Rates on hold: Glenn Stevens, governor of the Reserve Bank of Australia

Equities fail to hold onto early gains

In the first half of last week equities markets performed strongly, erasing the losses of the previous week. Positive economic and corporate figures in the US and Europe helped drag equity prices out of their recent turmoil. The Dow Jones had been trading close to 10,000 but failed to get that low, and buyers gained some traction in an oversold market.

The rally last week however, was most likely a short-term relief rally rather than a reversal in fortunes for the markets.

The selling since mid-January had been quite severe and after such pressure it is not uncommon to see some reversal as short sellers cover their positions and book some profits, and buyers see the low prices as an opportunity to go long.

Moving further afield, most will be aware that in Australia and New Zealand the recent economic recession has been much less pronounced than in Europe and the US – however some of the economic announcements last week proved cause for concern. In the southern hemisphere there was plenty of important market moving news for traders.

Early in the week, the Reserve Bank of Australia surprisingly kept rates unchanged at 3.75%, when the expectation was for an increase to 4%.

The news sparked immediate and heavy AUS/USD selling pushing the pair down 125 points or 1.3% to $0.8795. On Wednesday night, New Zealand announced that its unemployment rate had reached a 10-year high of 7.3%, and some hours later Australia released a retail sales report which showed a decline of 0.7%. Both of these figures were significantly worse than investors had forecasted.

The poor news from 'down under' put a halt to the equity market rally and on Thursday morning markets opened negatively. The downward pressure continued when poor weekly jobless figures greeted US traders as they arrived at work. Global economic fears persist, and will continue to hamper investors' efforts to make money buying equities.

As we write this piece, Friday afternoon's non-farm payroll figures in the US have not yet been released, but they are expected to show the creation of 15,000 jobs last month. This would represent a big improvement from the previous month's net loss of 85,000 jobs.

However, a positive figure is the one which markets are pricing in and any significant deviation from that number may set the tone for the next couple of weeks.

In a period when fear is prevailing, a big negative non-farms job figure could really cause a heavy negative push on equities, while a good figure may not achieve the same reaction in the opposite direction.

In the fear/greed dynamic which shapes market movements, the last nine months of 2009 saw investors firmly on the greedy side of this equation. Now there is a sense that much of this has passed onto the fear side. The Dow Jones will most likely threaten to break below 10,000 soon, and if it does, it will be a big physiological blow for equities.

Volatility returns in an action-packed week

Volatility hit recent highs in the oil market with US Light Crude moving higher by 4% by the middle of the week. Last week we commented on how a break-below $73/bbl could send prices to $70/bbl.

However, despite breaching the $73/bbl last Monday morning, crucially prices could not close below this level and since then oil rallied strongly. The rally can also be attributed to a surge in equity prices.

However, after printing a weekly high above $78 on Wednesday morning, by close prices were below $77 in what was very volatile trading day.

This was an indication that the sharp move higher at the beginning of the week may have over extended itself and prices could head lower. This is exactly what happened on Thursday as all the markets moved significantly lower.

It was also no surprise to see the rest of the commodities sector move higher at the beginning of the weak as equity prices rallied strongly and the dollar lost some of its impressive gains of the previous week. By midweek, gold was up around 2%, silver was up 1% and platinum an impressive 4%.

However, toward the latter end of the week most of these gains were wiped out as the dollar started to strengthen again and equities moved lower.

We feel the overall sentiment this year of lower equity prices, a strong dollar and lower commodity prices is set to continue for now. From a technical perspective, gold looks like a good trading opportunity as it seems apparent a downtrend has begun from the peak at $1221. The next key support level is at $1,075 and if prices can close below this level for two consecutive days then there is a good chance the price will continue to fall further.

Paddy Haran and Vinay Sharma, Delta Index