SUMMARY
STOCKS
US: Strength among financial stocks and a couple of positive pieces of data helped the broader market overcome an early fit of weakness that stemmed from a disappointing jobless claims report. In turn, stocks logged their third straight session of gains and are now up modestly week-to-date. Volume remains low. Japan: Japanese retail investors have become considerably less bearish on domestic stocks with sentiment at its highest in nearly two years, a Reuters poll on Friday showed, reflecting hopes the economy has bottomed out .
THURSDAY:
Asia up (N225 +0.71%, HS +1.59%, ST +0.72%, SSEC +2.10%, BSESN -1.50%)
Europe up (FTSE: +1.43%, DAX +1.51%, CAC 40 +1.59%)
US: up (S&P +1.09% NSDQ +1.01 % Dow +0.76% )
FRIDAY:
Asia near close mixed (N225 -1.40%, HS -0.11%, ST -0.54%, SSEC +1.69%, BSESN +0.62%)
FOREX
Safety currencies advance against riskier ones even as stocks rallied. This movement has continued into Friday morning Asian trade as of this writing.
EUR: EUR/USD—unchanged (doji) rising with stocks and risk appetite, low liquidity exaggerates moves. PMIs due Eurozone, French and German PMIs are due and further strength is expected across the board following the impressive improvements in July. Surprises either way could spark EUR volatility
USD: The dollar benefited from a weaker Asian equity session overnight despite coming under selling pressure yesterday after a positive Philadelphia Fed survey combined with reports that a major insurer might repay the US government. EURUSD traded in the range 1.4209-1.4269 while USDJPY fell to a low of 93.48
JPY: UP on safety demand. The yen rose broadly against major currencies on Friday as investors remained worried about the potential for further weakness in Chinese shares and shied away from risky investments. A trader for a Japanese brokerage cited dollar-selling by Japanese exporters, and added that the dollar's weakness against the yen was partly due to technical factors.
GBP: The yen rose broadly against major currencies on Friday as investors remained worried about the potential for further weakness in Chinese shares and shied away from risky investments
AUD, CAD, NZD, CHF: see summary, General comments
COMMODITIES
Like FX, fail to follow stocks up. It is very odd to see both commodities and FX fail to follow equities on the same day. For crude, the explanation was that the surprise US inventory drawdown was not due to rising demand but low imports and conversion by refineries into finished products, thus reversing the initial upward motion. No major news on gold except for pressure by the rising USD, which again, is unusual when stocks rise -- unless the rise is due to very good fundamental US economic news. There was no such news Thursday, so the USD, along with the rest of FX and commodities, was out of character.
MEANING
Again, global markets behaved very strangely. When stocks rise, commodities and most currencies rise, especially against the safe haven JPY, USD, and CHF. Instead, while stocks went up, most commodities and currencies were down, with only the USD, JPY, and CHF gaining strength. These safe haven currencies generally gain against the others ONLY when stocks and other risk assets are falling due to rising fear.
The big question: is this divergence a mere aberration due to quiet low liquidity late summer vacation trading, or is it a sign of a dying rally in risk assets: stocks, commodities, and higher yield or commodity currencies?
WHY
Again, the reason is unclear. It could just be an aberration from light volume due to European and US traders being on summer vacations or some other technical excuse. However, diversions like this may also be an early warning signal, that global stock markets have rallied to high.
French and German PPI were just released, and were better than expected. Given their upside GDP surprises recently, it will be interesting to see if the EUR rises, or if it has already priced in this news.
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.
Main Events
FRIDAY: MFG AND SERVICES PMI DATA ALREADY OUT AND WAS GOOD, STILL AWAITING OVERALL EUROZONE RESULTS LATER TODAY. USD EXISTING HOME SALES ALSO OUT LATER.
Market Summary Table: Risk vs. Safety Sentiment
[1] Actual ask price for currencies, futures contract prices for stock indexes, commodities. Direction and prices are at time of writing, 6am GMT .
STOCKS
US: Strength among financial stocks and a couple of positive pieces of data helped the broader market overcome an early fit of weakness that stemmed from a disappointing jobless claims report. In turn, stocks logged their third straight session of gains and are now up modestly week-to-date. Volume remains low
News that initial jobless claims for the week ending August 15 came in above expectations at 576,000 and continuing claims made a slight advance to 6.24 million in the face of expiring unemployment benefits undercut a positive bias in premarket trading. However, stocks were able to shake off the news of stubbornly weak labor markets and managed to make their way higher in the first few minutes of trade.
The initial advance was particularly kind to the financial sector, which gained momentum as bank stocks and insurers garnered additional support. Diversified banks finished 3.0% higher and multiline insurers closed with a 4.3% gain. The broader financial sector finished 2.6% higher, which was more than double the gain had by the next best performing sector (industrials, +1.2%).
The mood among participants improved further following midmorning news that leading economic indicators increased 0.7% in July. Though that was generally in-line with expectations, it marked the fourth straight increase.
A surprise increase in the Philadelphia Fed Index also proved pleasing. The index for August came in at 4.2, which was up from -7.5 in July and bested the -0.2 that was widely expected.
Gains by the financial sector, along with an upbeat Philly Fed Index and leading indicators report, helped drive all 10 major sectors to finish with gains.
The improved tone among broader market participants even helped lift retailers, which were hampered by weakness in shares of Sears Holdings (SHLD 65.00, -8.76) after the company reported a worse-than-expected loss. Weakness was shared by Buckle (BKE 26.84, -1.09) and Limited (LTD 14.35, -0.23), even though both companies posted better-than-expected quarterly earnings. Still, retailers were able to finish 0.4% higher.
Trading volume remains low. Though 1 billion shares exchanged hands in the NYSE for the first time since Monday, that's still well below longer-term averages. The lack of participation in recent sessions brings into question the legitimacy of the stock market's three-session run, which now totals nearly 3%.
Japan: A monthly survey also showed a majority of retail investors favour the campaign platform of the main opposition Democratic Party, which has a good chance of ousting the ruling Liberal Democratic Party in an election on Aug. 30.
The poll's investor sentiment index hit minus 10, an improvement of 24 points on July. This marked the first rise in three months and was the highest level since September 2007 when it was at zero.
The index, which is calculated by subtracting the percentage of respondents who say they are bearish from those who are bullish, underscores a growing belief among investors that the economy has bottomed and corporate profits are improving.
FOREX
Note: See Weekly Preview for Further Details and Analysis
General: Majors declined sharply during today's Asian session against the dollar. The U.S initial claims signaled pessimism in the American labor sector that corroded investor's risk appetite pressuring the high yielding currencies. The USDIX inclined recording a high of 78.65.
The euro dollar pair dropped today recording a low of 1.4209 and a high of 1.4266, having the union currency trading around 1.4225. The pair breached the 1.4250 level to the downside as investor's appetite for risk weakened pressuring the high yielding currencies. Today the pair is having a support at 1.4200 along with a resistance at 1.4255. If the support was breached we may see the pair falling to the 1.4175 level. However, The PMI manufacturing will be released later today affecting the pair's trades, while momentum indicators on the four hours scale are supporting the downside.
The pound dollar pair fell for the third consecutive day recording a low of 1.6420 and a high of 1.6519, having the royal currency trading around 1.6455. Today the pair broke the 1.6500 support. The pair is having a support at 1.6410 along with a resistance at 1.6480. However, momentum indicators on the four hour charts are supporting the downtrend, so we may see the pair breaching the support and getting back to the 1.6300 level.
Finally, the dollar weakened against the yen and the pair recorded a low of 93.48 and a high of 94.26. The pair is having a support at 93.30 along with a resistance at 94.10. The U.S existing home sales is on queue today and it may affect the pair's trades, and the stochastic oscillator on the daily scale is indicating that the pair is trading in an oversold area.
EUR: PMIs due Eurozone, French and German PMIs are due and further strength is expected across the board following the impressive improvements in July.
