What To Expect This Week as Markets Slowly Open

Most of the global markets are closed today, others are on holiday hours, and volume is expected to be very light.

Asian markets are open and trading today. This is their first chance to catch up on Friday’s economic news from the US and to even the score with the other markets.

Japan’s Nikkei Stock Average surged 1.1%, in response to Friday’s strong finish on Wall Street and upbeat U.S. economic data.

The Nikkei stock market performance hinges on yen movements, and that while the yen might continue to appreciate over the long term, it could fall against the U.S. dollar in 2012 due to possible recovery in the U.S. economy.

China’s Shanghai Composite was dipped 0.1% in rough trading. The index is still down more than 21% so far this year, including nearly 5.5% in losses suffered this month.

South Korea’s Kospi traded 0.6%down, and Taiwan’s Taiex dropped 0.3%, reversing early gains.

Stock markets in Australia, Hong Kong and Singapore are closed for holidays.

The markets have come to the last week of the year, expect market interest to be significantly reduced due to major holidays on each end, likely leading to largely sideways drift.

Reduced market volume also has the tendency to see spikes in volatility on news headlines and data reports, as fewer traders seek reduced liquidity in response to breaking events. In particular investors should note month/quarter-end fixing flows late in the week, where asset managers rebalance currency hedges.

The markets should see USD selling overall against other major currencies. Fixing flows will be evident in during the opening of the US markets daily, likely peaking as the London markets close. Note that markets are already mostly long USD, so the potential for a liquidation-driven USD slide is certainly non-trivial.

Data and economic reports are mostly light from the larger economies (US-consumer confidence and Chicago PMI are highlights; EU-German CPI and retail sales), but Chinese indicators could prove disruptive if they show further declines. The Chinese Nov. leading index is due out next week, but no fixed date/time is available for the release, while Thursday night ET/Friday in Asia sees the release of Dec. Business Conditions Survey and the HSBC Manufacturing PMI.

Italy is scheduled to auction just over 20 billion EUR in government debt  with sub-3 year maturities on Wednesday  and longer-dated 10 year bonds on Thursday. Markets will be closely watching the results and insufficient demand or too high a price could trigger another risk-negative reaction. The short-dated issues will be taken-up easily, but there is much more cautious on the longer tenors. Italian government bond yields surged toward 7% at the end of the week, suggesting bond investors are still fleeing the debt-laden country after 3Q GDP dipped into recession territory at -0.2%. Long-term yields at auction above 6.0-6.5% would be unsustainable and could unleash another wave of EUR pessimism.

The start of the year could see risk rally, investors put money back into the markets. Pre-positioning for such an early bounce could become evident toward the end of week, potentially sending USD lower/EUR and other risk assets higher.

Focus on the 79.60 support level in the USD index and the 1.3200/50 resistance area in EUR/USD, where a daily close beyond would suggest further corrections in risk assets. Alternatively, a daily close below recent 1.2940/50 lows in EUR/USD would suggest to us that risk aversion is dominating and signal the resumption of declines.