daily analysis, mid-and long-term outlook

24/01/2008

EURUSD

EurUsd is trading at the same level it was when we wrote our previous daily commentary, the pair moved lower in yesterday's afternoon trading hours but then retraced back up above 1.4600 after finding support at the 1.4500 level. The markets are still undecided after the events we've witnessed this week and apparently many are still expecting the FED to cut interest rates again, and until that situation gets some clarification trading will be difficult, the battle between bulls and bears will keep the pair trading close to the current levels.
Resistance Levels

1. 1.5000-- round number
2. 1.4966- Nov 23rd high
3. 1.4735 -Nov 9th High

Support Levels

1. 1.4500- round number
2. 1.4300 - Sept 30th High
3. 1.4000 - Round number
4. 1.3850 - July 24th High

FX Technical Commentary

Euro 1.4765

Initial support at 1.4588 (Jan 23 low) followed by 1.4507 (61.8% retracement of the 1.4366 to 1.4685 advance). Initial resistance is now located at 1.4790 (Jan 23 high) followed by 1.4859 (61.8% retracement of the 1.4922 to 1.4366 decline).
Yen 107.25

Initial support is located at 104.97 (Jan 23 low) followed by 104.91 (May 11, 2005 low). Initial resistance is now at 107.38 (Jan 18 high) followed by 107.59 (Jan 16 high)
Pound 1.9756

Initial support at 1.9462 (61.8% retracement of the 1.9338 to 1.9645 advance) followed by 1.9338 (Jan 22 low). Initial resistance is now at 1.9850 (Jan 23 high) followed by 1.9898 (Jan 18 high)
Australian Dollar 0.8725

Initial support a 0.8513 (Jan 22 low) followed by 0.8488 (Sep 19, 2007 low). Initial resistance is now at 0.8748 (Jan 23 high) followed by 0.8768 (50% retracement of the 0.9022 to 0.8513 decline)
Gold 910.20

Initial support at 876.80 (Jan 22 low) followed by 849.50 (61.8% retracement of 775.50 to 914.30 advance). Initial resistance is now at 914.20 (Jan 23 high) followed by 914.30 (Jan 16 high)
CurrencySup 2Sup 1SpotRes 1Res 2EUR/USD1.45071.45881.47651.47901.4859USD/JPY104.91104.97107.25107.38107.59GBP/USD1.93381.94621.97561.98501.9898AUD/USD0.85130.86120.88400.88520.8881XAU/USD849.50876.80910.20914.20914.30

Forex Depth Analysis: GBP/USD

Sterling may continue the uptrend after U.S. economy fell into a reces
The U.S. economy fell into a recession last month and cannot avoid a 'hard landing' because of missteps by Federal Reserve policy makers, according to Nouriel Roubini, chairman of Roubini Global Economics LLC.
The Fed underestimated the extent of the housing-market slump and the subprime mortgage crisis that has led to $133 billion in losses. The central bank lowered its target rate for overnight loans between banks by 75 basis points to 3.5 percent on Jan. 22 in its first emergency cut since 2001.
The following technical analysis gives us a detailed lookout on what is expected to happen to GBP/USD.
The buying point is at 1.9648; based on a bounce of the lower Bollinger band.

1. Fibonacci 61.8% is the take profit at 1.9617
2. Fibonacci 23.6% is the stop loss at 1.9448

The selling point is at 1.9440; based on a break of a strong support.

1. Previous support is the take profit at 1.9341
2. Fibonacci 38.2% is the stop loss at 1.9513

To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the crossing of MACD line to 9 period EMA line and breaks the middle level which is the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction.
The momentum oscillator is very important to understand the strength of the market and as we see on the graph it is in an uptrend. The Stochastic oscillator breaks 20% line and continues to go higher.

