Good morning,

Markets are called to open flat this morning. This is what's happening today:

  • The dollar climbed to a 2 1/2-year high against the yen and gold declined after U.S. Federal Reserve policy makers said they may cut cash infusions this year;
  • Japanese stocks surged in their first trading session of 2013 as other major Asian markets retreated;
  • Today non-farm payrolls data out in the US for December. Job creation is expected to come in strong with 160k jobs created for the month. Analysts keep on increasing their forecasts. This compares to 146k jobs created in November. The unemployment rate is expected to remain unchanged at 7.7%;
  • 10-year Italian debt is yielding 3.554%, 10-year Spain is yielding 5% and 10-year Portuguese debt is yielding 6.329%;
  • Brent is trading at $111.50/bbl;
  • Gold is trading at $1653.40/ t oz;
  • Apple closed the session at $542.10

What’s interesting about the markets is that you take a view but must be ready to change your opinion overnight when officials change strategy. This is why it is imperative that you get professional advice before taking a decision and monitor your portfolio periodically. A buy and hold strategy does not hold in these markets.

Federal Reserve officials, expressing concern over their swelling balance sheet, began debating an end to their unprecedented bond-buying as early as this year even while preparing to boost stimulus to a new record. “Several” members of the Federal Open Market Committee said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to minutes of their Dec. 11-12 meeting released yesterday. A “few” others were willing to let the program run to the end of the year while “a few others” didn’t give a time frame.

This is good news for a portfolio with dollar exposure because you will start to see a recovery in the value of your portfolio when it is converted to Euros. It is also good for investors who buy American stocks in Euros. Take for instance Apple stock trading on Frankfurt in EUR. When the Dollar strengthens, the value of the stock automatically increases. The EURUSD is not hedged so buying Apple in Euros actually increases in value when the Dollar increases and not as many investors think that the opposite will happen.

A strengthening Dollar is also good for Europe. Take Germany for instance. A strengthening Euro is not good for the country because its economy is dependent on exports. The stronger the Euro, the more the German economy suffers. So a weakening Euro is good news for the German economy. Don't forget that Germany is seeing a slowdown in demand from peripheral Europe. So a strengthening Euro would have put Germany in an even worse situation.

The markets might not like this move by the Fed in the short run, though we all know that QE is only a short term fix and that the gains obtained in the short run are less than the negative repercussions in the long run. The non-farm payrolls for December are expected to come in positive as the US continues to create jobs. So far so good. And at the end if the US manages to continue to grow at a rate of 2% in 2013, considering that Europe will remain in recession is not the end of the world. Hopefully the strength in the Dollar will help European companies more than it will hurt US companies.

I'd like to share with you a report on the EURUSD issued by Citi yesterday which today makes much more sense.

Is the EUR rally over?

EUR lost ground across the board with EURUSD surrendering its year-end gains in the immediate aftermath of the deal on US fiscal cliff.

Renewed investor uncertainty about the outcome of the upcoming negotiations on the US debt ceiling and the budget sequesters seems to have supported the safe haven USD against EUR. According to Citi’s economists the fiscal cliff deal announced in the early hours of 2013 is expected to shave about 1% off the US growth this year – in line with most market projections ahead of the fiscal cliff showdown. The risk seems to be that the Republicans and Democrats may fail to agree on the timing of the automatic spending cuts. In turn this could add to the headwinds for economic recovery in the US and, by implication, the global economy. Compounding market concerns seems to be the view that more aggressive QE from the Fed need not offset the impact of greater than expected fiscal drag in the US.

Markets will focus on economic data releases in the near term trying to gauge the resilience of the US and global economies. Positive data surprises from the ADP today and the NFP tomorrow could alleviate some of the investor concerns. That said, some uncertainty could linger ahead of fiscal cliff negotiations round two which could add to the EURUSD headwinds for now.

The second driver of the renewed EUR-weakness seems to be the fact that the EUR-rally may have run ahead of fundamentals. Our fair value model for EURUSD sent a SELL signal on Dec 31 when EURUSD traded at 1.3193.

A potential shift in market focus to the lingering issues in the periphery – Spanish bailout request and the Italian elections – could put an end to the latest EUR-rally. In addition, we think that year-end flows into Eurozone assets likely supported the single currency across the board. Supportive redemption flows in the peripheral bond markets also supported demand for government paper in Q4 2012. None of these factors is expected to be extended in 2013. EUR could look vulnerable yet again especially against G10 smalls at the start of 2013.

Stock to watch: SAP SAP to Beat 2012 Targets, Warburg Research Says

View supported by Oracle’s strong license growth;

SAP beat Oracle’s software license sales growth in recent qrts, Warburg Research says in note.

• Management already pointed out in 3Q call that upper end of 2012 guidance was covered by existing deal pipeline

• NOTE: SAP outlook as of Oct. 24:

• 2012 non-IFRS software, related services rev. rising 10.5%–12.5% Y/y (constant FX)

• Sees 2012 non-IFRS operating profit in range of EU5.05b–EU5.25b (constant FX)

• Sees 2012 IFRS effective tax rate of 26.5%-27.5%, non-IFRS tax rate 27%-28%

• NOTE: SAP is scheduled to report FY numbers Jan. 23 (co. has in the past released earnings early)

• Warburg expects new outlook for 2013, update of 2015 targets

• Stabilization of early indicators should have positive impact on deal flow during 2013, Warburg says

For further information on SAP or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli