Fundamental Analysis, Dec 18th 2012

Japan yen hit as loose policy seen; Draghi weighs on euro

The yen dropped to a 20-month low against the U.S. dollar on Monday after Japan's Liberal Democratic Party won a landslide election victory that leaders promise will usher in aggressive monetary easing policies to weaken the currency.

Former Prime Minister Shinzo Abe returns to power with the LDP's victory. He campaigned on a platform to boost the moribund economy with hyper-easy monetary policy and big fiscal spending to beat deflation, a recipe for weakening the yen that gives Tokyo an export advantage in international markets.

The euro rose against the yen as well, but saw its gains on the U.S. dollar undermined by European Central Bank President Mario Draghi after he reiterated concerns over slow growth of Europe's economy.

In mid-afternoon New York trade, the greenback was up 0.38 percent to 83.77 against the yen <JPY=>, its best level since April 2011. The euro climbed 0.33 percent to 110.24 yen <EURJPY=> but fell back from its 8-1/2-month high of $1.3191 to trade at $1.3158, down 0.04 percent against the U.S. currency.

A factor leading to the weakness was Draghi saying the medium-term outlook for the euro zone economy remained "challenging". Weak demand is expected to extend into 2013 and only a gradual recovery is forecast toward the end of that year while interest rates are expected to continue at record lows.

On the side strengthening the euro against the U.S. dollar was Richmond Federal Reserve Bank President Jeffrey Lacker, who said he expects it will be another three years until the U.S. unemployment rate drops to 6.5 percent. 

That means monetary policy is expected to remain in the zero to 0.25 percent range through 2015, conditions that weaken the buying power of the U.S. dollar.

Optimism about 'cliff' boost market; financials lead

The S&P 500 ended at its highest level in almost two months on Monday on rising hopes that negotiations over the "fiscal cliff" were making progress and that a deal could be reached in days.

After weeks of stalemate, President Barack Obama and Republican House Speaker John Boehner met at the White House on Monday, raising hopes that Washington will be able to head off steep tax hikes and spending cuts that threaten the economy.

All of the S&P 500's 10 sectors were higher, led by financials and other growth-oriented sectors. The S&P Financial Index <.GSPF> gained 2.1 percent, while the S&P consumer discretionary sector <.GSPD> was up 1.8 percent.    

Investors worry the U.S. economy could slide into recession if the tax and spending changes are implemented.

Boehner has edged closer to Obama's position by proposing to extend lower tax rates for everyone who earns less than $1 million. Still, his position remains far from that of President Obama. 

The Dow Jones industrial average <.DJI> was up 100.38 points, or 0.76 percent, at 13,235.39. The Standard & Poor's 500 Index <.SPX> was up 16.78 points, or 1.19 percent, at 1,430.36, its highest close since Oct. 22. The Nasdaq Composite Index <.IXIC> was up 39.27 points, or 1.32 percent, at 3,010.60.

Gold ends near flat, capped by US budget talks progress

Spot gold prices ended little changed on Monday as pressure from signs of positive developments in U.S. negotiations to avoid the "fiscal cliff" neutralized safe-haven bidding in the precious metal.

Earlier in the session, bullion climbed on hopes that the Bank of Japan would use more monetary stimulus after Japan's next prime minister, Shinzo Abe, called for the aggressive measure to boost growth.

But gold fell back after the Speaker of the U.S. House of Representatives John Boehner and President Barack Obama held another meeting on Monday to avert the potentially recessionary spending cuts and tax increases that will automatically take effect in January. Many see Boehner's weekend proposal which included tax increase as a potential breakthrough in the talks.

The metal had fallen for a third straight week last week. Gold, a traditional inflation hedge, has been under pressure as many economists expect the $600 billion in tax hikes and spending cuts could send the U.S. economy back into a recession.

Spot gold <XAU=> was up 0.1 percent at $1,696.04 an ounce by 2:56 p.m. EST (1956 GMT), having traded in a relatively narrow $13 range.

