Risky Assets to Move Lower in the New Year?

Risky assets across the board have fallen on above average volume during Wednesday's trading session. Over night, Italy had a better-than-expected 6-month debt auction; however, investors lost enthusiasm as they focus on Thursday's 10-year bond auction. Just after 9:00 a.m. headlines crossed the wires that the International Monetary Fund announced no decision has been made with Hungary about when discussions of a fund-supported program will begin. At the same time, rumors circulated that one of the rating agencies is considering a downgrade to France's AAA credit rating. Most major risky assets fell on heavy volume, following these events. The Euro fell about 100 pips versus the U.S. Dollar, gold futures fell over $25 per ounce, and silver futures fell over 4%. As the risk-off trade continued, the U.S. Dollar simultaneously saw strength, spiking almost 1% higher. Despite the Santa rally within the last couple of weeks, the fundamental picture for the world economy has not changed. The debt problems in the United States and abroad still exist. European banks are taking a page out of the U.S. banks' playbook and essentially hoarding cash, after the European Central Bank's long-term refinancing operations, as European sovereigns know that trillions of dollars of debt need to be paid down in the coming years. On top of that, China is dealing with its own problems, ready to slow the global economy even more. China's Purchasing Managers' Index for December fell below 50, signaling a contraction in the industry, which is a bearish indicator for the world's second biggest economy. China's Shanghai Composite Index has fallen over 20% year-to-date, and its housing sector continues to slow. Europe is one of China's largest exporters. As Europe slows, so will China, and when China slows, so will demand for industrial commodities and risky assets like crude oil and copper. Benzinga reached out to Brian LaRose, technical analyst at United-ICAP, to get his perspective on where the global economy stands. “We use a range of technical indicators and tools to predict where these markets will go, with the primary tool being Elliott Wave Theory,” LaRose said. “Elliott Wave Theory is very important as it takes in account the emotional aspects of the marketplace, which drives price action, especially today.” “Almost all of our Technical indicators suggest further downside is ahead for riskier assets such as commodities and equities,” LaRose continued. “We may see some strength going into the New Year; however, any gains in commodities and equities are likely to be very short lived. We would prefer to be scale up sellers in this scenario.” After asking to what will change their bearish view, LaRose continued: “We would change our view if some of these markets break above their 2011 highs, but we suspect that will only happen with US Dollar weakness and Euro strength, both of which would require some fundamental catalyst that is unforeseen.” Summing up United-ICAP's fundamental-short thesis in one sentence: “Austerity does not promote growth.” Well said.
Follow me on Twitter @bpilzner Sign up for a free subscription to the Weekly Radar - Benzinga's weekly newsletter highlighting technical levels and analysis for major markets for the week ahead.