Markets saw a lift in sentiment overnight as European Finance Ministers were able to reach agreements relating to the size of the EFSF (which was increased to 750 billion Euros) and the release of the next loan tranche for Greece (valued at 8 billion Euros).  Adding to the optimism in Europe is the expectation that retail sales in Germany will show strength when compared to the September figures.  This would match the positive surprise that was seen in the record high Black Friday retail sales in the US, so this could bring some lift back to equity markets and high yielding currencies if this come to fruition.

With all of the headlines currently centered on sales figures for the upcoming holiday season, it will not be surprising if macro data creates more volatility than what has been seen in recent weeks.  Today, the data docket out of the US will be heavy, with the ADP employment report, Chicago PMI, Pending Home Sales, MBA Mortgage Applications and the Fed’s Beige Book.  The ADP figure is likely to get the most attention, as this is generally viewed as a precursor for the Non Farm Payrolls figure (which will be released on Friday).  Any strength seen in the labor market will be viewed as supportive for the consumer spending data that will be key in to coming weeks.

Earnings releases will be seen from some major retailers but but data is less likely to influence price activity, as it will be viewed as a lagging indicator heading into the end of the fourth quarter.  Individual equities did get some attention yesterday, however, after Standard and Poor’s downgraded the credit rating of Goldman Sachs, Wells Fargo, JP Morgan and Bank of America, and all of these stocks met with selling pressure during the aftermarket session.  The effects of these downward moves on the broader S&P 500, however, were limited as the rally in crude oil helped push the energy companies higher.

In Europe, some significant data will also be released, with German Retail Sales and Jobs figures, French PPI, and the Eurozone Unemployment rate and CPI data all scheduled for release.  Earnings reports, however, will come mostly from second tier companies.  Most of the attention and volatility should be seen during the US session, however, as markets interpret the implications of the ADP payrolls figures.

Technicals:

The USD/JPY continues to push higher with prices now meeting resistance into 78.30.  Looking at Fib support for the latest rally, we can see that the 38.2% level matches nicely with resistance turned support, so short term bulls can get long in this area, with stops below the 100 and 200 period EMAs.  Any drop through there would turn the short term view back to bearish, as this is also the 61.8% Fib support level as well.  A break of 78.30 targets 79.

The S&P 500 continues its rally off of important long term Fib support and we are coming into some important psychological resistance levels that could send the index higher if broken.  The range we are currently watching is centered between 1200 and 1145 and an upside break will turn the short term bias back to bullish.  Indicator readings, however, are ready to cross back into negative territory, so any failures here will target the range lows.

Risk sentiment remained stable during the Asian session after news that sovereign credit downgrades would be receiving additional attention this week.  French newspapers printed stories suggesting that Standard and Poor’s is ready to lower its long term credit outlook in France to negative, and that this could come as early as Friday.  This was followed by rumors that Moody’s has place nearly 90 banks in 15 different Eurozone countries on credit watch, and this was enough to slow momentum in equity markets.  Prior to this, we were seeing a modest rally in the Euro but the news was enough to bring sellers back into the currency, stalling gains near the 1.34 level.

Macro data out of Japan showed that the country’s unemployment rate rose to a quarterly high of 4.5% (up from 4.1% previously).  This was higher than the consensus estimates, and given that the labor pool remained relatively unchanged, the numbers were enough to create volatility.  Household spending and retail sales figures were also released for the month of September and showed increases of 0.4% and 1.4% respectively.  Both of these figures showed substantial weakness in August, so this did bring some balance to the negative employment data.

In Australia, the RBA revised its growth forecasts lower but added an expectation that the country will return to a budget surplus before the end of 2013.  The 2013 forecasts are still lower than what was in place before the European debt crisis but these revisions do show some expectation that Australia will be somewhat protection from bank contagion effects.  Similar downward revisions were made to consumer inflation forecasts, with 2012 CPI now seen at 2.25%, followed by 3.25% in 2013.  If these projections are accurate, we will be less likely to see the RBA tighten monetary policy during this time frame, and this should be viewed as bearish for the Aussie Dollar in the long term.

For the moment, markets appear to be taking all of this information in stride, because even though we are seeing a lower ceiling in the high yielding currencies and in stocks, we have managed to see some lift in prices to start the week.  One explanation for this could be the optimistic expectation that is seen for this year’s holiday retail sales numbers, so US macro data is going to be more closely watch in the coming weeks.  The next major event risk is the Non Farm Payrolls data on Friday, so we could see some consolidation in the coming session.

Technicals:

The GBP/USD saw a small spike on the short term charts, but this rally was contained by the support turned resistance level at 1.56.  This is further evidence that the downtrend remains alive and well, as indicator readings are bearish, with negative momentum, and all of the major Fib support levels have been removed.  1.56 is now viewed as the first sell zone, support has moved down to 1.5430.

The FTSE has rallied to start the week, with prices testing resistance at 5320.  A break here would be somewhat encouraging, and turn the short term bias back to neutral.  A failure here, however, would be a significantly bearish signal and suggest another test of support at 5070.  Indicator readings are on the verge of crossing into negative territory, so the next move should be a very clear sign of where prices are headed next.  Sell a failure at 5320.

The Euro was broadly lower last week on holiday-thinned volumes, with the EUR/USD carving out new trading ranges below 1.33, which is within reach of the lows for the year at 1.3145.  Some of the negative activity was driven by the poorly received treasury auction in Italy on Friday, where yields on the 2-year note rose above 8% at one stage (a new all time high).  The yield curve inversion between the 2-year and 10-year bonds in another cause for concern, as the additional funding costs are seen as a drag on Italy’s ability to return to growth.

Market rumors of an IMF loan (valued at 600 billion Euros) have started to circulate and this is adding to the jittery climate that is currently in place.  Other news centered on Belgium, where Standard and Poor’s downgraded the long term credit rating by one level (to AA) and added a negative outlook for the country.  It could be said that markets have not fully reacted to this news, as treasury markets in the Eurozone were closed before the release.

In the UK, Chancellor Osborne made comments discussing government plans to insure bank loans (valued at 20 billion Pounds) to small private companies with the attempt of lowering borrowing costs for these businesses.  This theme of government stimulus was reiterated by the BoE’s Fisher, who said that during the last policy meeting, he voted to increase the government asset purchase program by 75 billion Pounds.  Additional stimulus of this nature would inevitably lead to revisions for UK consumer inflation and bring renewed debates on potential increases in interest rates.

A somewhat related story surfaced in New Zealand yesterday, where John Key was elected Prime Minister on a platform of reducing current levels of publicly held assets and if his party is able to pass legislation to achieve this, we could actually see some inflows into the New Zealand Dollar in the form of foreign investments.  These assets could be seen as an attractive opportunity, given the declines we have seen this quarter in the NZD.

Today’s macro data will come in the form of US Home Sales but the market reaction to the bond auctions in Europe still have the potential to be the driving factor in today’s trade.  This essentially points to choppy trading conditions, as markets return from last week’s holiday.

Technicals:

The EUR/CHF is remaining well supported above the 1.20 level, with prices most recently finding a bounce out of the 61.8% Fibonacci level on the 4H timeframe.  The move suggests another test of the highs at 1.2450 and it is starting to look like bullish traders might not get another opportunity to buy into the 1.20 region.  The prudent move, however, is to wait for some type of meaningful pullback, so as to justify risk to reward ratios.

The S&P 500 long term downtrend remains in place but to start the week we are seeing a bounce from some critical Fib support at 1150.  Short term, the move is encouraging and is likely to continue until oversold indicators are able to reset themselves.  A break of support, however, would be significantly bearish, and put the yearly lows back into view.

The Euro continues to trade lower against the majors as event risk continues to favor weakness in equities and high yielding currencies.  Recent comments from German Chancellor Merkel, dismissing the possibility of joint Euro bonds are adding the negativity as some analysts have suggested a strategy like this would bring a more immediate end to the European debt crisis.  The next event to watch will be the 8 billion Euro Italian bond auction and this is likely to be the guiding factor in sentiment for the remainder of the week.

Trading volumes have seen some marked decreases and this is leading to the stabilization in price activity relative to what we have seen since last summer.  The US is on its Thanksgiving holiday so there will be no significant data releases from the area and the most likely scenario is that equities and currencies will see slow drifts lower until trading slows to a halt at the end of the day.