1/24/2008 - EUR/USD - After having hit an approximate double-top last week (nearing the record high in the currency pair), price on the EUR/USD daily chart, as shown, dropped back down in what looked like the beginnings of a bonafide reversal. But that was not to be. After hitting a key horizontal support/resistance line at around 1.4350 on Tuesday (represented by the lower yellow horizontal line), which coincided with a 38.2% Fibonacci retracement level (the low-to-high retracement span being measured from the swing low on 8/16/2007 to the all-time high reached on 11/23/2007) price bounced cleanly up off this level, negating the double-top reversal for the time being. In the current bullish run-up, which is supported by oscillators like the displayed Stochastics showing a clear emergence from oversold territory, the next obvious resistance level to the upside is in the region of the approximate double-top (around 1.4920-60). And of course, any break above this level with momentum would represent a significant potential breakout trading opportunity.

EUR-USD1.4755. Uptrend is still intact in a triangle configuration. It should continue to rally to 1.4782 or 1.4896 if support around 1.4708 hold. After which a pullback to 1.4708 - 1.4673 zone is possible. USD-CHF1.0879. A drift to below 1.0838 or maximum 1.0798 is expected to precede a rally towards above 1.0908 or 1.0928. Fall below 1.0798 would be bearish. USD-JPY107.17. It looks set for gains to above 107.59. Supports at 106.56 and 106.77. A break of 106.34 will damage this bullish structure. GBP-USD1.9765. Market looks set for gains towards 1.9863 or above in extension. Dips should find support at 1.9682 - 1.9633 zone. EUR-CHF1.6052. It should be subject to more sell off towards 1.5941 or 1.5831. Corrective upward swings should face resistance around 1.6206 area. A break of 1.6141 is bullish. EUR-JPY158.12. Market looks set for gains towards 159.28 or above in extension. Dips should find support at 157.07 - 156.49 zone. EUR-GBP0.7465. Our preferred outlook is for a drift down to 0.7453 or below 0.7441. Resistances are at 0.7465 and 0.7472. A rise above 0.7484 would delay but not abort this expected fall. AUD-USD0.8821. A corrective/consolidation activity between 0.8735 and 0.8950 is likely for a while. USD-CAD1.0038. Market should not go lower than 0.9925. After this move down it should go up to 1.0026 - 1.0103 area.

I think that EUR drop to 1,40 again, and stay in a lateral market..until the economy stabilize.. USA is Bad , BUT EURzone too...lets see..

Best Regards,
Marcelo Marques

Technical Analysis Daily: GBP/USD

GBP/USD 1.9782

GBP/USD Open 1.9763 High 1.9844 Low 1.9498 Close 1.9737
First and strong resistance for the Cable today is 1.9890. Next is the top from 28 December at 1.2010, followed by 2.0110, where the 500 day crawling middle line passes. In downward direction support is expected at 1.9630, which is 37.8% correction of the climb 1.9340 - 1.9820. Next is the bottom from Wednesday 1.9480, and 1.9370, where the 100 week crawling middle line passes, which reacted on Tuesday but was not convincingly broken.
Technical resistance levels: 1.9890 1.2010 2.0110
Technical support levels: 1.9630 1.9480 1.9370
Trading range: 1.9770 - 1.9855
Trend: Upward
Buy at 1.9782 SL 1.9750 TP 1.9842
Today we made already +60 pips profit on GBP/USD from the following signal:
6:07 GMT Buy GBP/USD at 1.9776 SL 1.9750 TP 1.9836 TP reached at 7:37 GMT

EUR/USD's rally from 1.4365 extended further to as high as 1.4778 today before turning sideway. Break of 1.4715 cluster resistance holds (61.8% retracement of 1.4921 to 1.4365 at 1.4709) confirms that fall from 1.4921 has completed. Further rally is now expected to be seen to retest 1.4921 high with prospect of retesting 1.4966 record and 1.5 psychological resistance. On the downside, below 1.4508 is needed to indicate rebound from 1.4365 has completed. Otherwise, short term outlook remains bullish.
In the bigger picture, with 1.3581 resistance turned support remains intact, medium term up trend from 1.1639 is still in force. Regardless of internal structure, it is treated as resumption of long term up trend from 0.8223 (00 low) to 1.3668 (04 high) and has just failed 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004 target which overlaps with 1.5 psychological resistance. Having said that, the current price actions from 1.4966 is treated as consolidation to this long term rally. Though, sustained trading above 1.5 key resistance is needed to confirm the medium term up trend has resumed and bring rally to next projection target of 100% projection at 1.7048. Otherwise, more choppy consolidation could be seen inside established range of 1.4309 and 1.4966.

