Up Tuesday on a low volume US trade on a technical bounce and bargain hunting, but down Wednesday morning in Asia. Note that low volume suggests that the move doesn't have enough interest to continue. Apparently that's how Asia interpreted the move, as equities failed to follow through with further upside movement. Other risk assets (commodities, currencies except for the safe-haven JPY, USD, CHF) followed stocks up Tuesday, down Wednesday morning.
Asia down up (N225 +0.16%, HS +1.04%, ST +0.42%)
Europe: up (FTSE: +0.88%, DAX +0.94%, CAC 40 +0.91%)
US: up (S&P +1.01% NSDQ +1.30 % Dow +0.90% )
Asia near close down (N225 -0.79%, HS -1.86%, ST -0.62%, SSEC -4.30%, BSESN -1.93%),
General Comments: Following stocks, showing risk bias Tuesday, safety bias Wednesday morning as Asia stocks mixed/down. Since news of bottoming/slow recovery already priced in, unless better news, stock pullback & safety currency rise likely.
EUR: EUR/USD tumbled below 1.4100 in the aftermath of the release pushed lower by the surprisingly cool PPI data and a resurgence of risk aversion in Asia as Shanghai fell once again. The unit looks pressured and could see a run on the 1.4000 level later in the day if equity flows turn negative.
USD: Down as stocks rise Tuesday, recovering Wednesday morning as Asia stocks looking negative
AUD, CAD, NZD: see General Comments & details below
JPY: see General Comments & details below
CHF: see General Comments & details below
GBP: CPI data holds steady. BoE Minutes due today. See General Comments
Early Morning Asian FX Trade
Up Tuesday. In NYC: OIL stabilizes, +1.00% to 69.88 in NYC Gold +0.44% to 941 in NYC, per our charts oil up Tuesday fro $68-$72, Wednesday dropping to below 71, Gold little changed, very tight range over past 2-3 days.
Markets are in tight flat trading range, awaiting direction from significant news, which may not come for another few weeks. Barring very good news, may well to imitate the degree of mid-June-July pullback.
Profit taking sparked by extended markets that have a slow recovery already priced in, lacking much market moving news to support them in coming weeks. Awaiting next big news, which could be from: Central banks, IMF/OECD/World bank/? US NFP?
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.
Interest among buyers helped stocks shake off news that housing starts and building permits for July came in at a slower-than-expected annualized rate of 581,000 and 560,000, respectively. Though the July figures were above second quarter averages, they seemed to suggest expectations for the economy have become somewhat overextended.
Meanwhile, overall producer prices for July declined 0.9%, which was more than what had been expected. Core prices made a surprise 0.1% decline, which suggests that inflationary pressures remain restricted.
Stocks were able to finish just a few points shy of session highs. Gains were broad with nine of the 10 major sectors closing in positive territory. Health care (-0.1%) logged the only loss after outperforming in the previous session.
Note: See Weekly Preview for Further Details and Analysis
EUR: ZEW survey easily beat expectations, EUR up Tuesday against safer currencies, down Wednesday against them as Asian stocks and declining PPI pressure the EUR.
The German ZEW Economic Sentiment index rose to 56.1 from 39.5, above consensus 45.0, and the Current Situation index was firmer at -77.2 versus consensus -85.0. They noted that the outlook for all sectors of the economy has improved, especially the export sector. But ZEW president Franz said, "There is, however, no reason for euphoria. The German economy develops parallel to the world economy and should, hence, recover only gradually."
BREAKING NEWS 09:00 GMT- German Producer Prices declined at their sharpest annual rate since 1949 falling -7.8% in July.
On a month over month basis prices tumbled -1.5% versus forecasts of -0.2., The vast majority of the decline was due to falling energy prices which have rebounded somewhat in the past several weeks. Nevertheless, tonight’s data clearly confirms the deflationary bias in Eurozone’s largest economy and suggests that rates in the region may be too high.
Many have argued that ECB’s hawkish stance on monetary policy may come back to haunt it given the spread of deflationary pressures within the European economy. Although rates in the EZ are set only at 1%, if the region is in fact experiencing -1.5% deflation, real rates now stand at 2.5% and could seriously hamper any effort at recovery by making credit too expensive at a time when majority of the banks in the region are also tightening their lending standards.
EUR/USD tumbled below 1.4100 in the aftermath of the release pushed lower by the surprisingly cool PPI data and a resurgence of risk aversion in Asia as Shanghai fell once again. The unit looks pressured and could see a run on the 1.4000 handle later in the day if equity flows turn negative.
USD: Down as stocks rise Tuesday, recovering Wednesday morning as Asia stocks looking negative.
The dollar weakened against most of the majors amid a 1% gain in US and European equities. But USDJPY remained mostly below 94.80 following US data releases. Housing starts and building permits were weaker than consensus and PPI disappointed too, though our economists note the volatility in the motor vehicle components. We maintain our 3m EURUSD forecast of 1.30.
GBP: CPI data holds steady. BoE Minutes due today. Up Tuesday against safe-haven JPY, USD, CHF, down against them Wednesday morning.
Sterling received a boost from better than expected July CPI at 1.8% y/y versus consensus 1.5% y/y. Core CPI surprised to the upside at 1.8% y/y versus consensus 1.5% y/y. The figures suggest the threat of deflation has receded for now and also marginally weaken the case for further extensions to the BoE's QE program. However, it should be remembered that the BoE warned of volatile inflation numbers up ahead, and so it remains to be seen if recent CPI strength can be sustained, particularly as the BoE said inflation is likely to stay below the 2% target until at least 2012. For now, we still look for further GBP underperformance going forward with the BoE arguably at the most dovish end of the G10 central bank spectrum. BoE minutes are due. We continue to believe that the currency pair could test 1.60.
JPY: Lost ground Tuesday as stocks went up, then rose against the dollar and euro as Asian stocks declined, boosting demand for Japan’s currency as a refuge.
CHF: Intervention policy unchanged
The SNB's Jordan said the Swiss economic recovery is likely to be slow and GDP growth should be positive again by mid-2010 as Swiss banks have improved their positions, though some risks remain. He said deflationary risks cannot be ruled out yet in Switzerland and reiterated that a strong franc poses a risk to the recovery. Jordan said the SNB's measures have worked thus far and he is satisfied with the range the franc is currently trading in, though he declined to specify at what level the SNB would intervene. But the deflation risks mean it is still too early for a normalization of monetary policy from his perspective. Jordan's comments echo the themes and undertone from the SNB's mid-June assessment and so far the SNB continues to sound comparably cautious. We suspect the EURCHF could reach 1.52 in 1m and 3m.
CAD: CPI news coming
Foreign investors were net buyers of Canadian securities again in June, adding C$10.5 bn, higher than consensus of $1.75 bn. Foreign buying was spread across bonds at C$5.5 bn, stocks at C$2.3 bn and money market paper at C$2.7 bn. CPI is expected to drop further though core CPI should stay near the BoC's 2% operational guide. We maintain our 1m USDCAD forecast at 1.15.
AUD: RBA says there are risks to leaving rates low too long, will examine economic data to determine the timing of the interest rate hikes. Overall tone upbeat, says China rebound is helping Aussie export demand.
As expected, following stocks up Tuesday, following Asia stocks down in Wed morning Asia trade.
CRUDE: Oil extended gains towards $70 on Wednesday, after surging more than 3 percent on Tuesday on API data that showed a surprise fall in U.S. crude stocks, boosting hopes of demand recovery in the world's top energy user. The release of the more closely watched U.S. Energy Information Administration (EIA) data later in the day could confirm the American Petroleum Institute's (API) bullish figures, and will determine the market's trading tone for the rest of the week. Movements in stocks, however, can override this data.
GOLD: following stocks up Tuesday, following them down in Asia Wednesday morning, in very tight range
OTHER HEADLINES (Bloomberg)
China Stocks Enter Bear Market as Index Declines 20% From This Year's High
European, U.S. Stock-Index Futures Drop; Asian Shares Fall, Led by China
German Producer Prices Fall at Fastest Pace in 60 Years as Oil Costs Drop
Pimco Says U.S. Dollar to Decline Amid Concern It May Lose Reserve Status
Sovereign Funds Curb Risk Appetite After Criticism of Losses, Report Says
Don't Be Fooled by `V,' Europe Won't Erase Drop Before 2013, Chart of Day
U.S. ‘Monetary Medicine’ Causes Danger, Buffett Writes: NYT Link
Germany Prepares for 2010 Credit Squeeze: Daily Telegraph Link
Global Market Direction?
While we remain skeptical, there is growing evidence for further upside with stocks. In the interest of presenting a balanced picture, consider the following.
Stocks Set to Continue Rally?
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
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
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
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.
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.
Tue Aug. 18th
Monetary Policy Meeting Minutes
Core CPI y/y
German ZEW Economic Sentiment
ZEW Economic Sentiment
Foreign Securities Purchases
Core PPI m/m
Wed Aug. 19th
RBA Assist Gov Edey Speaks
MI Leading Index m/m
German PPI m/m
MPC Meeting Minutes
CBI Industrial Order Expectations
Core CPI m/m
Leading Index m/m
DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments.