How to Trade The World's Biggest Trading Day of the Month

The Biggest Economy's Biggest Trading Event: Monthly US Employment Reports


What It Is, Why it Matters, And How To Profit From It



What It Is

The US Department of Labor's Non Farm Payroll, Unemployment Rate, and Average Hourly Wage reports, released together on the first Friday of the month, combine to form what is arguably the month's key economic news event for the United States. It is intended to represent the total number of paid workers in the U.S. minus farm employees, government employees, private household employees and employees of nonprofit organizations.



The underlying idea is is to capture changes in the number of workers that contribute to GDP. The US Department of Labor releases it on the first Friday of every month 08:30 EST (the day before if that Friday is a holiday). At the same time, the US also releases monthly reports on the unemployment rate and average hourly earnings.





Why It's So Important

Together these reports consistently cause largest rate movements of any news announcement in the forex market. This is because about 70% of US GDP is from consumer spending, which ultimately depends on employment conditions and their affects on consumer income.



Thus these reports are arguably the most significant indicator of growth of the largest market in the world. Right or wrong, the market’s interpretation of these reports often causes significant movements in global stock, commodity, and forex markets, and can even reverse prevailing trends for the following week.



How Markets Are Affected

Exactly how this event affects the markets has varied over time. Historically, good news (lower than expected unemployment, higher than expected average wages) caused the USD and other assets that benefit from growth, like stocks, to rise. For the past two years, the USD has generally been bought as a safe haven in times of fear ,and thus moves like other low yielding safe haven assets. It moves up on bad news, and down on good news, the opposite of "risk assets," like stocks, commodities, and higher yielding and commodity based currencies. Thus most of the time, a disappointing report boosts the dollar while stocks and other risk assets fall. At times, a very positive report can even boost both the USD and stocks, for reasons we'll discuss another time.



Given the profit potential of trading the related market movements, many analysts, traders, funds, investors and speculators anticipate the NFP number - and the directional movement it will cause. This means that there can be increased volatility and trading opportunities days before the actual report release, because there are reports that come out in the preceding days that hint at the actual result. These include the employment section of manufacturing and services PMI reports, as well as the ADP non farms payroll report. Thus NFP related volatility can begin early in the week of the actual report.





How To Anticipate It

While we do not recommend attempting to trade the NFP based on one's personal prediction the results, it is still helpful to form an initial bias about whether it exceed or fall short of expectations. There are different methods for trying to predict the NFP result using different combinations of leading indicators. Here are some of the more popular ones.







• ADP Non Farm Payroll Report. Attempts to measure the same thing as the US Government report. Generally accurate in predicting the US NFP direction if not the exact magnitude of the change.The ADP figures have been weaker than the initially reported government number by 117K per month on average over the past 4 months.



• The employment component of the service sector ISM. Over the past 10 years, the index has had a nearly 90% correlation with non farm payrolls.



• The employment component of the Manufacturing sector ISM. Over the past 10 years, the index has had a very strong 87% correlation with non farm payrolls.



• The 4 week moving average of new weekly unemployment claims.



• The direction of continuing claims as shown by the prior 2 reports. That is, did the most recent show greater or fewer continuing claims, and was the rate of increase/decrease greater or less when comparing the prior 3 reports.



• Consumer Confidence as per the Conference Board – polls 5000 families about their expectations over the next 6 months/



• U. Michigan Consumer Confidence Survey – polls 500 people about their expectations for the next 5 years. Because of this smaller sample and longer time horizon, this report is considered less accurate than the Conference Board's report.



• The level of strike activity. A rising # suggests worse NFP, a falling # suggests a lower nfp.



• Monster.com Employment Index (based on the # of online job ads) rising or falling.



• Challenger, Grey, & Christmas y/y Layoff Report on the number of job cuts announced by employers. Limited short term correlation with overall labor conditions.



With so many different parties watching this report and interpreting it, even when the number comes in line with estimates it can cause large rate swings when the report finally does come out at the end of the week. Here's a way to trade this move without getting knocked out by the irrational volatility it can create.







Trading News Releases

This news release creates a favorable environment for active traders in that it provides a near guarantee of a tradable move following the announcement. As with all aspects of trading, whether we make money on it is not assured.

Watching how the market is reacting can provide us with more consistent results than trying to anticipate the directional movement the event will cause



Trading news releases can be very profitable, but one needs to stay calm and patient. This is because speculating on the direction of a given currency pair upon the release can be very dangerous. Fortunately, it is possible to wait for the wild rate swings to subside. Then, traders can attempt to capitalize on the real market move after the speculators have been wiped out or have taken profits or losses. The purpose of this is to attempt to capture rational, more sustained movement after the announcement, instead of the irrational volatility that pervades the first few minutes after an announcement. (For more, see our separate report Trading On News Releases)





A Strategy for Trading Moves Within the First 4 Hours on 5-15 Minute Charts



There are many ways to trade this event. Here is just one example.



The logic behind this strategy is to wait for the market to digest the information's significance. After the initial swings have occurred, and after market participants have had a bit of time to reflect on what the number means, we will enter a trade in the direction of the dominating momentum. We wait for a signal that indicates the market may have chosen a direction to take rates. This avoids getting in too early and decreases the probability of being opening a position before the market has chosen a direction.



The Rules

The strategy is generally traded off of 5 -- 15-minute charts. For the rules and examples, a 15-minute chart will be used, although the same rules apply to a five-minute chart. Signals may appear on different time frames, so stick with one or the other.



1. Do nothing during the first bar after the NFP report (8:30-8:45am in the case of the 15-minute chart).

2. The bar created at 8:30-8:45 will be wide ranging. We wait for an "inside bar" to occur after this initial bar (it does not need to be the very next bar). In other words, we are waiting for the most recent bar's range to be completely inside the previous bar's range.

3. This inside bar's high and low rate sets up our potential trade triggers. We use it to define the tradable breakout levels. That is, when a subsequent bar closes above or below the inside bar, we take a trade in the direction of that breakout up or down. We can also enter a trade as soon as the bar moves past the high or low without waiting for the bar to close. Whichever method you choose, stick to it. The first is safer, the second gets you in the move earlier and thus has higher profit potential, but with a greater risk of having the move reverse against you.

4. Place a reasonable stop loss order on the trade you entered. (For more, see our report A Logical Method Of Stop Placement.)

5. Make up to a maximum of two trades. If both get stopped out, don't re-enter. The inside bar's high and low are used again for a second trade if needed.

6. Our target is a time target. Generally, most of the move occurs within four hours. Thus, we exit four hours after our entry time. A trailing stop (one that is defined by a percent or # of pips from the furthest advance in the direction of your trade) is an alternative if traders wish to stay in the trade.





Example 1:

Figure 1: February 6, 2009. GBP/USD 15-minute chart. Time is GMT.

Source: Forexyard




Looking at Figure 1, the vertical line marks the 8:30am EST (1:30pm GMT) release of the NFP report. As you can see from the chart, there are three bars, or 45 minutes, of back-and-forth action following the release. During this time, we do not trade until we see an inside bar. The inside bar has a square around it on the chart. This bar's price range is fully contained by the previous bar. We will enter when a bar closes higher or lower than the inside bar. The next bar's close is circled, as that is our entry; it closed above the inside bar's high. Our stop in this example is a fixed 30 pips below the entry price, which is marked by a solid black horizontal bar.



