Tuesday, August 11, 2009

Daily AVAFX Traders' Global Markets Review/Preview August 11, 2009

Stocks, Commodities Down, Forex Mixed on Quiet Low Volume Trade


STOCKS: Asia up, Europe and US mostly down on quiet, low volume trade day lacking market moving news. Monday:
Asia Up (N225 +0.95%, HS +2.23%, ST ?+0.00%),
Europe: Mixed (FTSE: +0.68%, DAX -0.75%, CAC 40 -0.47%),
US: Down (S&P -0.33% NSDQ -0.40 % Dow -0.34% ).
Tuesday: Asia towards close: up (N225 +0.58%, HS +0.13%, ST +1.87%).

FOREX: Quiet mixed trading: An unusual day because there was no clear bias to risk or safety currencies.

COMMODITIES: Crude slightly down, gold down as USD stays strong, stocks flat > risk appetite unchanged

MEANING: Monday was a consolidation day, little movement overall

WHY: no market moving news or big traders moving markets

TRADING OPPORTUNITY: stocks at highs, dollar deeply shorted, be ready when key calendar events (see below) hit this week or if stocks moves down to short risk assets, go long USD. See other headlines for more on why markets remain overbought, overpriced, and vulnerable to pullback. See OTHER HEADLINES on banking troubles, which also suggest traders should be ready for pullback, though timing is not clear.


Asia Up (N225 +0.95%, HS +2.23%, ST ?+0.00%)
Europe: Mixed (FTSE: +0.68%, DAX -0.75%, CAC 40 -0.47%)
US: Down (S&P -0.33% NSDQ -0.40 % Dow -0.34% ).
TUESDAY: Asia towards close: up (N225 +0.58%, HS +0.13%, ST +1.87%)

Monday made for a rather boring day for stocks. There wasn't any market-moving news and the major indices spent the entire session trading with relatively modest weakness buying interest. See the below section for coming economic events. Those with an * in front are of top importance.


The euro was 0.3 percent lower at $1.4142 after brushing off a surprisingly strong reading of euro-zone
Sentiment on Monday. The Sentix index produced a -17 reading for August, improving from -31.30 last month.

EURUSD looks likely to range trade ahead of the next potential catalyst, such as a more-hawkish FOMC or a return of risk aversion, which will likely push the pair lower.

Dollar index continues to show USD strength, partly based on a combination of NFP news and an oversold condition that made it ripe for a bounce. A mixed picture for USD, though, gaining against EUR, GBP, CAD, CHF, down against JPY, NZD, and AUD. Analysts said extending the dollar's latest gains may hinge on the actions and statement by the Federal Reserve, which will end a two-day policy meeting on Wednesday. Friday's jobs data showed a smaller-than-expected fall in July U.S. payrolls, suggesting that employment may be turning the corner after months of extreme weakness. Investors were waiting to see if the dollar's latest move was a sign of a breakdown of the recent correlation between the U.S. currency and risk demand -- in which economic data suggesting an improving global economy would batter a dollar trading off an ensuing rise in risk appetite.
"After the positive non-farm payroll data last week, the dollar gained across the board," said Dan Cook, a senior market analyst at IG Markets Inc., in Chicago. "I will definitely be watching this week to see if this is a continuing trend.
"If it looks as though the U.S. economy may recover faster than the other major economies, we may reach a point where
dollar-based assets are more attractive," he added.

Before being certain of a structural shift favoring the dollar, we are waiting to see if recent events play out differently than those in the early June. Back then, we also saw higher Treasury yields and a stronger dollar after better-than-expected payrolls data. We maintain our 3m 1.30 EURUSD forecast on the basis of a potential return of risk aversion (from likely stocks pullback)

$37bn of 3y Treasuries will be auctioned tomorrow (Wednesday). Investors will be watching the auctions as any poor results for the $75bn of 3y, 10y and 30y Treasuries this week could raise concern on the ability to fund the deficit. 2y yields dropped to 1.23% and 10y yields moved down to 3.78% during the session. The dollar should continue to benefit as a safe haven amid any pullbacks in risk-seeking while we continue to monitor recent developments for lasting signals of sentiment shifts.