Dollar Yen Approaches 108 As Nikkei Skyrockets, But Danger Ahead in US

Talking Points

1. Japanese Yen: Propels to nearly 108 as Nikkei has biggest rise in months
2. Euro: Bid all the way to 4780 but consumer data disappoints
3. British Pound: Trades off the 198.00 level after bank calls for 125bp of easing in 2008
4. Canadian Dollar: CPI data on tap
5. US Dollar: No data today

Risk appetite returned with a vengeance in the currency market tonight as Nikkei skyrocketed by more than 500 points helping to propel USDJPY to within 10 points of the 108 level. Investors in Asia were encouraged by the rebound in equity prices in Europe and US over the past two days after the Fed's emergency inter-meeting rate cut of 75bp on Tuesday.
With little key data on the economic calendar this week currency markets have been trading in tandem with the equities. Carry trades fell when equities crashed and rose when stock rebounded tracing out rollercoaster price action all week long. The economic picture remains unclear as traders still debate whether US will enter a full blown recession or merely experience a temporary slowdown. Yesterday's weekly jobless claims were encouraging printing at 301k well below our threshold of 350K and indicate that at least for the moment the labor markets are not seeing any material deterioration in demand.
On the economic front the European data was mixed today with German consumer confidence printing better than forecast at 4.5 vs. 4.3 but nevertheless hitting a 2 year low while Italian Retail sales slipped into negative territory registering a contraction of -0.3% on a month over month basis. The negative effects of the global credit crunch are slowly seeping into the real economy in the Euro-zone and should turbulence persist, consumer demand may weaken significantly, undermining ECB's hawkish outlook. For the time being however, European monetary authorities continue to err on the side of inflation maintaining a restrictive policy.
With no US economic data on the docket currency markets will look to equities to set the tone once again and today's early gains in the carry trades and the high yielders could come under pressure if US stocks sell off. After two strong days of gains, equity traders may run into the case of buyer remorse, choosing to take their profits ahead of the weekend. Should stocks falter expect the EURUSD and GBPUSD to do the same as risk aversion/risk assumption remains the only game in town.

Long Term View of the USDJPY

Despite the fact that we really believe that the USDJPY will rebound from here in the very short term (from 106 to maybe 110), we found necessary to remind our readers about the long term view in this pair.
In fact nothing has really changed since our last piece on this subject. In mid July of 2007 started the most bearish sequence of technical events:

1. The re-entry inside the triangle, near 120.
2. The pair's RSI crossed its long term trend line (red-dotted line).
3. In August we saw the crossing of the long term 20 Single moving average and a very important trend line that held since the middle of 2004.
4. In August we saw also the RSI crossing the 50 level.
5. In October, we saw a test of the moving average crossing from below.
6. After a test of the greater triangle boundary, near 111-112, the pair broke it.

Why do we think that 105 is the first major target and 100 the medium term one? Because there are support areas that have proven themselves well in the past in these vicinities. 100 is also the lower boundary of the smaller triangle.
The other major reason for our belief is what you can see in the RSI part of the chart. Look how the rebounds, at the lower boundary of the triangle, occur in second rebound of the RSI and not at the first one. In 1 orange, the second rebound came while breaking the descending trend line. In 2 orange, it occurred at the test of the break of the trend line.
In our current situation, the first rebound of the RSI has not yet appeared. The descending trend line has not yet been broken up and there is no sign for a meaningful relief in the downdraft of the USD versus the YEN.
Please take care when you trade this pair because it is the mother of all the Carry-trade oriented pairs. The amount of fear that will be generated by the bear markets all over the assets span, will cause waterfall effect here and subsequent short covering rallies.

