Morning Fundamental Compass Direction : October 29, 2012

The U.S. economy grew faster than forecasted in the third quarter at an annualised rate of 2% boosted by consumer and defence spending and homebuilding. The median forecast of economists had been 1.8% with economist's forecasts ranging from 0.9% to 3.1%. Consumer confidence in October had risen to a five year high as a recovery in the real es-tate market boosted household finances. Consumer spending, which accounts for 70% of the world's largest economy, grew at a 2% annual rate with a fall in gasoline prices and a drop in the unemployment rate both contributing. Treasur-ies rose with yields on 10 year notes falling from 1.82% to 1.75%.

The highlights of the past week include the release of the latest Federal Open Market Committee report which indicat-ed that the U.S. economy is growing modestly and that the Federal Reserve will continue its monthly purchase of $40 billion of mortgage backed securities in its programme known as quantitative easing. Speculation also continued to mount that the Bank of Japan would introduce more monetary stimulus to boost its flagging economy. On a more pos-itive note, economic reports indicate that the contraction in China's manufacturing is beginning to ease. The USD had a broadly positive week as the EUR fell to close the week at 1.2930 while the Australian dollar has held steady at 1.0370.

Share markets in the U.S. fell for the second consecutive week amid weaker than expected corporate earnings to record their first monthly fall since May. The S&P 500 fell 1.5% over the week and, on Friday, lost one point to close at 1,412.00. 53% of S&P 500 companies that have reported quarterly earnings have missed analysts' sales forecasts. As the U.S. Presidential Election nears, investors may begin to adopt a wait and see approach which will more than likely see subdued trading conditions over the next few weeks. Facebook shares surged 15% after the company posted better than expected sales. European bourses closed the week relatively unchanged with the DAX gaining 0.44% while the FTSE barely moved.

Commodities eased marginally as the week closed with subdued trading as U.S. growth figures were released. WTI was spared heavier losses for the week by the better than expected growth figures and rising concerns over Hurricane Sandy. Fears that Sandy may become a “Frankenstorm” and the worst to hit the northeast in more than a century saw crude rise 0.3% to close at $86.30. Precious metals closed marginally lower with gold at $1,712 and silver down a touch to $32.00. Soft commodities were broadly lower with coffee, wheat and sugar losing the most ground. Copper closed unchanged.


AUD/USD was caught in the swings and roundabouts over the final trading day of the week as the Asia market didn’t like the look of the risk currency with the price falling sharply from 1.0350 to almost hit 1.0300 by the early start of the European morning. Bottom picking and talk of cross flow against the Euro and Sterling
saved the day for the AUD with the price starting a slow climb despite the Euro falling once the AUD started to recover. The recovery continued after the better than expected US GDP saw the equity markets and risk currencies lift. The rise took back almost all the losses from the previous day as the market looked to be caught up in bears closing out positions ahead of the weekend. No data and a good recovery during the end of last week doesn’t do much for our belief that the AUD will again head towards the parity level over the course of the next couple of weeks. All the businesses we talk to up and down the east coast are still very much in hard times and we favour another rate cut next week.

Compass Direction
Short-Term Medium-Term
NEUTRAL BEARISH
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US Oil (WTI) has stabilised after a week of heavy losses as U.S. GDP figures surprised on the upside and Hurricane Sandy threatens the northeast of the United States with media reports that it could become a “frankenstorm”. The Hurricane will more than likely cause volatile trading in WTI when markets resume trade. Sandy has forced the cancellations of flights, the closure of New York City transport and mass evacuations. Mayor Bloomberg called for the evacuation of more than 350,000 residents in the Battery Park, Coney Island, Rockaways and City Island areas as the storm threatens to do damage of up to $20 billion and affect 60 million people. The evacuation is only the second in the city's history. Crude, gasoline and heating oil prices all rose as traders became concerned about disruptions to east coast refinery output. The Brent- WTI spread continues to widen despite our expectations of an imminent fall below $20.00. Expect volatility today.

Compass Direction
Short-Term Medium-Term
BEARISH BEARISH