Friday, July 3, 2009

Thursday Global Review: Temporary Dip or Return of the Bear?


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


The week's main event, the U.S. New Unemployment Claims result for May, was a very disappointing 467K. That's 28.6% higher than the expected 363K, and 45% higher than the 322K for April.

As expected, this severe disappointment pounded world forex, commodity, and stock markets.

The only beneficiaries of the risking fear were the safe haven currencies (JPY, USD, CHF) against riskier currencies like the AUD and NZD.

The big question: Now that this much anticipated news is out, does Thursday's global slide signal a longer term move down or just a short term dip? The big answer: only time, and second quarter earnings will tell.


While forex, commodities, and stock indices mostly remain within their 4-8 week trading ranges on their daily charts, the often market-moving U.S. monthly employment figures have sent prices firmly in the direction of the pessimistic, risk averse, "dark side" of these price channels.

Because the price of most assets rises with rising optimism, this means that most instruments are heading toward or already testing their 4-8 week support levels. However, in the case of currency trading, there are definite exceptions to this rule.


However, currencies that are seen as safer generally rose on Thursday against currencies seen as more risky, as traders sought safety in falling markets. Thus currency pairs with the safer currency as the base currency (numerator or currency on the left side of the "/" line generally got a boost towards near term resistance. Thus the currency seen as the safest of all, the JPY, rose against everything. The second safest, the USD, rose against all but the JPY, and so on.

For example yesterday we mentioned how the EUR/GBP was moving up over the past few days and into the European trading hours of July 3rd. The EUR yields more than the GBP and is seen as a bit more risky. See how the pair thus moved down after the US jobs data came out.

Note how the pair was rising before the US unemployment announcement.

EUR/GBP Daily Chart – as of around 10:00 GMT July 2nd

Note how the pair had reversed (i.e. the safer GBP gained against the EUR) by the end of the July 3rd trading day in the US, after the 1:30pm GMT Unemployment data came out – it's the second candle on the right.

EUR/GBP Daily Chart – as of the end of the trading day July 2nd

In Thursday's review of Wednesday's market action we noted:

"As noted in yesterday's [Tuesday's] market update, the AUD/USD is near highs for the year.

However, Wednesday's very disappointing monthly ADP Non-Farm Employment Change report (-473k vs. -388K forecasted) and Change in Pending Home Sales (0.1% vs. 0.7% forecasted) has already sent the pair into a mild retreat. Similar gloom from Thursday's unemployment figures could potentially create enough fear/risk aversion to send the comparatively risky AUD lower against the safer USD, especially if stock markets drop on the news."

As suggested, the AUD/USD pair dropped on Thursday's news.

World Stock Indexes

Because global stock indexes rise with optimism about earnings and fall on pessimism, they reflected their concern on Wednesday with flat or negative results, then predictably plunged after the announcement, with the S&P down nearly 3%.

Don't say we didn't warn you. In Thursday's review of Wednesday's market, written and posted a few hours before the unemployment data came out, we said:

"…the S&P printing another cross-shaped DOJI STAR on its daily candlestick chart, reflecting indecision ahead of Thursday's unemployment data. Asia opened Thursday's trading (again, in Sidney on Wednesday night for the West) down generally between -0.5--1.35%, and as of this writing the major European equities markets are similarly down. Note that dojis on June 10-11, 19, and 23 all forecasted significant moves. ……If Wednesday's US employment and housing data foretell similar disappointments in US jobs on Thursday, more red ink might flow from the US stock indexes. "

The below chart shows how the March rally on the S&P 500 Index looks broken, along with that of most major international stock indices.

The S&P 500 Daily Chart

It's now back for the third time at late-May support levels. Barring any major positive surprises, the likely alternatives for stock indexes appear to be either horizontal or declining channels

Thus while stocks overall are still holding near their 20%-30% gains since March, there appears less likely that they'll hold these gains given an apparent lack of data suggesting a similar improvement in employment, earnings, GDP, or any other significant economic measure within the coming year.

To regain their uptrend, stocks will need overall positive earnings surprises or other economic news to justify higher prices. Positive earnings will be especially needed from the financial sector, which has been the source of both major declines and rallies for the past two years.

Guidance on second quarter earnings should begin to come out next week, and may well bring markets the direction they seek. Especially important will be financial sector earnings, for these have been the catalyst of all major market moves over the past two years.


The big mover once again has been crude oil. It is now sitting around $66.50 support for the third time in over 4 weeks. Could this price level once again be the kind of opportunity it has been over the past month?

Crude Oil is Back Around $66.50 for the Third Time in Over a Month


Our near term outlook remains unchanged. Given that risk-appetite favored assets like stocks, commodities and higher risk currencies like the AUD and NZD are still near 2009 highs despite considerable uncertainty that there will be meaningful growth to match their rise, here are two outcomes to consider in the coming months.

1. These may be vulnerable to a retest of March lows.

2. However, a continued longer term range trading might also provide the needed consolidation period for the recovery to catch up.

Given the amount of potentially very bad news for the financial sector, many would suggest you prepare for the first scenario, but pray for the second.

So, have we begun a longer term move down, or is this just another dip as markets move horizontally and wait for more clarity from Q2 earnings, especially bank earnings? We may well start to know in a few weeks.

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