Investors Want To Be Bullish, But Still A Lot Of Marco-Economic Headwinds

December 1, 2011 12:12 AM

What Traders are Talking About:

* Buzz from Wednesday lingers -- sort of. U.S. markets were abuzz yesterday after the coordinated effort by the Fed, European Central Bank and the banks of England, Japan, Canada and Switzerland to reduce the dollar swap line by 50 basis points and increase liquidity. In essence, the interest rate charged to banks was cut in an effort to keep European banks solvent and lending money. Investors liked the move, with commodities and the stock market staging broad-based rallies. The bellwether Dow Jones Industrial Average gained 490 points -- the largest one-day gain since March 2009. Asian stock markets played catchup overnight, while European markets were cautious amid comments from the head of the European Central Bank (read next item). Commodities were generally firmer overnight, although some of the buzz from yesterday wore off.

The long and short of it: Actions signal traders want to be bullish, but there are still a lot of macro-economic headwinds. To build investor confidence, more positive moves by global central banks are likely needed.

* Draghi warns conditions have worsened. European Central Bank (ECB) President Mario Draghi warned the European Union parliament that "downside risks to the economic outlook have increased," but that the ECB is willing to take further action to boost the euro-zone economy. The cautious tone from Draghi caused investors to take a step back and European stock markets favored the downside overnight. Despite the coordinated effort by global central banks Wednesday, Europe still has to come up with a viable long-term fiscal policy to solve its massive debt issues.

The long and short of it: Draghi's comments about the ECB being willing to do more is sparking speculation the central bank will cut interest rates for the second time in two months at next week's monetary policy meeting.

* China PMI data confirms factory sector contraction. China's official purchasing managers' index (PMI) fell to 49 in November from 50.4 in October while the HSBC PMI plunged to 47.7 from 51 the previous month. Both are below the level (50) that signifies contraction within the factory sector. Contraction in factory output due to falling demand domestically and abroad was likely a factor in China's announcement yesterday to start easing monetary policy via reduced bank reserve requirements.

The long and short of it: China's monetary policy focus has shifted dramatically -- from fighting inflation to combating a slowing economy, which would be bullish for commodities if a sharp economic downturn is avoided.


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