COMMODITIES
CRUDE: See Summary Above. Short Term: Following stocks, thus recovering along with Asian stocks Tuesday. Longer Term: Vulnerable to further stock pullbacks.
GOLD: See Summary Above. Short Term: Following stocks, thus recovering along with Asian stocks Tuesday. Longer Term: Vulnerable to further stock pullbacks.
OTHER HEADLINES (Bloomberg)
Sugar May Climb Further 80% on Shortage, Hedge Fund Manager Coleman Says
European Stocks, U.S. Index Futures Gain; Rio Tinto, HSBC Holdings Climb
British Land Loss Narrows as Real Estate Slump Eases, Some Values Increase
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?
http://blog.fxinstructor.com/stock-rally-set-to-continue/
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
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
12.1 2.8
-0.6
2:00pm
USD
TIC Long-Term Purchases
90.7B 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
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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