EUR/USD Medium Term Outlook

As a whole, there is no change in the wave count since the last update. The chart shows the movement started from 0.8563 (February 2001). As I wrote many times I think that the previous downtrend ended at this level (with a reversal triangle) and started the current very strong up-move in favor of the euro. It is obvious that the first wave from the up-move ended at 1.3664 (December 2004), followed by a corrective wave down to 1.1639 (November 2005) and subsequent resuming of the up-move i.e. we have three waves till now for the movement started from 0.8563. In my opinion all of them are corrective in nature This and the fact that I count the rise started from 0.8563 as wave [C] make me think that the movement started from 2001 is a giant terminal impulse (ending diagonal) with extended first wave. Wave 3 should be already over at 1.4966 (November 2007) and we should be currently in wave 4 with minimum requirement overlapping of wave 1 (1.3664) and more natural target 1.3300 – 50 % retracement of wave 3, followed by another strong rise in wave 5 with target 1.5000. With an eye on the fact that wave 2 took 11 month, it is logical the current wave 4 to take 6-7 month i.e. till the middle of the year. The interesting here is the fact that if the presented count proves to be correct, we should see a complete retrace of the potential terminal impulse once it is over (this should happen in the end of the year earliest). So the presented analysis suggests a reversal of the long term trend from levels around 1.5000 with a sharp sell-off below 0.8563 for 3-4 years. Argument in favor of such an idea is the fact that terminal impulses are always completely retraced for a less time than they took to form and most of the times this happens for 50 % of the time needed to develop such a pattern.

USD/JPY Medium Term Outlook

The suggestion form June 2007 for a giant terminal impulse started from 101.66 (January 2005) looks the best scenario at the moment. This count is presented on the chart and suggests that the terminal impulse finished at 124.12 (June 2007). We saw a sharp sell-off from the last level and the interesting here is the fact, that the down move should accelerate from here and we should see much lower prices in coming weeks and months. The minimum requirement for the current fall is 101.66 i.e. a complete retracement of the pattern but I don’t think that there will be any significant correction before 96.50 (at this level wave 3 of the fall will be 161.8 % of wave 1 on logarithmic scale). A key resistance is 114.63 and as long as this pair stays below it, the perspectives are extremely bearish.

Strategic Outlook 2008: A Rocky Ride

Outlook for 2008

Here at the beginning of 2008 the uncertainty about the development in the financial markets has not been higher in several years. This uncertainty has resulted in falling equity prices, lower yields on long-term government bonds and widening yield spreads. The uncertainty has been fuelled by concerns about a recession in the US as well as continuing turmoil in the banking sector and the money market.
In our assessment there is no indication that the uncertainty will disappear in the short term. Concerns about a recession the US may continue for quite some time into H1. Nervousness about further announcements of losses on the part of banks may trouble the markets. In that respect the housing market in the US, in respect of the risk of rising unemployment and falling house prices, is very important. Undoubtedly, this theme will not be exhausted in the short term. Moreover, we will see some uncertainty with respect to the development of the companies' earnings. Finally, the slowdown in growth in the US may result in concerns that the slowdown in growth may spread to the rest of the world.
The uncertainty has triggered reactions on the part of various monetary and fiscal authorities. The major central banks all over the world have attempted to calm down the turmoil in the money market by injecting additional liquidity and the money-market rates have fallen.
However, the spread between the moneymarket rates and the central-bank rates are still wide, as appears from the chart below. Most likely the spread reflects distrust on the part of the banks, and to a great extent the central banks do not have much power over these banks. This distrust will not disappear until we get a better idea of the potential losses in the financial sector.
The US central bank has been the most aggressive player to combat the turmoil. It has already lowered its interest rate by 1 percentage point and we may see further cuts. Also, the fiscal policy may be relaxed in the US, yet it applies to all these measures that they will have a limited impact on economic growth in H1.
Generally we expect that the difficult H1 will put a damper on investors' willingness to invest and thus also on the financial markets. We recommend that investors are cautious at the beginning of the year.
The prospects for economic growth in H2 are brighter as the Fed's interest-rate cut will begin to be reflected to a greater extent and housing construction is expected to stabilise. This will reduce uncertainty, and it is expected that the improved growth prospects will lead to stronger risk appetite on the part of investors.
Generally we expect an uncertain H1 in the financial markets, but this period will be followed by a more positive H2. It is expected that equity prices will recover and rise by 5-10% over the year. Also, we predict generally higher long-term yields and it is on the cards that the US dollar will strengthen. Finally, chances are that we will see decent returns on EM and commodities, while prospects are a bit more subdued with respect to corporate bonds.