Because our entry occurred at approximately at 9:45am EST (2:45pm GMT), we will close out our position four hours later. By entering the trade at 1.4670 and exiting four hours later at 1.4820, 150 pips were captured while risking only 30 pips. However, it should be noted that not every trade will be this profitable. (Before attempting to trade any strategy, be sure to read our report: Practice Trading with a Practice Account- What You Learn, What You Don't.)



Example 2:

Global equity markets generally move together. Note how closely the 15 minute chart below of the DAX 30 (a German stock index) mimics the moves of the S&P 500 in both timing and magnitude. The above strategy would have worked well here too.

Sept. 30th 15 Minute Charts of the S&P 500 and DAX 30 Index After the 13:30 GMT/08:30 EST Release of the ADP Non Farms Payroll Report.

Chart Courtesy of AVA FX



Strategy Disadvantage

While this strategy can be very profitable, it does have some faults to be aware of. For one, the market may move in one direction aggressively and thus may be beginning to fade by the time we get an inside bar signal. In other words, if a strong move occurs prior to the inside bar, it is possible a move could exhaust itself before we get a signal. It is also important to note that in high volatility times, even after waiting for a pattern setup, rates can reverse quickly. This is why it very important to have a stop in place.



Summary

The logic behind this strategy of trading the NFP report is based on waiting for a small consolidation, the inside bar, after the initial volatility of the report has subsided and the market is choosing which direction it will go. By controlling risk with a moderate stop we are poised to make a potentially large profit from a huge move that almost always occurs each time the NFP is released.



The View from Wednesday: Negative



So far, the indicators suggest a worse than expected report. Just a few easily available indicators thus far ALL point to a worse than expected report.



ADP Non Farm Employment Change was -245K vs. -200K expected and -277K prior. Over 20% worse than expected, but slightly better than last month's result. This should be seen as negative, but both media and the markets have managed to focus on the positive. As of this writing, one hour after the release, global stocks are down on the news but after the first half hour bouncing back, erasing half the drop. Overall suggests a weaker report than expected. Again, however, remember that the ADP figure has been weaker than the initial government number by an average of 117K over the last 4 months, meaning this one is still too close to call and could actually come out above expectations.



Online job ads are down over 100K from last month, suggesting a worse than expected report.



Chicago PMI came in at 46.1 (below 50 = contraction) vs. 52.1 forecasted and 50.0 last month, again suggesting a worse than expected report.



The Conference Board's Consumer Confidence Index was 53.1 vs. 57.0 forecasted and 54.5 prior, suggesting a worse than forecasted report.



Combined with the already extended rallies in risk assets, the above indicators tentatively suggest a disappointing Friday and pullback in risk assets and currencies.



Beware again, however, that markets have been very resilient and focused on whatever positives there are.



DISCLOSURE AND DISCLAIMER: THE VIEWS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX. THE AUTHOR HAS LONG POSITIONS IN THE ABOVE MENTIONED INSTRUMENTS.

GLOBAL OUTLOOK SEPT 30: Packed Calendar + US Jobs Reports = Tight Trading Ranges

SUMMARY


- Stocks: Tuesday: Asia up, Europe, US down, Wednesday morning Asia mixed, Europe up

- FX: Flat equities mean no clear bias to safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD up against JPY, EUR, down against GBP see below for details

- Main events today: AUD: Building Approvals, Retail Sales, NZD: Busniness Confidence, CHF: KOF Econ. Barometer, USD: ADP NFP, Chicago PMI, Crude Inventories, CAD: GDP, JPY: Tankan Mfg. & Non-Mfg. Index, Retail sales

- Big Theme:Despite potential for a volatile week, tight trading ranges thus far in most markets. News will be climaxing in Friday's US jobs data, Special importance to events that hint at its result. ADP and employment component of Chicago PMI will provide that, possibly move markets if surprising (i.e. +30% above or below expectations). Stocks, Gold, Oil still in extended rallies. Gold long futures at 12 mo. High

STOCKS

US

Tuesday's trade concluded in lackluster fashion as an absence of leadership left stocks to drift during the afternoon, unable to reclaim their initial gains.



Stocks had started the session in higher ground as a better-than-expected S&P/Case-Shiller Home Price Report for July brought about some modest support. The report's 20-City Composite showed a 13.3% year-over-year decline, which wasn't as bad as the 14.2% decline that was expected.



However, the solid state of things quickly became unsettled by news that the September Consumer Confidence Index pulled back to 53.1 from 5.4.5 in August. The dip was unexpected; economists, on average, had been expecting a reading of 57.0.



The major indices were unable to fully recover from the flurry of selling that followed the disappointing consumer confidence reading.



News that the FDIC will require insured institutions to prepay estimated quarterly risk-based assessments into 2012 seemed to weight on bank stocks, though the announcement was generally expected. Diversified bank stocks fell 1.9%.



Consumer finance stocks were hit just as hard. They fell 1.9% amid news that the Fed has approved rules amending the transparency and disclosure of terms in credit card agreements

Asia

Japan's Nikkei average was flat in cautious trade on Wednesday, with investors hesitant to actively take positions ahead of a series of economic data releases, Hong Kong shares down on thin trade and profit taking ahead of the National Day holiday

Europe

Down on US data, weaker oils outweigh gains in banks





TUESDAY GLOBAL

MARKETS RESULTS

ASIA- UP N225I +0.91% HS +2.06 % SSEC +0.90% FTSTI -0.39% AORD -0.17 %

EUROPE - DOWN FTSE -0.12 % DAX -0.40% CAC -0.28 % MIBTEL -1.09%

US- DOWN S&P -0.22% DOW -0.48% NASDAQ -0.31%

WEDNESDAY

ASIA MID DAY MIXED

N225I +0.33% HS -0.28 % SSEC -0.33% FTSTI +1.38% AORD +1.50 %

EUROPE: AT OPEN

UP

FTSE +0.16 % DAX +0.25% CAC +0.45 %



COMMODITIES

Trading in tight flat range over the past week along with stocks

Oil



Oil prices fell slightly on Tuesday following stocks as U.S. consumer confidence data weighed on markets, with added pressure from the government revised downward U.S. demand for July.

U.S. consumer confidence fell unexpectedly in September as the worst job prospects in 26 years fueled worries over personal finances, according to an industry report.

Oil markets have looked to wider economic data and equities markets for signs of a turnaround in the economy that could lift slumping fuel demand.



Oil Going Down



Oil Options Hit Highs as Verleger Predicts 44% Plunge: If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.”



Right to Sell



Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.



The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.



Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said. “There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”





Oil Going Up



Al-Naimi’s View



Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound, and said demand for crude was rising.



“Economic growth is the name of the game,” Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. “Oil today is a commodity. As long as economic growth is there, the price is going to go up.”



Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.



OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production.





Gold



Despite falling stocks, gold futures gained slightly, though precious metals remain under pressure as stagnating stocks, strengthening USD and the weight of the largest # of long speculative positions in a year. These longs will need to take profits at some point, adding downward pressure to gold. The noncommercial net long position -- buying to profit from further gains -- in gold futures on the COMEX division of the New York Mercantile Exchange stood at an all-time high of 236,749 lots for the week ended Sept. 22.