ECB Executive board member Bini Smaghi noted that further signs of economic recovery in the Eurozone have appeared in the Q3, but cautioned that "a few pieces of macro data are not enough" to say that the economy is back on even keel. He added that it was important for banks to have sufficiently strong capital positions "to sustain the recovery, when it arrives". Following Germany's surprisingly strong Q2 GDP estimate, the Bundesbank's monthly report noted yesterday that "a further marked increase in economic production" in Q3 is possible, as the stimulatory effects of monetary and fiscal stimuli builds. The report predicted that German inflation would become less negative in the months ahead before turning positive again by year end. We stay long a EURUSD strangle struck at 1.3162 and 1.4507.
NB: Lots of EUR PMI data for both French , German, Euro zone manufacturing and services
USD: See General comments above. Also, Philly Fed surprises The dollar benefited from a weaker Asian equity session overnight despite coming under selling pressure yesterday after a positive Philadelphia Fed survey combined with reports that a major insurer might repay the US government. EURUSD traded in the range 1.4209-1.4269 while USDJPY fell to a low of 93.48 from a high ot 94.29. Initial jobless claims were higher than expected at 576k versus consensus 551k and the prior was revised up to 561k. The four-week average in new claims edged up to 570k from 566k in the prior week but still well below the peak of 659k in early April The trend in continuing claims, meanwhile, has declined on balance recently. But the surprise on the day was the Philadelphia Fed Business Outlook Survey at 4.2 versus consensus -2.0. This was the first positive print since September 2008 and the rise corroborates the gain reported earlier this week in the Empire State index. The details of the Philadelphia Fed survey were also much more positive and suggest a rise in manufacturing output. We maintain our 3m EURUSD forecast of 1.30. Friday: existing home sales, Bernanke speaks
GBP: Mixed data. Both money supply and retail data were stronger than expected. The monthly retail number was as expected at +0.4% but past revisions pushed the y-o-y number up to +3.3%. M4 money supply surprised to the upside with a +1% monthly print (cons. +0.2%), the best monthly print since the BoE started its QE programme in March. Continued increases in money supply data would be view by the Bank as indicative of a QE programme which is starting to work. However, public sector net borrowing and public sector net cash requirements were higher than anticipated and put pressure on sterling. 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.
JPY: The yen rose broadly against major currencies on Friday as investors remained worried about the potential for further weakness in Chinese shares and shied away from risky investments. A trader for a Japanese brokerage cited dollar-selling by Japanese exporters, and added that the dollar's weakness against the yen was partly due to technical factors. The greenback has fallen below the bottom of the cloud on daily Ichimoku charts this week, a bearish technical signal. The yen rose broadly against major currencies on Friday as investors remained worried about the potential for further weakness in Chinese shares and shied away from risky investments
COMMODITIES
See Summary. Also:
CRUDE: But oil's surge proved short-lived as consensus grew on Thursday that this was due to a fall in imports rather than signs of a genuine rebound in U.S. fuel demand. Was also due to increasing activity at refineries converting crude to finished products As yet, there are also few signs of recovering U.S. fuel demand. Rally may be overdone. Freight traffic across North America fell 17.9 percent in the week ended Aug. 15 from the same 2008 week, a trade group said on Thursday in a weekly report.Apart from economic data, traders will also take cues from the direction of currency and equity markets. U.S. stocks rose for a third straight session on Thursday with financial shares leading gains after U.S. manufacturing data and a rebound in Chinese stocks reassured investors. China equities, viewed by investors as a weathervane of risk sentiment, tumbled to a two-month low earlier this week on disappointment that Beijing had not taken steps to prop up the market after the key index plunged 20 percent from two weeks ago.