U.S. COMEX gold futures for February delivery <GCG3> settled up $1.20 at $1,698.20, with trading volume on track to finish more than 50 percent below its 30-day average, preliminary Reuters data showed. It was up a penny for the day at $32.16, off a one-month low hit earlier in the session.

Oil Rises for Second Day on Fiscal Deal Speculation

Oil rose for a second day in New York on optimism that a U.S. budget agreement will be reached, narrowing the discount to Brent crude to less than $20 for the first time in eight weeks.

Prices gained 0.5 percent as House Speaker John Boehner proposed to raise tax rates on household incomes above $1 million a year in exchange for containing entitlement program costs. President Barack Obama is considering a concession on Social Security cost-of-living increases after Boehner dropped his opposition to raising tax rates for some top earners.

West Texas Intermediate crude for January delivery advanced 47 cents to settle at $87.20 a barrel on the New York Mercantile Exchange. The increase is the fourth in five days. The February contract gained 42 cents to $87.67.

Brent for February fell 54 cents to settled at $107.64 a barrel on the London-based ICE Futures Europe exchange. Brent’s premium to WTI slipped 96 cents to $19.97 a barrel, the narrowest spread in almost two months.

The Brent-WTI spread declined as Enterprise Products Partners LP (EPD) expects to begin operating the expanded Seaway oil pipeline in early January. Seaway reversed its flow in May to carry crude to Houston from Cushing, Oklahoma, the delivery point for New York oil futures.

Nikkei set to trade in range after 8-1/2 mth high

Japan's Nikkei share average is expected to trade in a range on Tuesday after climbing to an

8-1/2-month high in the previous session on the landslide election win by the conservative Liberal Democratic Party.

The Nikkei rose 0.9 percent to 9,828.88 on Monday, buoyed by a weaker yen on expectations that the LDP would step up the pressure on the Bank of Japan to further ease policy. The broader Topix <.TOPX> index gained 0.9 percent to 807.84.

The benchmark Nikkei has risen 13.4 percent over the past month, driven by the yen weakness after Abe called for the central bank to undertake "unlimited easing" and set an inflation target of 2 percent. 

The next most-traded was a January call at 10,500, followed by a January put at 9,500 and another put at 9,000 with the same maturity.

Seoul shares seen climbing after Obama, Boehner meeting

Seoul shares are likely to rebound on Tuesday after President Barack Obama met with top Republican John Boehner, giving  investors hope that a resolution to U.S. fiscal negotiations was in sight and driving the Standard & Poor's 500 index to a near two-month high. 

Kim added that the South Korean presidential elections, to be held on Wednesday, will likely not have a big impact on the market but could cause some investors to wait on the sidelines before building their positions.

Democrat and Republican aides said they were optimistic that a deal could be reached in the coming days to avert steep tax increases and spending cuts, as U.S. lawmakers set the stage foraction before a year-end deadline. 

The Korea Composite Stock Price Index (KOSPI) <.KS11> fell 0.6 percent to close at 1,983.07 points on Monday, moving further away from a nine-week high marked on Thursday. 

Local markets will be closed on Wednesday for the presidential elections.

Hong Kong shares seen edging up at open

Hong Kong shares were seen opening higher on Tuesday following a strong close on Wall Street and on expectations of a sustained rebound in China's domestic markets.

The Hang Seng index <.HSI> closed down 0.4 percent on Monday at 22,513.61, easing slightly from a 16-month high. The China Enterprises index <.HSCE> of top locally listed mainland firms fell 0.1 percent.

China shares on the mainland hit their highest level in 4 months with the CSI300 <.CSI300> of top Shanghai and Shenzhen listings trading in positive territory on the year after last week's big surge.

Elsewhere in Asia, Japan's Nikkei <.N225> extended its strong run and was up 0.5 percent while South Korea's Kospi <.KS11> was up 0.2 percent as of 0030 GMT.

Source : Reuters