Monday, August 17, 2009

Pre-Market Traders' Global Markets Review/Preview August 17, 2009

Risk Assets Drop on Friday Profit Taking, Bad US Jobs, Business Inventory, Retail Data. More Downside on the Way?

SUMMARY

STOCKS

Down on disappointing economic data caused much of the selling interest this week. In short, wholesale inventories, business inventories, retail sales and consumer sentiment were all worse-than-expected. The latter two items seemed to disappoint the market the most.

FRIDAY

Asia near close mixed (N225 +0.59%, HS -0.84%, ST +-0.00%)
Europe: down (FTSE: -0.87%, DAX -1.70%, CAC 40 -0.83%)
US: down (S&P -0.85% NSDQ -1.19 % Dow -0.82% )
MONDAY:
· Asia near close, down (N225 -3.10%, HS -3.62%, ST -2.35%)

FOREX

Following stocks, showing safety bias. See table below.







Note: A quick survey of other major pairs confirms Friday's safety bias. For example, the EUR gained against everything except the JPY, USD, and CHF. The CHF gained against everything except the USD and JPY, and so on.



COMMODITIES

Follow stocks down: Crude down 4.7% from $70.89- $67.53. Gold down over 1% from $959-947. Rising dollar adds pressure. Data on futures traders' positions shows a declining number of long positions in oil, and to a lesser degree, in gold. Long positions in silver actually increased, as overall economic improvement helps silver, which has many industrial applications, more than gold.

MEANING

Markets down on rising fear.

WHY

Profit taking sparked by perceived overall negative news on the week, and concern that current anticipated growth is already priced into stocks, forex, commodities.

TRADING OPPORTUNITIES: Each of the three are real possibilities:

· Play the Pullback: 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 prior analyses for info on why markets remain overbought, overpriced, vulnerable to pullback.
· Play the Up Trend: However, markets continue to focus on the positive and could continue up as long as no major news contradicts ongoing recovery story or questions current risk asset prices.
· Play the Trading Range: If no major news, markets could stay in flat trading range. Continuing low interest rates and upward stock momentum a plus for risk assets.

Note: Always use stop loss orders.

STOCKS

US: Weekly Recap: stock market snapped a four-week winning streak, dropping 0.6%, following a broad-based decline as investors focused on several worse-than-expected economic items. Corporate news was on the slow side, though there were several notable earnings reports from major retailers. The FOMC policy announcement also grabbed headlines, but was largely as expected.

Disappointing economic data caused much of the selling interest this week. In short, wholesale inventories, business inventories, retail sales and consumer sentiment were all worse-than-expected. The latter two items seemed to disappoint the market the most.

July retail sales slipped 0.1% as the consumer was hesitant to spend due to weak wage growth, depressed asset prices and concerns about job security. This was worse than the consensus estimate that called for an increase of 0.8%. Excluding autos, sales fell 0.6%, also worse than the consensus of +0.1%. While there might be some makeup due to tax-free holidays that were pushed into August, the July data is still a disappointment.

The University of Michigan Consumer Sentiment Index for August fell to 63.2 from 66.0 in July. This was well short of the 69.0 consensus estimate.

Some economic data did not disappoint, though it failed to lift the market. July CPI met expectations, while Q2 productivity and July industrial production were stronger-than-expected.


Nikkei 225: NB: Japan's GDP grew 3.7% annualized in Q2 vs. -11.7% in Q1, but the Nikkei fell >2.5% = strong recovery now priced-in. Bearish for (SPY) (DIA). Given significant #s of firms that gave negative Q3 guidance, these 2 items, along with pts below about why stocks due for pullback, add to that probability. Note, many say + Japan GDP due much to stimulus, unclear if economic growth sustainable on its own.


Market players said the Nikkei, which scored a 10-month closing high on Friday, succumbed to profit-taking after the GDP news, which the market watched closely, ran its course, with the stronger yen adding to the negative momentum.
"The trend for a stronger yen, behind which is growing concern about consumer spending in the United States, is weighing heavily on the market," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

But Asian share markets were down 1-2 percent on Monday on concern about the U.S. economic turnaround. Consumer confidence fell in August for the second straight month, eclipsing reports that showed industrial output gained for the first time in nine months and inflation was muted.
"Weak data is no longer treated as a harbinger of an economic apocalypse, but as an indication that the forthcoming period of growth is likely to be frustratingly tepid relative to the rich valuations of risk-sensitive asset markets," said David Watt, senior currency strategist at RBC Capital Markets.



