Friday, July 31, 2009

Global Markets July Review: Rally Without A Cause?

Or, The Importance of Beating Earnings…However You Do It


In mid-July markets were just beginning to stabilize after falling hard in late June and early July. The mood was grim, as a mixed economic picture was getting darker, due to

  • a downward revision of economic forecasts from the World Bank

  • a much worse than expected monthly US Non-Farms Payroll decline

    Against the backdrop of mixed economic news and risk assets at 2009 highs, the expectations of a rapidly approaching recovery that supported this rally seemed unrealistic. So stocks dropped, and virtually all risk assets followed, though to different degrees. The more volatile, like crude oil, dropped almost 20% from their highs.

    The declines slowed before the start of US second quarter earnings, as it was clear that these would provide the next market moving evidence about the world economy.

US Second Quarter Earnings Season Sparks Rally in Global Risk Assets

Even before the big name announcements, global stock markets began rallying hard Monday July 13th based on a New York Times article that predicted US investment banking giant Goldman Sacks (GS) would beat expectations.

The fortunes of the major US financial institutions have been at the root of every major stock market move over the past two years. The current economic crisis began with their subprime lending woes, and worsened with the collapse of Bear Stearns and Lehman Brothers. Stocks began their first serious rally with first quarter earnings reports in early March, when the major banks showed profits, albeit of questionable legitimacy and less likelihood of repeating.

Thus the mere rumor that GS, and by extension the other major banks, could be healing was enough to ignite another rally. Most other earnings reports followed with similar good news, especially those from the leading firms in various sectors.

The Rally's Basis? Bad Results Beating Worse Estimates = Good Times Ahead

However, the picture was far less rosy. Yes, most firms beat estimates, but most of these did so with declining revenues and/or earnings that managed to exceed even grimmer analyst expectations. Not one of the banks beat estimates based on steady ongoing operations. Goldman Sachs did it with high risk trading that by nature cannot be depended on to produce steady results. The others did it via one-time gains on asset sales. Citibank (C) would have shown a loss had it not sold its Smith Barney operation to Morgan Stanley (MS). All acknowledged rising "credit risk, " meaning that the value of their loan portfolios was likely to drop. Most showed losses from every aspect of their ongoing operations.

Outside of banking, there was also a large majority of firms exceeding analyst estimates, but again, mostly with bad results beating even lower expectations.

In sum, stocks rose, yet revenues and actual earnings from ongoing operations are mostly in a down trend. Because the downtrend was less steep than expected, the markets took that to mean bottoming and growth were on the way.

Commodity and forex markets followed stocks higher, though to varying degrees. Like stocks, the highest yielding and commodity based currencies hit or approached former highs against various crosses. However, crude and gold rose less.

Today's US GDP could be the trading opportunity of the week

With the theme of "bad results beating worse estimates = immanent recovery" already established, even new earnings announcements feel like old news and are failing to surprise the markets. Instead, traders are now refocusing on the weekly economic calendar and other key news events for direction

The next big news is US quarterly GDP figures, due out at 8:30 EDT, or12:30 GMT.

How Will Markets Respond to US GDP?

For short term and news oriented traders, this is the big opportunity to catch the market moving. The forecast is for an annualized contraction of 1.4%.

If GDP results are worse

Given that stocks and other risk assets have risen substantially over the past weeks with questionable justification, a pullback would be the likely result.

On the other hand, the markets have shown a remarkable ability to ignore bad news. Thus it's conceivable that if the figures are only mildly worse, there could be minimal or even no real pullback. No, that doesn't seem rational, but neither does the rally we've seen thus far.

If the numbers are much worse, they could undermine the "less bad = soon to be good" theory that underlies this rally. If that's the market's interpretation, then at least a test of Mid July lows would not be surprising. Some analysts have predicted that a 20-30% pullback could occur while still retaining a mild up trend from the March lows.

In fact, much would depend on the context of other events, especially further news on the jobs growth and the financial and housing sector's health.

If GDP results are in line with the expected 1.4% annualized decline

Again, given the markets' recent focus on the positive, that might be enough to at least keep stocks and other risk assets at or near current levels. On the other hand, with markets already extended, this might be enough to spark at least some profit taking.

If GDP results are much better than expected

Because traders have made so much of a rally based on so little justification, markets could easily take another great leap forward. However, with markets already so high, could this be seen as chance to cash out, and cause at least a short term pullback?

Coming Events & Conclusion

There are some major events next week, such as statements from a variety of central banks. Of particular interest will be that of the Bank of England, to see if there is further QE on the way after the UK's much worse than expected GDP figures. Good results from the US GDP numbers could lend support to those seeking more liberal QE policy.

However, the big news of the coming week will likely be US Non Farms Payrolls data. Last month, it was disappointed enough to knock global markets, that were at or near their highs for the year, into a 2 week decline that could have gone further were it not for US Q2 earnings results.

Once again, world markets are at or near the upper end of their trading ranges. If they survive US GDP later today, non farms payrolls could be their next test.

Disclaimer: The opinions of the author are not necessarily those of AVAFX
Disclosure: The author may have positions in the above instruments.

Wednesday, July 29, 2009

Wednesday Global Markets Briefing: Must Know News for Traders


Bias to safety assets like JPY, USD
Risk assets (stocks, commodities, commodity related currencies and higher yielding currencies down or flat
US GDP Friday is the likely big news of the week as earnings picture is now clarifying [poor results beating worse estimates, slower rate of decline may (?) imply recovery on the way] and economic news resumes key role for latest market direction.
NB: Most global stock indexes near or at 2009 highs despite a very mixed earnings and overall economic picture, are thus vulnerable to pullback. Since commodities and currencies follow stocks, these are likely to follow stocks down.


Unlike Monday, US stocks were unable to fight off selling on Tuesday and spent the day mostly down on profit taking fueled by poor consumer sentiment data and lack of enough positive news to counteract it.
Global Indexes for Tuesday: Asia mixed (N225 -0.17%, HS +0.70%, ST +1.17%), Europe: (FTSE: -1.25%, DAX -1.46%, CAC 40 +-1.23%) US: ( S&P- 0.26% NSDQ +0.26 % Dow - 0.13 ) Wed: Asia up (N225 +0.34%, HS -1.63%, ST -0.19%),


General: risk currencies flat/down, JPY up, markets seeking further news for direction US earnings influence fading, economic calendar news to resume importance, especially US GDP Friday should be climax of the week.

· The EUR/USD Down as stocks, risk appetite fall. We continue to see the euro struggling in the immediate future and see greater likelihood of correction towards 1.300 than towards further upside.
· USD: Dollar steady vs. euro after recovering from 8-wk low the previous day as weaker U.S. consumer confidence spurred safe-haven demand for the greenback and prompted investors to trim their accumulated long positions in the European currency. Financial markets overall prone to profit-taking after recent run-up and they could be more sensitive to weaker data The dollar strengthened against most of the majors, with the exception of the yen, as economic data was mixed and equities finished flat to modestly negative.
· EUR: Down against safer currencies, especially the JPY. Despite some recent deflationary data we suspect Euro zone inflation is mainly a base effect from energy prices and view deflation as an unlikely possibility and see headline inflation returning closer to target levels by the end of 2010, we continue to see the euro struggling in the immediate future as press reports suggest trouble ahead for European commercial real estate and consumer loans. We maintain our 3m EURUSD Vice President Papademos said it would be easy to withdraw liquidity from the market when the time comes and that the ECB will outline an exit plan well in advance. But he also said that there is no reason to plan for an immediate withdrawal at the current juncture German CPI is due and consensus is for another drop in the m/m and y/y readings ahead of the Euro zone July inflation estimate as our economists expect the Euro zone deflationary trend to worsen in July. We are looking for German CPI - EU Harmonized at -0.60% y/y. Despite the recent improvement in German consumer confidence, we continue to see the euro struggling in the immediate future as investors remain wary of fundamental problems in the Euro zone. EUR could more likely to test as low as 1.30 in the coming months
· CAD: down/flat, moving w/ crude, stocks.
· JPY: The yen strengthened against the dollar and the other major currencies as investors pared back risk-seeking amid a weak day in European and US equities. USDJPY traded as low as 94.05 before moving back up to 94.51 at the time of writing. Retail trade data is due and consensus is for -2.5% y/y compared to -2.7% previously. We continue to see USDJPY staying range bound though yen crosses will largely be determined by swings in risk appetite.
· CHF: generally slightly up.
· GBP: The BoE will likely be watching the upcoming mortgage approval and mortgage lending data as they consider whether or not to increase their asset purchase program at the next meeting. We are looking for a modest pickup in both metrics to 44.1k and GBP 0.5bn, respectively. We continue to view market expectations for the UK economic recovery as overdone, as confirmed by last week's much weaker than expected Q2 GDP release, and also expect further BoE action. As a result our bias is short the GBP versus USD and EUR.
· NZD: down/flat building consents much worse, business confidence way up
· AUD: down/flat Talk that rates had bottomed out and the next move would be up got a boost after Reserve Bank of Australia (RBA) Governor Glenn Stevens said in an upbeat speech on Tuesday the risks to the economy were now more balanced and he would not wait for unemployment to peak before tightening monetary policy. His comments saw markets swing in to factor in rate hikes as early as December. The latest data from the Commodity Futures Trading Commission showed speculators raised their long positions on the Aussie in the week ending July 21, while nearly doubling their bets against the U.S. dollar.


