The new trading week has started with a bang thanks to record
breaking sales on Black Friday and tons of speculation that Europe
is at the cusp of providing themselves with new support or
receiving external aid from the IMF. The euphoria from post
Thanksgiving Day shopping carried over to the financial markets but
given the high level of unemployment, Americans are living above
their means which implies that investor optimsm may be misplaced.
Even if Americans feel that it is their patriotic duty to spend,
can we really expect this strength to be sustained throughout the
entire holiday shopping season? The reality of the matter is that
strong holiday shopping does not mitigate the risk of a U.S.
recession. Black Friday and Cyber Monday may produce strong
results, but unless retailers continue to lure in consumers with
sharp discounting which inevitably kills profitability, they will
have a very tough time keeping their cash registers ringing. With
this in mind however, it is irrefutable that sales were
surprisingly strong on Friday and this will help bring much needed
relief to U.S. equities. U.S. new home sales will be released at
10am ET but the housing market report should have only a limited
impact on the dollar. Even if sales decline, the strength of Black
Friday sales will overshadow the weakness in a sector that has long
trailed the recovery.
Across the Atlantic, there has been very little substance to the
speculation of progress on the EU debt crisis which is why we
remain skeptical of the recovery in the euro. The IMF debunked the
rumor that they are preparing a EUR600 billion loan for Italy while
talk of AAA Elite bonds were also denied by the German government.
There have been more denials than affirmations from European
officials this morning but the euro's ability to hold onto its
gains indicates that investors are still holding out hope that EU
officials will make good progress on a new fiscal pact that would
prevent the Eurozone economy from collapsing. With Eurozone finance
ministers meeting in Brussels tomorrow and EU Finance Ministers
meeting on Wednesday, there is a realistic chance of progress and
that is the main reason why the euro has rallied. Belgium also
managed to sell all of its bonds on auction despite being
downgraded last week. They paid the highest yield ever but the
market is just happy that the bonds were bought period. We don't
expect a new rescue plan, an agreement to issue joint bonds or
changes to the EU Treaty to be announced, but any hint of
cooperation is all that euro traders need to be scared out of their
short positions. Even if European Finance Ministers stay mum on
support for the Eurozone, there are 2 opportunities next week for a
big announcement - at the ECB meeting and the EU Leaders Summit. We
aren't surprised by the optimism in the euro ahead of these
important gatherings, but given the track record of European
governments, the challenge of reaching an agreement that satisfies
all 17 nations, the vigorous denials that plans are in the works
and the risk of further downgrades by rating agencies, the EUR/USD
could still have tough time sustaining its gains. Until there is
substance to any of the rumors and speculation in Europe, euro
traders should be cautious. With Italian bonds being auctioned off
on Tuesday and Spanish and French bonds being auctioned on
Thursday, expect more volatility in the euro.