FOREX

Note: See Weekly Preview for Further Details and Analysis


EUR: Real Recovery? Outlook Bearish

Germany and France unexpectedly post positive growth in the second quarter, but weakness elsewhere in the Euro zone undermines the EUR, as does longer term solvency risk in Eastern Europe
Investor sentiment gauge rises to a 12 month high
Euro Zone consumer-level inflation hits a new record low


USD: U.S. DOLLAR: Ready to Rally? Outlook Bullish

Summary
US Retail Sales disappoint and the US Dollar rallies as a safe haven when markets turn down
Federal Reserve’s interest rate decision sparks impressive US Dollar volatility
Forex options and futures sentiment suggests USD may continue rallying

Treasury International Capital (TICs) data could clarify if the past week’s US Bond auctions reflected real demand from abroad (good for the USD) or Fed purchasing to support demand
Housing Starts and Building Permits reports, and an end-of-week Existing Home Sales release
could also move stocks and hence the USD



With the FOMC rate decision and retail sales now behind us, many traders may be wondering whether the rally that we saw week in the EUR/USD, GBP/USD and USD/JPY is all the action that we will see in the month of August.

Unfortunately range trading may dominate for the rest of the month since the big event risks including the ECB, BoE and Fed rate decisions are all behind us. We previously said that volatility picks up in August and we have already seen the breakout move that we expected in the first week of the month. From here on forward, the calendar is dominated by Tier 2 economic data which is less market moving. August is also the month where most Europeans go on vacation and with one third of all global forex turnover occurring in London, the absence of European traders will certainly be felt.


For example, the reaction to the retail sales report Thursday could be indicative of the degree the declining volatility that we might expect from the currency market over the next few weeks. There is no question that consumer spending is important because it is the backbone of the U.S. economy. Therefore the surprising decline in retail sales should have elicited a bigger reaction in the U.S. dollar (as well as a more negative reaction in stocks). Reasons include:

It is at odds with the optimistic comments from the Federal Reserve. On Wednesday, the central bank said consumer spending was constrained, but at the same time the economy is stabilizing.

There are also plenty of reasons to believe that consumers are simply delaying their purchases. Back to school sales and tax free holidays are primarily being held this month and next while the cash for clunkers program is gaining traction. Gas prices have also increased which means that gas station receipts will probably rise. Traders expect consumer spending to rebound over the next 2 months and are therefore downplaying the latest results.


Questioning the Strength or the U.S. Recovery

We do not believe that the July retail sales figure throws off the recovery but it does undermine the strength of the recovery. As Bernanke previously warned, the consumer will not fuel the global recovery which leaves the burden on U.S. corporations and the government. In terms of the actual data, consumer spending fell 0.1 percent in July, the first drop in 2 months. Without the positive impact of the cash for clunkers program, consumer spending dropped 0.6 percent, the largest decline since March. Weekly jobless claims rose but overall the trend of claims is down with continuing claims dropping to the lowest level since April.


GBP: GBP/USD: UNDER-PERFORMANCE EXPECTED, ADDITIONAL QE HURTING GBP: Outlook Bearish

Summary

The dovish BOE Quarterly Inflation Report leads to lower GBP rate forecasts
The UK claimant count rate rose to a 14-year high in July
GBP/USD likely to move with stocks, thus vulnerable to pullback
If this week’s CPI report results are too low, could raise fears of more QE, drop GBP further


Although the weaker U.S. retail sales report drove the British pound higher against the greenback, the currency lost value against the Euro and Yen. With GDP in Germany and France turning positive, there is an even greater chance that the British pound will underperform. Earlier this week, employment numbers from the U.K. were discouraging and the Bank of England warned that interest rates will remain low an extended period of time. If the ECB grows more optimistic because of the latest growth numbers, it would be sharp departure from the pessimism and dovishness of the BoE. No economic data from the U.K. was released this morning and nothing is expected over the next 24 hours. As result, the pound should continue to underperform the euro while the GBP/USD will be at the whim of the market’s sentiment towards U.S. dollars.



JPY: USD/JPY: Will Good GDP New Help the Yen? As of Monday, slow recovery is priced in, thus positive GDP data causes profit taking

Summary
Japan’s Current Account Surplus Grows as Exports Surge in June
BOJ Leaves Rates Unchanged, Says Economic Conditions Have “Stopped Worsening”
Corporate Goods Prices Unexpectedly Gain on Rising Import Costs
Expected positive GDP news could help if the Yen trades on fundamentals, or hurt it if it continues to fall with good news


CAD: Pressed by Sentiment, BoC Intervention Threats

Summary:
Canada runs its longest trade deficit since 1975
Canadian dollar revives its correlation to crude just when risk appetite shot higher
Has USDCAD made its last gasp bear wave before a major reversal takes hold?