The US

The US has embarked on what seems to be an uncertain and difficult year with respect to the economy. Particularly H1 will offer challenges and the risk of recession is quite considerable (40%). Chances are that economic growth will be invigorated in H2.
A number of challenges will arise, particularly for consumers, in H1. Oil prices have gone up considerably, the turmoil in the financial markets and among the banks is relatively strong and many homeowners who have taken out floating-rate sub-prime loans will be facing higher interest expenses. Moreover, we may be in for a moderate increase in unemployment and slightly lower increases in wages. Also, consumers will be under pressure from the housing market, as there is a risk of downright declines in house prices.
Basically, the corporate sector is in good form. This is important as, due to falling investment on their part, companies are often the ones that push the economy into recession. Profits are high, debts have increased to a limited degree while assets have increased quite substantially in recent years. Also, based on the short-term indicators the order books are thick and inventories are not that high. International economic growth is still reasonable and, together with the weakening of the US dollar, this will sustain exports.
On the whole, these factors will result in very moderate growth in H1.
While economic growth seems to be in for challenged in H1, the prospects for H2 seems brighter. The interest-rate cut on the part of the Fed will begin to be reflected and the marked decline in housing construction is expected to come to an end. Moreover, oil prices will not constitute the same burden to consumers.
We expect the Fed to cut interest rates twice over the spring. This may seem fairly moderate, but the bank has already lowered its rate by 1 percentage point, of which the first 0.75 percentage point was an insurance premium against weaker economic growth. However, if the US slides into recession, we expect the Fed to lower its interest rate to about 2%.

Euro zone

Economic growth in the euro zone has fallen gradually since the summer of 2006. The growth rate is already at about 2%, i.e. corresponding to the long-term average. We expect that economic growth will fall further in H1 2008 and then it will recover in H2.
A number of factors will have an adverse effect on economic growth over the coming months, including strengthening of the euro, declining growth in the export markets, high oil prices and the credit crisis. We expect, however, that the impact of these factors on economic growth will gradually diminish. Moreover, we expect that the strong labour market with the lowest rate of unemployment in many years will contribute to a slightly higher level of consumer spending over the year.
On the whole, we expect economic growth of 1.8% in 2008. This implies a fairly pronounced slowdown in growth relative to 2007, for which its seems that growth came to 2.6%. The economic growth rate will, nevertheless, be close to the long-term average.
Due to the slowdown in growth, the inflation pressure will be alleviated somewhat. However, the growth rate will still be so high that the ECB sees a risk of rising inflation over the coming months. This must be viewed in the context that high oil and food prices have currently resulted in an overall inflation rate above 3%. The ECB fears that this will spread to the inflation expectations on the part of the companies and the consumers and thus result in a more permanent inflation problem.
We expect, however, that due to the more uncertain growth prospects the ECB will maintain its interest rate at 4% over the coming months despite the risk of inflation. The uncertainty with respect to that estimate is to the upside.
We expect that inflation will fall over the year and at the end of the year the inflation rate will be at about the target of 2%. Due to the expectations that the economic growth will recover at the same time, there are also prospects that the ECB will maintain its interest rate at 4% in H2. The uncertainty with respect to this estimate is to the downside, primarily because we see a strong risk of recession in the US.