GOLD: futures dip as USD gains both in US trade despite rising stocks ,and on unease in Asia trade
OTHER HEADLINES (Bloomberg)
China Said to Plan Tightening of Bank Capital Requirements as Stocks Rally
Bernanke Diverging With King Means El-Erian Sees Dollar Loss on Disunity
Stiglitz Says Financial Crisis Shows Failure of American-Style Capitalism
Taiwan Economy Contracts at Slower Pace in Second Quarter on China Exports
Politics
Asian Stocks Post Weekly Decline Amid Earnings Concerns; Toyota Declines
Yen Extends Gain Versus Dollar as China Said to Plan Tightening of Capital
Stiglitz Says Dollar's Role as Store of Value Is `Questionable,' Has Risk
China's Stocks Extend Rebound, Paring Third Weekly Decline, on ICBC Profit
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
Thurs. Aug. 20th
TIME
CURRENCY
EVENT
ACTUAL
FORECASTED
PRIOR
2:30am
AUD
RBA Monthly Bulletin
7:15am
CHF
Trade Balance
2.35B
1.79B
1.57B
9:30am
GBP
Retail Sales m/m
0.4%
0.4%
1.2%
9:30am
GBP
Public Sector Net Borrowing
8.0B
0.1B
13.0B
10:00am
CHF
ZEW Economic Expectations
18.6
0.0
1:30pm
CAD
Wholesale Sales m/m
0.6%
-0.1%
-0.3%
1:30pm
USD
Unemployment Claims
576K
548K
558K
3:00pm
USD
Philly Fed Manufacturing Index
+4.2
-1.9
-7.5
Fri. Aug. 21st
TIME
CURRENCY
EVENT
ACTUAL
FORECASTED
PRIOR
8:00am
EUR
French Flash Manufacturing PMI
50.2
49.1
48.1
8:00am
EUR
French Flash Services PMI
48.9
46.6
45.5
8:30am
EUR
German Flash Manufacturing PMI
49.0
47.1
45.7
8:30am
EUR
German Flash Services PMI
54.1
48.8
48.1
9:00am
EUR
Flash Manufacturing PMI
47.9
47.8
46.3
9:00am
EUR
Flash Services PMI
49.5
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.
Market Summary Table: Risk vs. Safety Sentiment
COMMODITIES
THURSDAY SAFETY, FRIDAY MIXED
CRUDE OIL
DOWN
SAFETY
UP over $72.50
RISK
GOLD
DOWN
SAFETY
FLAT $938
NEUTRAL
WHEAT
DOWN
SAFETY
FLAT $468
NEUTRAL
FOREX
THURSDAY: SAFETY, FRIDAY MORNING: SAFETY
EURUSD
FLAT HOLDING PRIOR GAINS
RISK
DOWN
SAFETY
GBPUSD
DOWN
SAFETY
DOWN
SAFETY
USDJPY
DOWN
SAFETY
DOWN
SAFETY
USDCHF
DOWN
NEUTRAL
UP
NEUTRAL
USDCAD
DOWN
RISK
UP
SAFETY
AUDUSD
DOWN
SAFETY
DOWN
SAFETY
EURJPY
DOWN
SAFETY
AUDJPY
DOWN
SAFTEY
EURCHF
DOWN
SAFETY
[1] Actual ask price for currencies, futures contract prices for stock indexes, commodities. Direction and prices are at time of writing, 6am GMT
STOCKS
US: Strength among financial stocks and a couple of positive pieces of data helped the broader market overcome an early fit of weakness that stemmed from a disappointing jobless claims report. In turn, stocks logged their third straight session of gains and are now up modestly week-to-date. Volume remains low
News that initial jobless claims for the week ending August 15 came in above expectations at 576,000 and continuing claims made a slight advance to 6.24 million in the face of expiring unemployment benefits undercut a positive bias in premarket trading. However, stocks were able to shake off the news of stubbornly weak labor markets and managed to make their way higher in the first few minutes of trade.
The initial advance was particularly kind to the financial sector, which gained momentum as bank stocks and insurers garnered additional support. Diversified banks finished 3.0% higher and multiline insurers closed with a 4.3% gain. The broader financial sector finished 2.6% higher, which was more than double the gain had by the next best performing sector (industrials, +1.2%).
The mood among participants improved further following midmorning news that leading economic indicators increased 0.7% in July. Though that was generally in-line with expectations, it marked the fourth straight increase.
A surprise increase in the Philadelphia Fed Index also proved pleasing. The index for August came in at 4.2, which was up from -7.5 in July and bested the -0.2 that was widely expected.
Gains by the financial sector, along with an upbeat Philly Fed Index and leading indicators report, helped drive all 10 major sectors to finish with gains.
The improved tone among broader market participants even helped lift retailers, which were hampered by weakness in shares of Sears Holdings (SHLD 65.00, -8.76) after the company reported a worse-than-expected loss. Weakness was shared by Buckle (BKE 26.84, -1.09) and Limited (LTD 14.35, -0.23), even though both companies posted better-than-expected quarterly earnings. Still, retailers were able to finish 0.4% higher.