Continued weak against USD after last week's QE increase, also weak GDP. The Daily Telegraph's article headlined "UK risks a Japan-style lost decade, BoE to warn," kept sterling under pressure ahead of the BoE's inflation report on Wed, Aug 12. Cable dropped down to a low of 1.6431 on the day and EURGBP rose to 0.8580 at the time of writing. Trade balance data is due. Our 6

The yen climbed across the board on Tuesday, gaining strongly against the Australian and New Zealand
dollars as investors trimmed long positions in those currencies after Chinese data showed below-forecast factory expansion Recovered some of losses against USD, EUR as stocks fell, JPY bought as safe haven. China's industrial output grew at the fastest rate in nine months in July but fell short of expectations, disappointing some in the market and prompting them to take profits on riskier trades, dealers said.

No news, quiet trade, slightly down as stocks drop, Chinese factory growth disappoints. Today's big news will be housing starts. Good news help balance the glum employment picture.

The Australian and New Zealand dollars, which have been favored as pro-risk economic recovery trades in the past few months, fell 0.8 percent against the Japanese currency.
"Since the currency market overall has been on a correction phase, it looked at the more negative parts of the data as it
needed triggers," said Hideki Hayashi, a global economist at Mizuho Securities.
"Especially the Aussie, which had risen rapidly among the yen crosses, faced more profit-taking than others." Resource demand from China helped underpin Australian exports even as global trade slumped, and Hayashi said China's data was
not in itself negative.
"China and Australia are important partners. And Australia, which has resources, stands out among industrialized nations as it has higher interest rates and its domestic demand is strong," he said.

RBA Governor Glen Stevens delivers his semi-annual testimony to parliament on Friday, but it is unlikely that he would have changed his tone so soon after last week's RBA rate decision and quarterly Statement. The Baltic Dry Index fell to an over a 2-month low last week. It was its worst week since Oct'08 (falling 17%) due to slowing Chinese demand for shipments of coal and iron ore slowed. The RBA's monetary policy report sounded a cautiously optimistic note, observing that the global economy is stabilizing and "extreme risk aversion seen earlier in the year has retreated somewhat". The bank judged that the domestic economy has shown "considerable resilience", helped by a strong recovery in China that has boosted demand for Australian exports. The statement forecasts that the domestic GDP growth will average 0.5% over 2009. On the subject of interest rates, stronger-than-expected economic data and a general improvement in sentiment both domestically and overseas, have "reduced the likelihood" that further cuts to the policy rate will be needed.


CRUDE: Technically overbought, vulnerable to pullback, with much of the good news already priced in, overwhelming percentage of futures long on crude, and demand remains weak. Crude also vulnerable to stock pullback. Crude prices could also suffer if USD continues to strengthen, either on good US economic news or as safety haven during stock pullback.

GOLD: Gold futures fell Monday for a fourth straight session, and sluggish investment demand pushed holdings in the biggest gold exchange-traded fund to the lowest level in three months. Investors are also awaiting the outcome of the Federal Reserve's two-day policy meeting, which ends on Wednesday. The Fed is expected to tighten its monetary policy sooner rather than later, a move that could boost the U.S. dollar, reduce inflation worries and pressure gold prices.


China's exports, imports fall sharply in July-AP Government reports China's exports fall 22.9 percent in July, imports down 14.9 percent (due to sharply lower prices for oil, iron ore, and other raw materials from last year's record levels

Watchdog says bad assets still threaten banks- AP In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel warns that banks still hold many risky loans of uncertain value. If unemployment rises sharply or the commercial real estate market collapses -- as many economists fear -- the banking system could again lose its footing, the panel says in a report to be released Tuesday. [this risk is one of prime reasons markets are overvalued]

"The financial system (remains) vulnerable to the crisis conditions that (the bailout) was meant to fix," the panel wrote in a draft copy of Tuesday's report.

Small banks are especially vulnerable, the report notes. The troubled assets weighing on their balance sheets generally are in the form of complete loans, as opposed to the mortgage-backed securities formed from bundles of numerous loans that have been divvied up. The Treasury Department's main program for buying up bad assets, however, currently targets only those securities and not the so-called "whole" loans.

In addition, the report says, regional and smaller banks hold greater numbers of commercial real estate loans, "which pose a potential threat of high defaults." It said the adequacy of small banks' capital cushions against losses hasn't been tested by the government, which performed "stress tests" in May only on the 19 biggest U.S. banks

Owners of shopping malls, hotels and offices have been defaulting on their loans at an alarming rate, and the commercial real estate market isn't expected to hit bottom for three more years, industry experts have warned. Delinquency rates on commercial loans have doubled in the past year to 7 percent as more companies downsize and retailers close their doors, according to the Federal Reserve.

