SUMMARY
STOCKS: Profit taking in the wake of slower-than-expected economic growth in Japan triggered a global sell-off that sent stocks below their recent trading ranges and handed the major U.S. indices their worst single-session percentage loss in six weeks. An unusual case of Japan news leading world stocks.
MONDAY:
Asia down (N225 -3.10%, HS -3.62%, ST -2.35%)
Europe: down (FTSE: -1.46%, DAX -2.02%, CAC 40 -2.16%)
US: down (S&P -2.43% NSDQ -2.75 % Dow -2.00%
TUESDAY:
Asia near close, UP (N225 +0.16%, HS +1.04%, ST +0.42%)
FOREX: Monday following stocks down, Tuesday, as stocks rise in Asia, showing risk bias Tuesday. See table below.
EUR: Germans Warn of Overconfidence
USD: Looking Bullish in Short Term as Stocks Falter, Monday News is Good. Stimulus in US, China Not Reaching Consumers
AUD, CAD, NZD: As usual, dropping Stocks Hit These With Rising Dollar, Falling Commodities, Unwinding Carry Trades
JPY: Japan Growth Restarts, But Still Disappoints, Sending Stocks Lower, Yen Higher, elections today may bring New Party to Power on economic discontent. Unclear how they could effect trading
CHF: Consumer spending up, helps CHF gain against EUR, but not USD
GBP: Heavy Trade on Weak Data, Possible Deflation Threatens Additional QE and Declines in GBP
Tuesday Morning Asia FX Trade
COMMODITIES:
Monday: Under pressure with other risk assets. In NYC: stabilizes, +0.13% to 66.84 in NYC Gold +0.46% to 938 in NYC. WTI crude oil plummeted Monday to as low as 65.23 before recovering to close at 66.75, -1.1%, Monday. Slumps in oil price in the past 2 days suggested investors' confidence on the demand/supply outlook remained vulnerable. Gold (XAU) fell heavily on USD strength to 930 supports. Overall trading with a low of USD$930 and high of USD$948 before ending the New York session.
Tuesday: Recovering with Asian stocks.
.
MEANING
Markets down on rising fear Monday, Asia showing mild recovery. Will Europe and US continue the move?
WHY
Profit taking sparked by perceived overall negative, and concern that current anticipated growth is already priced into stocks, forex, commodities, perhaps too much.
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: With stocks looking overextended in the near term, overseas participants moved against stocks upon learning that Japan's economy expanded at a slower-than-expected rate of 0.9% in the second quarter. In turn, Japan's Nikkei shed 3.1%, while several other major Asian averages also finished with losses exceeding 3%. Stocks in Europe followed suit, but their decline wasn't quite as sharp. Overall weakness among the major global indices sent the Dow Jones World Index to a 2.9% loss, which is its worst since April. The steep decline comes just one session after the global index registered a high for 2009.
Sellers pushed the S&P 500 to a considerably lower start, but that was the extent of the session's excitement -- the benchmark index spent the rest of the session trading sideways in an extremely narrow range.
Note that the stock market's pullback didn't bring out any buyers looking to buy the dip as has been the case in recent weeks. The absence of that support left the stock market to fall to its lowest level since July.
FOREX
Note: See Weekly Preview for Further Details and Analysis
EUR: Germans Warn of Overconfidence
EUR/USD drops with stocks, as usual
German, French recoveries still tentative, threatened by further job losses, weak consumer spending despite last week's positive GDP reports
German ZEW survey of large institutional investors and analysts due out today expected to improve
Because this pair generally follows the direction of global stocks, we are not surprised to see the currency pair trade sharply lower as equities sell off globally. Economic data from the Eurozone was mixed with the trade surplus rising from EUR2.1B to EUR4.6B in the month of June but shrinking from EUR1.1B to EUR1.0B on a seasonally adjusted basis, which is the more important figure. Exports dropped 0.1 percent in June while imports were unchanged. At the time the EUR/USD had traded to a 5 month high which is likely to have contributed to the weak foreign demand. Domestically, rising unemployment curtailed any major purchases. Last week, we learned that Germany and France have come out of recession. Investors are skeptical which is expected considering the magnitude of the contraction, but German officials are also warning against excess optimism. Bundesbank President Weber who is a member of the European Central Bank’s monetary policy committee said even though GDP could be revised up, the pace of job losses will increase which could restrain consumption and it is too early to declare an end to the financial crisis considering that rising insolvencies could pose a risk to balance sheets. German Chancellor Merkel was a bit more direct when she said that “arrogance” is returning to financial markets which suggest that she too believes that traders are getting ahead of themselves.
The German ZEW survey is due for release tomorrow and sentiment is expected to improve given better than expected economic data and recent stability in the financial markets.
USD: Looking Bullish in Short Term as Stocks Falter, Monday News is Good. Stimulus in US, China Not Reaching Consumers
Dropping stocks bring risk aversion, USD rises against all but Yen, as expected when stocks drop
Likelihood of further stocks pullback bullish for USD and other safe-haven currencies (JPY, CHF) vs. others
Stimulus in US, like in China, reaching businesses but not yet helping employment, consumer spending
Very positive TIC Long-Term purchases (measure of the difference in value between foreign long-term securities purchased by US citizens and US long-term securities purchased by foreigners during the reported period – a kind of trade balance for government bonds) fed by rising 10 year bond rates
Empire State Manufacturing Index also much better than expected
Inflation and housing market data are due for release on Tuesday. With import and consumer prices released before the PPI number, the impact of any surprises or disappointments in producer prices should be minimal. Therefore the market will be paying closer attention to the housing starts and building permits numbers
Risk aversion dominated trading in the currency market Monday with the U.S. dollar rising against every major currency except for the Japanese Yen. Economic data was better than expected but concerns have grown about the strength of the recovery and whether the economy has improved enough to warrant the recent gains in U.S. equities. Since the beginning of the month, investors had grown increasingly uncomfortable with the green shoots theory despite improvements in economic data which was why the S&P 500 struggled to extend its gains for the past 2 weeks. However even though currency traders were already risk averse, the liquidation has now expanded to equities and if that continues and we believe it will, it should lead more losses for the dollar against the Japanese Yen and further gains for the greenback against the everything else, especially the EUR and GBP, though the large number of USD shorts against the AUD and NZD make these vulnerable as well.
China Syndrome? Stimulus Gets to Businesses, But Not Yet "Trickling Down" to Consumers
Towards the end of last week, the price action in the currency market indicated that investors were skeptical about the strength of the recovery, but it was not until the sharp sell-off in equities today did stock market investors jump onboard, exacerbating risk aversion across the financial markets. The liquidation began in Asia when investors sent the Shanghai Composite Index down 5.8 percent, the biggest decline in 9 months. This nervousness amongst investors in China translated into nervousness in the U.S. because problems in one country will undoubtedly lead to problems in the other. The concern in China right now is that the market has gotten ahead of itself. Yes, the Chinese government has funded a massive stimulus package but so far, it is businesses and not consumers that are benefitting. Interestingly enough, one could argue that we have the same problems here in the U.S. where it has been a business and not consumer led recovery. Therefore without another stimulus it will be a long and hard recovery that the average Joe and Jane will not feel until months later. So if the U.S. follows in the footsteps of China, we could see a steeper slide in equities and more risk aversion in the currency market. The VIX index (a measure of fear/risk aversion) has also jumped sharply which confirms our belief that the odds favor more weakness.
Economic Data Review/Preview
The last NAHB index of builder confidence rose to the highest level since June 2008, and Monday's reading met the forecasted improvement from 17 to 18. For perspective, however, a reading over 50 indicates a positive outlook, so once again, we are getting a "less negative than expected" = good news kind of good news. Reading is still deeply negative to the point of irrelevance.
The Empire State manufacturing survey also rose to a 20 month high while foreign demand for U.S. dollars rose by the strongest amount in 16 months. The details of the report show that foreign investors shifted of short term Treasury bills and other instruments and into longer term Treasury and government bonds. This is a reversal of the previous month's trend where demand was skewed towards the short end of the curve. Interestingly enough, demand was particularly strong amongst private investors but a similar pattern of demand was also seen in foreign central banks. Including short term TIC flows, total purchases of dollar denominated assets fell by $31.2 billion in June. Part of the reason why demand was skewed towards the long end of the curve was because long term bond yields skyrocketed in June.
Ten year yields for example climbed to a 7 month high of 3.948 percent on June 10th while 30 year yields climbed to a high of 4.763 percent. Short term rates on the other hand have remained low. The Federal Reserve also extended their Term Asset-Backed Securities Loan Facility (TALF) program to June 30th for commercial mortgage-backed securities and to March 31st for newly issued asset-backed securities and already-issued, or "legacy," commercial mortgage-backed securities. Both programs were set to expire at the end of the year. Although expanding the TALF program provides more support for the economy it also reflects their degree of concern about the commercial real estate industry, which has been struggling to recover
Inflation and housing market data are due for release on Tuesday. With import and consumer prices released before the PPI number, the impact of any surprises or disappointments in producer prices should be minimal. Therefore the market will be paying closer attention to the housing starts and building permits numbers.
GBP: Heavy Trade on Weak Data, Possible Deflation Threatens Additional QE and Declines in GBP
GBP weakens further against USD, EUR on housing price decline spurred by tight credit
Busy UK news week with consumer prices, the minutes from the most recent Bank of England meeting and retail sales due for release
Falling prices, deflation fears could lead to additional QE, King Warns UK can't afford a high GBP
GBP/USD test of 1.60 coming?
The British pound weakened against both the euro and U.S. dollar following sharp decline in house prices this month. According to Rightmove PLC, the nation’s largest residential property Website, the asking prices of homes are 2.2 percent lower in August compared to the previous month. Demand has been improving, but the difficulty of attaining credit has prevented prices from increasing alongside demand. This is a big week in the U.K. with consumer prices, the minutes from the most recent Bank of England meeting and retail sales due for release. The inflation data is scheduled for tomorrow and the Bank of England has already warned that CPI could be below their 2 percent target in the medium term. The market expects CPI to fall for the first time since January on a month to month basis and for the annualized pace of CPI growth to drop from 1.8 to 1.5 percent. As long as prices continue to fall, the Bank of England will be in no rush to tighten monetary policy. In fact, the BoE is one of the few major central banks from whom we could still expect additional stimulus. The GBP/USD broke below 1.65 to hit a fresh 2 month low intraday. It may be difficult for the currency pair to rally in face of potentially weak economic data. We continue to believe that the currency pair could test 1.60.
JPY: Japan Growth Restarts, But Still Disappoints, Sending Stocks Lower, Yen Higher
Yen up against everything on risk aversion from declining stocks
Gains most against AUD, NZD
As expected when U.S. stocks down 2 percent, it the Yen rose against every major currency. USD/JPY in particular has now fallen 5 out of the past 6 trading days. The most significant weakness was seen in NZD/JPY and AUD/JPY, which dropped more than 1.7 percent. Like the Shanghai stock market, Japanese equities also fell sharply last night with the Nikkei down 3.1 percent.
Part of the demand for the Yen can be attributed to the rise in GDP. After contracting by an upwardly revised 3.1 percent in the first quarter, the Japanese economy grew by 0.9 percent in Q2. On an annualized basis, this translated into 3.7 percent growth, a sharp improvement from the 11.7 percent contraction in the first 3 months of the year.
However despite the positive report, growth fell short of expectations and the details indicate that it is foreign demand and government spending that is revving the economic engine and not domestic demand. As with the US and Euro zone, the worst may be over, but real recovery is far from certain, with real potential for world stocks to retest March lows.
CHF: Consumer spending up, helps CHF gain against EUR, but not USD
Consumer spending rose 0.9 percent in Switzerland during the month of June. This encouraging sign helped to lift the Franc against the euro
But demand for U.S. dollars was too strong for the currency to register any gain.
AUD, CAD, NZD: As usual, dropping Stocks Hit These With Rising Dollar, Falling Commodities, Unwinding Carry Trades
RBA announcement today could help AUD, but further stock declines could override any positive news
As usual, dropping stocks hit these currencies with triple-effect of unwinding carry trades, rising USD, declining commodity prices
Given the drop in global equities, it's no surprise that for the second trading day in a row, the Canadian, Australian and New Zealand dollars lost value against the greenback. The strength of the dollar, which tends to rise against everything except the Yen when stocks decline, has driven commodity prices down close to 1.5 percent. New Zealand was the only country with economic data over the past 24 hours. According to the latest report from Business NZ, service sector activity has expanded thanks to stronger sales and new orders.
New Zealand is recovering, though not as fast as Australia. The central bank of New Zealand is just more cautious about the impact of a strong currency than its neighbor. USD/CAD is trading back above 1.10 which is quite an incredible feat, considering the previous weakness of the currency pair.
Canadian Finance Minister Flaherty believes that the economy has performed very well during the global economic crisis and he believes that new government construction projects should start to yield visible results in the near future.
Early Wednesday (GMT) the focus will turn to Australia will the minutes from the most recent central bank meeting are due for release. The RBA has been far more hawkish than their peers and we expect the same tone in the RBA minutes which will hopefully ease some of the selling pressure on the AUD/USD. There is no economic data from New Zealand but Canada will be releasing International Securities Transactions which is their version of the TIC data.
DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments.
No comments:
Post a Comment