Trading volume remains low. Though 1 billion shares exchanged hands in the NYSE for the first time since Monday, that's still well below longer-term averages. The lack of participation in recent sessions brings into question the legitimacy of the stock market's three-session run, which now totals nearly 3%.
Japan: A monthly survey also showed a majority of retail investors favour the campaign platform of the main opposition Democratic Party, which has a good chance of ousting the ruling Liberal Democratic Party in an election on Aug. 30.
The poll's investor sentiment index hit minus 10, an improvement of 24 points on July. This marked the first rise in three months and was the highest level since September 2007 when it was at zero.
The index, which is calculated by subtracting the percentage of respondents who say they are bearish from those who are bullish, underscores a growing belief among investors that the economy has bottomed and corporate profits are improving.
FOREX
Note: See Weekly Preview for Further Details and Analysis
General: Majors declined sharply during today's Asian session against the dollar. The U.S initial claims signaled pessimism in the American labor sector that corroded investor's risk appetite pressuring the high yielding currencies. The USDIX inclined recording a high of 78.65.
The euro dollar pair dropped today recording a low of 1.4209 and a high of 1.4266, having the union currency trading around 1.4225. The pair breached the 1.4250 level to the downside as investor's appetite for risk weakened pressuring the high yielding currencies. Today the pair is having a support at 1.4200 along with a resistance at 1.4255. If the support was breached we may see the pair falling to the 1.4175 level. However, The PMI manufacturing will be released later today affecting the pair's trades, while momentum indicators on the four hours scale are supporting the downside.
The pound dollar pair fell for the third consecutive day recording a low of 1.6420 and a high of 1.6519, having the royal currency trading around 1.6455. Today the pair broke the 1.6500 support. The pair is having a support at 1.6410 along with a resistance at 1.6480. However, momentum indicators on the four hour charts are supporting the downtrend, so we may see the pair breaching the support and getting back to the 1.6300 level.
Finally, the dollar weakened against the yen and the pair recorded a low of 93.48 and a high of 94.26. The pair is having a support at 93.30 along with a resistance at 94.10. The U.S existing home sales is on queue today and it may affect the pair's trades, and the stochastic oscillator on the daily scale is indicating that the pair is trading in an oversold area.
EUR: PMIs due Eurozone, French and German PMIs are due and further strength is expected across the board following the impressive improvements in July.
ECB Executive board member Bini Smaghi noted that further signs of economic recovery in the Eurozone have appeared in the Q3, but cautioned that "a few pieces of macro data are not enough" to say that the economy is back on even keel. He added that it was important for banks to have sufficiently strong capital positions "to sustain the recovery, when it arrives". Following Germany's surprisingly strong Q2 GDP estimate, the Bundesbank's monthly report noted yesterday that "a further marked increase in economic production" in Q3 is possible, as the stimulatory effects of monetary and fiscal stimuli builds. The report predicted that German inflation would become less negative in the months ahead before turning positive again by year end. We stay long a EURUSD strangle struck at 1.3162 and 1.4507.
NB: Lots of EUR PMI data for both French , German, Euro zone manufacturing and services
USD: See General comments above. Also, Philly Fed surprises The dollar benefited from a weaker Asian equity session overnight despite coming under selling pressure yesterday after a positive Philadelphia Fed survey combined with reports that a major insurer might repay the US government. EURUSD traded in the range 1.4209-1.4269 while USDJPY fell to a low of 93.48 from a high ot 94.29. Initial jobless claims were higher than expected at 576k versus consensus 551k and the prior was revised up to 561k. The four-week average in new claims edged up to 570k from 566k in the prior week but still well below the peak of 659k in early April The trend in continuing claims, meanwhile, has declined on balance recently. But the surprise on the day was the Philadelphia Fed Business Outlook Survey at 4.2 versus consensus -2.0. This was the first positive print since September 2008 and the rise corroborates the gain reported earlier this week in the Empire State index. The details of the Philadelphia Fed survey were also much more positive and suggest a rise in manufacturing output. We maintain our 3m EURUSD forecast of 1.30. Friday: existing home sales, Bernanke speaks
GBP: Mixed data. Both money supply and retail data were stronger than expected. The monthly retail number was as expected at +0.4% but past revisions pushed the y-o-y number up to +3.3%. M4 money supply surprised to the upside with a +1% monthly print (cons. +0.2%), the best monthly print since the BoE started its QE programme in March. Continued increases in money supply data would be view by the Bank as indicative of a QE programme which is starting to work. However, public sector net borrowing and public sector net cash requirements were higher than anticipated and put pressure on sterling. 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.
