Wednesday, August 12, 2009

Daily AVAFX Traders' Global Markets Review/Preview August 12, 2009

Risk Assets Down on Profit Taking Ahead of BoE, FOMC Statements

SUMMARY

STOCKS: Asia ends up, Europe, US close lower on profit taking on Tuesday ahead of BoE, FOMC statements. Early Wednesday trade in Asia also shows stocks down.

FOREX: Risk currencies down against safer-havens, JPY biggest gainer.

COMMODITIES:
Crude down below $70 dropping for 3rd day, steady near $70 in Wednesday Asia trade.
Gold down 5th day to $944 on weak demand, risk aversion and profit taking ahead of FOMC, profit taking, as USD stays strong on dropping stocks and rising risk aversion ahead of FOMC. Longer term, gold producer forward hedging hitting multi-year lows as producers want more exposure to future spot prices, suggesting that miners believe higher prices are on the way.

MEANING: Profit taking on rising risk aversion favors safe haven currencies, shorting risk assets in short term.

WHY: Given high prices on risk assets they are vulnerable to pullback from rising risk-aversion from Tuesday's: negative US inventory, productivity, labor cost numbers. Declining inventories suggest businesses don't see recovery coming, and the productivity and labor cost figures suggest US workers are earning less and will be spending less. More importantly, uncertainty from BoE and FOMC statements today, both of which could move markets, as detailed below.

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, vulnerable to pullback. See OTHER HEADLINES on banking troubles, which also suggest traders should be ready for pullback, though timing is not clear. TRADERS SHOULD MONITOR BoE and FOMC statements today. USD and GBP could be big movers on these.

STOCKS

MONDAY
Tuesday:
Asia up (N225 +0.58%, HS +0.13%, ST +1.87%)
Europe: Down (FTSE: -1.08%, DAX -2.44%, CAC 40 -1.38%)
US: Down (S&P -1.27% NSDQ -1.13 % Dow -1.03% )
Wednesday:
· Asia towards close: up (N225 -1.42%, HS -3.01%, ST -1.16%)

Weakness among financial stocks led to a broad-based selling effort that resulted in the stock market's worst single-session percentage decline in one month. Though stocks finished off of session lows, they still closed in weak fashion, unable to garner support and limit losses as they did in the previous session.

The downturn left the S&P 500 just below 995, which is considered a support level below the psychologically significant 1000. Many market watchers regard 990 as the next level of support, followed by 980.


FOREX

EUR: The final print of German CPI data was revised up fractionally to -0.5% y/y versus consensus -0.6% y/y. Eurozone July CPI is expected to remain at -0.6%. ECB President Trichet, though, said the recent drop in inflation rates was due to base effects and expects inflations rates to turn positive again later in the year. 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.

USD: Plenty of market moving news: Treasury auctions, FOMC statements. If Fed is seen as too inclined to extend its stimulus programs, dampens hopes of raising interest rates, or is otherwise seen as too dovish on fighting inflation, that could hurt the dollar. Opposite indications would help the USD, as would remarks that convince markets that inflation is not a threat. If US 10 year Treasury bond sales are weak, the Fed might be forced to buy, which is in essence more stimulus and would thus look dovish in the fight to defend the USD's value and would hurt the USD. The BoE statement today could also potentially influence USD if it implies that UK Debt/GDP ratio is too high, because it might raise questions about stability of not just the GBP but also the USD because the US has also used stimulus and debt aggressively. See below for more in FED AHEAD.

GBP: Could see volatility if today's BoE statement is taken as more hawkish in defending the GBP's value, which would support the GBP. If the BoE statement is taken the opposite way, the GBP could drop further. Also, if it implies that UK Debt/GDP ratio is too high, because it might raise questions about stability of not just the GBP but also the USD because the US has also used stimulus and debt aggressively. See below for more in FED AHEAD.


JPY: The yen was a major beneficiary on Tuesday after stock markets succumbed to profit-taking on their extended rally. "The recovery story has been pushed hard, very hard, and it makes sense to see this momentum unwind a little," said Adam Carr, senior economist at ICAP, Sydney.
"Particularly when there are plenty of equity analysts running around arguing strong moves to date don't reflect fundamentals." Traders also said the dollar's jump to an eight-week high near 98 yen late last week following better-than-expected U.S. employment data was over done, and investors were now cutting dollar long positions versus the yen.