Interest-rate markets

The fear of recession affects the interest-rate markets at the beginning of the year. The longterm yields have fallen over the past six months, yet with interruptions and counterreactions. Undoubtedly the uncertainty will still be considerable. We also expect that 2008 will offer considerable and fast-paced changes in sentiment. We expect that H1 will see the lowest levels of the market rates.
Later on new hopes of economic progress will result in increases in the long-term interest rates. In that respect, it will be decisive how the market players assess the inflation prospects. Due to increases in energy, commodity and food prices, the current inflation rate is fairly high. We may see periods in H2 when the market becomes nervous about the inflation prospects.
Since the summer of 2007, the short-term money-market rates have been unusually high relative to the central banks' interest rates. The decisive thing for normalisation of the interest rates is that confidence is again established among the market players. The central banks may help by playing an active role in the daily realignment of liquidity, but it is difficult for them to affect confidence among banks. A higher degree of confidence among the parties in the money market is decisive for normalisation of short-term rates. Most likely, it will be quite some time into 2008 before the problems in the money market are solved.
Over a period, we have seen considerable fluctuations in the market rates and we expect this trend to continue in H1. The considerable fluctuations result in a wide spread between the expected highest and lowest interest-rate level. Below we have outlined the expected interest-rate development in the euro zone and a more or less similar development is expected in the US.

Currency

We interpret the most recent high volatility in respect of the US dollar as an indication that the downtrend for the dollar is coming to an end and instead it will be followed by a new pronounced uptrend. This will require a decisive breach of 137 for EUR/USD or 544 for USD/DKK. We expect to see such a breach over the next three months. We foresee that subsequently the anti-cyclical dollar will continue to increase over the coming months and at least test 130 against the euro (573).
If, in line with out main scenario, the US economy succeeds in having a soft landing instead of sliding into recession, we expect that the US dollar will be subject to renewed sales pressure in H2 due to rising risk tolerance. Under our main scenario, we foresee that the dollar will peak at about 130 (573) and subsequently it will be pushed towards 135- 137 (544-552) at the end of the year.
On the other hand, in our risk scenario assuming that the US economy slides into recession, we foresee that the dollar will continue skyrocketing to test at least 125 (596).
High risk aversion and high volatility is poison to the two funding currencies CHF and JPY. Due to the most recent exchange rate increases, both currencies are now in the process of actual trend changes against the euro. We expect that the exchange rate for the CHF will continue to increase in H1. Revisiting levels at about 158 for EUR/CHF (472) before the end of H1 is therefore realistic and subsequently CHF is expected to gradually weaken again. If the risk scenario materialises, we foresee that CHF will strengthen up towards 481 (155) at the end of the year.
The yen offers quite a different story. The current trend change for EUR/JPY is expected to have more far-reaching implications for its status as funding currency. We foresee that in H1 the yen will increase towards 145 (5.15) and at the end of the year it will be at about 130 (5.75) - irrespective whether the main or the risk scenario materialises. It will take many months for the yen as a funding currency to regain investors' confidence if we see the expected increase in the exchange rate in H1. An uptrend for the yen should not be ignored. Particularly not when considering that the preceding trend lasted for about seven years!
Commodities

Seen from the point of view of commodities, the prospects for 2008 seem bright, but this is not the whole truth. A stronger USD and economic and financial hangover will offset continued strong growth in demand in emerging-market countries.
With respect to base metals, we expect that EM countries will, through steep growth in demand, offset slower growth in demand elsewhere. On the supply side, we anticipate that several years of high prices are beginning to trigger higher growth in supply. The growth in demand will, however, be so strong that global stocks stay comfortably below the longterm average. This, combined with continued high production costs will support prices. We believe that part of the weaknesses for 2008 has already been discounted in the present base metal prices, and consequently we expect to see marginally rising prices from the present levels in 2008.
Despite a forecast slowdown in the US economy, we expect to see solid growth in the demand for oil - especially in H2 2008 - when EM countries will be the main driving force. The oil market will in other words remain tight in 2008 with relatively low OECD stocks, bottlenecks within refinery, geopolitical risks and moderate surplus capacity in OPEC. This does, however, not change the fact that the price will, due to the slowdown in economic growth and the strengthening of the USD, decline in H1 and increase again subsequently.
In H1 2008, several factors will support a rising gold price, including the status of gold as a safe haven during turbulent periods of time in the financial markets as well as insurance again rising inflation. On the other hand, a solid strengthening of USD cannot help having an impact on gold due to the usually strong inverse correlation between the development of USD and the development of gold. Therefore, we do not expect that the precious metal can repeat recent years' success with returns at the high end of 20 per cent.
High wheat prices in 2007 are expected to result in higher production in 2008. On this basis, among other things, we expect to see declining prices at six months' term when the US harvest will come in. Historically low global wheat stocks and a strong demand at the export markets point to rising wheat prices in H2. An increase in the sowing of wheat indicates that corn and soy beans must battle for the remaining area. This combined with strong global demand from e.g. China and the ethanol industry will result in a decline in stocks and an increase in prices.
Equities

