The Week Ahead - Lots to Ponder!

This week is guaranteed to produce volatile market action, with plenty of headline risk and a raft of interesting data releases on the economic calendar. Stay tuned and stay careful out there. This week is a busy one, with Asian markets fully back on-line (though many in China are not back to work until next week), a key EU summit today and ongoing nerves related to the Greek bailout deal and the potential for the need for a second bailout for Portugal, and a heavy US economic calendar guaranteeing a week that will be heavy on the nerves and possibly also on volatility.

EU summit today

Europe remains in political and financial hot water despite the squeeze higher in several Euro crosses over the last two weeks - most notably in EURUSD. Portuguese yields and CDS prices continue to spiral perilously as the market tries to price whether a voluntary Greek deal even remains a possibility (at stake is whether CDS are triggered and therefore whether they serve as a viable hedge in general for other Euro sovereigns' debt).

But the main focus this week remains on Greece, where the latest request from the EU side to implement a tighter control of Greek finances (and requiring the significant cession of sovereignty) may throw off the negotiations for the second bailout deal and the haircut and restructuring offered to private investors.

Other issues to be agreed on at the summit today are related to the new fiscal compact and the official signing of the ESM deal, that will give the rescue fund. An interesting issue for the former (the fiscal compact) is whether an agreement can be struck and implemented without unanimity. A Bloomberg article from yesterday said that a draft last week saw only 12 of 17 EMU countries on board for the agreement.

Meanwhile, we have to wonder whether it is the ECB's activity in the EU sovereign auctions and liquidity boosts that remains the key driver for the Euro as much as the political situation. In that light, the natural focus for this cycle is the coming 3-year LTRO to be carried out at the end of the month.

Today saw the auction of 5-10 year Italian debt (somewhat disappointing participation, and the auction fell slightly short of the EUR 8 billion target, and the yield jumped 20 bps on the 10-year BTP), and the auction schedule for the rest of the week is fairly heavy, with German 10-year debt up for auction on Wednesday and Spain set to auction 3-5 year bonds and France to auction 6-10 year bonds on Thursday. The auctions this week come just as key yield milestones were reached on Friday after peripheral EU debt had a banner week last week, with Spanish 10-year yields dropping briefly below 5% and Italian 10-year yields dropping well below 6% on Friday.

Sarkozy is promising a financial transaction tax for France in August, perhaps in a bid to sway voters ahead of the first round of the presidential election in April, which already appears to be a lost cause for the sitting president.

Heavy economic data calendar

This is a big week for the economic calendar (see the updated Trading Floor Financial Calendar for a full list) , with the following highlights:

Today

• US Dec. Personal Income and Spending data and the PCE inflation data - the PCE is the Fed's favourite measure of inflation and we're nudging close to a two-year high in the core inflation measures.

Tuesday

• Japan Dec. Household Spending and Employment data, January Manufacturing PMI
• Canada Nov. GDP - note that growth was flat in October
• US Jan. Consumer Confidence and Jan. Chicago PMI - the regional surveys have been strong and point to a strong January ISM, and confidence jumped very sharply higher over the last two months.

Wednesday

• "World Manufacturing PMI day" with Australia, China, most of Europe and US reporting Manufacturing PMI's - (ISM for US, of course. China's Dec/Jan. data has likely been heavily affected by the early New Year's celebration.)

Thursday

• Australia Dec. Building Approvals - expected down more that -20% YoY as Australian housing bubble continues to unwind) and Dec. Trade Balance
• US Weekly Initial Jobless Claims - continue to suggest job growth, though we've just seen two weeks of spiky data - so a good reading is important to confirm the trend.

Friday

• "World Services PMI day" with Australia, China , most of Europe and US reporting key Jan. Services surveys (US ISM non-manufacturing).
• Canada Dec. Employment Report - a key month to establish whether we are in a downtrend or essentially trend-less after three wild swings in a row.
• US Dec. Employment Report - expectations looking for north of +150k in private payrolls growth.

Markets

Bonds

Remain strong on the QE meme as the ECB has exploded its balance sheet since early December and after the Fed last week extended its expectations for zero interest rates to the end of 2014. Follow through is the key question this week as the key developed world benchmarks near the bottom of the range in yields.

FX

The USD flailed for support last week after the Fed's new FOMC statement and as long as global asset markets remain in liquidity celebration mode, the USD will remain on the defensive. Many are pointing to the positioning reports from the US futures market to underline the risk of a further Euro squeeze, but the question is which way the chips fall on the EU risks this week. Certainly in EURUSD, the 1.3210/40 was a resistance area we discussed all last week and where the pair found resistance last night. The 55-day moving average is another minor focus (around 1.3120) after the pair crossed above that MA last week.

Elsewhere, a pair like AUDUSD needs to find support at its 200-day MA (just above 1.0400) if the rally is to keep up a head of steam. The key upside focus there is on the 1.0760 area resistance that was twice tested late last year. USDJPY plunged last week after squeezing to "ideal" resistance (78.30, the range high and 200-day moving average) as the FOMC statement discouraged the USDJPY bulls. We've no visibility on when the Bank of Japan/Ministry of Finance might intervene, but continued strength in the bond market is likely to keep the pressure to the downside in JPY crosses (i.e., encourage JPY strength) all other factors being equal. EURGBP seems to be a weak echo of the EURUSD pair.

Equities

With well over 100 of the S&P 500 companies reporting, the earnings season was beginning to show a pattern of relatively disappointing results on average, but then the Apple earnings report was so overwhelmingly positive that it provided a massive boosted to the average, if not the median corporate result. With approximately a quarter of the S&P 500 companies reporting Q4 earnings this week, we'll have a better impression of the corporate outlook by later this week.

Commodities

Precious metals had an explosive week last week as they remain the go-to market when a central bank promises fresh rounds of money printing (i.e., after the dovish FOMC meeting last week). Crude oil remains very nervous on geopolitics/Iran.