"These (long positions) make the metal vulnerable to the downside, if upside momentum slows down further and weak longs start liquidating," said Alexander Zumpfe, senior precious metals trader at Heraeus in Germany.

CURRENCIES



General: Stocks flat, no clear bias to risk or safety currencies, AUD up on news, EUR/USD down. We suspect stagnant stocks and uncertainty ahead of Friday gives preference to safe haven currencies, but not seeing it in charts at this time.





USD: Gaining as stocks fall on bad consumer confidence data, rose from 8 month low against the JPY on pro-intervention remarks by MoF Fuji, near 88, also gained 0.3% against the EUR, though dropping 0.4% against the GBP on news that the BoE may well decide to not increase stimulus. Big news day (see above) for the USD.



EUR- Down again, $4.4572 (-0.3).as USD strengthens on weakening stocks. German unemployment change data due today could move EUR, because spending has contracted in Germany & Italy



JPY - Dropped against the USD after MoF Fuji pro intervention remarks (as we predicted would happen in staff briefing). Japan is still an export economy trying to export its way out of recession against weak global demand. Many believe is just a technical correction because there were so many short the USD/JPY, though others believe there is not fundamental reason for the JPY's recent strength. IP up ahead Industrial production is expected to improve again but the focus will be on the outlook for October, which provides the first insight into the Oct-Dec quarter GDP. Our economists think output will continue to grow into Oct-Dec that translates into 3% q/q annualized GDP growth. The October IP outlook should provide confirmation



GBP – Gains against USD, EUR and others on news that the BoE may well decide to not increase stimulus.



Mixed messages from the Bank of England are beginning to undermine the central bank’s credibility. This morning, the BoE revealed to economists that they are not planning to cut the deposit rate anytime soon, which was something that they hinted at earlier this month. They also addressed the confusion about their stance on the British pound. The BoE said the market misinterpreted and overreacted to Central Bank Governor King’s comment about a weak sterling being helpful as benign neglect for the pound. Their policy is unchanged and if the pound fell significantly, it would become a concern. Although we continue to believe that the BoE is in denial and really wants the pound to fall and would ideally like to cut the deposit rate if it did not have consequences on market expectations, their latest comment on the deposit rate soothed immediate fears. Meanwhile the final GDP report reveals that the economy contracted by 0.6 percent in the second quarter, leaving the annualized GDP rate at 5.5 percent. The current account deficit ballooned to -11.4B from -4.1B in the second quarter which supports our belief that the U.K. really needs a weaker currency



AUD – Better than expected retail sales keep hopes alive for rate AUD interest rate hike before year end. Had the result been, negative, this would have been the third consecutive negative monthly retail sales figure and would have made a rate increase before year end more unlikely.



NZD – Steady vs. the USD in thin trade, as local news focuses on a large earthquake in Samoa, small tsunami expected for NZ coast. NBNZ Business Confidence prints at 49.1 vs. 34.2 in the prior month



CAD – Tracking oil first, stocks and risk appetite second, so the CAD is likely to move with oil and stocks. BoC Carney again states concern about strength of CAD against USD, CAD selling off against USD over past week. Over past month, sounding less optimistic, increasing buybacks for mortgages, expressing openness to more stimulus.



CHF – Meanwhile, the Swiss Franc has sold off against the U.S. dollar and Euro on the heightened fear of intervention from the Swiss National Bank. There has not been a warning from the SNB and the Swissie did not rise to new highs, but the last time the SNB intervened was when the ECB conducted their first ever one year tender. They are set to conduct their second tomorrow and therefore Swiss traders are on intervention watch. According to the latest UBS Consumption Indicator which fell to a 5 year low, plans for consumer spending have retreated as rising unemployment forces consumers to cut back.



KoF indicator due The KoF leading indicator will be released tomorrow and the market is expecting the figure to return to positive territory (cons. 0.3 vs. -0.04 prev.) Two major rounds of EURCHF buying by the SNB on March 12 and June 25 coincided with the ECB holding long dated liquidity tenders. The next 12m ECB tender is on September 29-30. If we do see SNB intervention push EURCHF back towards 1.53-1.54, we'd sell the cross again as Swiss banks need to keep shrinking balance sheets.





Counting Down to Non-farm Payrolls: Insights from Kathy Lien



Tomorrow the release of the ADP employment report will shift the market’s focus to Friday’s non-farm payrolls report. The market expects the ADP number to confirm their overall belief that the pace of job losses is slowing. There is a good chance that the consensus is right because less people have been filing for jobless claims on a weekly basis.



However with many people still wary of a double dip recession, the risk certainly lies with a weaker report. This morning’s surprise decline in consumer confidence and corresponding drop in the labor differential suggests that there has only been a limited improvement in the labor market – i.e. continued but slowing job losses.



An environment where jobs are being created is very different from an environment where people are still falling under the axe, albeit at a slower pace. It is important to be aware of the risks, but there are still many reasons to be optimistic about Friday’s report. The following chart illustrates the strong correlation between the U.S. unemployment rate and the difference between the consumers’ assessment of current business conditions. We subtracted the number of people who believe that business conditions are still bad with the number of people who believe that current business conditions are good and compared that with the unemployment rate going back to 1966. As you can see, extreme pessimism about current business conditions has coincided with a high unemployment rate. The index of business conditions is beginning to peak which suggests that we may be nearing a similar situation in the unemployment rate. Aside from ADP, the final release of second quarter GDP and the Chicago PMI report is due for release on Wednesday.

Unemployment and Consumer Sentiment-A Strong But Unsurprising Correlation

CONCLUSIONS



Potentially an unusually volatile week full of news and climaxing in US Non Farms Payrolls and Unemployment Rate Reports. With so many trends extended, safest bet appears to be range trading at strong multi-month support or resistance once a bounce begins. See Crude oil for Tuesday as an example as it begins to bounce. Keep close watch on stocks, especially the S&P 500 for direction of other risk assets. Long gold futures are at 12 month highs among traders small and large, short gold futures are at a 12 month high for commercial traders. This implies extreme risk appetite/bullish sentiment, which is considered bearish. See report: What Pro Traders Think of Gold: COT Report of Sept. 22.



Trading Opportunities: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Always use sell stop orders.



Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back.










OTHER HEADLINES



(Bloomberg)



Bank of Japan Said to Consider Ending Corporate Debt Purchases on Recovery

•European Stocks Rise, Extending Best Quarter This Decade; Infineon Climbs

•CIT Said to Consider Financing From Citigroup, Barclays as Deadline Nears

•IMF Cuts Forecast for Global Losses on Loans, Investments to $3.4 Trillion

•Pimco Save More, Spend Less Economy Brings New Normal's Total Return to 5%:

(seekingalpha.com)

http://seekingalpha.com/article/163093-yield-curves-fx-and-libor-trends



DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

What Pro Traders Think of Gold: COT Report of Sept. 22

For the week ending 9/22, here are professional traders' positions on gold, as per the Commitments of Traders Report for the week ending Sept. 22nd.

