharply from the $10 Brent premium back in mid-December. However, the premium is still far short of the $28 seen in early October, although Citigroup’s Seth Kleinman sees the spread heading back towards $20. The Brent premium reflects the continued tensions between the West and Iran which are having a far greater impact on Europe than the US. It also prices in the high US inventory at the Cushing hub thanks to increased US production from North Dakota.

Looking forward - Friday 3rd February

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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.