Fundamental Analysis, January 9th 2012

Euro seen falling as Europe faces recession

It has been a rough start to 2012 for the euro and it won't get any easier next week as the region grapples with a possible recession and two of its larger economies conduct a crucial test of investors' appetite for their debt. In the first week of the year the euro has lost 1.8 percent and 1.6 percent of its value versus the safe-haven U.S. dollar and yen, respectively. The losses were largely driven by a growing contrast between the recovery in the world's largest economy and Europe, which is widely believed to be either in, or headed toward, a recession. Data showing a healing U.S. labor market helped send the euro to a near 16-month low against the dollar on Friday and more losses are likely if euro zone sovereign debt and bank funding issues stay unresolved. Yields in Italy and Spain have continued to increase since the beginning of the year, with Italian 10-year yields back close to their end-November level. As Europe's economy remains weak, the European Central Bank could decide to initiate measures to stimulate growth through asset purchases or another interest rate cut, or both. In late afternoon New York trade, the euro <EUR=> was 0.5 percent lower against the dollar at $1.2718 after hitting a low of $1.2696 <EUR=>, its weakest since September 2010, according to Reuters data.

US STOCKS-Economy boosts Wall St in 2012's first week

U.S. stocks rose in the first week of 2012, even though news that the U.S. jobless rate neared a three-year low did not whet interest in equities on Friday. The U.S. market came into the new year revisiting familiar themes, with signs the U.S. economic recovery was gathering speed taking some of the focus off of lingering concerns about the euro zone's debt crisis. The Dow rose 1.2 percent, the S&P gained 1.6 percent and the Nasdaq added 2.7 percent for the week, with most gains coming from cyclical sectors tied to growth. Among the week's largest gainers the KBW bank index <.BKX> jumped 5.7 percent, in contrast with the 2.7 percent fall in the top gauge of European bank stocks <.SX7P>. Data this week painted a rosier picture on the labor, housing and retail markets, auguring a recovery in growth in 2012. The government's report on non-farm payroll jobs for December earlier on Friday was the latest in a list of economic numbers that were stronger than anticipated. On Friday the Dow and S&P edged lower. Worries about higher bond yields in Italy and Spain, as well as potential oil supply disruptions in the Middle East, were cited as giving investors a pause.  On Friday, the Dow Jones industrial average <.DJI> dropped 55.78 points, or 0.45 percent, to 12,359.92. The S&P 500 Index <.INX> fell 3.25 points, or 0.25 percent, to 1,277.81. The Nasdaq Composite <.IXIC> gained 4.36 points, or 0.16 percent, to 2,674.22.   

Gold eases as market digests US payrolls data

Gold eased on Friday, snapping a five-session winning streak, but trade was choppy as investors digested a report of better U.S. job growth and the unemployment rate near a three-year low. The metal still notched its biggest weekly gain in five weeks after it broke ranks with a slumping euro in the last two days.. Trading volume was decent after data showed U.S. nonfarm payrolls increased 200,000 in December and the unemployment rate dropped to a near three-year low of 8.5 percent, offering the strongest evidence yet the economic recovery was gaining steam.

Spot gold <XAU=> fell 0.3 percent to $1,617.19 an ounce by 2:32 p.m. It was up 3 percent for the week, its first weekly rise since early December. U.S. gold for February delivery <GCG2> settled down $3.30 at $1,616.80. Gold had been trading in lockstep with the euro in the past two months when the metal crossed into a bear market. Last week, the precious metal was briefly 20 percent below its record September high.   The 25-day correlation log between spot gold and euro was near a one-year high reached last week, indicating a strong positive link between the two in the last month.