Gold Futures Positions: Large Speculators, Small Speculators, Commercial Traders


Meaning


Overall: Long open gold futures are at a 12 month high-extreme bullish sentiment that typically means gold is overbought and due for correction.



Speculators large and small, who represent market sentiment, are overwhelmingly long- near or at annual high long sentiment for gold



Commercial traders are overwhelmingly short



Small speculators are considered to be the most likely to be wrong and the best ones to trade against.



Large commercial traders, as the ones who must actually supply the commodity in question, are considered the best informed and the worst ones to bet against.



Conclusion: Those long gold should have tight stops in place. Risk appetite abnormally high ,thus same advice holds for those long stocks and higher yielding and commodity currencies like the AUD, NZD, CAD, EUR. Bullish for JPY, USD, CHF





DISCLOSURE AND DISCLAIMER: THE AUTHOR HAS NO POSITIONS IN GOLD. THE OPINIONS EXPRESSED ABOVE DO NOT NECESSARILY REFLECT THOSE OF AVAFX

GLOBAL OUTLOOK SEPT 29: Packed Calendar + US Jobs Reports = Volatility

SUMMARY


- Stocks: Monday: Asia down, Europe, US up, Tuesday morning Asia up, Europe futures point higher

- FX: Rising equities, safety currencies [JPY, USD, CHF in order of safety appeal] generally down Monday vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], with USD big exception, Tuesday morning some reversals see below

- Main events today: JPY: Core CPI, GBP: Current Account, Final Q2 GDP, CBI realized sales, USD: S&P/CS Composite-20 HPI, CB Consumer Confidence

- Big Theme: A volatile week ahead, climaxing in US jobs data, Special importance to events that hint at its result. Likely to set direction until US Q3 earnings season begins Long term USD weakness remains, but so does very overbought stock market that could pullback anytime and, given extreme level of USD shorts, cause a wild USD bounce.Q3 earnings within 3 weeks. Volatility = stay with range trading at strong support, like crude reversal seen this morning. Tight stop losses appropriate.

STOCKS

US

News of renewed merger and acquisition activity didn't bring many participants to the market, but stocks were still able to sport broad-based gains for the entire session and log their best gain in one month.



Stocks were given support in the early going by news that Xerox (XRX 7.68, -1.29) will pay $6.4 billion in cash and stock for Affiliated Computer Systems (ACS 53.86, +6.61), while Abbott Labs (ABT 48.58, +1.12) will pay $6.6 billion in cash for Solvay's drug business.



Though it was overshadowed by the larger deals, American Securities announced it will acquire GenTek (GETI 37.77, +10.77) for $38.00 per share, which represents a near 40% premium over GETI's closing price last Friday.



The supportive role played by Monday morning's M&A news helped stocks to recover from their worst weekly loss since July.



Several sectors had their moments of leadership, but by the end of the session financials logged the best gains. The sector settled with a gain of little more than 3.4%, which marks the sector's best single-session percentage advance in two months. Multiline insurers (+6.0%) underpinned the financial sector's impressive move.



Consumer staples stocks lagged on a relative basis as Dow component Kraft (KFT 26.17, -0.07) showed moderate weakness. Still, the sector netted a gain of 0.5%.



Though stocks traded with broad-based gains, there wasn't much behind them. Trading volume on the NYSE fell to its lowest level in one month, coming in below 1 billion shares.



Despite broad-based buying among equities, Treasuries were still able to advance. As such, the benchmark 10-year Note gained 11 ticks, which sent its yield down to multimonth lows of 3.28%.



The U.S. dollar also showed strength, which drove the Dollar Index to a 0.2% gain. Despite that move, commodities were still able to garner support and send the CRB Commodity Index up 0.6%.



Advancing Sectors: Financials +3.4%, Materials +2.0%, Consumer Discretionary +2.0%, Technology +1.7%, Energy +1.7%, Industrials +1.6%, Telecom +1.5%, Health Care +1.4%, Utilities +0.9%, Consumer Staples +0.5%

Asia

Japan's Nikkei average rose 1 percent on Tuesday, with exporters such as Kyocera Corp (6971.T) rebounding after the yen pulled back from an eight-month high against the dollar. Sept 29 (Reuters) - Hong Kong shares rebounded from a three-week low on Tuesday, buoyed by an overnight rally on Wall Street, as investors scooped up shares of oversold stocks including banks and telecoms, as new US merger activity stirred interest in US stocks.

Europe

The FTSE closed 1.6 percent higher on Monday, with heavyweight banks, miners and energy stocks reversing early losses, helped by a strong opening for the U.S. market, after rising 0.1 percent on Friday.



"It wasn't until the U.S. open that the markets turned themselves," said Jimmy Yates, Head of Equities at CMC Markets.





MONDAY GLOBAL

MARKETS RESULTS

ASIA- DOWN NIKKEI -2.50% HS -2.07% SSEC-2.65 % FTSTI -1.24% AORD -0.70%

EUROPE - UP FTSE +1.70 % DAX +2.78% CAC +2.30 % MIBTEL -1.09%

US- UP S&P +1.80% DOW +1.47% NASDAQ +2.11%

TUESDAY

ASIA MID DAY UP

NIKKEI +0.91% HS +2.37 % SSEC -0.33% FTSTI +1.62% AORD +1.50 %

EUROPE: AT OPEN

DOWN

FTSE -0.09 % DAX -0.08% CAC- 0.09 %



COMMODITIES

Rising with stocks, awaiting a full week of news, especially the US NFP and Unemployment rate reports.

Oil



$62 or even a retest of June lows around $59 is possible



Near Term Prospects for Oil: All agree prices will move—but which way? This depends on what you believe to be the basic driver of crude prices: current supply/demand or market sentiment about growth, as represented in global stocks, especially in the S&P 500 index.





Oil Going Down



Oil Options Hit Highs as Verleger Predicts 44% Plunge: If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.”



Right to Sell



Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.



The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.



Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said. “There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”





Oil Going Up



Al-Naimi’s View



Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound, and said demand for crude was rising.



“Economic growth is the name of the game,” Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. “Oil today is a commodity. As long as economic growth is there, the price is going to go up.”



Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.



OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production.





Gold



Also tracking the S&P 500, futures holding on above $990. Like all commodities, awaiting this week's slew of economic data

CURRENCIES



General: USD rises Monday against all majors except for the CAD and AUD, DESPITE strongest rise in S&P in 5 weeks. Very odd, because over the past year, when U.S. equities rise, the dollar tends to fall because the improvement in risk appetite eases safe haven flows that have been parked in the U.S. dollar. When 3 month LIBOR rates in U.S. fell below Japanese levels, the correlation between equities and currencies exacerbated as the dollar became the funding vehicle of choice for investors looking to assume risk. SEE BELOW AND WEEKLY OUTLOOK FOR DETAILS





USD: Not only rallying, but rallying Monday along with stocks. We believe neither this relationship nor the USD rally to continue. Reasons for both stocks and the USD rising include:



• Recent remarks from ECB President Trichet in support of the USD. With USD shorts still at extreme levels, this might have been enough to spur short term profit taking. However, Trichet's thoughts on the USD are well known, and the ECB does not seem worried about EUR strength, so we question the staying power of this USD rally.



