Equity investors too bullish

Economics

This week we expect US non-farm payrolls for November to remain positive, but to pull back from very strong growth in October. ISM business sentiment should improve for the manufacturing sector but give back some ground for the service sector.

Eurozone business sentiment in November may suffer due to concern about the current strength of the euro. In Japan we expect industrial production to have rebounded in October in line with a sharp rise in exports seen in trade figures.

Foreign exchange

USD/EUR: Resistance levels for this week are 1.3350 and 1.3570, but the extremely overbought readings on both daily and weekly indicators put the odds in favour of the downside.

JPY/USD: Trending down in a downtrend channel. Within this downtrend channel, the downward potential seems to be limited to 101.30 and oversold conditions favour an upward correction

Fixed income

Reports from China Business News that the Chinese central bank cut its holdings of U.S. Treasury bonds were later denied by the Chinese authorities.

A selling or even less buying of U.S. government bonds by Asian central banks would clearly put upward pressure on U.S. yields. A shift to European bonds would also put more upward pressure on the euro against the dollar and keep yields lower in Europe.

We expect U.S. yields to rise over the week but also expect this move to push up European yields somewhat.

Equities

Notwithstanding mixed macro-figures and a seemingly endless slide of the dollar, stock markets' sentiment remains indubitably strong with investors anticipating an end-of-year rally.

Liquidity is still finding its way to the trading floors, as investors are clearly adopting a glass half-full approach instead of looking at the real underlying fundamentals, which have not changed materially recently. In that respect all our eyes are focussed on next Friday's payroll number proclamation.