Weekly Market Review: US Economy Weathering Budget Battles

Service industries in the U.S. probably grew in January at about the same pace as in the prior month, showing the biggest part of the economy is weathering Washington budget battles, economists said before a report this week. The projected 55 reading in the Institute for Supply Management’s non-manufacturing index would follow December’s 55.7, the highest level in 10 months, according to the median forecast of 62 economists surveyed by Bloomberg before Feb. 5 figures from the Tempe, Arizona-based group. Another report may show the trade deficit narrowed in December.

China’s services industries grew at the fastest pace since August as gains in retailing and construction aid government efforts to drive a recovery in the world’s second-biggest economy. The non-manufacturing Purchasing Managers’ Index rose to 56.2 in January from 56.1 in December, the Beijing-based National Bureau of Statistics and China Federation of Logistics & Purchasing said in a statement yesterday.

Europe’s political tremors risk spoiling the region’s market calm, with corruption allegations buffeting Spanish Premier Mariano Rajoy and Italy’s Silvio Berlusconi narrowing the front-runner’s lead as elections loom. Rajoy, facing opposition calls to resign amid contested reports about illegal payments, travels to Berlin today as euro- area leaders schedule a flurry of meetings this week ahead of a Feb. 7-8 European Union summit. Last week’s nationalization of the Netherlands’ fourth-largest bank and a 2.17 billion-euro ($3 billion) loss at Deutsche Bank AG underscore the fragile economic health in the region.

EUR/USD: The EUR/USD touched a 14-month high on Friday, after the Fed said it will continue easing “if the outlook for the labor market does not improve substantially” and reiterated that it will continue to hold interest rates close to zero until the unemployment rate falls below 6.5%, while manufacturing activity in the bloc improved in January and inflation and unemployment stabilized in the Eurozone, boosted demand for the single currency. Today, the pair was trading lower at 1.36211 at the time of writing on market correction and profit taking. Moreover, market participant turned cautious after corruption allegations buffeting Spanish Premier Mariano Rajoy and Italy’s Silvio Berlusconi narrowing the front-runner’s lead as elections loom. In the week ahead, volatility is expected, thus investors should stay focus on news and data in both the Eurozone and the U.S. Events likely to affect the markets are: Monday; Spain will produce data on the change in the number of people unemployed. On the other hand, the U.S will release data on factory orders. Tuesday; the euro zone will produce data on retail sales, while Spain and Italy will release data on service sector activity. Later in day, the U.S will publish a report on U.S. service sector activity. Wednesday; Germany will release data on factory orders, while the U.S. will release data on crude oil inventories. Thursday; Spain and France will hold auctions of 10-year government bonds, while Germany will release data on industrial production. Meanwhile, the ECB will announce its benchmark interest rate; the announcement will be followed by a post-policy meeting press conference with President Mario Draghi. On the other hand, the U.S. will release the weekly report on initial jobless claims. Friday; the U.S. will round up the week with data on the trade balance. All these data should be closely monitored for visibility on the pair. The resistance level is at 1.37072 and the support level is at 1.34217 on the weekly chart.
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USD/JPY: The USD/JPY traded at a more than two-and-a-half year highs on Friday, on speculation the Bank of Japan (8301) will boost monetary stimulus. Today, the pair was slightly down at 92.772 at the time of writing on market corrections and profit taking as the rise may have been a bit too quick. However, the yen remain under pressure as Prime Minister Shinzo Abe’s administration pressed the central bank to ease monetary policy further to beat deflation. Finance Minister Taro Aso said yesterday the government is imitating his Depression-era predecessor, Korekiyo Takahashi, who told the BOJ to underwrite government debt to fund deficit spending. Prudence is recommended on the pair. Events likely to affect the markets in the coming week are; Monday; the U.S. will release data on factory orders. Tuesday; the Institute of Supply Management will publish a report on U.S. service sector activity. Wednesday; the U.S. will release data on crude oil inventories. Thursday; Japan will release data on core machinery orders. While the U.S. will release the weekly government report on initial jobless claims. Friday; Japan will produce data on the current account. On the other hand, the U.S. will release data on the trade balance. The resistance level is at 93.645 and the support level is at 91.513.
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Oil (WTI): Oil traded near to the highest level since September on signs of economic recovery in the U.S. and China, the world’s biggest crude consumers. In addition, the dollar traded near the weakest since November 2011 versus the euro, increasing the investment appeal of commodities priced in the U.S. currency. Today, the commodity was trading lower at 97.410 at the time of writing on market corrections and profit taking following the huge gains registered last week. However, market sentiments remain positive on the commodity. In China, the non-manufacturing Purchasing Managers’ Index rose to 56.2 in January from 56.1 in December, the Beijing-based National Bureau of Statistics and China Federation of Logistics & Purchasing said in a statement yesterday. A reading above 50 signals expansion. In the week ahead, oil traders will be anticipating the outcome of upcoming policy meetings by the European Central Bank and the Bank of England, while U.S. data on service sector activity will also be in focus. Other events mentioned in the paragraph above will also bring some fluctuations on the market. Investors should stay cautious. The resistance level is at 99.792 and the support level is at 95.385.