SUMMARY
STOCKS
US: Friday, a better-than-expected Existing Home Sales figure (5.24 million vs. 5.00 million consensus) led to a 1.9% rally in the S&P 500. However, many analysts attributed this gain to much lower prices (about $30k lower on the month) and foreclosure sales. Also, new home building continues to drop, as does employment. So investors are effectively ignoring poor economic data while going long the positive data. The end result is all four of the major indices listed below made fresh 2009 highs on Friday.
Looking ahead to next week, economic data takes center stage. The housing numbers continue with the June S&P/Case-Shiller Home Price Index on Tuesday, Aug. 25 and July New Home Sales on Wednesday, Aug. 26. That day will also feature July Durable Goods Orders. All of this leads up to the Preliminary reading for second quarter GDP on Thursday, Aug. 27. The current consensus is for a revision to -1.4% from the Advanced reading of -1.0%.
FRIDAY:
Asia mixed (N225 -1.40%, HS -0.64%, ST -0.58%, SSEC +1.69%, BSESN +0.62%)
Europe up (FTSE: +1.98%, DAX +2.86%, CAC 40 +3.15%)
US: up (S&P +1.86% NSDQ +1.59 % Dow +1.67% )
MONDAY:
Asia near close up (N225 +3.35%, HS +1.87%, ST +1.46%, SSEC +1.34%, BSESN +2.23%)
FOREX
Risk currencies advance against safer ones on rising stocks, risk appetite, + comments from Jackson Hole conference. This movement has continued into Friday morning Asian trade as of this writing.
EUR: EUR/USD The euro received a boost from strong Eurozone, German and French PMIs, which came in well ahead of expectations. The Eurozone Services Flash PMI reached 49.5, against expectations of 46.5, after printing 45.7 back in July. Meanwhile, the composite reading managed to hit the key 50.0 level (cons. 48.0, prev. 47.0).
USD: Overall down on risking stocks, risk appetite. EURUSD traded higher on Friday, up to a high of 1.4377 from a low of 1.4276 in the US session, while USDJPY traded up to a high of 94.72 from 93.42. The price action was consistent with improved risk appetite on the back of better than expected housing data. The S&P500 rose by 1.9% during the session.
AUD, CAD, NZD, CHF, GBP: See Weekly Preview/Review
JPY: Opposition party favored to take power, JPY may feel pressure from political uncertainty
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
COMMODITIES
Rising w/ stocks, risk appetite. NYC Friday: oil 73.83, over $74 in early Monday Asia trade +1.26% Gold 953.10 +1.36%, flat early Monday in Asia. Up on speculation for growth led inflation
MEANING
Stocks continue to focus on +, pulling other risk assets along. But for how long?
WHY
Willingness to focus on positive, downplay much existing negative 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:
Monday: EUR Industrial New Orders m/m, CAD Retail Sales. Tuesday: NZD Inflation Expectations q/q, GBP Nationwide HPI m/m, USD S&P/CS Composite-20 HPI y/y, Consumer Confidence SEE WEEKLY PREVIEW for full review of this week's events as they relate to specific instruments.
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: Weekly Recap - U.S. equity markets had shown little direction in the first two weeks of August, range trading near their 2009 highs. But volatility returned this week, with the major indices reversing a sharp Monday decline to close with gains. The S&P 500 added 2.2%. All 10 sectors that make up the index advanced, led by Energy (+3.2%) and Health Care (+2.9%). In regard to the latter, Democratic leaders said this week they may attempt to pass health care reform that includes a public insurance option without Republican support, which had the effect of raising doubts on the reform effort, helping health care stocks rally. Getting back to the broader market, China was in focus early this week. Following a 109% rally from October through the beginning of August, a 5.8% plunge on Monday -- which helped the S&P 500 close down 2.4% that day -- and another 4.3% decline on Wednesday brought the Shanghai Composite to a two-week correction of 20%. At first equity markets around the world followed suit, as China would be an integral part of any global economic rebound. But as we've seen throughout the market's five-month rebound, buyers stepped in, specifically on Wednesday when the major indices quickly regained opening losses and then surged higher just before midday, though on no specific catalyst. The buying effort was particularly evident in reaction to this week's economic data. We had negative housing data on Tuesday -- July Housing Starts 581,000 vs. 599,000 consensus; Building Permits 560,000 vs. 577,000 consensus -- and negative employment data on Thursday -- Initial Jobless Claims 576,000 vs. 551,000 consensus -- but equities closed modestly higher both days. Then on Friday, a better-than-expected Existing Home Sales figure (5.24 million vs. 5.00 million consensus) led to a 1.9% rally in the S&P 500. So investors are effectively ignoring poor economic data while going long the positive data. The end result is all four of the major indices listed below made fresh 2009 highs on Friday. Key Events Next Week for US: The housing numbers continue with the June S&P/Case-Shiller Home Price Index on Tuesday, Aug. 25 and July New Home Sales on Wednesday, Aug. 26. That day will also feature July Durable Goods Orders. All of this leads up to the Preliminary reading for second quarter GDP on Thursday, Aug. 27. The current consensus is for a revision to -1.4% from the Advanced reading of -1.0%.
FOREX
General: [See Also Weekly Preview/Review: Global Markets Weekly Trading Preview: Quiet Range Bound Week? ]
Jackson hole comments support commodity currencies. Last week we issued a new tactical trade recommendation, selling AUDNOK on a break below 5.00, and targeting a move to around 4.78 with a stop around 5.0950. Although we expect both currencies to perform well as a weaker dollar should benefit the commodity currencies, we expect a relative value opportunity to emerge as good Australian economic news looks to be fully priced in, while the NOK still has some catching up to do. If the world economy continues to improve from here, more Norges hikes are likely than priced. If it falters less RBA hikes are likely than priced. Either scenario should favour AUDNOK downside.
EUR: The euro received a boost from strong Eurozone, German and French PMIs, which came in well ahead of expectations. The Eurozone Services Flash PMI reached 49.5, against expectations of 46.5, after printing 45.7 back in July. Meanwhile, the composite reading managed to hit the key 50.0 level (cons. 48.0, prev. 47.0).
Our economists also note that the finer details of the releases give grounds for renewed optimism, with forward looking indictors such as new factory orders and export orders continuing to impress. Today's data are consistent with our view that the euro area economy will return to growth in H2.
Meanwhile 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 effects of monetary and fiscal stimuli continues to build. The report also predicted that German inflation would become less negative in the months ahead before turning positive again by year-end.
USD: Overall down on risking stocks, risk appetite. EURUSD traded higher on Friday, up to a high of 1.4377 from a low of 1.4276 in the US session, while USDJPY traded up to a high of 94.72 from 93.42. The price action was consistent with improved risk appetite on the back of better than expected housing data. The S&P500 rose by 1.9% during the session.
In his speech at Jackson Hole, Fed Chairman Bernanke did not introduce any new ideas about policy. He said that "economic activity appears to be leveling out", and that "the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."
Existing home sales rose more than expected in July: +7.2% m/m to a 5.24mn annual rate (cons: +2.1% to 5.00mn, UBSe: +2.5% to 5.01mn) from 4.89mn in June. We maintain our 3m EURUSD forecast of 1.30.
GBP, CAD, AUD, NZD, CHF: See weekly preview
JPY: The latest polling shows that the opposition DPJ could win as many as 300 seats out of the 480 seats in parliament at the upcoming lower house election on Sunday, thereby securing a landslide victory. A DPJ victory in the near term would marginally undermine yen on political uncertainty. Investors might also be concerned about the potential for increased government spending. Should US dollar weakness resume in earnest, investors might pay more intention to past DPJ comments suggesting the party does not want Japan to acquire more US dollar denominated bonds.
In the week ahead we have jobless and CPI data. We continue to target USDJPY at 95 over 1 and 3 months.
COMMODITIES
EUR: The euro received a boost from strong Eurozone, German and French PMIs, which came in well ahead of expectations. The Eurozone Services Flash PMI reached 49.5, against expectations of 46.5, after printing 45.7 back in July. Meanwhile, the composite reading managed to hit the key 50.0 level (cons. 48.0, prev. 47.0).
Our economists also note that the finer details of the releases give grounds for renewed optimism, with forward looking indictors such as new factory orders and export orders continuing to impress. Today's data are consistent with our view that the euro area economy will return to growth in H2.
Meanwhile 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 effects of monetary and fiscal stimuli continues to build. The report also predicted that German inflation would become less negative in the months ahead before turning positive again by year-end.