• The Conference Board reported that online help wanted ads fell by 101,800 in September, which suggests that Friday’s non-farm payrolls report may not be as healthy as everyone expects, thus feeding fear and USD demand as carry trades unwind.



• General nervousness among traders typical of the days preceding US monthly NFP and unemployment rate reports this Friday, compounded by the extra volatility in FX markets at the end of the quarter and light volume from the Yom Kippur holiday.



In sum, we expect the inverse correlation between stocks and the USD to resume. Since January 2009, the correlation between the S&P 500 and the EUR/USD has been near 90%.



Nor do we believe the USD rally will last. Any talk from the Fed about supporting a strong dollar does not appear all that serious. As long as there is no real economic recovery, inflation pressures, the main concern of a weak currency nation, remain low, and falling commodity prices further restrain inflationary pressures. Meanwhile, the weak USD boosts US corporate overseas earnings, adding hope for a better Q3 earnings season. It also ups foreign demand for relatively cheap US assets Thus for now; the US economy is getting the benefits of a weak currency without the disadvantages.





EUR- As noted above, Trichet's comments supporting the USD may have been the catalyst to spark profit taking on the extreme levels of USD shorts. The coming heavy news week both for the USD and EUR should provide near term direction.



JPY - Volatile as new Move Fuji sends mixed signals about intervention if the JPY gets too strong. The Wall Street Journal reported that for every one-yen appreciation in the exchange rate, Toyota sacrifices Y25B in profits. Toyota’s sensitivity to the Yen probably reflects that of many other Japanese corporations. Therefore it will be hard for Mr. Fuji to allow the yen to appreciate uncontrollably. His efforts to create a country that is less dependent on external demand may be curtailed if the strong yen dents the recovery. Consumer prices are down more than prior, suggest deflationary pressure, adding to pressure for JPY intervention.



GBP – Dropped for the 4th day in a row against the USD, breaking support, next level of support is around 1.550, mixed comments from UK officials continue to weigh on the GBP, as do mixed economic data releases.



AUD – Hawkish comments by RBA Gov. Stevens boost the AUD over the past day, stating his confidence that exit from stimulus policies will come soon, and repeated that current rates are at "unusually low levels." The RBA remains the first bank we expect to raise rates



NZD – Down on USD strength, little news coming, moving with market sentiment



CAD – Tracking oil first, stocks and risk appetite second, so the CAD is likely to move with oil and stocks. BoC Carney again states concern about strength of CAD against USD, CAD selling off against USD over past week. Over past month, sounding less optimistic, increasing buybacks for mortgages, expressing openness to more stimulus.



CHF – Following sentiment, EUR strength.



CONCLUSIONS



Potentially an unusually volatile week full of news and climaxing in US Non Farms Payrolls and Unemployment Rate Reports. With so many trends extended, safest bet appears to be range trading at strong multi-month support or resistance once a bounce begins. See Crude oil for Tuesday as an example as it begins to bounce. Keep close watch on stocks, especially the S&P 500 for direction of other risk assets.



Trading Opportunities: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Always use sell stop orders.



Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back.



Currency Pair in Play for today



EUR/GBP: Currency in Play for Next 24 Hours





EUR/GBP will be the currency in play for the next 24 hours. We will have data for the Euro-zone that includes German Unemployment at 3:55 am ET or 7:55 GMT as well as the CPI estimate for 5:00 am ET or 9:00 GMT. The U.K. will release the Index of Services at 4:30 am ET.



Although EUR/GBP remains within the Buy Zone, which we determine using Bollinger Bands, the ugly reversal candle suggests that we may have a deeper pullback in the currency pair. After hitting a 5 month high of 93 cents, EUR/GBP retreated aggressively. There is a good chance that the currency pair could fall below 91 cents, but as long as it holds above 90 cents, the uptrend remains intact. A rebound over the next 24 hours will meet resistance at 0.9267. If the decline exacerbates and EUR/GBP falls below 90 cents, the next level of support is at 0.8885, which is the 10 and 200-day SMA.







OTHER HEADLINES



(Bloomberg)



Unemployment Confronts Obama Rhetoric With Threatened Chronic Joblessness



•Unilever's First Outsider Taps P&G Playbook as Sara Lee Heralds Purchases



•State Housing Agencies Said Slated to Get U.S. Treasury Help for Borrowers



•Smartest Currency Traders Juggle Krone, Krona, Kiwi in Central Banking Bet

(seekingalpha.com) Just one but really worth the read:



http://seekingalpha.com/article/163093-yield-curves-fx-and-libor-trends



DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

Global Markets Outlook Sept 27-Oct.2 Part II: Judgment Day, Judgment Week?

 

GBP

Continued Erosion Against All Majors As Fundamentals Worsen, Reduce Its Risk Asset Appeal

Fundamental Forecast for British Pound: Bearish

Summary

--BoE Mervyn King Undermines GBP saying the weak pound “will be helpful” in supporting a feeble recovery

--Upcoming spending cuts and speculation of a cut in the deposit rate means the BoE is running out of options

--The Bank of England minutes show a unanimous vote to keep the bond purchasing program at 175 billion pounds

Analysis

The British pound was down hard against all majors. Prominent breakouts are starting to look the establishment of new trends as the struggling fundamental health of the United Kingdom begins to override the appeal the currency once held as a source for high yields. The next few weeks could be critical in clarifying where the pound is going and how it fits into the market.

Of course, risk trends will have an impact on what kind of direction and pace the GBP takes. However, it will likely start to be more of a one sided influence. Should risk tumble in the wake of the G-20 meeting as investors worry the capital markets can’t support their own weight without a government safety net, the pound will likely tumble. There is still a latent build up of risk appetite behind this currency that was fed by the belief that the recovery in the global economy and markets would be exceptionally beneficial for the United Kingdom which is generally considered to be among the weakest industrialized nations. As the outlook for a speedy recovery and fades, so too does the picture of London retaking its title of financial center of the world. Yet, what happens should sentiment actually improve? Even then, the pound may well lag or even continue to fade despite the positive turn.
Over the past weeks and months, it has become blatantly clear that Europe’s second largest economy is struggling to pull itself out of its deep recession; and the time frame for a return to growth is being continuously pushed back. Not only did the 2Q GDP numbers tell us that the slump was more intense than initially though; but we have also seen that policy officials are running out of options to support an orderly recovery.

This past week, the minutes seemed to have a positive tilt in that there was a unanimous vote to keep the bond purchasing program at 175 billion pounds (whereas in the previous vote, the was minority dissention headed by Governor Mervyn King for a greater amount).

Nonetheless, the central bank kept open the possibility of further expansion of this unorthodox policy. Another step that was speculated to under consideration was a cut to the deposit rate paid to banks that hold their capital with the BoE. This too was written off; but commentary by King and other MPC members continues to stoke speculation that either or both is still a considerable possibility. Without doubt, the central bank is running out of options to jump start the economy. The further the policy authority extends itself without a commensurate response from financial health or economic activity, the more dire the nation’s condition. Considering the government will have to follow through on a serious round of spending cuts in the near future (expected to be the biggest reduction in over three decades), time is certainly working against policy officials.

