Equity markets and high yielding currencies are seeing major advances higher as improved housing data in the US and cited optimism in German business confidence surveys helps fuel a low volume, pre-Christmas rally.  Other pieces of supportive news came with the ECB’s release of the first tranche of funds in its 3 year loan program and the successful bond auction in Spain.  Yesterday’s monetary policy meeting with the Bank of Japan was mostly uneventful, with no change in the country’s base rate and no new additions to its asset purchase plan.

Yesterday’s macro data focused on the US housing market and German business confidence.   US Housing Starts data rose to its highest level in 19 months and analysts will use this along with today’s releases (MBA Mortgage Applications and Existing Home Sales) to determine the validity of the overall trend.  We will also see some important earnings releases in the household goods sector as Walgreen’s and Bed Bath & Beyond will report along with CarMax and Micron Technology.  The main headline in US equities came after Oracle released disappointing quarterly profits and dropped nearly 9% in the aftermarket session.

In ratings news, Fitch placed Italian and Spanish private banks on “negative watch” and lowered its credit outlook on four additional French banks, on the argument that the European Financial Stability Facility could become insolvent itself and limit the ability of these banks to receive private funding when needed.  The total impact of these statements was limited, as order flows seem to govern price activity but the longer term impact of these events is likely to be reviewed next year.

In the US, the Federal Reserve has initiated plans to require banks to increase their capital reserve ratios (in accordance with Basel III international requirements and the recent Dodd-Frank bill).  The general view is that this is a defensive move (rather than an effort to limit pricing pressures) with the main goal of protecting banks against potential liquidity shocks that could enter the financial sector at a later date.

Today’s price activity is indicative of what can be seen when trading volumes decrease.  At the beginning of this week’s trade, volatility slowed to a near halt before posting intraday gains of over 3% in some indices with very few fundamental drivers.  Because of these possibilities, traders should prepare for the possibility of unexpected and drastic moves in either direction and stop loss levels should be conservative.

Technicals:

The EUR/USD is trying to bounce off of some significant long term support levels in the 1.2950 region (which is the 61.8% retracement of the larger decline on the weekly charts).  The latest move is tripping some short term stops but from our perspective the downside pressure is not removed until we see a break of resistance at 1.3250.

The S&P 500 is showing a strong bounce, with prices breaking key Fibonacci resistance at 1240.  This level was also historical resistance, so the break is encouraging for the moment.  Longer term, we need to see prices break out of the longer term symmetrical triangle before we can expect the bull move to test new highs.

Related posts:

1. Market Attention Turns Back to Macro Data; S&P 500 Approaches Resistance at 1200 Level
2. Central Bank Policy Coordination Brings Buyers to Risk Assets; S&P 500 Rallies to 1250
3. ECB, BoE and RBNZ Policy Meetings to Take Center Stage; S&P 500 Pushes Through 1250
4. Heavy Data Today: Eurozone PMIs, UK Retail Sales and US Housing Data to be Released
5. UK Housing and EU PMI Data Released Today; Central Banks Release Inflation Reduction Statements
6. Italian Austerity Votes Pushes Equities Higher; S&P 500 Hits Resistance at 1270
7. Positive US Data Pushes Up Global Equities; Gold Breaks Resistance, Targets Old Highs
8. Equities Rise on Positive Jobless Claims and European Data; German IFO Released Today
9. Earnings Helping to Support Equities at the Highs; Lots of Macro Data to Close the Week
10. NZ Dollar Reaches New Highs on Surge in Trade Numbers; ECB Continues its Focus on Asset Privatization