New Year, Same Old Problems

by TradeTheNews Staff

Happy New Year, and good riddance 2008. The year was one of the worst ever for equity markets (the worst on record for the Nasdaq), while a flight to safety has created a potential new bubble in the US Treasury market. 2008 also saw the beginning of a global recession, pummeling commodities, and spawning record volatility in currency markets. In financial markets, January tends to set the tone for the rest of the year, so economic events and data this month may be of particular importance, especially in light of major political changes afoot.

Equities Grope for a Bottom

With some economic recovery projections starting to move out to 2010, January may be too early to predict a rebound, but it does warrant looking at historical trends. If the first week of January and then the full month both show gains on the major equity indices, there has been a more than 90% correlation with the indices ending higher for the year. This could be helped by the so-called “January effect”, early buying of small cap stocks after year-end tax loss selling, which may lift equities for the first few days of the month.

A couple of key gatherings will also affect equities this month. The influential annual JP Morgan healthcare conference convenes January 12-15. Last year drug companies were bought up ahead of the conference on anticipation of new drug announcements, and this pattern may repeat itself. Retail technology manufacturers may try to offset shaky holiday sales with a look at their latest products at the Consumer Electronics Show (CES) running from January 7 to 11. The Macworld Expo will also convene in early January (Jan 5-9). Apple already raised a flag of caution when it announced CEO Steve Jobs would not attend the Expo, creating renewed speculation about his health and Apple's ability to roll out new inventive products this year.

The fourth quarter earnings season begins in mid-January, officially signaled by Alcoa's report on January 12. With the NBER recently slapping the official 'recession' label on the US economy, Q4 results are expected to be grim. A bevy of US companies will paint the picture of just how painful Q4 was across the board as consumers and corporate customers pulled into their shells. Commentary on guidance will likely be rare as lack of visibility is leading more and more companies to decline to provide a quantitative outlook.

Commodities Diverge

As companies brace for the recession, commodities continue to suffer from ever shrinking global demand for inputs. Hedge fund deleveraging may be over, but new demand and speculative zeal are nowhere to be found. Gold has found new footing, rising 25% in the last few months and is approaching $900 again. With treasuries oversaturated with investors, gold may continue to attract a flight to safety trade in early 2009.

In contrast, the price of crude oil continues to wallow around $40 per barrel despite OPEC announcing substantial production cuts and the flare up of the Israel-Hamas conflict. An escalation of the Middle East conflict could create some impetus for crude to rebound, but a more likely scenario is that energy futures will get a boost from OPEC members declaring better compliance over the next few months with the previously announced cuts. Absent such conditions however, energy and other commercial commodities may find a hard time gaining ground as the global economy limps along in a deflationary cycle.