Domestic CGPI is expected to be unchanged m/m while the y/y figure is expected to drop even further. Industrial production, capacity utilization and the BoJ monthly reports are all due as well. The yen continued to benefit from the pullback in risk sentiment as USDJPY and the yen crosses headed lower during the session. We still look for USDJPY around 95 within the coming weeks as it appears to remain a safe haven currency for now.


CAD: Housing starts disappointed at 132.1k and the June reading was revised down to 137.8k. The trade balance and the new housing price index are due, with the trade balance expected to be negative again as Canadian exports remain weak. A drop in crude oil and the pullback in risk seeking have helped keep USDCAD supported above 1.10. The greater likelihood going forward appears for the USD to gain a bit more on risk aversion.

AUD, NZD: Down on risk aversion ahead of FOMC statement.
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.



COMMODITIES

CRUDE: Dropping Tuesday, steady Wednesday around $70 ahead of FOMC meeting. 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. On its part, the Organization of the Petroleum Exporting Countries anticipated that the slow recovery in global consumption and rival oil supplies would shrink demand for its crude next year.
Paris-based International Energy Agency (IEA) will release its closely watched oil monthly report later on Wednesday.


GOLD: Short Term: dropping on profit taking, concerns ahead of FOMC statement that it might be more hawkish, hinting at coming exit from QE, which would lessen chances of inflation OR that it could be so gloomy that inflation seems unlikely in near term. However, if Fed is less optimistic and more pro-stimulus than expected, that would pressure the USD, and support gold.
Longer Term is more positive, global gold price hedging by producers is nearing a multi-year low, suggesting that miners DO NOT want to be bound by current prices and want more exposure to anticipated higher spot prices.


OTHER HEADLINES

The FOMC and the Markets

In sum, the Fed is unlikely to be worried about inflation (too much unemployment, banking troubles for a quick recovery), and is likely to express more concern about job recovery, thus while rates are likely to be left unchanged (since little has changed since last statement in July) tone of the statement is more likely to remain "dovish" (not fighting inflation) and thus pressure USD downward.

Given the timing of Wednesday's 10 year Treasury bond auction results at 1700 GMT and the FOMC at 1815 GMT, it should not surprise if we see weaker statistics for the 10y auction as some investors are concerned that the FOMC could unexpectedly decide to increase the size of the Treasury purchases, similar to the BoE's surprise decision last week. A surprise on the asset purchase front or a more dovish than expected Fed could temper expectations of a shift in sentiment, following last week's nonfarm payrolls release, and could weigh on the dollar. But while we wait to see if recent events play out differently than those in the early-June episode, the dollar should continue to benefit as a safe haven amid any pullbacks in risk sentiment. And higher yields, depending on the FOMC statement, could once again prove to be dollar-supportive.





Why Markets May Be Ready to Pull Back: Links to articles worth seeing.

Preview from Europe: Non-Farm Payrolls Add to Bullish Tone

[http://seekingalpha.com/article/155029-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 & shows we're 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%.



CONCLUSIONS
Traders should carefully monitor BoE and Fed Statements. Most markets are arguably overbought and thus may be vulnerable to pullback. Either of these statements have the potential to move markets—in either direction.

TRADING OPPORTUNITY: With markets at highs, USD and JPY still deeply shorted, the odds favor a pullback. While traders should not attempt to fight the tape, they should be ready with planned trades (instrument, entry and exit points, including stop loss levels) to play the short side. However, today's statements from the BoE and Fed have the potential to move markets up if they present enough optimism.
ECONOMIC CALENDAR
[Forecasted—Prior ] All times are GMT, *= Most Important

Economic Calendar News [actual-expected-prior, all times GMT]

TUES AUG 11
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 -6.5B -6.4B -6.3B
*1:15pm CAD Housing Starts 132K 141K 141K

WED AUG 12
2:00am AUD Westpac Consumer Sentiment 3.7% 9.3%
2:30am AUD Wage Price Index q/q 0.8% 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%

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