CRUDE down from around $68 to 66.74 GOLD down hard about 2% from $956 to $937 on EUR/USD DROP


Treasuries had a decent day, but saw gains cut in the wake of a record $42 billion auction of 2-year Notes. The high yield for the auction was a reasonable 1.08% and the bid-to-cover was a solid 2.75, but at 33% the indirect bidding [is from big foreign central banks, sovereign funds] was lower than we would have liked to see. The 2-year Note fell two ticks, but the benchmark 10-year Note added nine ticks. That left the pair trading with a spread just above 260 basis points.

JPMorgan Says Brazilian Real to Gain on Trade Surplus, Investment Inflows Brazil’s real may strengthen to 1.8 per dollar by year-end as faster economic growth lures foreign investment and higher demand for commodities boosts the country’s exports, according to JPMorgan Chase & Co.

Orders for U.S. Durable Goods Probably Dropped in June on Auto Shutdowns Orders for U.S. durable goods probably fell in June for the first time in three months, reflecting auto-plant shutdowns, economists said before a report today.

Pound Little Changed Against Dollar at $1.6422; Little Changed Versus Euro The pound traded little changed against the dollar and the euro.

Morgan Stanley Tells Investors to Sell Dollar Versus Euro, Norwegian Krone Investors should sell the dollar against the euro, Norwegian krone and Canadian currency as the global outlook improves, Morgan Stanley said.
Euro's Advance Against Dollar May Persist, Helaba Says: Technical Analysis The euro’s gains against the dollar may persist, Helaba Landesbank Hessen-Thueringen said, citing technical indicators.


[figures from left to right: actual (if shown)—forecasted—prior]


6:00am GBP CBI Realized Sales - lower consumer spending -15 -12 -17
9:00am USD S&P/CS Composite-20 HPI y/y +, less decline -17.1 -17.8% -18.1%
10:00am USD CB Consumer Confidence disappoints: -46.6 49.1 49.3
12:35pm USD FOMC Member Yellen Speaks
6:00pm USD Fed Chairman Bernanke Speaks
6:45pm NZD Building Consents m/m Disappoints -9.5 -4.8% 3.5%
7:50pm JPY Retail Sales y/y Disappoints -3.0% -2.5% -2.7%
Tentative AUD HIA New Home Sales m/m Disappoints 0.5% 5.7%
11:00pm NZD NBNZ Business Confidence Surprises 18.7 5.5


Treasuries are back in focus Wednesday with a $39 billion auction of 5-year Notes (1:00 PM ET).
8:30am USD Core Durable Goods Orders m/m -0.1% 1.1%
10:30am USD Crude Oil Inventories -1.8M
2:00pm USD Beige Book
5:00pm NZD Official Cash Rate 2.50% 2.50%
5:00pm NZD RBNZ Rate Statement
6:00pm USD Fed Chairman Bernanke Speaks
7:50pm JPY Prelim Industrial Production m/m 2.5% 5.7%
9:30pm AUD Building Approvals m/m 8.0% -12.5%



Short Term: Profit taking in stocks leads risk assets lower. With the US Q2 earnings picture clear [bad results beating worse estimates], daily economic calendar and geopolitical news resumes its importance. Markets await news for further direction. With stocks at or near 2009 highs despite any additional justification than was present when they last hit these levels in June, we suspect the likelihood is for some pullback but within trading ranges established over the past two months. US GDP this Friday is the likely next big news to move markets and set near term mood.


Markets are seeking direction from news. Unlikely to hit anything soon to justify a move beyond the trading channels established over the past two months.

DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments.

Tuesday, July 28, 2009


Friday's US GDP Results May Provide the Answer

Reserved British QE vs. Aggressive American QE

Last month, the BoE surprised many forex traders by announcing that it planned to let the current stimulus program (aka Quantitative Easing or QE) expire in August, despite concerns that the flame of recovery was too weak stop fanning with low interest and easy credit.

In contrast, last week US Federal Reserve Chairman Bernanke took the opposite approach, and resisted pressure to even give even a deadline for ceasing America's stimulus program until recovery was more firmly entrenched. He emphasized his fear that because consumer spending comprises about 70% of US GDP, America could not sustain a jobless recovery.

The short term effects on the two currencies after these announcements were predictable. The GBP rose with the reduced threat of lower interest rates in the short term and higher inflation in the long term. The dollar has continued to struggle following Bernanke's comments.

Maintaining their reserved British approach to QE, the Exchequer announced that they would let their temporary reduction (from 17% to 15%) of value added tax, (part of their QE program), expire at year's end. For perspective, this VAT is well above combined US state and local sales taxes.

Are you a struggling UK business, or employed by one? A family struggling to make ends meet? Stiff upper lip, old chap. Ah well, it's said there's similar suffering for new boys in English boarding schools.

Economic data for both countries is still a very mixed bag, with plenty of bad news, and good news that is often the "less decline than expected" type, which was the vast majority of the "good news" from US earnings thus far. Decreasing rate of decline does not necessarily imply a coming recovery.

So how does the UK's decision look thus far? While it's admittedly too early to tell, the recent news is not encouraging. Last week, they reported the largest annual drop in GDP ever recorded since they began tracking it in 1955, -0.8% in Q2 and 5.6% annually.

On Tuesday July 28th, Britain's CBI Realized Sales data, a major leading indicator of consumer spending came in at -15 vs. a forecasted -12 and a previous -17.

This Friday, the US will report its own quarterly GDP figures. Forecasts are for a contraction at an annual rate of 1.5%, less than an annual pace of decline in the first quarter of 5.5%, with some analysts predicting it could be the last negative quarter.

If Friday's American GDP results meet or beat expectations, the UK may find itself reconsidering its more reserved QE approach.

Implications for Global Markets

Good For Risk Assets

This implication will not be lost on traders. If the world's largest economy looks like it's recovering, that is very good for global recovery. That means stocks, commodities, commodity based currencies (like the CAD) and high yield currencies like the AUD and NZD would tend to rise.

Good for the USD?!

Until recently, that would mean the USD should drop, because it has moved inversely with stocks and risk appetite. The USD has been strictly a safe-haven currency. However, while stocks rallied hard last week, the dollar did not drop as much as stocks rose. Some analysts questioned whether the USD was starting to trade more based on the improving fundamentals of its underlying economy.

If so, better US growth figures might spark a rally in the USD. Not only could the sterling get pounded, so could other currencies. Many currencies are at nearly two month highs against the USD, which has been heavily shorted. That makes these pairs more vulnerable against the dollar in the short term, especially if:

There is bad news from the underlying economies of the EUR, AUD, or other currency.
If this week's US treasury bond auction suggests oversupply of US debt, and thus rising US interest rates, which would support the USD in the short term.

We'll know more on Friday.

Disclaimer & Disclosure: The above opinion is not necessarily that of AVA FX. The author may have positions in the above instruments.


Why are they meeting now? Both parties have pressing requests to make of the other.

What They Both Want

The most likely mutual (though especially Chinese) motive is to quickly prop up the USD.

What China Wants

The Chinese want to protect:
1. their over $800 billion in USD forex reserves
2. their dollar denominated profits from their largest export market
3. the survival, borrowing, and purchasing power of the US market

In addition, the Chinese Premier has already signaled his interest in Chinese companies making more overseas acquisitions. There will be US businesses on the menu, particularly those holding natural resources, technologies, or marketing channels the Chinese want. China would like to see these go smoothly.

What The US Wants

1. continued Chinese purchases of US Treasury bonds
2. greater access to Chinese markets for US exporters
3. greater Chinese consumer spending, especially on US products

The Win-Win Solution

Let the Chinese buy US companies, give the US what it wants.

In sum:
More Chinese imports from US and more Chinese purchases of US assets, particularly of companies holding natural resources, technologies, or marketing channels the Chinese want. It's a mostly win-win situation.

China Gets

1. Hard assets which will help fuel future export growth in exchange for their otherwise weakening USD
2. Support for the value of their own USD forex holdings, around $800 Billion and growing, by increasing US exports
3. Reduced total and proportional USD forex holdings
4. Continued US purchasing of Chinese exports. That is, Beijing will be able to buy US Treasury Bonds and thus fund US consumer purchases of Chinese exports without significantly raising their total or proportional USD holdings, since the new dollars and/or treasury bonds coming in can be used to buy US assets.

Wouldn't ownership of US assets mean more USD flowing in? Perhaps, depends on the asset purchase. If Chinese companies bought raw materials or technology that can be transferred to Chinese production, or US-owned marketing channels outside of the US (like GM's Opel car distribution network in Europe), then not necessarily.

The US Gets

A much better chance at avoiding an economic crash, or at least a long period of stagnation.

Does Either Party Have a Choice?

Not really. The Chinese are stuck with a pile of dollars that is too big to get rid of without destroying its value. They need to spend them where the dollars will be easily accepted without raising suspicion that the Chinese are dumping dollars. The US needs to export more, generate more jobs, and get continued purchases of US debt to buy time to solve its deeper economic problems .

What It Means for Global Markets

In the longer term, the very minimum affects include:

1. In Forex: A recovering US economy, trade balance, and dollar
2. In Commodities: tightening supplies with more Chinese control over them
3. In Global Stocks: Unclear, except that anything that gets growth going in these economic behemoths is likely to mean higher stock prices
4. Expanding Chinese exports, economic power, and influence

Disclosure & Disclaimer: The opinions expressed are not necessarily those of AVA FX. The author may have positions in above mentioned instruments.

Sunday, July 26, 2009

Weekly Preview: Key Clues From Global Markets –Part II




Japanese Yen seeks the next driver of risk appetite, USD/JPY may be the most volatile currency on Monday
Fundamental Forecast for Japanese Yen: Neutral


- Earnings season draws to a close; but where does that leave risk appetite?
- Japan’s trade balance improves as both imports and exports plunge
- Yen crosses don’t offer a clear cut technical outlook
Direction from the Japanese yen is often the product of risk appetite. However, the primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.
Through the end of this past week, we have seen upside surprises decrease, and the notoriety levels of the reporting companies recede. Looking back on the week four Fed ‘Stress Tested’ banks report losses and many more blue chips missed forecasts. Looking ahead, there are very few major reports due; but more importantly, there are far fewer days when a group of notable earnings releases will be reported at the same time (and therefore can generate enough influence to catalyze risk appetite. One of the last opportunities for an earnings related swell is on Thursday when ExxonMobil, MetLife, Walt Disney, Dow Chemical, Travelers and Colgate are scheduled to release.
If earnings don’t drive markets, what will?

Conceivably, there may be enough upward momentum built up in stocks to keep sentiment and program-trading bullish.

There may also some fundamental news items driving sentiment. There are many growth-related indicators on the docket to feed the outlook for the world’s recovery; but it is Friday’s US GDP figure that will truly establish the progress of the global economy. The consensus calls for a significant moderation of the nation’s contraction. However, whether we receive a positive or negative surprise (or no surprise at all), that is a long time to wait when market conditions seem to require an immediate resolution.

There is a long list of Japanese economic data that should make the week a crucial one. We will see Retail Trade on Tuesday, followed by Industrial Production on Wednesday. It is unclear whether or not the recent improvement in production will be hindered by persistent yen strength, or if that influence will be felt now or later. Thursday will hold both the Jobless Rate and Consumer Prices. CPI should hold considerable weight because any perceived threat of deflation may spell trouble for the BoJ’s quantitative easing exit plan strategies.

USD/JPY could be the most volatile pair for Monday

USD/JPY will be the currency in play when trading reopens. Japan will release Corporate Service Price on Sunday at 23:50GMT or 7:50PM EST followed by U.S. New Home Sales at 14:00GMT or 10:00AM EST on Monday USD/JPY advanced for the second week in the row, putting it in the Range Trading Zone which we determine using Bollinger Bands. Despite a temporary rally, the pair remains in a multi-month downtrend. If USD/JPY manages to break next level of resistance hovering at 50-day SMA which coincides with the 1st Standard Deviation at 95.50, an uptrend may emerge. Nonetheless, if the pair drifts below the1st Standard Deviation of the Bollinger Bands which represents current support level at 93.25, the currency pair could head towards 90.


Fundamental Outlook for British Pound: Neutral


-U.K. GDP contracted by 5.6% annually, which was the most since records began in 1955
-U.K. Retail Sales rose more than expected by 1.2%, Led by a 4.7% increase in textiles
-BoE voted 9-0 to keep rates and QE measures unchanged
The British pound ended a week of choppy price action heading lower as the 2Q GDP preliminary reading showed a deeper than expected contraction of 0.8% against expectations of 0.3%. Economic growth on the year dropped by a 5.6% which was the most since record keeping began in 1955.

The growth figures raise concerns that the BoE would need to add to their quantitative easing efforts in order to ensure an economic recovery. The release of the MPC’s minutes from the July meeting showed that after considering additional measures the committee unanimously voted for no changes but would review their alternatives again in August when they release their quarterly inflation report. A 1.2% increase in retail sales spurred hope that domestic consumption would start to improve as non-food sales rose 1.6% pointing to an increase in discretionary spending. However, elevated unemployment levels and the service sector declining by 1.0% in the second quarter will make future growth challenging.
Although the drop in growth is alarming, the improving outlook for the global economy which was evident in the massive rally in equities during the week could keep the MPC on hold. Bank of England Deputy Governor Charles Bean said this week that the economy may have stopped shrinking which could signal the potential for an improvement in the central bank’s growth estimates when they release their latest report on August 12. The growth numbers and the corresponding inflation outlook will determine the future course of action.

GBP News to Note

The economic calendar this week will give us further insight into the U.K. housing market and prevailing credit conditions.

  • The Nationwide Building Society is expected to show that house prices rose 0.2% in July as thawing credit markets are underlining demand. Indeed, mortgage approvals are forecasted to rise to 47,000 from 43,400 in June which would be the highest since April, 2008 but still far below the ten year average of 97,000.
  • The BoE lending report mortgage lending was showing sign of improving but that credit for consumers and businesses remains a challenge.

The GBP/USD has been trading at the top of its recent range of 1.6000-1.6700 which could leave it susceptible to a move lower. However, we have seen solid near-term support from the 20-Day SMA at 1.6371, which is starting to converge with the 50-Day SMA at 1.6260- a level that has held since March.

GBP/USD: Topping Out?

The pound is weaker across the board thanks to a dreary GDP report. Anyway you look at it growth prospects in Great Britain suddenly seem much more pessimistic.

  • Growth in the UK slid by more than double expectations by -0.8 percent marking the fifth straight quarter of contraction, a streak trumped only by the recession in the seventies.
  • Furthermore, annualized figures showed the largest drop since records began in 1955.

Among the most depressed sectors was the financial industry, a segment that will be crucial for any chance at recovery.

In response to the wake-up call that today’s report provided, former BoE member David Blanchflower is calling for an expansion of Quantitative Easing, potentially doubling programs that are already in place. Blanchflower believes that if the bank does not take action, an economic recovery will never fully materialize.

His comments are in stark contradiction with what many have touted as the potential for the unwinding of QE initiatives. In fact, many economists are concerned that letting these initiatives go on for too long may even distort financial markets.

However, it is clear that the UK condition is much worse than expected which may require further easing by the BoE. Such a decision would be disastrous for the pound, not to mention a big drain on the bank’s credibility. Economic data for next week include housing data, consumer credit and confidence.


With no economic data from any of the 3 commodity producing countries, the Canadian, Australian and New Zealand dollars traded higher. Finance Minister Jim Flaherty confirmed the echoed the comments made by the Bank of Canada this week. He said he sees encouraging signs that the domestic economy is stabilizing and there is potential for growth in the third and fourth quarters, but he is worried about the impact of the strong Canadian dollar. The loonie came within a whisker of testing its year to date high.

In the week ahead, outside of GDP numbers on Friday, there is no market moving Canadian data on the calendar. Therefore we expect the loonie to move with oil prices. Should crude head towards $70, the USD/CAD could fall to a new yearly low. If it simply stabilizes here or falls, we may see a sharp rebound in the currency pair.


There were no exciting developments for the Australian or New Zealand dollars last week but that could change this week with the Reserve Bank of New Zealand meeting to discuss monetary policy. Australian Central Bank Governor Stevens will also be delivering a speech on the “Challenges for Economic Policy.” For the NZD and AUD, official comments will be major news.


Crude oil and gold continue to follow the general direction of stocks, though not necessarily on the same day, nor at the same time, nor to the same degree. For no clear reason, oil would climb sharply one day while gold was quiet, then the opposite would happen on another day. Or, neither would move while stocks did, or stocks would be flat while one or both moved.

Look for key news items on growth, especially Friday’s US GDP numbers to provide the likely direction, though if there are no surprises, crude inventories can provide fuel for movement.

Other News to Watch

China – US Economic & Strategic Dialogue

Next week, the U.S. will be holding an economic and strategic dialogue with China, the first under the Obama Administration. U.S. officials provided details on some of the topics. The two nations are expected to talk about boosting recovery efforts.

The US will be pushing for

  • more Chinese consumer spending
  • openness to foreign investment
  • a more active Chinese role in moderating North Korea’s push for nuclear weapons and general bellicosity

The Chinese will seek assurances of a stronger dollar, or at least minimal further declines, in order to protect the value of their approximately $800 billion of USD reserves.

In the longer term, prominent commentators have noted that Premier Wen Jiabao has pushed Chinese companies to hasten their “going out strategy” and for the first time ever, he said the government could use foreign exchange reserves to help companies invest abroad.

It the Chinese plan on spending lots of money to buy things, traders would want to own these assets, or those that benefit from this increase in Chinese demand.

China has long preferred to take stakes in companies that meet their resource needs and based upon their 2008 trade activities, we would expect their domestic firms to look for investments in companies that produce electrical machinery, power generation equipment and commodities in countries like Saudi Arabia, Brazil, Australia and even Japan or Germany.

If correct, this thesis suggests long term long opportunities for currency traders in the Brazil Real, Australian Dollar and Japanese Yen, possibly at the expense of the USD, which would be their currency of choice to fund these purchases.

However, it’s not clear that the USD would suffer much, since the Chinese may well continue to buy US Treasury bonds to help fund US spending (much of it on Chinese goods) while spending USD on foreign asset purchases as a means of maintaining, but not increasing, their current dollar holdings. The Chinese do not, after all, want to drive down the value of the dollars they hold by sparking a run on the USD.


Disclaimer & Disclosure: The opinions expressed are not necessarily those of AVAFX. The author may have positions in the above mentioned instruments.

Weekly Preview: Key Clues From Global Markets –Part I



Summary: A Coming Shift in Forces Driving Markets? How Long Can the Rally Continue?

