As Black Friday approaches, the mood in the financial markets is anything but dark – ahead of the busiest shopping day of the year in the United States, investors are convinced that a Santa Claus rally is underway. Equities are trading at nosebleed levels after the S&P 500 closed above 1,800 for the first time last week – and crude oil prices are down sharply after Iran and six major countries announced a deal aimed at slowing its progress toward nuclear weapons.
Implied volatilities are sitting at remarkably low levels across the currency markets, with many participants justifiably convinced that the global economy is more balanced than it has been in years. Growth in the emerging world is slowing just as the developed countries rebound. Despite a few small brushfires, geopolitical tensions have abated. The Federal Reserve is expected to begin tapering in the new year, but this isn’t expected to translate into monetary tightening until well into 2015 – if not later.
Across the pond, the euro is up sharply after Germany’s IFO Institute reported that business sentiment improved dramatically in September. The index hit 109.3, well above consensus forecasts nearer the 107 mark – signalling a widespread sense of optimism in Europe’s largest economy.
The speculative long position on the euro has grown to become the largest among the majors, but we remain broadly skeptical of the currency’s putative strength. While Germany and some of the peripheral countries are returning to growth, the French economy is dying on the vine. With little indication that policymakers recognize the scale and nature of the problem, and no signs of the cross-aisle support that characterized reform processes in Greece, Ireland, Spain and the United Kingdom, the country’s performance gap against Germany is widening by the day. In short, a correction beckons, but the news is more likely to come from Le Monde than Der Spiegel or the Financial Times.
Here in Canada, consumers are giving new meaning to the term “Ford Nation” – Statistics Canada reported that retail sales rose almost 1% in September, almost three times faster than markets had anticipated. Automobile sales generated the lion’s share of the increase, with new car sales rising by 5%, helping the sector to gain 4.1% overall.
This surprising rise in consumption levels did little to offset the Canadian dollar’s weakness however. The currency spent much of the last week on the defensive after Bank of Canada Governor Poloz crushed the OECD’s assertion that interest rates should begin rising in 2014, saying that price pressures are benign while the economy remains vulnerable. His views were vindicated on Friday morning when inflation dropped to a five month low – causing the loonie to fall almost a full cent. Traders are now targeting the 1.06 mark, but the 2011 high of 1.0660 will signal true capitulation for the bulls.
Through the four day working week ahead, wide variances in liquidity levels are likely to create price choppiness, particularly in the aftermath of Wednesday’s release of US durable goods orders for October. In a sense, this number will be the first to encompass the effects of the government furlough, and will provide a critical indication of the inventory build that typically accompanies the onset of holiday shopping season. As such, most US traders will make an appearance on Wednesday morning – and most corporate hedgers should look to put orders in place to capitalize on big moves in the event that the number is world-shaking.
Further reading: GOLD: Bearish, Looks To Weaken Further