Tuesday, July 7, 2009

WorldMarketsGuide Preview: Calm & The Next Big Signal

Markets Calm, But Is It the Calm Before the Storm? The S&P May Provide the Signal

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


Flat, tight range trading, choppy. Any of these terms could describe the overall action of Global forex, commodity, and stock indexes from the later part of Monday into mid Tuesday GMT. This suggests that, after the recent plunge following very disappointing US unemployment figures, markets have returned to trading in tight ranges as they await the next big news/risk event or emerging theme of greater optimism or pessimism.

Looking at the bigger picture, most markets remain within their 4-8 week trading ranges, though the action has clearly shifted back to the lower, support side of their trading channels for stocks, commodity, and higher risk currencies. Conversely, safe haven currencies like the JPY, USD, and CHF are at the upper end of recent trading ranges, as are currency pairs in which the base currency (numerator, to the right of the "/") is safer than its cross currency (denominator, to the left of the "/").


The big question remains the same: given the diminishing likelihood of a significant recovery within the next year, do world markets remain in their current 4-8 week trading ranges, or has the next move down already begun?


While most markets have settled into tight horizontal ranges over the past few days, there are exceptions. As noted in recent posts, the EUR/GBP has continued to rise since Friday despite the EUR's higher yield and perceived risk, possibly due to rising concern about further declines in interest rates in Britain or increasing relative economic strength of the Euro Zone.

That a higher risk currency pair can rise in this fearful market shows great relative strength in this pair. If markets turn more optimistic, this one might really move.

EUR/GBP- A Rare Case of Higher Risk Currency Pair Rising


Crude oil continues to be the big mover, crashing recent support of $66 and currently around $64.50 after rebounding from below $64. Having fallen through various recent support levels, including Bollinger bands and its 50 day moving average, the next strong support level could be around $60.

Crude has already lost about 10% in about a week. As the past month has shown, once it finds it's footing, it's capable of making similar moves up – fast.

Crude Oil Daily Chart – Finding Support for Another Fast Move Up? (03 jul)

So where do global markets go from here? Recent history suggests global stock indexes, especially the S&P, to show us the way.

World Stock Indexes – The Prime Mover?

Like currencies and most major world stock indexes, while at times volatile intraday, they have closed mostly flat.

Given the history of the past two years, risk appetite or avoidance, aka optimism or pessimism about the economic recovery, is likely to be the driving force behind future moves in world markets.

This sentiment has been clearest in stock indexes. Not surprisingly, the best single index for representing both global sentiment and how that's reflected in international equity indexes has been the S&P 500 index, comprised of the 500 largest firms of the world's largest economy. Most of the time, movements in world stocks have caused movements in currencies and commodities.

In sum, if you know the direction of the S&P, you have an excellent clue about how world stock, commodity, and currency markets are performing. A rising S&P usually means rising stocks, commodities. In general, world stock indexes, especially the S&P, have been the prime mover of commodity and currency markets. While the growth and stocks of Chinese or other emerging market exporters certainly may outperform at times, most markets have moved together. It's not surprising. If the biggest consumer countries are suffering, so will emerging market exports and economies.

Thus if the S&P can hold it's multi-month support around the 865-880 range, it's far more likely that most other global stock, currency, and commodity markets will reflect that in their own support/resistance levels. If the S&P should fall through that level, recent experience suggests the rest may well follow.

A Line In the Sand for the S&P, and Global Markets?

Conclusion – The Big Question & Its Likely Answer

So, the big question remains. Have we begun a longer term move down, or is this just another dip as markets move horizontally?

July 2nd's market drop from bad US non-farm payroll results seems to have settled world markets into the lower edge of their 4-8 week trading ranges, and pushed low risk currencies higher.

As noted in yesterday's post, the NFP results from the US hit hard, and may well keep most markets in the lower part of their 4-8 week channels and even testing support. Much of the reason for the NFP's impact lies in the context in which this news occurred. Consider that:

· News over the past weeks had been mixed at best and markets were waiting for an important indicator like the monthly US NFP results.

· The last time we saw this kind of drop was on June 22nd, 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. However, the OECD forecast was based on 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, possibly leading traders to conclude the World Bank was right and that real recovery is not coming soon, and that growth related assets were likely to fall in value.

Thus our outlook remains unchanged. The likely near term prognosis for most global markets:

1. These may be vulnerable to a retest of major 2009 support levels, which will be more likely if the S&P drops and stays below the May's 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 increasingly hard for the first scenario, but pray harder still for the second.

This week's economic calendar is relatively light on news. Thus the answers are most likely to start coming the following week in mid July, when Q2 earnings start to come out in force.

As we've noted before, the most important news will come from financial sector earnings, which have been the source of major market moves since the current world economic dive began.

We should know much more within the next 10 days.

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