The Week Ahead 12/14/09

{+++}In the last two weeks, markets were rattled by Dubai’s debt crisis, caused by silly spending in a far-away land – this week traders had a serious case of European sovereign jitters. The ratings agencies went after Spain and Greece thanks to the Euro Zone members’ shaky finances and the ECB’s tentative steps toward an exit policy. The euro suffered, and this, combined with other technical factors, sent the dollar higher. Just a week ago spot gold was pushing out to new highs above $1,220; oil was testing $80 throughout most of October and November. By Friday, both gold and oil were well off their recent highs. Crude closed below $70 for the first time since early October. The US economic calendar was light of major data and equity trading volumes were below average.

It was a certainly a tough week for sovereign debt, US and UK fixed income markets were no exception. Moody’s got the ball rolling with a provocative report early in the week hinting at misgivings over the US and UK AAA ratings, only to clarify later in the week that there was no imminent threat of a downgrade for either country. The Treasury auction for the year was sluggish – capped off by $13B in US Long Bonds disappointingly selling above the key technical level of 4.50%. The strong retail sales data on Friday added further weight to Treasuries, and as the week drew to a close the 10-year note had re- established a foothold above 3.50%. The US yield curve is now nearly as steep as it has ever been with the benchmark spread has widening toward 275 basis points. These levels have been seen only two other times, coming out of the early 90’s and 2002-03 recessions.

In currencies, the greenback has gained steadily last week, building on newly-discovered momentum in thinning year-end liquidity conditions, aided by technical factors and the ratings dramas in Europe. Dealers have been watching higher Treasury yields for clues on the next leg of the dollar’s price action. One European dealer warned that, after US Treasury 2-year yields moved from 0.65% to 0.85% over the last few weeks, any move above 0.85% could provide momentum. Some risk aversion has come out of Europe’s sovereign problems, culminating with Fitch’s action on Greece and S&P’s move on Spain.

A great deal of activity in the Asian markets was kicked off on Tuesday, when Japan finally unveiled its secondary stimulus budget following weeks of intra-party debate. Japan’s Q3 final GDP saw a walloping revision from preliminary levels, exceeding most of the already bearish analyst forecasts following the surprisingly poor capital investment data posted late last week.

Asian markets reversed a three day losing streak on Friday as China closed out the week with some robust data. China reported the highest rate of industrial production growth since June of 2007, rising 19.2%, beating estimates handily and solidifying the ongoing Far East recovery story.

The market continues to hang around 1100 and it’s totally possible that we just get ” a whole lotta nothin’ “, between now and year end. The market has held its own very well in the face of a strong dollar so far, that won’t last if the buck continues higher, but for now the bulls are clearly in charge and have been for a yer now. The lack of sellers is truly amazing.

Have a great week, one new long: VNO