Little Movement Overall Despite Bad News From US, Stocks Down Moderately, Other Risk Assets Down Slightly/Flat, USD Fails to Recover Despite Lower Stocks
SUMMARY
Global Equities: down slightly/flat, showing resilience despite very bad news yesterday, could have been much worse considering signs that Friday's NFP may show unemployment not improving or worsening.
Forex: Steady, little movement despite worrying news from US and stocks down a bit, AUD up on better employment.
Commodities: Crude oil flat around $71 per barrel, Gold down slightly to $962. Both of these are now, along with other risk assets, near multi month highs, catching up to stocks which were flat, showing consolidation ahead of Friday's NFP
Wednesday's economic calendar shows good news for GBP, AUD, bad news from EUR, USD, NZD. Thursday's calendar quiet, ECB announcement to be the main event, BoE statement also could be important.
STOCKS
In the US, the stock market struggled for most of the session. Losses were broad-based and considerable as most of the major sectors in the S&P 500 traded at least 1% into the red. Their weakness wasn't necessarily caused by the day's economic data, but the data certainly didn't stir up any support for stocks either.
Released before the opening bell, the latest ADP Employment Report indicated that 371,000 jobs were slashed in July, but that was greater than the 350,000 job losses that had been forecast. Meanwhile, job losses for June were revised lower to reflect 463,000 job cuts. The figures come ahead of the government's nonfarm payrolls report, which is expected to show 328,000 job losses when it is released Friday.
The ADP data was followed by some modest selling pressure in premarket trading, but stocks still started the session flat. Selling pressure intensified ahead of the latest ISM Service Index and factory orders data.
The ISM Services Index for July unexpectedly slipped to 46.4 from 47.0 in June. It was expected to come in at 48.0. The disappointing reading caused participants to generally dismiss the third straight monthly increase in factory orders, which most recently turned 0.4% higher in June. (NB: EMPLOYMENT PART OF THIS ALSO WORSE THAN EXPECTED)
The broader market did attempt another upward push into the close, but this time the advance was rebuffed. Still, the S&P 500 held above the 1000 mark as its decliners outnumbered its advancing issues by 2-to-1 in relatively high volume. Declining issues outnumbered advancers by more than 2-to-1 in the Dow. Procter & Gamble (PG 53.91, -1.55) was a primary laggard among blue chips, even though the company bested the consensus earnings estimate for the latest quarter. Fellow Dow component Kraft (KFT 28.33, -0.01) also lagged, despite posting a positive earnings surprise. DJ30 -39.22 NASDAQ -18.26 NQ100 -0.9% R2K -0.8% SP400 -0.3% SP500 -2.93 NASDAQ Adv/Vol/Dec 969/2.36 bln/1701 NYSE Adv/Vol/Dec 1388/1.88 bln/1640 is in, and thus so are the likely gains for the near term.
Materials stocks also garnered support and finished 0.8% higher after spending the middle half of the session in the red. Besides financials, it was the only other sector in the S&P 500 to make a gain. The sector benefited from a rebound in commodity prices, which saw oil prices rebound from a loss of more than 2% to close 0.8% higher at nearly $72 per barrel. Oil prices were initially pressured by a larger-than-expected weekly inventory build of 1.67 million barrels.
FOREX
General: Risk currencies flat/down with stocks, commodity and higher yielders doing worse against lower yielders, exception, USD down or flat against these, underperforms other safety currencies despite weak stock market action.
EUR ECB decision due Eurozone Services PMI continued the recent trend of expectation-beating data releases and rose to 45.7 versus consensus 45.6. The composite reading managed to reach 47.0 against expectations of 46.8. We do not expect the ECB to change the official rate. Investors will closely watch the press conference for any signals of future ECB actions, conventional or otherwise. We think the outcome could be more dovish than expected, which would weigh on EURUSD. It is interesting to note that at every single post-meeting conference, ECB President Trichet stressed that 1% is not the floor in rates, indicating that there is still a body of opinion within the Governing Council which favours further cuts. According to the IMF, the EUR is currently overvalued in a range of 0-15% and this has prevented any gains in the margins for Eurozone exporters. This is not a welcome development for the region's manufacturers and monetary conditions also need to be accommodative to create a positive environment for banks to cleanse balance sheets. A more dovish tone would prevent yields from becoming more attractive but could also put more downward pressure on the euro rather than simply alleviating current interest in the currency
USD: Disappointing data The non-manufacturing ISM disappointed expectations of 48.0 by coming in at 46.4, down from 47.0 previously. WORSE, THAN THE HEADLINE # WAS THE SLIP IN THE EMPLOYMENT INDEX from 43.4 last month to 41.5. The slip in the non-manufacturing ISM and the weaker results in the ADP estimate of -371k provided the dollar with a temporary boost before the buck slowly gave back some of the gains as equities regained some ground. US and European equities finished slightly negative. Taken together these suggest conditions are not improving in the US, and that Friday's NFP could again disappoint & threaten rally
JPY: See General.
CHF: See General.
GBP: More positive economic surprises ahead of BoE Services PMI for July beat expectations of 51.8 at 53.2 versus 51.6 previously. Industrial production and manufacturing production expanded in July at 0.5% m/m versus consensus 0.0% and 0.4% m/m versus consensus -0.1% m/m, respectively. Investors will now turn to the BoE's policy decision. Today's strong data may encourage the adoption of a "wait and see" approach, effectively pausing QE operations to see if the economy recovers without further quantitative stimulus. We do not expect a change in the official rate and think the BoE will indeed enter a "wait and see" mode with regards to the size of the QE program.