The commercial real estate market's fortunes are tied closely to the economy, especially unemployment, which registered 9.4 percent last month. As people lose their jobs, or have their hours reduced, they cut back on spending, which hurts retailers, and take fewer trips, affecting hotels.

Traders said the market was also looking to cover short positions against the dollar ahead of the end of the Federal Reserve's two-day policy meeting on Wednesday.
After better than expected U.S. jobs data last week and a sharp rise in the dollar, the market has been trying to ascertain whether the rising risk appetite-falling dollar dynamic which has held for much of this year has started to crumble.
The market has even begun to price in tightening by the Federal Reserve early in 2010. But analysts are wary, noting the dollar had a short-lived climb in early June for similar reasons, with the market speculating that U.S. interest rates would start to rise sooner than expected.
"Whether a paradigm shift is taking place with regards to a loosening in correlation between risk aversion and the U.S. dollar is still too early to call," said Jonathan Cavenagh, a currency strategist at Westpac, Sydney.
Federal Reserve policy makers are expected to hold the fed funds rate at the zero-0.25 percent level but analysts say they could sound more confident about the economy and might lay out a plan for pulling back some of the Fed's quantitative easing policies.
"The scale of job losses is still large. So it will be too early to put an end to the U.S. quantitative easing policy," said Yuichi Hojo, a director in the forex division of UBS.

New Bull Market Just Bull?

Two excellent blogs on why the current rally may be just a stage in soon to be resumed bear market:

· Preview from Europe: Non-Farm Payrolls Add to Bullish Tone
Very good graphs on Bob Farrell's Rule # 8: Bear markets have 3 stages 1. sharp downturn 2. reflexive rebound 3. drawn our fundamental downtrend & suggests we're currently in reflexive rebound stage, prelude to a further downturn in stocks and other risk assets.
· Preview from Europe: Stocks Consolidate at Lofty Levels
· http://seekingalpha.com/article/153851-preview-from-europe-stocks-consolidate-at-lofty-levels
Key points include:
A record 13.9% of companies beat their EPS estimates, prior record was 7.9% in Q1 of 2004. Does this suggest the game of lowball estimates have become far more exaggerated?

Year over year profit growth still at -29.5%. Yes, that's better than the -31.7% consensus estimate before Q1, but at the start of the year estimated growth rate for Q2 was -11.3%, So actually, earnings are coming in below expected by more than 18 percentage points on this basis, but believe me, there is nary a newspaper or a bubblevision TV program that is going to make mention of that particular statistic.

What about guidance? Again, not a broadly reported statistic but there have been 39 negative EPS pre-announcements versus 15 positive pre-announcements thus far for 3Q. That yields a negative/positive ratio of 2.6x, which is actually well above the 1.8x at this same juncture during the Q1 reporting season three months ago and the long-run average of 2.1x.

What about valuations? The S&P 500 is trading at 16.5x calendar year 2009 earnings estimates; 14.7x four-quarter forward estimates; a 13.2x calendar year estimates. These are forward estimates, which are merely analyst projections, and they are based on operating, not reported earnings. And the best, the very best, multiple that can be drummed up is 13.2x. That doesn’t exactly sound like bargain prices from where we sit, especially when dividends are being slashed and the corporate bond market is still offering up coupons of over 7%.


MEANING: Monday was a quiet consolidation day.
WHY: No significant market moving news
TRADING OPPORTUNITY: stocks at highs, dollar still deeply shorted, while traders should not attempt to fight the tape, they should be ready to take profits and go short if the markets begin a pullback.
[Forecasted—Prior ] All times are GMT, *= Most Important

Economic Calendar News [actual-expected-prior, all times GMT]
12:50am JPY Core Machinery Orders m/m 9.7% 2.8% -3.0%
*2:30am AUD Home Loans m/m 1.1% 1.9% 2.2%
7:45am EUR French Industrial Production m/m +0.3% -0.1% 2.6%

Aug 11 12:01am GBP BRC Retail Sales Monitor y/y 1.8 1.4%
12:01am GBP RICS House Price Balance -8.1 -9.8% -18.1%
*3:00am CNY Industrial Production y/y -10.8 11.5% 10.7%
3:00am CNY CPI y/y -1.8 -1.7% -1.7%
3:00am CNY NBS Press Conference
3:00am CNY PPI y/y -8.2% -8.3% -7.8%
Tentative JPY Monetary Policy Statement
*Tentative CNY Trade Balance 10.6 10.3B 8.3B
*Tentative JPY BOJ Press Conference
9:30am GBP Trade Balance -6.4B -6.3B
*1:15pm CAD Housing Starts 141K 141K

2:00am AUD Westpac Consumer Sentiment 9.3%
2:30am AUD Wage Price Index q/q 0.8% 0.8%
6:00am JPY BOJ Monthly Report
*9:30am GBP Claimant Count Change 25.5K 23.8K
9:30am GBP Average Earnings Index 3m/y 2.3% 2.3%
9:30am GBP Unemployment Rate 7.7% 7.6%
10:00am EUR Industrial Production m/m 0.4% 0.5%
*10:30am GBP BOE Gov King Speaks
*10:30am GBP BOE Inflation Report
*1:30pm CAD Trade Balance -0.6B -1.4B
*1:30pm USD Trade Balance -28.4B -26.0B
3:30pm USD Crude Oil Inventories 1.7M
*7:15pm USD FOMC Statement
*7:15pm USD Federal Funds Rate <0.25% <0.25%

Aug 13 2:00am AUD MI Inflation Expectations 3.2%
*7:00am EUR German Prelim GDP q/q -0.3% -3.8%
7:45am EUR French Prelim GDP q/q -0.5% -1.2%
8:15am CHF PPI m/m 0.1% 0.0%
9:00am EUR ECB Monthly Bulletin
10:00am EUR Flash GDP q/q -0.5% -2.5%
*1:30pm USD Core Retail Sales m/m 0.2% 0.3%
*1:30pm USD Retail Sales m/m 0.5% 0.6%
*1:30pm USD Unemployment Claims 540K 550K
1:30pm USD Import Prices m/m -0.2% 3.2%
3:00pm USD Business Inventories m/m -0.9% -1.0%
*11:45pm NZD Retail Sales m/m -0.3% 0.8%

*Aug 14 12:30am AUD RBA Gov Stevens Speaks
12:50am JPY Monetary Policy Meeting Minutes
12:50am JPY Tertiary Industry Activity m/m -0.3% -0.1%
7:45am EUR French Prelim Non-Farm Payrolls q/q -0.9% -1.2%
10:00am EUR CPI y/y -0.6% -0.6%
10:00am EUR Core CPI y/y 1.4% 1.4%
1:30pm CAD Manufacturing Sales m/m -0.2% -6.0%
*1:30pm USD Core CPI m/m 0.1% 0.2%
1:30pm USD CPI m/m 0.0% 0.7%

After a rollercoaster week, forex trading expects another interesting week: rate decisions in the US and Japan, CPI figures around the world and much more. Let’s see what’s on the menu this week.

Last week began with a collapse of the dollar. Later on, it began recovering, and then made a comeback on Friday’s surprising Non-Farm Payrolls. Will the greenback stabilize this week? Or are we expected for another volatile week? Here are the major events that will impact currency trading this week:

Tuesday, August 11th: In Japan, there’s a fresh rate decision. Overnight Call Rate isn’t expected to move from rock bottom, 0.1%. Traders will check out the Monetary Policy Statement and later the BOJ Press Conference for hints on recovery. Yen carry trades will shake.

British Trade Balance is expected to show a stable deficit, remaining around 6.3 billion.

In Canada, Housing Starts are predicted to stay stable. This is a very important figure for the loonie. In the US, quarterly Prelim Non-farm Productivity and Prelim Unit Labor Costs are the first American figures for this week.

Wednesday, August 12th: In Australia, the Westpac Consumer Sentiment. In addition, quarterly Wage Price Index is also important for the Aussie.

Britain’s first and most important employment indicator, Claimant Count Change, is predicted to stand at 25.5K. Later in Britain, the BoE releases the monthly BOE Inflation Report. It’ll be accompanied by a speech from BoE governor, Mervyn King. The Pound will definitely go wild…

In North America, American and Canadian Trade Balance figures are published at the same time. USD/CAD is sensitive to this double-feature event.

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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