European trading is likely to see the bulk of the activity, with the DAX and CAC futures already pointed toward a lower open.  Macro data will come in the form of German Import prices and Consumer Confidence in France, so the majority of headline guidance will come from the results of Italy’s bond auction.  We did see some headlines from some of Europe’s peripheral countries, as Moody’s downgraded the credit rating in Hungary by one level (to Ba1) and kept its “negative outlook” in place.

In Japan, macro data did get some attention as well, with the country’s core consumer inflation numbers showing a drop of 0.1% for the month of October (following a 0.2% rise during the previous month).  Shorter term, these types of figures have little trading impact (because of the subtle degree of the changes we are seeing) but this data does give investors an indication of the broader economic environment, which continues to show systemic stagnation without many prospects for change in the medium to long term.

So far, market players have not taken the lower liquidity levels as an opportunity to push market prices in new directions but the possibility does exist, so keep this in mind when choosing areas for trade stop losses for the remainder of this week.

Technicals:

The GBP/USD continues its massive drop, with prices breaking key Fib support on the daily charts and momentum indicator readings crossing into negative territory.  This is definitely suggesting of further declines but the one-way moves are starting to become over-extended to the point where contrarian buy positions are starting to looks favorable in terms of risk to reward.  Major support is seen at 1.5260, and short term longs can be taken into this area.

The FTSE is showing very little bounce with prices dropping below the 5100 level.  Daily momentum indicators are still bearish but suggestive of a reversal (given the oversold nature of the latest price activity) so we can start to look for short term buy positions into psychological support at the 5000 level.  Be aggressive taking profits on any bounces, however, as the trend is clearly downward and unlikely to let up any time soon.

The Euro remains heavy on its lows with little bounce seen overnight after the negative response to the German Bond auction conducted yesterday.  Germany’s inability to attract treasury investors is leading many to believe that the country’s debt problems are worse than previously thought and adding to this is the continual conversation about possible downgrades in France’s AAA credit rating.  Bond yields in each of the core (AAA rated) Eurozone economies are now seen as being affected by the current crisis and this is contributing to the weakness we are seeing in the region’s equity markets.

Because of these factors, macro data will get more of a central focus today as third quarter GDP in Germany will be released, as will the IFO survey and these reports will give investors some guidance for assessing the true state of Europe’s largest economy.  Recently, this type of data has been mostly ignored but now with the US on Thanksgiving holiday, the lower levels of market liquidity could lead to price volatility into these releases.  Market expectations have been revised lower more than once for this data, so it will be interesting to see what type of growth will need to be seen in order for markets to show some encouragement.

In the UK, Bank of England meeting minutes from its November monetary policy meeting were released yesterday and showed a unanimous vote to keep its interest rate and asset purchases programs in place, along with a general expectation that inflation levels will stabilize throughout 2012.  The GBP did see a bounce after the release (during a session mostly dominated by US Dollar strength), as there was little suggestion that MPC members are biased toward additional injections of quantitative easing stimulus (at least from a short term perspective).

UK macro data will also see the release of the third quarter GDP report (which is expected to show growth of 0.5% on a quarterly basis) but this release is expected to only have a peripheral effect with market attention squarely focused on developments in the Eurozone and the release of today’s German macro data.  Even if investors remain on the sidelines today, these releases will likely be the guiding influence when market volumes return to normal levels after the holiday week comes to a close, so the results of these releases should be given notice.

Technicals:

The USD/JPY is finally starting to show some lift as prices have found support in the 76.55 region.  The short term nature of the rally does throw some doubt on the bullish argument for the pair but if prices can break above support turned resistance at 7.25, we should see another test of the hourly highs at 77.60.  Buying dips is the preferred strategy, first support comes in at 77.

The S&P 500 is showing some sharp declines after meeting the 1290 resistance level and prices have since retraced nearly 61.8% of the last daily rally.  The severity of the drop does suggest that prices will need a period of consolidation before making any extreme moves lower but a break of the Fib support will be very ominous for the long term view.  First resistance comes in at 1180.