AUD: Likely to Strengthen As RBA Hints At Higher Rates Before Year’s End

Summary
Australian Wage Growth Slumps in 2Q
NAB Business Confidence Hits Two-Year High
RBA hints on interest rate increases plus improving exports fueled by China growth give current up trend potential staying power

NZD: Topped Out for 2009?

Summary
New Zealand Retail Sales May Suggest Surprising Growth
Credit card data shows purchases rose for fifth time in six months
New Zealand dollar remains very highly correlated to S&P 500, thus vulnerable to stock pullback




COMMODITIES

CRUDE: See Summary Above
GOLD: See Summary Above


OTHER HEADLINES (Bloomberg)
King Crushing Pound as U.K. `Can't Afford Stronger Currency' as GDP Slips
Citigroup May Pressure Hall, Phibro Traders to Take Pay in Stock Not Cash
European, U.S. Stock-Index Futures Fall; Asian Shares Retreat, Led by Sony
Yen Gains to Two-Week High Against Euro on Japan GDP, Renewed Bank Concern
China Stocks Plunge Most in Nine Months, Led by Yunnan Copper, PetroChina
Banks May Reach Point of No Return as Toxic Loans Exceed 5% of Holdings
No New Normal as JPMorgan Sees V-Shaped Recovery With Growth Accelerating
Google Inserts Movie Previews Into Internet Search Ads to Counter Slowdown
China Embarks on Energy, Mining Acquisition Spree After Valuations Slump
Sugar May Climb Further 80% on Shortage, Hedge Fund Manager Coleman Says
Beware `Horror Flick Monster' Mark-to-Market Accounting: Chart of the Day


Stocks Set to Continue Rally?

While we remain skeptical, there is growing evidence for further upside with stocks. In the interest of presenting a balanced picture, consider the following.

If economic data along with the Fed can be used as a guide, there no reason to see global stock markets retreat to any appreciable degree going forward. Therefore, expect to see markets continue to rally over the third and fourth quarters.

The Fed has basically raised its assessment of the economy, noting in the latest statement that “economic activity is leveling out.” Inflation figures to remain “subdued for some time” and the market has again been reassured that rates will not rise for an “extended period,” a sign that policymakers are in no rush to end their efforts to boost the economy. Language slightly less optimistic helped stocks rally over 12% since the previous meeting on June 24.

German and French GDP rose 0.3% in the second quarter which helped limit the overall European contraction to just 0.1% over the period, an indication that much like the U.S. the worst recession in the post-war period has just about ended and that economic expansion will occur over the third and fourth quarters of 2009. The ECB is likely to remain cautious however, and looks to continue its program of offering banks unlimited amounts of cash while keeping borrowing costs at record lows.

The Libor-OIS spread, the premium banks charge over the expected daily Fed Funds rate, narrowed to 25 basis points overnight, a level that former Fed Chairman Allan Greenspan labeled as “normal.” And while the banks still remain reluctant to lend, cash has been and likely will remain readily available in the capital markets. High grade U.S. companies sold $898 billion of bonds this year, the busiest period since at least 1999 according to Bloomberg, while European firms have issued a record $1.2 trillion this year, more than was sold in all of 2007. Ten year investment grade spreads, the difference between corporate borrowing costs over risk-free Treasuries, narrowed from 603 basis points down to just 254. Liquidity has been just as available in the high-risk markets; non-investment grade firms have sold at least $19.8 billion of debt this week and sales this year total about $858 billion compared with $648 billion during the same period last year.

Emerging-market stocks increased by the most in almost two weeks on Thursday after the Fed’s statement reassured investors there. The DJ Stoxx 600, a European index, gained 1.6% heading into the N.Y. open.

The dollar will likely continue declining against the euro, pound and A$ as those currencies resume their months-long rally against the yen. Commodities will remain strong while government debt prices decline. Expect to see the normal in and out breathing along the way, but just ignore it for the time being because more cash is likely to come into the market as investors grow even more fearful of missing the rally and give up waiting for a significant retracement.

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
SeekingAlpha.Initializer.LogAndRun(function () { adding_wl_icon_for_watchlist_link('23625163945420','', ['dai','ewj','ewu','ivv','rtp','spy','udn','uup','vlkay.pk']); })

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%.