USD: Overall down on risking stocks, risk appetite. EURUSD traded higher on Friday, up to a high of 1.4377 from a low of 1.4276 in the US session, while USDJPY traded up to a high of 94.72 from 93.42. The price action was consistent with improved risk appetite on the back of better than expected housing data. The S&P500 rose by 1.9% during the session.
In his speech at Jackson Hole, Fed Chairman Bernanke did not introduce any new ideas about policy. He said that "economic activity appears to be leveling out", and that "the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."
Existing home sales rose more than expected in July: +7.2% m/m to a 5.24mn annual rate (cons: +2.1% to 5.00mn, UBSe: +2.5% to 5.01mn) from 4.89mn in June. We maintain our 3m EURUSD forecast of 1.30.
GBP, CAD, AUD, NZD, CHF: See weekly preview
JPY: The latest polling shows that the opposition DPJ could win as many as 300 seats out of the 480 seats in parliament at the upcoming lower house election on Sunday, thereby securing a landslide victory. A DPJ victory in the near term would marginally undermine yen on political uncertainty. Investors might also be concerned about the potential for increased government spending. Should US dollar weakness resume in earnest, investors might pay more intention to past DPJ comments suggesting the party does not want Japan to acquire more US dollar denominated bonds.
In the week ahead we have jobless and CPI data. We continue to target USDJPY at 95 over 1 and 3 months.
COMMODITIES
See Summary. Also:
CRUDE "Oil is still drawing support from the positive data on Friday," said David Moore, an analyst at the Commonwealth Bank of Australia. "There aren't too many economic indicators due today that will push oil prices much higher, but any damage to oil and gas facilities off Canada would add upside pressure." Oil's Friday gains followed home sales data for July showing recovery in the U.S. housing market, while Federal Reserve Chairman Ben Bernanke also said the global economy appeared to be recovering. Asian stocks are set to rise on Monday, riding on the tails of the Wall Street bounce that sent the S&P 500 index to a 10-month intraday high, amid building optimism about an economic recovery.
GOLD: Gold is being underpinned by buying from speculators, with the euro's recovery above $1.43 and a rally in oil to the year-to-date high levels increasing their risk tolerance," said Shuji Sugata, manager at Mitsubishi Corp Futures & Securities' research team. "But such buying is not sustainable. They stop buying when gold rises towards $960, which looks like an initial resistance," he said.
OTHER HEADLINES (Bloomberg)
Bond Bears Dumping Two-Year Treasuries Defy Fed History on Interest Rates
Dollar, Yen Decline Versus Euro as Recovering Economy Damps Refuge Demand
Coal Rally Ending as China Slows Imports to Open Idle Mines, Boost Surplus
ECB Warns of `Bumpy Road Ahead' as Officials Signal No Stimulus Exit Soon
Aussie Options Turn Bearish as Odds of Rate Increase Diminish With China
ECB Warns of `Bumpy Road Ahead' as Officials Signal No Stimulus Exit Soon
Consumer Spending in U.S. Probably Decelerated in July as Payrolls Dropped
Global Market Direction?
Because global stocks have set direction for commodities and currencies, we present links and key points of articles arguing for and against further upside. While we remain skeptical, there is growing evidence for further upside with stocks. In the interest of presenting a balanced picture, consider the following.
Bull in a China Shop [Excerpt]
http://www.reuters.com/article/reutersEdge/idUSTRE57K2T520090821
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…but 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.”….. 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.
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
Bull in a China Shop [Excerpt]
http://www.reuters.com/article/reutersEdge/idUSTRE57K2T520090821
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…but 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.”….. 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.
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.
For those unable to trade currencies, commodities, and stock indexes directly, here are some ETFs to use in their place. Investors should first examine the particular ETF, because many ETFs do not track the underlying instrument well (compare charts to see how the oil ETF USO has underperformed crude oil,showing less than half of oil's gains from Feb-June 09)
Currency ETFs: (FXA), (FXB), (FXC), (FXE), (FXF), (JYF), (FXY),(UUP), (UDN), (CYN), (CYB), (DBV)
Commodity ETFs: (FXEN) (DUG) (GLD) (SLV) (USO), (UNG), (GSG), (DBA)
Stock Index ETFs: (SPY), (DIA), (QQQQ), (IWB), (VTI)
DISCLOSURE & DISCLAIMER: Opinions expressed do not necessarily represent those of AVA FX. The author has positions in above mentioned instruments.
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