Stocks continue to be the prime mover of commodity and currency markets, but there are signs the correlation may be weakening. We consider the evidence both for why this is and what new forces are appearing.

The emerging theme from earnings season: poor results beating worse estimates, but that’s enough excuse to launch a rally back to 2009 highs, sometimes beyond. Seems like a sign of underlying weakness, but could this determined focus on the positive indicate short term strength?

Introduction: Review for the Sake of Preview

As expected, movements in stocks continued to set the general direction for currency and commodity markets, though the connection is showing signs of loosening.

At first glance, the second week US Q2 earnings reports could be seen as a repeat of the first week, with markets hyper-focused on just one question: did earnings beat estimates? Because they mostly did, the market went higher. Never mind that the estimates were very low, and that a closer look usually revealed a declining business and ominous signs for Q3 and beyond.

Stock indexes generally continued to lead markets for other risk assets risk, with commodities, commodity based currencies, and higher yielding currencies (which are bought as carry trade volume rises) following stocks indexes’ general direction.

Emerging divergence?

However, we started to see signs of possible divergence in both timing and magnitude of how currencies and commodities track equities. Regarding timing, there was more daily variation from this rule, with stocks rising one day while other risk assets remain flat, or vice versa. Concerning the magnitude of moves, there are more obvious divergences. That is, stock indexes are near or at 2009 highs, however, most other risk assets are not at comparable levels.

Stock Indexes: Rising despite declining demand? A sign of near term weakness- or strength?

Last week we suggested that the strong rise in equity indexes, despite generally unimpressive earnings performance, could indicate that the markets were biased to further gains, facts be damned. That is indeed what happened.

Earnings for the most recent quarter largely came out ahead of expectations, with 111 beats, 10 in-line and 21 misses.  But the earnings beats were largely due to cost cutting measures, not upside surprises on the top line. Specifically, 72 companies posted revenue that failed to live up to expectations, and 102 reported year-over-year declines in revenue.

For instance, Microsoft met analyst EPS estimates in its fiscal fourth quarter at $0.36, but the software giant's revenue decline of 17% y/y to $13.1 bln was well short of the $14.4 bln consensus. Shares of MSFT fell 4.0% for the week.

There were 11 other Dow components that reported -- Merck (MRK), United Tech. (UTX), DuPont (DD), Coca Cola (KO), Caterpillar (CAT), Boeing (BA), Pfizer (PFE), 3M (MMM), AT&T (T), McDonald's (MCD), American Express (AXP) --  all of which topped EPS expectations. Yet the revenue results reflect the difficult corporate environment -- only two companies posted positive (nearly flat) y/y revenue, and seven missed the consensus revenue estimate.  The market's reaction to the earnings reports were mostly positive, led by a 23.6% surge in shares of CAT.

Two major banks reported this week, Morgan Stanley (MS) and Wells Fargo (WFC). MS missed estimates and WFC increased its loan loss reserves, driving their shares down. Yet given enough news that the market took positively, the markets were able to hold and ultimately continue moving up despite news from the banks.

While the above sounds like stocks are ready some kind of correction, there is another way to view this dubious rally. That stocks could still keep gaining despite growing evidence of weakness in the big financials and cyclical stocks suggests at least some short term resilience and strength, rational or not.

Conclusions for Equities

  • While stocks are already near highs and there is plenty of bad news for short sellers to latch onto, stocks have nonetheless managed to keep going up, so short term traders should be taking what gains the market can give on the long side, but must ready to play the short side when, if, the market turns.
  • Longer term investors should be preparing their lists of buy targets if / when stocks tumble

Forex and Commodities

As noted above, followed stocks higher overall though the week, though they did not follow stocks lock-step each day.


Beyond of the rally in USD/JPY and the sell-off in USD/CAD, range trading has been the dominant theme .The euro and British pound for example ended the week virtually unchanged against the dollar while the Australian and New Zealand dollars strengthened marginally. The listless action in the currency market has many traders wondering what the chances are for a breakout in the dollar next week.

The dollar showed unexpected strength this week given that rising stocks and risk appetite have generally hurt the USD recently. This led many to wonder if the dollar might start to trade higher not only as a safe haven when markets decline, but for a new reason-- improving US fundamentals. This makes for an uncertain future when combined with the fundamental influence that the 2Q GDP report will have on the currency. Now, not only do traders have to interpret the data, they will also have to judge whether it has a greater impact on risk appetite or growth considerations for the beleaguered dollar.

Forex Preview: Key Trading Info for the Coming Week

The short version: First, look to earnings and equities for direction in FX and commodities, then second, other economic news. However, look for key news, especially US GDP results on Friday, to become more influential, especially if earnings fail to provide any positive surprises.


Are US economic fundamentals beginning to counteract risk appetite?

Forecast for US Dollar: Bearish


  • Fundamentals support an eventual recovery in US and global growth. But when?
  • Will improving US fundamentals support the USD, or will the ensuing rise in risk appetite hurt the dollar?
  • Bernanke sees signs of stabilization, calls focus on the deficit
    Do technical indicators suggest continued decline or reversal?

Assuming that the dollar continues to move inversely with stocks and risk appetite, the most immediate threat to the greenback’s stability is the intensity and direction of risk appetite. While this currency is deeply mired in speculation surrounding the economy’s leading or lagging growth potential, interest rate expectations, and deficit projections among other influences; risk appetite, driven by equities has proven itself to be the key factor in the USD’s movements .

With the Federal Reserve vowing to keep the benchmark lending rate at levels that insure a carry status when conditions do turn around and politicians ensuring the economy will struggle with record levels of debt for years to come, there seems little doubt that the dollar will maintain its position on the opposite of risk appetite.

Or is there? Considering the stalled progress most of the dollar and yen crosses saw last week, despite rising risk appetite as manifested in the stocks and other risk assets, are traders beginning to again consider positive fundamentals of the underlying US economy in favor of the USD?

With EURUSD and GBPUSD just off of key levels of resistance, the pressure is growing. However, the primary source of momentum over the past weeks – the second quarter earnings season – is already showing weakening influence as we appear to be getting the overall theme: beating already very low expectations with declining revenues and/or earnings that do NOT suggest coming real growth.

So, it’s not surprising that while equity indexes are approaching or hitting new highs, commodities, fixed income and risk-sensitive currency pairs have not pushed to comparable levels, though they have certainly followed the same direction. Oddly enough, one of the most likely catalysts for risk going forward also happens to be the most attention grabbing indicator on the US docket: US GDP, to be announced this coming Friday

Given that it will be taken as a gauge of global economic health, we again wonder whether risk appetite or US fundamentals will exert the bigger influence on the USD.

If the GDP reading is seen as positive, the ensuing rising risk appetite could outweigh the implications for US returns and actually drag the dollar down; and vice versa. Another important consideration is the timing of this release. Due Friday, speculators may decide to move the dollar before the data crosses the wires. If this is the case, the GDP report could factor into long-term projections but not short-term volatility.

Major Economic News for the USD

From the U.S., we have housing market data, consumer confidence, durable goods, the Fed’s Beige Book report and second quarter GDP numbers due for release. Of all these reports, the most important will be the Q2 growth numbers on Friday. A further slowdown is expected for the second quarter but the contraction should be more modest. In Q1, the U.S. economy shrank by 5.5 percent. The current forecast for Q2 growth is -1.5 percent. The earnings season also continues with 25 percent of the S&P 500 companies reporting this week, putting us more than half way through earnings season.

The focus will be on oil companies, financials, telecom and media. Some of the big names reporting include ConocoPhillips, Exxon, Chevron, Deutsche Bank, Daimler, Sony and Colgate.

Although there are enough event risks to trigger an upside or downside breakout in the U.S. dollar, outside of the U.S. GDP figures, none of the numbers are likely to surprise the markets. For the most part, we know that the housing market has stabilized, consumer confidence is improving and manufacturing activity is increasing. Even if the data disappointments, it will only confirm the general belief that it will be a long and hard recovery.

Therefore we think that the chances are in favor of more range trading than a breakout in the coming week.

Watch stock indexes

However equities are still likely to be the key influence on the USD, at least until Friday’s GDP report. If equities continue to push higher, we may see an upside breakout in currency pairs such as the EUR/USD, but the rise in VIX futures suggests that risk aversion is returning and therefore equities could face a correction.

If stocks pull back

Rising stocks have fed risk appetite, strong new demand for AUD, NZD, and EUR versus the USD.

Based upon the latest CFTC Commitment of Traders report, for the week ending July 21, forex traders on the futures market added to their short dollar positions. Their demand increased the most for Euro, Australian and New Zealand dollars. In fact, net long euro positions surged from 13,899 contracts a week earlier to 34,722 on July 21. This is the largest amount of long positions since March 2008 and the sharpest gain that we have seen in a very long time. Long Australian dollar positions also increased to the highest levels since August 2008.

Whenever there is such a strong increase in net long positioning, it suggests that the currency pair is prone to profit taking on any piece of bad news. Depending upon the severity of the news, the reversal could also be very sharp.


Deflation and US bond auction pose threat

Fundamental Forecast for Euro: Bearish


Deflation Risk Rising:
- German Producer Prices Fall Most in Over Two Decades
- Euro Zone, German PMI Results Top Expectations, Stay in Below 50
- Sentiment Points to Continued Euro Gains Against the US Dollar

US Bond Auction Could Help USD vs. the EUR
The Euro looks vulnerable in the week ahead as headline inflation figures point to the increasing likelihood of deflation while the US Treasury holds a record-setting bond auction that stands to boost the Dollar at the expense of the single currency.


Germany’s Consumer Price Index is set to show the annual pace of inflation turned negative for the first time in 23 years in July after holding at a standstill in the previous two months. The broader Euro Zone measure of consumer prices has already turned negative, shedding -0.1% in June and likely to slip another -0.4% in July. If expectations of falling prices become entrenched, the currency bloc could be facing a long-term period of stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.
For their part, the European Central Bank has seemingly struggled to formulate an effective policy response to the deflationary threat thus far. Jean-Claude Trichet and company have focused on banks as the vehicle through which to make money cheaper and put a floor under falling prices, promising unlimited lending to the region’s financial institutions including an unprecedented 442 billion euro in 12-month bank loans. The ECB will also implement a 60 billion bond-buying scheme. To the central bank’s credit, borrowing costs have indeed moved lower: although the ECB publicly maintains target interest rates at 1%, it has allowed the average cost of overnight lending (referred to as EONIA) to drift far below that. Indeed, borrowing in Euros has been consistently cheaper than doing so in British Pounds since late June, even though the Bank of England’s stated interest rates are substantially lower at 0.5%.

However, the lower cost of credit between banks has not translated into lending, and so has offered little stimulus to the overall economy. Indeed, loans to Euro Zone businesses and households grew just 1.8% in May, the lowest since records began in 1991. Banks may be choosing to hang on to cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, according to the IMF, as well as the fallout from looming defaults and/or devaluations among the EU’s newly-minted central European members.

Thus traders may yet punish the Euro as the ECB’s inability to ensure that looser monetary conditions translate beyond the interbank market make deflation all but certain.

US Bond Auction

An unprecedented bond auction in the United States may also weigh on the Euro. The US Treasury’s announced last week that it will sell a record $115 billion in bonds next week in a bid to help finance the rapidly growing public deficit, pushing 10-year notes to register the largest daily loss in nearly seven weeks and sending yields to the highest level in a month.

Many believe that the US Dollar will benefit as the government floods the market with new debt: Treasury prices will head sharply lower, putting tremendous upward pressure on the long-term interest rates. This will make USD-denominated assets attractive to yield-seeking investors, driving demand for the greenback.

Because the Euro is the second-most traded currency after the greenback, it often serves as the de-facto anti-Dollar, with short term studies showing a hefty -85.8% correlation between average indexes of the two units’ values. Meaning that any real turn in sentiment in favor of the US Dollar will weigh heavily on the Euro, not just in the pairing against the greenback but also against other currencies.

Other Euro Considerations: Coming News to Note

Better than expected economic data has lifted the Euro against the U.S. dollar. Based upon the Euro zone PMI reports, manufacturing and service sector activity contracted at a slower pace in July. This improvement was seen across France and Germany with German business confidence also rising for the fourth month in a row to the highest level since October 2008. Stronger consumer spending and higher factory orders have made German businesses more optimistic.

Although these numbers may suggest that the recession is over, the Euro zone economy still faces a lot of uncertainty. Growing unemployment and the rise in the EUR/USD this month could sap domestic and external demand. Don’t forget that the IMF expects the Euro zone to be the only region still contracting in 2010.

The outlook for the Euro zone economy is still unclear but next week’s economic data should help clarify the current economic picture. Germany will be releasing its inflation and employment reports while more sentiment indicators are expected from the Euro zone. We believe that the odds are skewed towards a correction in the EUR/USD in the coming week, though the 1.38 to 1.43 trading range is likely to remain intact. As for Switzerland, the KoF leading indicator report is due on Friday. Stronger numbers are expected, but with Swiss National Bank sitting at 1.50, we do not expect a major breakdown in EUR/CHF.

End Part 1

Thursday, July 16, 2009

Must-Know Mid July Review/Preview: The Importance of Beating Earnings

Stock Indexes have well-reflected and augmented Trader Sentiment for virtually all global asset markets. In Earnings Season stocks actually create it.

Introduction: New Forces Driving Global Asset Markets

What a difference 2 weeks makes. Don't be fooled by the below daily chart of the S&P 500, which appears to show nothing more than a 2+ month trading range with little net change since mid May

Because the level of optimism about global economic prospects has been best reflected in major stock indexes, especially in the most representative stock index of the biggest economy, the S&P 500 Index, we look at it to begin our review of the past half month and preview of the clues it holds going forward.

Chart 1:S&P Daily Chart: A Trading Range Belies the Underlying Changes Over the Past 2 Months

Despite the sedate appearance of the oscillations within this trading range, there has been profound change.

To paraphrase the opening lines of film The Fellowship of the Ring, (please imagine your own ominous background Lord of the Rings soundtrack):

"The markets have changed. You can feel it in the news, and in the air. You can see it in the correlations between the trader sentiment, the news, and the charts."

Background: A Brief Chronology and Interpretation

Here's a review of recent events.

Q1 Bank Earnings Spark a Rally in Stocks, Commodities, and Currencies

In the beginning of March, in the depth of gloom about the economy in general and the stability of the US and thus world financial system in particular, US banks reported unexpected Q1 profits, igniting a rally that peaked in early June around 945 on the S&P. Global commodities and riskier currency pairs broadly followed this trend and the movements described below.

With Earnings Season Done, News Becomes the Driver of Sentiment, Stocks, Currencies and Commodities

The rally had stalled a bit above 800, to be revived by the Washington's announcement of the PPIP, a plan to allow banks to both dispose of their bad assets and buy other bad assets at very little risk with Washington essentially guaranteeing the banks against losses they might incur thus guaranteeing profits.

Thus the rally resumed, and in the process forced quant fund programs to trigger stock purchases to unwind their short positions, thus further feeding the rally until it stalled, then made a last lunge at 945, typical of the 20-30% or more rise that major global stock, currency, and commodity markets achieved as they moved up more or less in sync along with the S&P .

Economic News Doesn't Support the Gains, Global Markets Drop

Because recent economic news in late May through Mid June had been at best mixed, traders questioned whether there would really be similar gains in employment, GDP, earnings, or any meaningful metric of growth within the coming year. Global stocks thus reflected that fear and spent this period in a tight trading range near their highs for 2009, testing a bit lower and oscillating back up.

Then came the World Bank's downward revision of its global economic forecast on June 22. International stock index traders, already nervous, sold off as the scales now seemed tipped toward a later, weaker recovery. Stocks then recovered their June 22 losses, helped in part by a counterbalancing OECD upwardly revised forecast.

The main difference in opinion was that the OECD held the US would grow enough to compensate for the admittedly weaker GDP elsewhere.

Then came the Thursday July 2nd US non-farms payroll data, which confirmed that the US jobs picture was not improving and that the US consumer, whose spending is about 70% of the US GDP, was getting poorer as average hourly wages were flat and average hours worked were declining.

Thus prospects for a stronger US recovery seemed dimmer, and that directly undermined the OECD report.

In the context of the conflicting economic news, this report seemed to have more decisively tipped the consensus toward belief in a more distant, weaker recovery what stocks had priced in. Stocks fell again, erasing their recent recovery. After the long 4th of July weekend in the US, world markets again fell hard, forming a new downtrend.

Another downgrade of the global economy, this time from the IMF, only added to the gloom.

To see an example of how well synchronized currencies and commodities have been with stocks, note the correlation of some representative 1 day commodity and currency pair charts with that of the S&P chart on and shortly after the July 2nd US payroll data came out.

Chart 2: Currencies, Commodities Have Been Moving with the S&P (Lower Left)

Q2 Earnings: The Last Stand?

The last near term hope was the impending Q2 earnings season. If earnings and Q3 guidance could show a clearly positive or negative theme, it could greatly influence the next multi-month market move, as was seen from the Q1 announcements.

Once again, the most important announcements and guidance would come from the financial sector, the root of the all major market moves over the past two years as well as almost every recession since the early 1980s. Remember the Latin American Debt Crisis? Guess who lent them the money? Remember the Savings & Loans crises of the early 90s? Perhaps the financials were arguably not the key to the dot com bust (but who was underwriting and promoting the IPOs and communications infrastructure build-outs of firms lacking the income to justify the investment?). However, their sub-prime lending and securitization of this dubious debt sure created this one.

Those traders who study chart patterns should look again at Chart 1 above. Note how the S&P was poised at 876, at the brink of the neckline of a bearish head and shoulders pattern that suggested high potential for continued downtrend.

The Importance of Beating Earnings (Estimates): Stocks Again Go from Merely Reflecting Sentiment to Creating It

That is the change in the dynamics of what moves world stock, currency, and commodity markets during earnings season. In the absence of other strong competing news, stocks become more of an independent force acting on other asset markets rather than a mare leading indicator or best indicator of trader sentiment.

On July 13, The New York Times reported that Goldman Sachs (GS) would beat estimates when it reported Q2 earnings on the 14th. That news alone sent the S&P and other markets soaring. The following day GS indeed beat earnings expectations before the market opened. After the close of July 14th trading, Intel also beat earnings expectations, feeding further rally in Asia, where much electronic and chip manufacturing is done.

Moving more or less in synch, commodities, commodity-based currencies, and higher yielding currencies followed and started to climb off of multi-month lows. Safe haven currencies like the JPY, USD, and CHF, which had been gaining against the others, began to drop.

As of this writing, JPMorgan Chase (JPM) did the same, potentially providing more lift for the rally.