Coming Soon: Banking Crisis of Historic Proportions
http://seekingalpha.com/article/156269-coming-soon-banking-crisis-of-historic-proportions

Key Points:
Banks are not doing enough business to earn their way out from under a still growing mountain of loan default losses
Bank failure rate much higher than anticipated two months ago. For 2009, may have about 230 vs 125 forecasted, and amount of assets involved is much larger than in past per bank failure
Loan defaults increasing for several more quarters, especially commercial loans
FDIC is in trouble, probably bankrupt
May be going to historic lows in bank credit
Best case US GDP Growth of about 2% per year for 2010-11 will not be enough to allow many mid sized and smaller banks to survive.



CONCLUSIONS
As noted in the summary, there are three real possibilities regarding market direction, at least for the short term. The most likely, however, appears to be continued range trading unless some very potent news comes along. This week's calendar is relatively light on market moving news, however with markets still near highs, there is potential for volatility.
ECONOMIC CALENDAR

Economic Calendar News [actual-expected-prior, all times GMT*= Most Important]

Monday Aug. 17th

TIME
CURRERNCY

EVENT
ACTUAL-FORECASTED
PRIOR

12:01am
GBP

Rightmove HPI m/m
-2.2% NONE
0.6%

12:50am
JPY

Prelim GDP q/q
0.9% 1.1%
-3.8%

12:50am
JPY

Prelim GDP Price Index y/y
0.5% 1.8%
0.9%

8:15am
CHF

Retail Sales y/y
0.9% 0.8%
-1.4%

1:30pm
USD

Empire State Manufacturing Index
2.8
-0.6

2:00pm
USD

TIC Long-Term Purchases
17.7B
-19.8B


Tue Aug. 18th
TIME
CURRENCY

EVENT

FORECASTED
PRIOR
2:30am
AUD

Monetary Policy Meeting Minutes



9:30am
GBP

CPI y/y

1.6%
1.8%
9:30am
GBP

Core CPI y/y

1.5%
1.6%
10:00am
EUR

German ZEW Economic Sentiment

45.2
39.5
10:00am
EUR

ZEW Economic Sentiment

44.6
39.5
1:30pm
CAD

Foreign Securities Purchases

16.25B
18.89B
1:30pm
USD

Building Permits

0.58B
0.57M
1:30pm
USD

PPI m/m

-0.2%
1.8%
1:30pm
USD

Core PPI m/m

0.1%
0.5%
1:30pm
USD

Housing Starts

0.60B
0.58M






Wed Aug. 19th

TIME
CURRENCY

EVENT

FORECASTED
PRIOR
12:20am
AUD

RBA Assist Gov Edey Speaks



2:00am
AUD

MI Leading Index m/m


-0.2%
7:00am
EUR

German PPI m/m

-0.1%
-0.1%
9:00am
EUR

Current Account

-1.7B
-1.2B
9:30am
GBP

MPC Meeting Minutes

0-0-9
0-0-9
11:00am
GBP

CBI Industrial Order Expectations

-50
-59
12:00pm
CAD

Core CPI m/m

0.1%
0.0%
12:00pm
CAD

CPI m/m

-0.2%
0.3%
1:30pm
CAD

Leading Index m/m

0.2%
-0.1%


Thurs. Aug. 20th

TIME
CURRENCY

EVENT

FORECASTED
PRIOR
2:30am
AUD

RBA Monthly Bulletin



7:15am
CHF

Trade Balance

1.79B
1.57B
9:30am
GBP

Retail Sales m/m

0.4%
1.2%
9:30am
GBP

Public Sector Net Borrowing

0.1B
13.0B
10:00am
CHF

ZEW Economic Expectations


0.0
1:30pm
CAD

Wholesale Sales m/m

-0.1%
-0.3%
1:30pm
USD

Unemployment Claims

548K
558K
3:00pm
USD

Philly Fed Manufacturing Index

-1.9
-7.5


Fri. Aug. 21st
TIME
CURRENCY
EVENT

FORECASTED
PRIOR
8:00am
EUR
French Flash Manufacturing PMI

49.1
48.1
8:00am
EUR
French Flash Services PMI

46.6
45.5
8:30am
EUR
German Flash Manufacturing PMI

47.1
45.7
8:30am
EUR
German Flash Services PMI

48.8
48.1
9:00am
EUR
Flash Manufacturing PMI

47.8
46.3
9:00am
EUR
Flash Services PMI

46.6
45.7
3:00pm
USD
Existing Home Sales

5.03M
4.89M
3:00pm
USD
Fed Chairman Bernanke Speaks






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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