Events

A meaningful improvement in the outlook will come with time and a wide array of indicators, though in the near term economic data is vital at this point to stabilize the GBP. There is an abundance of them this week – some perhaps significant enough to help ignite optimism. Most prominent, but least likely to surprise, is the final reading of the 2Q GDP numbers. There is rarely a meaningful adjustment in this last recalculation of the data; but the new current account numbers, some spending adjustments or capital investment alterations would be notable. Among the other notable figures, mortgage approvals, net consumer credit and the money supply are important gauges for financial health. The BoE home equity withdrawal figure and PMI factory and construction data is growth focused

CHF

Nearing Intervention Levels vs. the EUR

Fundamental Forecast for Swiss Franc: Bearish

Summary

- Barring SNB intervention threats, moving with risk appetite

- Swiss Franc rallies on optimistic Swiss National Bank

- Hitting annual highs against the USD, but SNB more focused on the EUR

Analysis

The Swiss Franc traded to fresh yearly highs against the US Dollar and near multi-month peaks against the Euro on a broad flight to safety across key financial markets. Relatively hawkish rhetoric from the Swiss National Bank gave skittish investors little reason to fear central bank intervention, and indeed there was seemingly little in the way of further CHF appreciation. Yet the Euro/Swiss Franc exchange rate finished dangerously close to the key 1.5000 mark. The Swiss National Bank has twice defended said level through aggressive forex market intervention, and any further EUR/CHF declines would certainly test the bank’s resolve. A busy Swiss economic calendar promises no shortage of volatility across CHF pairs, and the coming week may prove pivotal in determining trajectory in the USD/CHF and EUR/CHF.
Recent price action has emphasized that the Swiss Franc remains quite sensitive to moves in key risky asset classes, and traders should primarily watch moves in the US S&P 500 and similarly significant risk barometers in the days ahead.

Events

Markets will keep an eye on upcoming KOF Leading Indicator data and the following day’s SVME Purchasing Managers Index report. The Swiss State Secretariat of Economic Affairs (SECO) recently upgraded its forecasts for domestic economic growth through the medium term—likely leading to similarly bullish calls for upcoming financial economic data. Indeed, consensus forecasts ahead of the often market-moving Swiss KOF report calls for the first positive reading in 12 months. Suffice it to say, a disappointing result could easily hurt the recent wave of optimism for the domestic economy. The following SVME Purchasing Managers Index is likewise expected to improve to its strongest levels in over a year, and disappointments could similarly limit further CHF advances.
Watch for further EUR/CHF declines in the week ahead—especially if the pair nears the contentious 1.5000 mark.

CAD

Tracking Crude Oil Down, Looking to Hold Trading Range, Awaiting Policy News

Fundamental Forecast for Canadian Dollar: Bearish

Summary

- Tracking Oil First, Stocks Second

- Retail Sales in Canada Unexpectedly Falters in July

- International Investors Increase Purchases of Canadian Securities

- USD/CAD SSI Points to Further Losses

Analysis

The Canadian dollar weakened against the USD, with the exchange rate pushing above the 50-Day moving average for the first time since July to reach a fresh monthly high of 1.0984, and the USD/CAD is likely to hold its broad range over the following week as investors weigh the outlook for future policy. The Bank of Canada announced it will extend the C$ 125B mortgage purchase program to “at least the end of January 2010” earlier this week in order to strengthen the banking sector, but said that two of the three emergency programs will be concluded at the end of October as the central bank sees “lower market-based funding costs and the lack of coverage in recent auctions for temporary liquidity facilities.” Moreover, Governor Mark Carney warned businesses will need further “restructuring” as he expects trade conditions to remain subdued over the next 18 months, and went onto say that it will take some time before “we are really going to see true growth, self-sustaining private sector growth” as the government stimulus begins to taper off.
Meanwhile, Prime Minister Stephen Harper said that the recovery remains “extremely fragile” and expects the downturn in the labor market to weigh on economic activity going forward, and the cautious outlook held by policy makers may continue to hamper long-term expectations for higher interest rates in Canada as the BoC pledges to hold borrowing costs at the record-low going into the following year as long as inflation remains muted.

At the same time, Governor Carney continued to see a risk for a slower recovery following the marked appreciation in the exchange rate, and said that the rise may become an increased concern “if the currency appears to move away from fundamentals.” Nevertheless, the central bank head stated that it will be “absolutely essential” for the board to meet its medium-term target for inflation and remained willing to “provide additional stimulus” as the BoC maintains its dual mandate to ensure price stability and to promote full-employment, and went onto say that the board maintains the flexibility to adopt “unconventional policies” if conditions warrant.

Events

However, as the economic docket for the following is expected to show the monthly GDP reading to improve for the second consecutive month in July, while producer prices are expected to rise 0.4% in August, the data may spur increased demands for the Canadian dollar as policy makers anticipate economic activity to pick up throughout the second half of the year. Thus if risk appetite revives, the USD/CAD may retrace the three-day advance over the following week to push back below the 50-Day SMA at 1.0858 however, the rebound in risk aversion may lead the pair to test the 100-Day SMA (1.1116) for near-term resistance over the following week.

We expect the CAD to move first with oil, second with risk appetite as depicted in stocks, and finally with news events.

AUD

Like All Commodity Currencies, Tracking Risk, Especially As Depicted by S&P 500

Fundamental Outlook for Australian Dollar: Bearish

Summary

- Moving With Risk, A Big News Week For Market Moving News, Climaxing in US NFP

- New Home Sales Surge, Matching Record Gain in August

- RBA Says Financial System Resilient But Risks Remain

Analysis

The Australian Dollar is likely to look past the local economic calendar and track risk sentiment as traders digest the outcome of the G20 summit in Pittsburg and a slew of high-profile releases from the US. The communiqué released following the meeting was unsurprisingly vague: leaders committed to come up with new bank capital requirements by the end of next year and put them in place by 2013, agreed to reform compensation practices to align risk-taking with bonuses, and said they will reform the International Monetary Fund to give greater say to emerging economies like China. Concrete policy details on these proposals were naturally scarce, leaving the markets to wonder how countries will put them into practice. The first hints of that will come from a post-G20 meeting of European Union finance ministers taking place over the weekend, with the outcome likely to have implications beyond the currency bloc to shape risk appetite at the beginning of next week.

Further ahead, the US economic calendar is packed with scheduled event risk, leaving the door open for volatility as traders continue to look to Wall St to set the pace of global equities and with them risk sentiment at large. Finally, while the G20 vowed to keep stimulus measures in place until a global recovery is firmly in place, clear signs of scaling back expansionary policy are already emerging from the US Federal Reserve and the Treasury Department. FDIC Chairman Sheila Bair added fuel to speculation that US policymakers are starting to back-track on expansionary policies, urging to end bailouts for large banks on Friday. These forces could spur the long-awaited downward correction in risky assets in the week ahead, taking the closely correlated Australian Dollar long for the ride.