What is crucial for the development of equities is not whether the US economy will slide into recession or not. If investors anticipate that recession will set in, the effect will be the same. Consequently, earnings expectations will fall to “almost” recession level. This is exactly what investors have experienced in recent months.
Earnings expectations for 2008 are in our view too high and must therefore be downgraded in the US as well as in Europe. But should the economy slide into recession, lower Fed-funds rates will support the equity markets.
Basically, the fundamental conditions for equities are still reasonable with respect to economic indicators, global economic trends and the fact that investors are not overinvested in equities.
We expect that the equity markets will increase somewhat from the current level. The majority of this year's equity returns will materialise in H2 when the economy will report better growth rates and when investor jitters flag off.
In general, we still expect that 2008 will be a normal year with respect to returns (5-10%), corresponding to the long-term trend in corporate earnings.
We prefer US equities to European equities due to expectations of stronger monetary-policy flexibility on behalf of the Fed compared with the ECB, and also because investors are still overweight in European equities. A factor which can be an additional problem when the trend in corporate earnings may disappoint in 2008.
Danish shares plunged over the past three months. The decline was also somewhat sharper than in other equity markets. Although equities now no longer seem to be more expensive compared with other countries, earnings key figures in cyclical equity markets, such as the Danish market, are undoubtedly somewhat behind. Or in other words - equities are on the decline now - whereas earnings will be on the decline in the future. We believe that H1 will end slightly better for equities than it seems just now. But still with a negative development for H1 as a whole. For H2, we anticipate a somewhat better development to the effect that Danish equities will end the year in moderately positive territory.

Emerging markets

In general, we predict that 2008 will be yet another year characterised by good returns in EM. Given our expectations that the US will avoid recession, and that global economic growth will be at the high end, boosted primarily by strong growth in EM, we anticipate that risk tolerance will stage a comeback in the course of H2. For the full year, we expect to see a return in local currency of 10% at index level whereas the return in core currency is expected to come out around 5-6% in USD terms.
Although we anticipate good returns, it is worthy of note that we will presumably be in another regime than in the period 2003-2006, which was characterised by sharp global economic growth, relatively relaxed monetary policy, low inflation, low financial volatility, ample liquidity and resultant highly risktolerant investors. The fundamental background has hence grown much more challenging - and there is a stronger need to be selective.
We anticipate that a volatile H1 will be replaced by a more positive H2. The financial crisis has not yet fully let go of the financial markets, and in H1 a slowdown in economic growth (especially in the Western world) will go hand in hand with high inflation in a number of EM countries. This may rekindle jitters and put several EM central banks in a difficult situation. In general, we also expect that the central banks of a string of EM countries will not be quite as responsive as the markets would have liked. Still, we anticipate volatility rather than negative return, due, among other things, to the resistance shown by EM assets in the recent turbulent period of time.
We believe that H2 will be more positive, due for instance to a clarification of the global economic growth situation in the US and in the euro zone.
Corporate bonds

