Risk aversion was in the driving seat last week as investors rushed out from stocks and commodities on a couple of concerns. US stocks were shot down by President Obama's bank proposal to limit risk taking by banks and doubt on Bernanke's future as Fed chairman in the second term. European stocks were dragged down by US equities, deteriorating investor sentiments as well as continuous concern on Greece's fiscal health and deficit contagion spreading to other European nations. Asian stocks were pressured by worry of further tightening measures by China government to cool growth and inflation. Dollar benefited from safe haven flow and rose sharply against most major currencies. However, the Japanese yen was indeed the biggest winner last week and yen crosses were extremely heavy.
On Thursday, US President Barack Obama proposed restrictions on risk-taking at financial institutions. The plan includes limiting the size of financial institutions and to ban some 'risky' activities including proprietary trading and internal hedge funds. The news damped investments for risky assets such as commodities and equities. On Friday, two Senate democrats said they would oppose Bernanke's second term as Fed chairman and there are altogether five Senate Democrats in this position with eighteen others undecided. Bernanke needs 51 votes to be confirmed but hey may need 60 votes from Senate to overcome a procedural hurdle. However, it's doubtful whether Bernanke would get 60 votes when the current term expires on January 31. These two issues sent DOW -5.1% down from intraweek high of 10729.89 to close at 10172.98.
The ongoing concern on Greece's ability to cut down its fiscal deficit boosted interest in Portugal's 2010 budget plan this week. IMF warned Portugal last week of the "critical" importance of getting its public finances in order and said that "fiscal consolidation is critical to prevent further deterioration and preserve hard-won credibility." There were growing concern of contagion spreading from Greece to other nations in the Eurozone even though the prospect of Eurozone breakup is still very low. Investors are also deeply concerned as German and Eurozone ZEW economic sentiments dropped much more than expected in January and triggered doubt on the sustainability of recovery in the region. Euro continued to weaken against Swiss Franc and dived to as low as 0.8650 against Sterling before recovering.
Asian stocks were pressured as Chine hiked one-year bill yield again and on speculation that that China will raise interest rates last Friday. While rates was not raised at the end, investors will continue to be cautious on any more tightening measures from China.
The above developments will continue to be main drivers in the financial markets. The developments in the next few weeks will be important to development whether last week's sharp fall in stocks and commodities were overreactions or a real change in sentiments and trend.
Looking at the charts, DOW's sharp reversal last week has sent the index deeply below the medium term trend line support as well as 55 days EMA. The break of 10218 key near term support level also confirms that a medium term top is in place at 10729.80 with bearish divergence condition in daily MACD and RSI. While it's still a bit early to say that the up trend from 6469.9 has completed totally, more downside should now be in favor in near term to bring the index through 10000 psychological towards 38.2% retracement of 6469.9 to 10729.98 at 9102.
Another point to note is that VIX, the fear index, rocketed higher last week to close at 27.31, having its biggest three day rise since February 2007. This could be another sign of market reversal.
Crude oil's fall from 89.35 extended further to close at 74.54 last week. While it's still early to suggest that medium term rise from 33.2 has finished. Some near term weakness is in favor to trend line support at around 70 psychological level.
Gold's fall from 1163 has also extended last week and closed below 1100 level at 1190.8. THe development indicates that correction from 1227.5 is set to resume for another low below 1075, and probably to projection level at 1010.7, which is close to 1000 psychological support.
The above developments will continue to favor more upside in both dollar and yen. Considering bearish outlook in USD/JPY, we'd expect yen to outperform the greenback though. Nevertheless, this is inline with the outlook of dollar index. Dollar index rose to as high as 78.81 last week before treating mildly. The break of 78.45 resistance confirms that whole rise from 74.19 has resumed. Current retreat from 78.81 is expected to be contained above 77.41 support and bring rally resumption. We'd expect more upside to 61.8% projection of 74.19 to 78.45 from 76.60 at 79.23 and then 38.2% retracement of 89.62 to 74.19 at 80.08.
Also, recap the bigger picture outlook, whole fall from 89.62 has completed at 74.19 on bullish convergence condition already. Our preferred view is that price actions from 88.46 are a three wave consolidation to longer term rise from 70.70. That is rise from 74.19 is tentatively treated as resumption of the longer term up trend. The final structure of the rise from 74.19, be it impulsive or corrective, will provide more hints on whether this view is correct.