Earnings season is still young, so it's too early to offer anything more than tentative thoughts. These include:

If GS and JPM are beating earnings estimates, it becomes that much more likely that Bank of America (BAC) and Citigroup ( C ) will bring home good news, and so for the other big name financials. If the theme from the financial sector earnings is positive, it greatly reduces the chances of a near term down trend to test November or March support levels. If the overall theme of earnings season is positive, that likelihood diminishes further still.

Conclusion: A New Rally Foretold? Or Back Home on the (Trading) Range?

It's clearly too early in earnings season to say, and there have already been plenty of big name earnings misses. Even if the overall theme from earnings is positive, since stocks and other risk assets have already significant highs logged for the year, those highs will be tough to surmount as long as jobs and consumer spending doesn't start to show real improvement.

In addition, there are plenty of potential landmines that could douse the current optimism. Just a few include:

1. The possibility is growing that commercial lender CIT could go bankrupt, leaving thousands of businesses without credit lines.

2. Enough bad earnings reports, and there are already a healthy share of those out so far.

3. More bad news that dampens consumer spending, like unanticipated job losses or spending drops.

Of course, the above doesn't even begin to address the deeper long term problems still facing the banks, like increasing job losses and their affects on bank residential and commercial mortgage portfolios, credit card debt, etc.

In short, a new downtrend has become less likely, a new test of recent highs in stock indexes, higher yielding and commodity currencies and commodities appears more likely. In sum, we may well have a return to the trading ranges established over the past 2 months, as markets await further developments.

Disclaimer: The opinions of the author are not necessarily those of AVAFX
Disclosure: The author may have positions in the above instruments.

Wednesday, July 15, 2009

The Daily AVAFX Global Forex, Commodity, & Stock Markets Review/Preview July 15, 2009

The Importance of Beating Earnings II: Estimates Are Exceeded, Markets Up Tuesday, Early Wednesday GMT

(As of approximately 11:00 GMT Monday, 7:00 am EST)


Stocks were up on positive earnings news from big name firms, commodities follow.Increasing risk appetite favors higher yielding and commodity currenciesEarnings are the big news this week, so markets await coming announcements


As we've stated repeatedly in these pages, it's clear that results from the financial sector have the potential to move the markets. Earnings surprises from the banks began the March 3rd rally, and it is difficult to conceive of continued advances in the markets without more of the same in the Q2 reporting. Goldman Sachs already delivered yesterday by solidly beating consensus expectations, yet the news proved anticlimactic given the advance report from the NY Times, and the S&P rose only modestly.

Among the heavyweights we'll hear from tomorrow and Friday include (banks in boldface):JPMorgan Chase (16th), Google (July 16), IBM (16th), Bank of America (17th), Citigroup (17th) and General Electric (17th).

Stock Indexes

On Tuesday Asian markets were up strongly on growth optimism, Singapore upwardly revised forecast, Europe followed through and was up about 1%, and the US up about 0.5%, on light volume. In early Wednesday trading, Asia closed up 0.16%(N225) – 1.5%+ (Hand Seng, Straits Times), and the major European indexes are also up as of this writing.

In Britain, unemployment increased by only 23K, far less than the 41K expected. In addition, recently Britain reported improvements in housing prices and retail sales, suggesting that the worst may indeed be over for the UK. Given this news plus the positive start to the Q2 US earnings reporting, the FTSE has responded, along with the other major European indexes so far today, with its third straight solid increase.

Thus stocks have virtually recovered the lost ground since the July 2nd non-farms payroll report, despite any evidence of an improving situation for the US consumer, on whom most US firms will ultimately depend. But why spoil the fun with such thinking? In the end, the value of stocks reflects the underlying earnings prospects of the business in the relatively short term, not do not always necessarily reflect the health of the underlying economy.

Index traders should keep a careful eye on earnings calendars for clues about how the given indexes will move, especially the S&P. There are many easily available online for free, for example at Yahoo! Finance:


Because fear, aka "risk-appetite" has been the prime driver of currency prices, and stocks, especially the S&P, have given the clearest, simplest picture of the market's mood, currencies have generally tracked stocks. That is, when stocks move up as they did yesterday, higher yielding currencies (AUD, NZD) favored by risk-seeking carry traders have gone up, while safe-haven currencies (JPY, USD, CHF) have gone down.

Understand that point, and you have a good idea of what happened Tuesday. Look at a chart of almost any currency pair in which there is a meaningful difference in yield, and the higher yielder gained. There are exceptions to this idea, of course. For example the EUR central bank rate is twice that of the GBP, yet the EUR dropped against the GBP on Tuesday (however, it is recovering somewhat as of this writing on Wednesday).

Overall, however, most higher yield currencies have tracked stocks and have traded in tight horizontal ranges, reflecting the same uncertainty ahead of major Q2 earnings announcements, but moving up yesterday along with the markets. Safe haven currencies like the JPY, USD, and CHF have generally moved in the opposite direction of stocks and other risk assets like commodities. Thus these were mostly down yesterday.

Note, however, that if there is no yield difference, then other factors come into play. For example, the USD/CAD has hit a 3 week low as the CAD surged against most currencies, despite the lack of any news to support such a move, except for the CAD's tendency to move with US stocks.

Sometimes, however, currencies with the same yield just stay in a tight range, as we've been seeing with the USD/CHF.

Thus traders have the chance to either play currency in horizontal ranges like the USD/CHF, or play to trade a pair that is in a clear trend over the past few days, like the USD/JPY.
As noted above, since currencies are moving with stocks, short term traders and news traders should keep a careful eye on the earnings announcement calendar for the coming days to be prepared for moves leading up to and following the "big name" announcements. For example, July 16 will feature earnings from Google, IBM, and JPMorgan Chase.


As risk assets, commodities have tracked the general movements of the stock markets too, some with more volatility, some with less. Thus they moved up yesterday, and are likely to continue to track moves in stocks. Given crude's recent volatility, it can at times be a better play on stock market moves than trading the stock indexes themselves, since it has at times exaggerated stock market moves, offering greater profit potential. Also influencing crude today will be the EIA's weekly inventory report. Yesterday's API report showed inventories falling, but crude rose only minimally.
Surprisingly, gold has had bigger moves over the past few days than oil, rising from a low of around $907 to almost $930, an over 2% move, as rising CPI in Britain and the US, along with rising stocks and a falling dollar, has bounced gold off of its 2 month low. Next likely major resistance is around $940.


Whatever happens, this week is likely to hammer home the lesson of the above title: the Importance of Beating Earnings Estimates, because the success or failure of the leading firms and banks to do could well be the catalyst for the next multi-month market trend.

Disclaimer: Opinions herein stated do not necessarily reflect those of AVAFX, and the author may have positions in the instruments mentioned.
Disclosure: The author may have positions in the above instruments

Monday, July 13, 2009

5 Ways to Profit Fast if the Financials Beat Expectations?

Advice from a Global Markets Trader

Every major market move since the current economic crisis started, has originated with the earnings picture of the financial sector. With the banks the crisis began, with the banks the March rally began. Thus it's hard to imagine a better way to revive the rally than upside surprises in the financials

If they surprise either way, traders need to have a plan in place.

Logically, The Banks Shouldn't Be Profiting, Right?

What am I missing? Given their apparently deteriorating fundamentals, banks should not be showing Q2 profits.

Official unemployment is 9.5%, well beyond the worst case stress test 8.9% levels. Each decimal point means thousands to tens of thousands of additional bad mortgages and credit card debts. It means less spending and thus more bad commercial mortgages. It means more job losses, which means less spending, and so the vicious cycle goes.

Yet the New York Times recently ran an article predicting profits at Goldman Sachs. Noted economist and NYU Professor Nuriel Roubini has also acknowledged that due to changes in FASB accounting rules the banks may be able to show good results for another quarter or so. He doesn't go into detail about how this could be.

So one should at least be prepared for the possibility of positive bank earnings.

Yes, it's conceivable that with enough cooperation from regulators, enough bad debt can "revalued" or just plain moved off the balance sheet, all fully legal. Yes, it's also possible to create enough fake profits, as was done via AIG, to feed the major banks profits. Yes, in a worst case scenario, Washington can invoke "the greater good" and just plain print up some cash to give them.

These are possibilities, but I don't claim to understand how it's really going to be done

I've tried to follow some of it. There was a very good article: Exclusive: Big Banks' Recent Profitability Due to AIG Scam, though it got a bit too technical to fully follow.

What to Do if The Financials Surprise to the Upside?

While I may not understand how they'll do it, I do know how to respond in order to profit from the news.

Here are some of the obvious ideas from someone who follows global stock, commodity, and currency markets.

The Main Idea: Buy Assets that Feed "Risk Appetite"

The overall concept here is that because confidence in the stability of the US financial system has been at the heart of the current economic crisis and March rally, expect a burst of optimism to break out in the global markets for any asset that increases in value on improved growth prospects. Another term for these kinds of assets used in the currency and commodity trade is "risk assets, " assets that carry more risk but benefit more if conditions improve

These are assets that rise with optimism about growth. Even if the bank profits are as fraudulent as those in Q1, we might well see a rise in optimism, and those prone to short term trading for short term fast profits could score. Here are some of the obvious ideas from someone who follows global stock, commodity, and currency markets.


Short term traders should buy stocks and stock indexes, the more volatile the better, or related ETFs. Longer term investors seeking income should begin to take partial positions in their favorite stocks IF they're willing to watch them and put stop losses under them when the reality about the banks finally surfaces. If they can't watch these or won't put stop losses underneath these to minimize risk of loss, they should stay out of the market.


