The Daily AVAFX Trader's Global Markets Review/Preview Wednesday August 5, 2009

The Daily AVAFX Global Forex, Commodity, & Stock Markets Review/Preview Wednesday August 5, 2009

A Mixed Picture: Asia, Europe Stocks Down, US Up, Risk Currencies Mixed, Commodities Steady Or Up, Catching Up to Other Risk Assets As They Too Approach 2009 Highs

SUMMARY

Global Equities: An overall very mixed picture, with only modest movement up or down. Asian and European equities down a bit, US stocks up a bit as better than expected US spending and rising pending home sales news outweighed disappointing personal income data and profit taking to leave stocks slightly higher.
Forex: Overall, no big moves among the major pairs, with risk appetite (higher yielding and/or commodity based) currencies were down against others, with the JPY, CHF, EUR, and GBP generally gaining against the AUD, NZD, CAD. However, almost everything held or gained against the still weakening USD.
Commodities: Crude held steady around $71 despite weak equities, due to declining inventory data and a weakening USD. Gold up over 1% from $951 to $963 catches up to crude as now both these too near multi month highs, catching up to stocks and risk currencies. Now commodities too are near 2009 highs.


STOCKS

Better than expected US spending and rising pending home sales news outweighed disappointing personal income data and profit taking to leave stocks slightly higher. Only a late buying surge allowed the US markets a barely positive finish.

Stocks started the session in negative territory as participants were left largely unimpressed by the latest batch of earnings announcements, which didn't contain any real market movers. News that June personal income fell a larger-than-expected 1.3% and June spending made a generally in-line 0.4% increase also failed to stir action.

However, a much better-than-expected monthly increase of 3.6% for June pending home sales bounced stocks off of morning lows. The move proved unsustainable, but financials emerged to provide support to the broader market.

Financials stocks were down more than 1% in the early going, but rebounded to settle with an 2.1% gain, just shy of their session high. There wasn't any particular catalyst to account for the sharp reversal from red to green other than momentum buying. That momentum helped carry the major indices into positive territory midsession.

Despite leadership from the financial sector, the broader market was unable to break free from its fit of choppiness. Still, the apparent instability couldn't disrupt a strong advance into the close that gave stocks their fourth straight advance.

NB: Healthy rallies should show growing volume. The 20 day simple moving average for volume on the S&P has been dropping mid-May and stayed flat for July, raising question about how long the current rally can last unless there is substantially good news from Friday's non-farm payrolls data. Even then, one could argue that given the expectations for recovery in the coming year already priced in with July's rally to new 2009 highs, even a good NFP reading could prompt profit taking. Traders may decide the news of the bottoming is in, and thus so are the likely gains for the near term.


FOREX

General
Risk currencies (higher yielding and commodity based) up w/ rising stocks, commodity and higher yielders generally lost ground to lower yielders, the big exception being the USD, which fell or failed to gain against all majors due mostly to continued risk appetite bolstered by US stocks. However, traders should be prepared for a pullback in stocks and other risk assets. Given that the USD has not been this deeply shorted since around March 2008, and thus could rally hard on any extended drop in stocks and risk appetite.

EUR
See General. Also, Services and Composite PMI up next Eurozone PPI was 0.3% m/m for June versus consensus 0.2% m/m and the May estimate was revised upwards to 0%. The y/y figure was as expected at -6.6%. After several months in negative territory, the news will be greeted with some relief by ECB policymakers as the data as the data decreases deflation risk for now. Services and Composite PMI for the Eurozone are due and consensus is for no change on both fronts. Some see euro rising towards December high of $1.4720

USD
See General. Also, breaking through multi-month support against virtually all other currencies. Risk sentiment continues to be a significant near-term driver as investors are just as willing to buy the buck at any hint of trouble as they are to shun it. If the USD fails to rebound soon, it could indicate a longer term downtrend according to some analysts.

CAD
See General. Note that Canadian Finance Minister Flaherty said on Aug. 4 that he is concerned about recent rapid changes in the CAD. He reiterated his opposition to speculative influences in the currency and said steps could be taken to dampen fluctuations, should there be indications of speculation, though he did not elaborate any further. No active BoC intervention is seen in the near term, but mere mention of the threat can dampen demand, especially given the recent success of Swiss National Bank intervention.

JPY
See General.