JPY: The yen rose broadly against major currencies on Friday as investors remained worried about the potential for further weakness in Chinese shares and shied away from risky investments. A trader for a Japanese brokerage cited dollar-selling by Japanese exporters, and added that the dollar's weakness against the yen was partly due to technical factors. The greenback has fallen below the bottom of the cloud on daily Ichimoku charts this week, a bearish technical signal. The yen rose broadly against major currencies on Friday as investors remained worried about the potential for further weakness in Chinese shares and shied away from risky investments
COMMODITIES
See Summary. Also:
CRUDE: But oil's surge proved short-lived as consensus grew on Thursday that this was due to a fall in imports rather than signs of a genuine rebound in U.S. fuel demand. Was also due to increasing activity at refineries converting crude to finished products As yet, there are also few signs of recovering U.S. fuel demand. Rally may be overdone. Freight traffic across North America fell 17.9 percent in the week ended Aug. 15 from the same 2008 week, a trade group said on Thursday in a weekly report.Apart from economic data, traders will also take cues from the direction of currency and equity markets. U.S. stocks rose for a third straight session on Thursday with financial shares leading gains after U.S. manufacturing data and a rebound in Chinese stocks reassured investors. China equities, viewed by investors as a weathervane of risk sentiment, tumbled to a two-month low earlier this week on disappointment that Beijing had not taken steps to prop up the market after the key index plunged 20 percent from two weeks ago.
GOLD: futures dip as USD gains both in US trade despite rising stocks ,and on unease in Asia trade
OTHER HEADLINES (Bloomberg)
China Said to Plan Tightening of Bank Capital Requirements as Stocks Rally
Bernanke Diverging With King Means El-Erian Sees Dollar Loss on Disunity
Stiglitz Says Financial Crisis Shows Failure of American-Style Capitalism
Taiwan Economy Contracts at Slower Pace in Second Quarter on China Exports
Politics
Asian Stocks Post Weekly Decline Amid Earnings Concerns; Toyota Declines
Yen Extends Gain Versus Dollar as China Said to Plan Tightening of Capital
Stiglitz Says Dollar's Role as Store of Value Is `Questionable,' Has Risk
China's Stocks Extend Rebound, Paring Third Weekly Decline, on ICBC Profit
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
Thurs. Aug. 20th
TIME
CURRENCY
EVENT
ACTUAL
FORECASTED
PRIOR
2:30am
AUD
RBA Monthly Bulletin
7:15am
CHF
Trade Balance
2.35B
1.79B
1.57B
9:30am
GBP
Retail Sales m/m
0.4%
0.4%
1.2%
9:30am
GBP
Public Sector Net Borrowing
8.0B
0.1B
13.0B
10:00am
CHF
ZEW Economic Expectations
18.6
0.0
1:30pm
CAD
Wholesale Sales m/m
0.6%
-0.1%
-0.3%
1:30pm
USD
Unemployment Claims
576K
548K
558K
3:00pm
USD
Philly Fed Manufacturing Index
+4.2
-1.9
-7.5
Fri. Aug. 21st
TIME
CURRENCY
EVENT
ACTUAL
FORECASTED
PRIOR
8:00am
EUR
French Flash Manufacturing PMI
50.2
49.1
48.1
8:00am
EUR
French Flash Services PMI
48.9
46.6
45.5
8:30am
EUR
German Flash Manufacturing PMI
49.0
47.1
45.7
8:30am
EUR
German Flash Services PMI
54.1
48.8
48.1
9:00am
EUR
Flash Manufacturing PMI
47.9
47.8
46.3
9:00am
EUR
Flash Services PMI
49.5
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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