Get Crude: Most commodities rise with growth prospects. Industrial commodities like crude oil obviously find greater demand. Crude oil has been among the most volatile, fast to rise when the mood is good, fast to fall when fear takes over, almost ignoring actual supply/demand factors like inventory levels. Note: related commodities would also be likely to do well.

Gold: With prospects for rising growth comes the prospect for rising inflation. Given the explosion in new bills circulating in all major currency groups, the only thing holding inflation back is the deflationary pressure of recession. Once that is gone, it will be difficult for governments to control inflation given the unprecedented, massive expansion of money supply. When there is fear of inflation, gold rises. Fast. Note: Silver would also be expected to rise along with gold.



There are 2 kinds of currencies that do well in times of optimism.

One kind is commodity currencies, the AUD, the CAD, and to a lesser extent, the NZD. Economic expansion means increased demand for the commodities on which these economies are based, thus these do well.

The other kind are high yielding currencies that are bought for "carry trades". These include the AUD and NZD. "Carry trades are simply currency trades involving the sale of a low yielding currency in order to buy a higher yielding one and profit on the difference in interest between the two the longer you hold them, as long as the lower yielding currency that you sold doesn't rise in value relative to the higher yielding currency, one can earn the difference in interest.

Because currency trading is usually done with leverage, often 100:1 or more, even $5000 can control $500,000 in currency like the AUD. If you're earning 3% on AUD and paying almost nothing on the JPY you sold, so 3% of $500K is $15,000/year or portion thereof. Moreover, if risk appetite/optimism continues to rise, you profit on appreciation in the higher yielding currency against the lower yielding one you sold.

The same principle applies to other currency pair, I merely present a few of the most obvious ones.

What to Avoid

Safe-haven Assets: Most kinds of cash, especially low yielding, safe-haven ones like, JPY, USD, CHF, EUR and US Treasuries.

These have low yields, and will be dumped by currency traders. Moreover, currencies that have had major expansions of supply (almost all major ones, but especially the USD) will be vulnerable to inflation.

On the Other Hand, If Bank Earnings Disappoint

Quite simply, do the opposite, avoid or sell short stocks and commodities, hold JPY, USD, and CHF in that order. Sell the AUD/JPY, buy the JPY versus anything. Review my past articles, since this has been my belief.


The above is just a brief overview of where traders should look to trade long if banks surprise us once again and once again spark a rally in stocks, commodities, and higher yielding and commodity currencies.

Disclosure & Disclaimer: the author may have positions in the above instruments. The opinions expressed are not necessarily those of AVAFX

WorldMarketsGuide Monday Preview: Clues from Global Markets

High Anxiety: Markets Flat or Down Ahead of U.S. Q2 Earnings

(As of approximately 11:00 GMT Monday, 7:00 am EST)

Summary: Uncertainty As Markets Await US Q2 earnings.

Global markets mostly flat or down on Friday, Asia closes down hard on Monday, with Europe opening mixed, reflecting low risk appetite ahead of the first big US earnings reporting week for Q2, as a pack of leading companies, and banks both report on Q2 results and give guidance going forward

Introduction: The Theme Is Uncertainty & Fear

To paraphrase the first lines of the first of the Lord of the Rings films, The Fellowship of the Ring, "The world has changed (over the past 3 weeks). You can almost feel it in the charts, in the news, in the air."

First, there was June's fading optimism about the March Rally in stocks, commodities, and riskier currency pairs, as was reflected in June's mostly flat trading range. This ambivalence was supported by mixed economic news that suggested the gains in these markets were far ahead of actual growth prospects in jobs, GDP, earnings, or any other meaningful metric for the coming year.

Next, in late June, The World Bank revised global growth forecasts downward, and markets tanked. The OECD differed slightly, saying that US growth would be strong enough to outweigh continuing decline elsewhere. The views balanced each other, markets began to recover.

Then came the very disappointing monthly US non farms payroll data, which undermined the OECD report. It showed job losses accelerating and suggested that recovery would be later and weaker in the US than previously thought, thus undermining the OECD. With the stake thus driven into the market's heart, it fell back, as if into a coffin. Last week, the IMF announced it too was revising its quarterly world growth forecasts down thus nailing the lid shut on near term recovery hopes.

With a surge of major second quarter (Q2) earnings reports this week, we ask, "will these bones rise up?" Will there be enough positive surprises to relieve the fear, or re-ignite the rally?

Stock Indexes

Stocks finish mostly down Friday, continue down Monday as the major Asian markets drop hard, Europe flat.

Because most major indexes have formed a declining trading channel over the past 2 weeks, longer term traders might want to draw that channel and attempt to enter positions near support or resistance.

Shorter term traders may want to use the horizontal, flat trading ranges established since Wednesday for choosing support or resistance levels to enter positions.

For those who use chart patters as an indicator, note how the S&P appears to have broken the "neckline" of this bearish Head and Shoulders pattern, suggesting further downside. The very pronounced flat top around 940 is also not encouraging, and may be viewed by some as a variation on a bearish double top. However, as noted repeatedly before, positive surprises from the financial sector earnings announcements could well give the market its next boost.

S&P 1 Day Chart as of July 13

A partial list of firms reporting this week includes CSX Corp. (July 13th) , Goldman Sachs (July 14th), Johnson & Johnson (14th), Intel (14th), YUM! Brands(14th), JPMorgan Chase (16th), Google (July 16), IBM (IBM), Bank of America (17th), Citigroup(17th) and General Electric(17th).

Things may be clearer by Friday.


Most currencies have tracked stocks and have traded in tight horizontal ranges, reflecting the same uncertainty ahead of major Q2 earnings announcements.

There have been exceptions. For example the JPY continues to rise against everything, especially the higher yielding currencies as traders unwind carry trades in which they sold low yielding yen to buy higher yielding AUD or NZD. In the chart below, note how the AUD/JPY has established a downward trending channel for trend traders. Other JPY, USD or CHF pairs show similar down trends against higher yielding AUD and NZD for the same reason, unwinding of carry trades by those attempting to sell Yen and buy a higher yielding currency in order to collect the higher interest rate while paying a much lower one on the Yen, USD, or CHF.

AUD/JPY 1 Day Chart as of July 13


As risk assets, commodities have tracked the general movements of the stock markets too, some with more volatility, some with less. As noted before, crude generally has exaggerated the S&P 500's movements (we often see the S&P as the most representative example of general stock market index behavior. So have others, such as wheat.

For example, note the comparison below of 1 day charts of different instruments. Note how the chart for crude oil [upper right chart] exaggerates the moves on the S&P [lower left chart].

Comparison of Daily Stock Index Movements with Representative Commodity and Currency Markets

Conclusion: The Next Big Question

Will there be enough positive earnings surprises to steady or even lift the markets out of their recent downtrends? Despite all the negative news, don't be shocked if it happens.

As mentioned before, the March 3 rally was preceded by leaks of good news from the critical banking sector, and that if more were coming, we might expect more of the same. Indeed, the New York Times recently reported that Goldman Sacks will beat expectations. Enough news like that might well be just the tonic needed to at least stop the downward momentum, at least for now. Just don't look too closely at how they got those numbers.

Certain things, like sausages, are best enjoyed if you don't know how they're made.

Disclaimer: Opinions herein stated do not necessarily reflect those of AVAFX, and the author may have positions in the instruments mentioned.

Sunday, July 12, 2009

Weekly Preview: Key Clues from Global Forex, Commodities, Stock Indexes --Part I



Before June 22nd’s employment data, there were many who could still see global markets heading higher. For the near term, that opinion now appears out of favor. The debate is now whether markets will continue their mostly horizontal tight trading ranges of the past month or more, or if their retreat from May’s highs will now prove to be the beginning of a new down trend to test support levels.

For those who missed the fireworks, here’s a recap.

Is July the Turning Point? Or Just Another Move Down Within Price Channels?

Markets were nervous on Thursday before the Non-Farms Payrolls report came out, with Asian, and European stocks already solidly down on Thursday before the report came out. The results confirmed the fear.

Context Is Everything

To understand the impact the July 2nd NFP employment data had, consider the context.

  • News over the last weeks of June had been mixed and markets were waiting for an important indicator like the monthly US NFP results.
  • Major World Stock Markets were typically sitting on gains of 20-30% since the rally began March 3rd from surprisingly good Q1 US financial results. Yet in fact there had been little fundamental data to suggest that employment, GDP, earnings, or any other meaningful measure of improvement would show similar gains over the coming year. Thus in June most global equity, commodity, and currency markets reflected this concern by trading in tight horizontal channels awaiting news to clarify if the growth already priced in with the current rally was really coming. Confidence in the rally was fading, markets were nervous.
  • During these final weeks of June, the biggest news (and biggest drop in most global markets) came when the World Bank announced downwardly revised estimates for even greater global economic contraction. Markets recovered from the drop, due to no small degree to a more optimistic picture from the OECD that served to balance the World Bank’s more pessimistic outlook. However, the very basis for the OECD forecast was a more optimistic view of US growth, which it believed would outweigh a worsening situation in other regions. Thus the NFP report struck at the foundation of the OECD's view, undermined it, possibly leading traders to conclude the World Bank was right and that real recovery( in the US or elsewhere) is not coming soon, and that growth related assets were likely to fall in value.

