The week ahead – time for opportunity buying?

The last week brought about a continuation of a selloff on all major markets that is stocks, EURUSD and commodities. Especially a slide on the EURUSD is impressive. The question is – are we going to see a bottoming out?

These moves are the strongest in almost a year. The main factors influence expectations more than real money. Those include tighter regulations for banks, fears of monetary policy tightening in China and consequences of fiscal problems in Greece. None of those alone creates a systemic risk for global markets and even taken together they shouldn’t undermine prospects for the gradual economic recovery. However, they delivered a good motive for something more than just a profit taking on stocks and industrial commodities and created flows to the dollar and yen.   

It is worth to underline a return to a clear and strong positive correlation between stocks and EURUSD (and EURJPY as well). This has been a cause of the “fear factor” which dominated markets in the second half of the last week. Therefore it is likely that those markets may look for a bottom at the same time. But will they?

Technically it is still not that certain. The EURUSD managed to break through two important supports last week – 1,3743 (a resistance from March and May 2009, a support from June 2009) and 1,3650 (when the second impulse wave matched the first one), and inched down to as low as 1,3585, suggesting a slide to a support around 1,3417 (a local minimum from May 2009 and 61,8% retracement from Oct08-Nov09). Friday’s finish on Wall Street gave some hopes for the bulls, drawing a strong daily hammer candle (on S&P500 futures) but a mixed opening of contracts today in Asia weakened that signal. A slide to a support of 1025 pts is still on the table.

Fundamentally, the picture still looks fairly good. The earnings season in the US was generally upbeat. The rise in the GDP (5,7%) in the fourth quarter was fueled by restocking but the strong ISM reading suggest further improved in the pipeline. Fall in employment in January might have been disappointing, but if we take revisions into account, the latest reading suddenly looks much better in a comparison. Retail sales figures this week are about to complete this picture. While a psychological impact on Chinese figures (especially prices) may carry a similar weight, the Chinese fears seem to be already priced in. For the EURUSD and stock indices the bottoms might still lie ahead but there is no reason for a panic.

Przemysław Kwiecień
Chief Economist
X-Trade Brokers Dom Maklerski S.A.
Przemyslaw.kwiecien@xtb.pl

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