Events

On the economic data front, Private Sector Credit is set to show that lending to businesses and households grew just 2.7% in the year to August, the slowest pace on record, hinting at mounting headwinds for the buoyant Australian economy. Coupled with unemployment at a six-year high of 5.8% and expected to continue steeply higher into 2010, this outcome bodes ill for consumption and thereby overall economic growth as Australians are unable to earn or borrow to finance their spending. A shallow rebound in Retail Sales will offer little solace: receipts are expected to rise 0.5% from the previous month in August; this puts the annual growth rate at about 5.3%, a hair above July’s five-month low of 5.2%. September’s AiG Performance of Manufacturing report may prove interesting: the metric showed that the industrial sector expanded for the first in 14 months in August, and traders will be keen to see if the trend continues, though markets may be getting desensitized to improvements on this front amid constant chatter about global rebuilding of inventories in the financial media. Finally, the annual growth rate in Building Approval is set to turn positive for the first time in 14 months, but this too may pass without little fanfare after last week’s jump in new home sales was chalked up to the effect of the government’s first-time home buyer credit.

NZD

Higher Still? Possibly, If Risk Sentiment Holds Steady

Summary

Fundamental Forecast for New Zealand Dollar: Bullish

- Fundamentals Good, But Risk Sentiment Key, Kiwi Could Be Bigger Beneficiary of Good NFP Report than the USD

- New Zealand Trade Balance Deficit Widened in August to -725M, On Declining Exports

- Gross Domestic Product 2Q Unexpectedly Rose by 0.1%,Versus forecast of -0.2%

- Westpac Consumer Confidence Rose to 120.3, Highest Since March,2005

Analysis

The New Zealand Dollar set another fresh yearly high of 0.7313 this past week, which was the highest level since 8/4/08. An unexpected return to growth for the economy was the catalyst along with prevailing risk appetite. The second quarter GDP reading rose 0.1% versus the median forecast of -0.2% on a pick-up in consumer spending and a rise in exports. Indeed, the improving global economy saw demand from abroad increase especially for dairy and logs some of the country’s main exports. However, the trade balance deficit shrunk in August as exports slowed by 23% the lowest level in two years, which could be a sign that demand is waning as once depleted inventories have been restored. The domestic outlook improved as consumer confidence rose to 120.3 from 106.0 in the third quarter which is the highest level since the first quarter of 2005. Nevertheless, the New Zealand economy is reliant on exports and if we start to see demand level off, then the diminishing growth outlook could start to weigh on the “kiwi”.
The recent G-20 summit saw global leaders to pledge to maintain stimulus efforts until obvious signs of growth emerge. There are still concerns that rising unemployment will keep consumer retrenched and put banks at risk for future credit defaults.

Events

The economic docket holds very little event risk with only building permits and business confidence readings on tap. They both will speak to the stat of the domestic economy. However, all eyes will be on the U.S. labor report which is expected to show the lowest job loss since August, 2008. A better than expected print could trigger about if risk appetite and support for the high yielding New Zealand Dollar. Conversely, a sharp rise in employment could sink the “kiwi” especially after its recent run and with technical indicators showing it at oversold levels. We saw weakness to end the week and it appears that a test of support at 0.7006-20-Day SMA is a possibility.  However, the next level of resistance for the pair is not until 0.7765-7/15/08 high and a move back above the yearly high could see it targeted.

Conclusion

This week could well be the most volatile we’ve seen in a month or more, with risks to the downside even more pronounced, traders and investors should have plans in place for when and how to deal with a possible pullback in risk assets and rise in safe haven ones, particularly safe haven currencies. USD shorts remain near 12 month highs, so a pullback in stocks could send a lot of short USD traders rushing towards the exits.

DISCLOSURE/DISCLAIMER: Opinions expressed are not necessarily those of AVAFX. The author has positions in the above instruments.

Global Markets Outlook Sept 27- Oct. 2, Part I: Judgment Day, Judgment Week?

 

Is it coincidental that the trading week begins with Yom Kippur, the Jewish Day of Judgment? This could well be the week of judgment for the current rally, for good or bad.

A packed news week, climaxing in the critical US Non Farms Payroll and Unemployment Rate reports, collides head on with an aging rally in risk assets on low volume which many believe to be overvalued and long overdue for a pullback.

STOCKS

How long can stocks resist their own historical tendency to revert to some sort of mean, given the weight of fundamentals against them? Just a few points to consider:

• S&P 500 is now up more than 60% from the low, despite mostly flat or still falling revenues. When will fundamentals ever catch up to this level of valuation? After a 60% rally, we are typically well into in the next business cycle, seeing the job creation to sustain and grow the consumer spending makes up 70% of US GDP. Since the rally began in March, the US alone has shed 2.5 million jobs (as may as were lost in the entire 2001 recession). The most optimistic expectations are for continued job losses at a slowing pace. Even for those still holding jobs, this puts downward pressure on wages. The US consumer is still getting poorer, meaning further declines for that 70% of GDP.
• US exports are down 25% from their June ’08 peak
• Credit growth remains negative
• Home sales continue to drop despite record low interest rates, deeply cut prices, and tax breaks for first time buyers
• Business inventories continue to fall
• Looming need to cut stimulus, raise interest rates
• No economy big or healthy enough to replace the US as primary economic engine of the world
• If risk appetite is so strong, why are yields FALLING on US government bonds? It doesn’t sound like the bond market is expecting a very robust recovery. Pimco, the world’s largest bond fund, is already in this trade. They have been loading up on treasuries of late – bringing them to their highest relative weight in 5 years.

COMMODITIES

Following stocks for now, this does not bode well for commodity prices.

CURRENCIES

USD

Bouncing Higher on Flight-To-Safety Sentiment, Coming Big News Week To Test the Move

Summary

Fundamental Outlook for US Dollar: Bullish

- Falling stocks boost USD, override weak US housing and durable goods orders

- The Federal Reserve left rates unchanged, but signaled a more optimistic outlook

- University of Michigan consumer confidence jumped to a 21-month high in September

- US durable goods orders tumbled 2.4% in August, marking the steepest drop since January

Analysis

The US dollar ended the past week marginally higher after the Federal Reserve issued a more optimistic outlook on the economy. In the coming week, though, there will be a variety of growth indicators on hand that may clarify whether the US recession really ended in Q2. That said, the US dollar index will have to contend with resistance just above 77.00 at the start of the week, and EURUSD support at 1.4615.

Events

Tuesday, the September reading of the Conference Board’s measure of US consumer confidence is expected to rise up to a one-year high of 57 from 54.1 in August. Last week the University of Michigan’s consumer confidence index show that sentiment improved greatly in September, with the index hitting a 21-month high of 73.5 from 65.7. Note however, that consumer confidence has yet to translate into sustained spending growth.

On Wednesday, two big events:

• ADP Non-Farm Employment Change report, the first big hint at Friday’s official and more important US DOL reading. This is arguably the climactic event of the week, if not the month, since it’s the key indicator of future consumer spending, which is 70% of US GDP.
• Final US Q2 GDP estimates are due to hit the wires, but the results will only be market-moving if we see surprising revisions. The final reading is forecasted to be revised down to -1.2 percent from -1.0 percent, though this would still represent a sharp improvement from Q1, when GDP plunged 6.4 percent. Better-than-anticipated results could lead carry trades higher, especially in light of speculation that the recession may have ended in Q2.