Unemployment is Key for the US

In short, the NFP report served to tip sentiment firmly negative, furthering the belief that recovery would not be as soon or as strong as hoped. With about 70% of US GDP coming from consumer spending, the NFP report hit expectations for the US especially hard, since

· Worsening employment directly undermines consumer spending. Not only were more jobs lost than expected, but average hourly wages were flat and average hours worked declined. Thus even the US worker/consumer who still has a job is earning less.

· Bank stress tests’ worst cast unemployment for 2009 was 8.9%, and it’s now at 9.5% with no strong sign of slowing. More unemployment means more deterioration in bank mortgage and credit card portfolio valuations, more defaults, more need for additional bailouts.

· Mortgage rate resets are coming in waves in 2010-11, and will result in much higher mortgage payments, further increasing the default rate for a poorer US homeowner and further weakening the banks.

Remember, news about the health of the US financial sector has been the root of all major market moves over the past two years since the current crisis began.

The news really was bad. The U.S lost 467K jobs in May, about 29% more than the 363K forecasted and 45% above April’s surprisingly small (at least in today’s market) loss of only 322K jobs. This report, issued at the beginning of June, had fed hopes that the worst might be over, and kept world stock and commodity markets mostly, trading in a horizontal range near their highs for the year, awaiting further news to justify the 20-30% gains in stocks since the beginning of March and nearly 100% gain in crude oil since 2009 began.

This report dashed those hopes, causing a predictable sell off in US trading on Thursday in “risk-appetite” assets that appreciate with optimism about the world economy stocks, commodities, and higher risk currencies (the AUD, NZD). Safe haven assets, particularly the JPY, USD, and CHF currencies rose against other currencies deemed riskier.

Since Tuesday July 7th, most markets have settled into tight trading ranges

Big Themes For the Coming Week

The S&P remains the key market to watch

It’s the best single best indicator of global stock markets, which are the best indicator of fear/pessimism, which is what drives commodity and currency markets.

Note the correlations between the daily S&P chart, that of other major international stock indexes, and those of a few representative currency and commodity. Note the moves on July 2nd (when the US NFP data was released, sparking the recent sell off) and beyond, and how well they correlate.


Comparison of Daily Stock Index Movements with Representative Commodity and Currency Markets

Q2 earnings season is now in full swing, and perhaps the most important news that could move the USD, and the markets, will be Q2 results from the financial sector, especially from the 20 largest institutions that Washington won’t let fail. Again, this sector has been the root of both the market collapses and rallies, and surprises from Wall Street could easily outweigh other events this week. Their fundamentals are, if anything, eroding along with US jobs and spending.

However, will this weakening show up yet? Many, such as noted economist Nuriel Roubini, believe the banks may be able to somehow exploit laxer accounting rules to present a decent picture for the next quarter or so. However, there are too many potential time bombs due to go off in the next 2-4 quarters to really believe the nasty news is still to come for the banks, and thus, for all global markets awaiting recovery.

Thus if an overall positive or negative theme emerges from Q2 earnings, especially financial earnings, THAT could easily be THE market moving news of the week.


Thus the rally in world “risk assets” like stocks, commodities, and riskier currencies like the AUD and NZD may indeed still be well ahead of world growth prospects, and thus vulnerable to pullback. Resulting risk-aversion would be likely to include:

  • Gains by safe-haven currencies (JPY, USD, CHF) against riskier and commodity-based export currencies (AUD, NZD, CAD)
  • Downward pressure on commodities, and stocks, either in the form of an outright downtrend, or continued trading in the current ranges established over the past 4-8 weeks, with risk assets approaching or testing support levels, and safe haven assets like USD, JPY, and CHF currencies moving in the opposite direction
  • If March lows tested in global stocks, possible long opportunities, especially for buy and hold income stock investors

US Dollar: Declining Risk Appetite Favors It Against Riskier Currencies, Now Awaiting Next Big News, Probably from Q2 Earnings, Especially Financial Sector Earnings Coming This Week

Overall USD Outlook for the Coming Week: Neutral

Risk Appetite Has Been the Key Factor in Currency Markets, So Rising Fear Could Boost the USD Toward Its Upper Range Against Riskier Currencies, however its steep drop against the JPY appears overdone.

Summary & Potential Market Movers for the USD

Overall USD Outlook: Neutral – But More Fear Could Well Boost the USD

  • IMF upgrades its forecast for the US, downgrades most of the world including Euro zone and Britain, but upgrades Japan, Canada
  • Consumer confidence declines for first time in 5 months
  • G8 avoids talk about replacing USD as reserve currency
  • Biggest news this week for the USD: The overall theme of US Q2 Earnings, especially financial sector earnings. Also: Tuesday’s monthly Core Retails Sales, Wednesday’s Core PPI and FOMC minutes, Thursday’s TIC Long-Term Purchases, Friday’s New Building Permits

USD Has Been Moving on Fear, Not Fundamentals, Awaits the Next Big News

Risk aversion, certainly not fundamentals, has made the USD one of the the strongest of the majors in the past weeks. In May there were those who questioned whether the dollar was still seen as a safe haven. Both the World Bank downgrading of world economic growth and the recent US jobs data driven market drops have reaffirmed the USD’s safe haven status. This past week’s IMF report revised its forecast upward for the US (less contraction), which these days passes for a good report.

For the later part of the past week, the markets seemed to have digested the increased fear levels and the dollar has mostly settled into a tight trading range against other majors, and is likely to begin the week that way as currency markets await the next big news that moves the prevailing fear level up or down.

The big exception may continue to be the USD/JPY which has been diving without any clear reason. Some propose a combination of factors has converged to drive the pair down, such as narrowing interest rate spreads between US and Japanese government bonds, concern about Japanese exporters dumping dollar holdings, etc. However, in the end this is all speculation and thus, lacking any evidence otherwise, we must assume it is an over-reaction vulnerable to correction. Those continuing to sell this pair should proceed with caution, since such steep declines as seen with this pair don’t tend to last.

Since the current crisis began, bad news, especially from the still most economically important US, has paradoxically strengthened the dollar in the short term because it is still seen as a safe haven.

However, given the worsening employment and wage picture, the longer term picture for the USD is worrisome, since fewer jobs and lower earnings means less consumer spending, which is about 70% of the US GDP. Of course that means lower exports to the US for the rest of the world’s economies, which would also weigh on their currencies. Thus the dollar need only be the least ugly currency of the bunch to be the strongest.

It’s also a major problem for the US banks, as poorer consumers mean declining value for both residential and commercial mortgage portfolios. The bank stress tests assumed a worst case 8.9% for 2009, and we’re already officially well above that at 9.5%. The real figure could easily be far worse, due to the way US employment data is gathered.

Q2 earnings season is now in full swing, and perhaps the most important news that could move the USD, and the markets, will be Q2 results from the financial sector, especially the 20 largest or so that Washington won’t let fail. Again, this sector has been the root of both the market collapses and rallies, and surprises from Wall Street could easily outweigh other events this week.

Euro Likely to Remain in Tight Trading Range Barring Breakdown in Stocks


Overall Euro Outlook: Bearish

  • Emerging overall theme from US Q2 earnings, especially from banks, may be the biggest influence
  • Euro bounces on financial risk sentiment, German Trade Balance data
  • German Industrial Production gains most in 16 years

A relatively busy economic calendar in the week ahead suggests we can expect a pickup in intraday price moves, but low volatility expectations give little scope for a sustained EURUSD breakout.

Potential Market Movers for the EUR

News that might move the pair this week includes:

  • Tuesday’s German ZEW institutional investor sentiment
  • Tuesday’s Euro-Zone Industrial Production

· While there is potentially market moving news on the calendar, the recent past shows that if there is news that moves the S&P, could outweigh all others.

The recent downturn in global financial and economic sentiment suggests that future outlook for business conditions may have suffered through the month of July, and there are noteworthy downside risks to consensus forecasts. Ditto the Euro Zone Industrial Production numbers.
Recently published German Industrial Production reports showed that output grew at its fastest in 16 years in the month of May, and similarly robust figures out of France boosted forecasts for upcoming Euro Zone data. Consensus forecasts now call for a noteworthy 1.5 percent month-on-month gain in European industrial output—a welcome sign of hope for the industrial sectors. Substantial declines in consumer demand have meant that spending has fallen by record amounts across the Euro Zone, and highly export-dependent countries such as Germany have felt the pinch. We will need to see upcoming Industrial Production numbers impress to keep hopes of sustained recovery alive. And though Euro Zone Industrial Production figures have not historically produced major EURUSD volatility, traders should be on the lookout for any post-event reactions on the data.
It will otherwise remain important to monitor trends in broader financial markets—especially the US S&P 500, which fell near its lowest levels in over two months, causing a by now predictable drop in the Euro, this time by nearly four percent against the Japanese Yen, on flight-to-safety flows. Similar flare-ups in market tensions could once again drive EURJPY price moves, but note that the Euro has held firm against the US Dollar.
Last week commentators noted that forex options markets pointed to limited Euro/US Dollar volatility expectations and suggested that the EURUSD would remain stuck in its recent range. Flare-ups in financial market tensions leave 1-week Implied Volatility levels on EURUSD options marginally higher on the week, but we doubt that these point to a Euro breakout. Given such an environment, we may have to wait until a material shift in financial market sentiment before calling for extended EURUSD moves. Until then, expect the Euro to remain choppy within a wide trading range against the US Dollar.

To be continued in Part II


I have positions in most of the above mentioned investments.


The views of the author are not necessarily those of AVAFX