What Can Traders Expect for 2011?

I am writing this after I got up from a farewell and a new years party at a friend's place. I still feel dizzy, but really wanted to write about what I think are the major events that will determine market directions in the year 2011. I will start off with some macro events you traders should be focusing at  before you invest in any asset classes, then I will include some technicals to end the topic.

First we will start off with what everyone is familiar with, China. This giant has been named by economist and investors as the miracle economy. It's economy has been fueling the world economy and helping many others recover from the worse recession since the Great Depression. However, China's growth is expected to cool down next year as authorities have stepped in to curve inflation before it gets out of hand. Property prices, consumer goods have been shooting through the roof, and many economist have warned that China may have a crash and that could effect the world recovery. Hence, the Chinese authorities have been increasing interest rates. Last Saturday (25th December 2010) the Bank of China increased its benchmark interest rate by 25 basis points to curb inflation and rising prices. We would expect this trend to continue going into 2011 as authorities fight rising prices. What is the consequence of this for traders? Well, as interest rates rises we would expect consumers to spend less, people find it harder to access lending, and growth is expected to slow down. If China really slows down, commodities prices would likely suffer and economies such as Australia would be expected to slow down.

The second factor we have to be aware of is the crisis in Europe. We've seen Greece and Ireland ask for bail, now people are focusing on Spain's debt issue. This has led the EURO to depreciate in value from the exchange rate of USD1.42 to only 1.38. Much speculation is on whether the Euro zone will be able to exit the crisis this year. In addition to the mismanagement of debt, a major problem is the difference in economic development of different members of the EU. While Germany is the strongest economy of all members, many members are struggling to even gain GDP growth of 0.1% while sharing the same fiscal policy and interest rates with Germany. This economic difference is threatening the euro currency and the EU as a whole. We would have to look at how things play out this year.

Thirdly, we have to look at the world's largest economy, while it struggles to reduce it's unemployment rate, it's fed policy is not doing any good for other economies. The US Fed, in October, introduced Quantitative Easing round 2 or QE2, and pledged to inject $600 billion into the economy for the period of six months to help stimulate the economy and reduce unemployment. However, this stimulus is likely not working and is being criticized by other governments that the Fed that it is trying to devalue the USD, while calling for other governments especially China to allow its currency to appreciate. while this war is likely to continue, USA is not out of the woods yet, so we have to be very cautious before investing.

Finally, technicals suggest that some asset classes are overdone, in other words, oversold or over bought. The Australian dollar, the kiwi and Canadian dollar are 15 to 30% oversold, technically, so any thing bad about these countries would suggest a reversal in those currencies. The Japanese Yen is increasing in value for no reason. Gold is oversold, but as long as the Feb keeps injecting money into the economy, and the Euro zone doesn't look like it will improve, then gold is likely to increase in value. To buy gold, I would suggest a correction before we see further increases.