AUD: Australia added 32,200 jobs in July, far better than forecasts for a 20,000 fall in employment, while the jobless rate held steady at 5.8 percent, adding to signs of an economic recovery. The strength in the Aussie was tempered by a drop in full-time jobs and falling Chinese shares, but the market took these numbers as increasing the likelihood of an early rise in interest rates The market cannot find a factor which could break the uptrend in the Aussie," said Hideki Amikura, deputy general manager of the forex section at Nomura Trust Bank. "But that said, tomorrow's U.S. jobs report is expected to show weak numbers which may be the potential catalyst to dampen economic recovery hopes, and reverse recent gains in assets including stocks and yen crosses," Amikura added.
NZD: See General. In contrast, the New Zealand dollar fell after data showed the country's jobless rate climbed more than expected to 6.0 percent for the second quarter, a nine-year high, backing views its central bank will keep interest rates at a record low well into 2010. Labour data due The labour market will likely soften for the rest of the year as our economists are looking for the unemployment rate to increase from 5.0% to 5.3% for the second quarter (consensus 5.7%). They note a softening labour market will flag additional downside for wage inflation ahead, which reduces any inflation-related worries from the labour market in the near-term. The reported jump in milk prices by a major New Zealand dairy exporter boosted NZD, which could mean that the NZD could also be a beneficiary from the global economic upswing. But RBNZ officials will remain wary of the impact of NZD strength on growth prospects.
COMMODITIES
Following the general direction of stocks, which show or feed a combined effect of rising risk appetite (which causes a weaker USD) and falling USD in which these are priced, thus causing commodities to rise. Timing varies somewhat. Monday crude rose fast, gold was steady. Tuesday the two switched roles and gold moved up while oil held. Overall, commodities are catching up to stocks and are now also nearing 2009 highs.
Crude held steady below $72, recovering from a nearly 2% drop on weak equities, unexpectedly large US inventories.
Gold down slightly from $963 to $962. Gold may average $925 an ounce this year on increased demand for haven investments as the global economy faces “formidable structural challenges,” according to HSBC Securities. The forecast is 5.7 percent higher than an earlier target of $875 an ounce, the bank said in a report yesterday. HSBC raised its 2010 estimate for the metal by 8.6 percent to $950 an ounce and its 2011 target by 14 percent to $825. Gold prices will be subject to a myriad of competing forces, including strong investor demand, potentially volatile commodity prices, weak jewelry demand, sluggish mine output, and heavy scrap sales,” New York-based analyst James Steel wrote in the report. “The interplay between these forces will likely keep gold in a wide and volatile trading range.”
OTHER HEADLINES
Hank Greenberg Said to Face SEC Lawsuit After Role as AIG Chief Executive
European Futures Rise Before Interest-Rate Decisions; Asian Stocks Advance
Commerzbank Posts $1.1 Billion Loss on Higher Loan Provisions, Writedowns
China's `Fine-Tuning' Signals Monetary Policy Tightening, Economist Says
BoJ Said to Predict Deflation Through 2011 Even Amid Recovery
CONCLUSIONS
Pronounced quiet suggests traders remain cautious ahead of Friday's US non-farm payrolls data. Last month's announcement was disappointing and sent world markets tumbling from near 2009 highs. See AVAFX's special report on ideas for profiting from this event at www.avafx.com/analysis.
ECONOMIC CALENDAR
[Forecasted—Prior ] All times are GMT, *= Most Important
WEDNESDAY AUG 5TH BIG NEWS FR UK, US: UK BETTER, US WORSE
*2:00am GBP Halifax HPI m/m 1.1% 0.7% -0.5%
4:30am GBP Manufacturing Production m/m +0.4% 0.0% -0.5%
*4:30am GBP Services PMI 53.2 51.9 51.6
5:00am EUR Retail Sales m/m -0.2% 0.3% -0.4%
*8:15am USD ADP Non-Farm Employment Change -371k -335K -473K
*10:00am USD ISM Non-Manufacturing PMI -46.4 48.1 47.0
10:00am USD Factory Orders m/m +0.4% -0.5% 1.2%
10:30am USD Crude Oil Inventories 1.7M 0.9M 5.1M
11:45pm NZD Employment Change q/q -0.4% -0.7% -1.3%
11:45pm NZD Unemployment Rate 6.0% 5.6% 5.0
THURSDAY AUG 6TH A QUIET DAY, BUT ECB AND BOE STATEMENTS COULD BE IMPORTANT
2:30am AUD Employment Change +32.2K -18.8K -23.1K
2:30am AUD Unemployment Rate 5.8% 6.0% 5.8%
*Tentative GBP MPC Rate Statement
*7:00am GBP Official Bank Rate 0.50% 0.50%
*7:45am EUR Minimum Bid Rate 1.00% 1.00%
*8:30am CAD Building Permits m/m 1.1% 14.8%
*8:30am EUR ECB Press Conference
*8:30am USD 1ST TIME Unemployment Claims 593K 584K
10:30am USD Natural Gas Storage 71B
7:30pm AUD AIG Construction Index 42.6
9:30pm AUD RBA Monetary Policy Statement
DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments.
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