CHF
See General. Weaker CPI Swiss CPI for July fell faster than expected to -0.7% m/m (consensus -0.5%, previous 0.2%). The annualised reading was also weaker at -1.2% (consensus -1.1%, previous -1.0%). The central bank will probably warn that adjusting its current intervention policy will still not be a near-term prospect as long as deflation risks remain. Rhetoric suggests that the SNB is content so far with the results of intervention but will wait until September and hope for a clearer picture on the regional and global growth outlook.

GBP
See General. Construction PMI issues positive surprise Construction PMI for July beat expectations of 45.0, and managed to reach 47.0, up from 44.5 in June. Up next is Services PMI, which is expected to pick up slightly to 51.8 from 51.6. The BoE's MPC appears more confident of a near-term recovery but will likely want to see more evidence of a sustained growth before it considers raising policy rates. A strong result in the Services PMI would probably discourage the MPC from expanding QE. Many analysts continue to short the GBP vs. the USD and EUR.

NZD
See General.

AUD
See General.


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 around $71 despite weak equities, due to declining inventory data and a weakening USD.
Gold up over 1% from $951 to $963 Gold down slightly to around $953 from over $954.


OTHER HEADLINES

(Bloomberg)Household income in the U.S. is weakening as the influence of the government’s stimulus plan wanes, prompting economists, Federal Reserve officials and a Nobel laureate to warn that consumer spending may struggle.

“Consumers have started to change their behavior and they are going to save more,” said Richard Berner, co-head of global economics at Morgan Stanley in New York and a former researcher at the Fed. “You have pressure on wages, you have employment still declining.” Key points included:

US Commerce Dept data that showed:

· Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.

· Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years.

Official Unemployment is projected for 2010 to be around 10%. Due to the way this is calculated, real unemployment is considered to be much higher

Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year’s first quarter, according to figures from the Fed.

The savings rate in June fell to 4.6 percent as incomes dropped, yesterday’s Commerce Department report showed. The rate, which reached a 14-year high of 6.2 percent the previous month, is likely to keep climbing


CONCLUSIONS

Global stocks and other risk assets have rallied far on only mixed data. Hints of improvement in unemployment in US PMI on Monday were very significant because they suggest Friday's 'Main Event" of the week non farms payrolls data may also please the markets. Given the markets' recent ability to rise on very mixed data and ignore the negative, genuinely good news could really move up. However, given that global markets are already at or near 2009 highs they remain vulnerable to pullback if there are negative surprises, especially from employment data, which appears to be the weak link in the recovery thus far.

Moreover, even a good NFP could ironically spark a selloff if traders believe recovery expectations are already priced in and that the odds off pullback suggest it's time to take profits. If that happens, given the extended nature of the rally and that commodity currencies are trading at historically wide ranges against the USD, the move could gain momentum, causing a sharp drop in risk assets and rise in safe havens like the USD.


ECONOMIC CALENDAR

[Forecasted—Prior ] All times are GMT, *= Most Important

TUESDAY AUG 4TH

*12:30am AUD Cash Rate 3.00% 3.00% 3.00%
*12:30am AUD RBA Rate Statement no change, bullish on AUD economy
8:30am USD Core PCE Price Index m/m 0.2% 0.2% 0.1%
8:30am USD Personal Spending m/m 0.4% 0.3% 0.1%
8:30am USD Personal Income m/m -1.3% -0.9% 1.3%
9:30am USD FOMC Member Tarullo Speaks
*10:00am USD Pending Home Sales m/m +3.6% 0.6% 0.1%
7:01pm GBP Nationwide Consumer Confidence 60 59 58
*9:30pm AUD Trade Balance -0.44 -0.79B -0.56B


WEDNESDAY AUG 5TH

*2:00am GBP Halifax HPI m/m 1.1% 0.7% -0.5%
4:30am GBP Manufacturing Production m/m 0.0% -0.5%
*4:30am GBP Services PMI 51.9 51.6
5:00am EUR Retail Sales m/m 0.3% -0.4%
*8:15am USD ADP Non-Farm Employment Change -335K -473K
*10:00am USD ISM Non-Manufacturing PMI 48.1 47.0
10:00am USD Factory Orders m/m -0.5% 1.2%
10:30am USD Crude Oil Inventories 5.1M
6:45pm NZD Employment Change q/q -0.6% -1.1%
6:45pm NZD Unemployment Rate 5.6% 5.0%
7:01pm GBP NIESR GDP Estimate
*9:30pm AUD Employment Change -17.8K -21.4K
*9:30pm AUD Unemployment Rate 6.0% 5.8%


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