In recent years the appetite for risk has been quite high, fuelled by the falling default rate (currently below 1%) and strong growth rates with respect to earnings and economic growth. 2008 will be quite an interesting year for the credit market as to a very high degree it will be of importance to act on two important theorems ensuing directly from the characteristics of the asset class. Buy long-term bonds when the price has fallen to a level when, as a creditor, you can expect to get your dividend if the company goes bankrupt. Buy short-term bonds if the company has high liquidity/access to liquidity.
However, generally it is to be expected that some of the themes of the previous years such as LBOs and structured bonds issues will die out.
At the beginning of 2008 we are facing a situation where the crisis in the financial sector has not yet been solved. We do not foresee that these problems will disappear right away. Banks are playing a most crucial role in respect of the default rate. They are the ones that take action when a company gets into trouble.
The first half of the year will be characterised by these problems - particularly the first quarter. Also, the first half of the year will be affected by the situation that a large number of companies in the US or companies with exposure to the US will have problems generating earnings growth. The credit market will focus very much on the ability to accept and handle this new market situation. Thus, the credit market will focus more on consolidation than on growth. A positive theme will be the decline in new issues relative to recent years. This will support the credit market in Q2. On the whole, we expect that H1 will start off on a bad note but end on a good one.
The positive trends will continue into H2, yet at some point the market may again be up against some adversity. We expect that the default rate will begin to go up - although we do not expect any marked increase. Also, we should bear in mind that it may create noise in the market, especially if any major name defaults. That is not unlikely, particularly not within construction in the US. This may result in volatility over the past quarter of the year.
For the year as a whole, we expect yields of about 5-7.5% for global high yield, which will primarily be fuelled by the development in the two middle quarters of the year. The reason for this is the expectation that the spread will widen by up to 75 bp over the year, which will result in a loss of up to 3.5%, while the coupon income will bring the total yield up to about 5- 7.5% (the basis for the scenario ML HY index). The yield will probably be more or less evenly distributed between H1 and H2.

Daily Pivots: (S1) 1.4637; (P) 1.4708; (R1) 1.4825;
EUR/USD's rally from 1.4365 extended further to as high as 1.4778 today before turning sideway. Break of 1.4715 cluster resistance holds (61.8% retracement of 1.4921 to 1.4365 at 1.4709) confirms that fall from 1.4921 has completed. Further rally is now expected to be seen to retest 1.4921 high with prospect of retesting 1.4966 record and 1.5 psychological resistance. On the downside, below 1.4508 is needed to indicate rebound from 1.4365 has completed. Otherwise, short term outlook remains bullish.
In the bigger picture, with 1.3581 resistance turned support remains intact, medium term up trend from 1.1639 is still in force. Regardless of internal structure, it is treated as resumption of long term up trend from 0.8223 (00 low) to 1.3668 (04 high) and has just failed 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004 target which overlaps with 1.5 psychological resistance. Having said that, the current price actions from 1.4966 is treated as consolidation to this long term rally. Though, sustained trading above 1.5 key resistance is needed to confirm the medium term up trend has resumed and bring rally to next projection target of 100% projection at 1.7048. Otherwise, more choppy consolidation could be seen inside established range of 1.4309 and 1.4966.

Daily Pivots: (S1) 1.9583; (P) 1.9680; (R1) 1.9860;
Cable's rebound from 1.9337 extends further to as high as 1.9847 today. Break of 1.9789 resistance indicate that a short term bottom is in place at 1.9337 with bullish convergence condition in 4 hours MACD and RSI. Further rise should be seen to short term falling channel resistance (now at 1.9902). Break will indicate that whole fall from 2.1161 has completed too and bring stronger rally. On the downside, below 1.9464 support is needed to indicate rise rom 1.9337 has completed. Otherwise, short term outlook remains bullish.
In the bigger picture, prior break of medium term rising channel and 2.0 psychological support at least indicate that rise from 1.8090 has already completed at 2.1161. With 55 weeks EMA taken out too, it's likely that the medium term up trend from 1.7047 has also completed. Deeper medium term decline is expected towards 61.8% retracement at 1.8619.
Though, break of the short term falling channel will indicate that whole decline from 2.1161 has completed. Stronger short term rally should then be seen, probably to retest prior medium term channel support turned resistance (now at 2.0250) before resuming the medium term fall from 2.1161.