Compass Directions: Afternoon Report For November 17, 2011

The majors eased in early trade today as the Fitch report highlighting the risks of the European debt crisis to the American banking system prompted a sell-off. The People’s Bank of China release a statement that “the foundation of price stability is not yet solid” signalling continued vigilance with inflation controls. Overnight, the market will be focussed on the outcome of a sale of EUR 12.2 billion of French and Spanish debt. Yields on US 10 year notes fell one basis point to 1.99%. After trading to as low as 1.3420, the common currency is closing the afternoon at 1.3480.

New Italian Prime Minister Mario Monti has named his new cabinet which includes no politicians in a move that is seen by many investors as a positive move. Maybe non-politicians will have more success in tackling the debt crisis that is bringing the nation to its knees? The Fitch report showed that the six biggest US banks have a combined risk of $50 billion to Greece, Italy, Ireland, Portugal and Spain and an even bigger exposure of $188 billion to France. The Australian dollar slumped to within 20 points of parity after the release of the Fitch report before recovering to close the afternoon above 1.0100.

Stocks in Asia were volatile in trade today as investors remain on edge over the European debt crisis, global growth prospects and new concerns over the exposure of US banks to Europe. The MSCI Asia Pacific Index swung between a loss of 0.8% to marginal gains while the MSCI China Index fell for the third consecutive day to record its longest run of losses in more than 6 weeks. The Nikkei is flat at 8,462 while the Hang Seng is down 0.88% to $18,793. The ASX 200 has closed higher by 0.3% to 4,261 in a rollercoaster day of trade.

Commodities fell in trade today. WTI Crude Oil is down by 0.3% to $102.25 falling from five month highs. Precious metals were mixed with gold lower by 0.67% to $1,762 while silver rose marginally by 0.22% to $33.90. Soft commodities were broadly lower and copper is down by 0.3% as base metals eased. Overnight, we have the release of UK Retail Sales, Swiss ZEW Economic Expectations and US building permits, unemployment claims and the Philly Fed Manufacturing Index.



GOLD moved modestly lower in Asian trade today as equities moved lower early in the session and the USD gained. However, after stronger than expected in China’s leading index we saw the USD weaken and equities reverse most of the days losses as some optimism returned. This saw Gold prices rebound off the lows and end the session on the days highs. Gold traded in a $1,756-66 range and finished the session weaker by 0.40% at $1,765. All in all a good day for precious metals as key support levels were not in reach of the market and as long as key short term support at $1,750 continues to hold we are a buyer in the near term with stops just below $1,735. We are in a consolidation phase at the moment and given that prices have held up so well while equities have tanked and the USD has gained signals that a bullish move is just around the corner. Major resistance remains at $1,800/02 and the next time this level gets tested we see a break triggering a big move towards $1,920. Initial resistance lies at $1,777 and a break here and then $1,785 should see us testing $1,800. On the downside, $1,750 and $1,735 are the key levels to watch with a break of the latter seeing extended losses towards major support at $1,695.




AUD/USD was smashed during the morning session as the Fitch report into the effects of the European crisis and the links to foreign banks spooked the market with risk assets being sold across the board. The break below the previous 1.0055 bottoms saw stops hunted as we expected with the price rushing to a 1.0021 low before option related buying and Australian Exporter interest saved the day. Short covering and the realization that every Fitch had report was already know has seen the majors recover during the afternoon to have the AUD only down around 30 or so points. For now we are changing the short term bias to neutral as the market has tested the parity level with most ticking the box for the short end decline and with the failure to close towards the lows a short covering bounce looks more than likely. Confirmation would be a move about 1.0160 but we are more than happy to take back the short dated positions even at the current level.