On Thursday, the ISM manufacturing index is projected to rise for the ninth straight month in September to 54 from 52.9, which would be the highest reading since April 2006. With 50 being the point of neutrality, this would also be the second month that the index signals an expansion in activity, adding to evidence that the sector is experiencing a recovery in business activity. As with the last release, overall risk aversion will dominate the USD that day. However, the report will still be useful because of its employment component as a leading indicator for the big news on Friday: US non-farm payrolls.

Barring major surprises, The US non-farm payrolls (NFPs) index should be the climactic news of the week. It is forecasted to show job losses for the 21st straight month in September, though the rate of decline is anticipated to slow further. At the time of writing, Bloomberg News was calling for NFPs to decline by 187,000, which would be the smallest drop since August 2008. Meanwhile, the unemployment rate is projected to edge up to 9.8 percent from 9.7 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the very few reports that impacts the US dollar from a pure fundamental point of view. A better-than-anticipated result is likely to provide a boost to the US dollar, but it will be interesting to see the impact of disappointing results as weak US data tends to weigh on risky assets and push the greenback higher amidst flight-to-quality.

EUR

Big news week For Both EUR and USD Suggests The EURUSD Trend May Be At Crossroads

Summary

Fundamental Forecast for Euro: Neutral

- Risk sentiment reflected in the S&P likely to continue to drive the pair, override news

- Euro breaks key technical short-term trend line

- Candlestick charts suggest a potential Euro reversal

- German IFO improves for sixth month

Analysis

A late-week breakdown in risk sentiment sparked a flight to safety across forex markets—predictably to the Euro’s detriment, because it tends to move opposite the USD, which usually rises in such conditions. Near-term Euro forecasts will very much depend on the trajectory of risk assets, and a busy global economic calendar promises no shortage of volatility through the week ahead.

While just a few days of declines doesn’t necessarily signal a major top, the EUR/USD lost much of its short-term momentum—having broken below short-term technical support and threatening further declines. Fundamentals will likely play a fairly significant role in the days ahead as the combination of German and US Employment figures will illuminate economic conditions in both key countries. The reports may confirm recent waves of economic optimism or temper them. No one disputes that there have been improvements, the debate is all about whether risk assets are overpriced in relation to likely results over the coming year.

Events

Early-week German Consumer Price Index numbers and Euro Zone Consumer Confidence figures could produce surprises, but most traders look forward to market-moving German Unemployment Change figures due Wednesday. Prior results showed unemployment actually fell for the second consecutive month through August, but the numbers were distorted by government stimulus payments inducing firms to keep workers on their payrolls, thus their significance was limited. Forecasts for September results call for a far less sanguine 20k jump in unemployment. Given that Germany is largely considered the bellwether for the broader Euro Zone economy, any disappointments could led to a noteworthy correction in the Euro exchange rate.
For the days leading up to and following it, Friday’s US Nonfarm payrolls result could likewise have a pronounced effect on Euro pairs. US and European markets have proven especially sensitive to major surprises in the monthly payrolls number. Consensus forecasts call for the eighth-consecutive improvement in the jobs release, and any disappointments could clearly make a dent in broader forecasts for growth out of the world’s largest economy.
The critical question remains whether we can expect further equity market gains. Much like the Euro, the S&P 500 showed early signs of reversal through late-week trade. A continuation of said tumbles could easily force the Euro to move in kind.

JPY

Risk Sentiment, Along with Intervention Threats and Data Drive Yen Higher

Fundamental Forecast for Japanese Yen: Bullish

Summary

- Recently relatively steady with rising stocks, strong with falling stocks, thus offering more reward than risk.

- Finance Minister Fujji reiterates his opposition to FX intervention

- Policy officials start reducing the stimulus that has supported the most aggressive rally in decades

- Exports shrink 36 percent in the year through August, exacerbated by sharp appreciation of the yen

Analysis

The Japanese yen was clearly biggest mover and gainer amongst the majors this past week. However, we can’t attribute this appreciation to risk appetite alone. Other risk sensitive assets (equities, bonds funds, commodities, high-yield currencies) have pulled back over the same period; but not to the degree of increase in the yen. Underlying sentiment no doubt prompted the trend; but early signs of policy withdrawal and confirmation from the new Japanese Finance Minister suggesting the days of FX intervention has passed provided the fuel for momentum. Whether this trend continues will depend on overall risk appetite, which in turn will be influenced by the markets’interpretation of the G-20 commitments; weighing the fair value of the yen; and the outlook for the domestic recovery.

While the first concern is related to the G-20 meeting and commitments that were announced this past week, the fundamental relation to the yen is risk appetite. In the six-month rally from anything and everything that can bear a yield above the risk-free assets that traders took shelter in during the worst of the crisis, we have seen an early upsurge in demand for return and an elemental redistribution of capital. There have certainly been earlier adopters to the market reversal and those lured in by the steady capital gains; but most of the inflow of wealth is simply coming from the market sidelines and is seeking an investment with stability and steady returns.

Given the trend’s duration and movement, it wouldn’t take much to spark fear of a reversal and catalyze a wave of profit taking; but it is the money that is flowing back in for the long haul that will decide the larger trend. Both these short-term and long-term dynamics can be impacted by the G-20’s joint statement and individual government’s efforts going forward. The impressive recovery in market levels this past year is in large part due to the guarantees, liquidity injections and bailouts by the world’s policy makers.

It is unclear whether speculator confidence in the balance of risk and reward will be anywhere as strong as it has been without the government safety net. However, with German and the US cutting down its programs last week while the global call for ‘exit strategies’ grows to a roar; we’ll know soon.

It is generally true that the majors are free-floating currencies and economics indeed sets exchange rates; but perfection only exists in academic theory. In reality, the Japanese yen has carried the burden for potential intervention from the Bank of Japan for years. As a major export nation, the former DPJ administration considered a ‘weak yen’ policy essential to economic stability. However, new LDP Finance Minister Fujii has explicitly said that the currency should reflect economics. The first time, the policy makers made this statement the week before last, the yen responded with a sharp appreciation. With a reiteration of the same this past week (despite the yen being at relative highs), the currency moved on to another leg of its rally. How much pressure has been priced in due to intervention fears? Only time will tell. What’s more, how will the economy handle this steady appreciation? Domestic demand has long been lacking for Japan.

Of course, this all assumes Fujii-san actually means what he says, not a given in politics, particularly when exporter pressure becomes extreme.

As the currency appreciates, a critical artery of growth is slowly pinched off. In line with the G-20’s commitment to balance savings, domestic demand and trade; Japan will have to compensate for the potential loss in exports with domestic demand at a critical time for the economy. In the midst of a fragile recovery, we will watch key economic data due over the coming week to check Japan’s progress in getting out of its worst recession on record.

Events

The 3Q Tankan surveys, industrial production, employment, household spending, housing activity and inflation will offer tangible evidence.

See Part II for Continuation

DISCLOSURE/DISCLAIMER: Opinions expressed are not necessarily those of AVAFX. The author has positions in the above instruments.

GLOBAL OUTLOOK FRIDAY SEPT 25: Weak Home Sales, Rising Dollar Spurs Global Market Pullback

GLOBAL OUTLOOK FRIDAY SEPT 25: Weak Home Sales, Rising Dollar Spurs Global Market Pullback



NB: When analysis is missing here find it at http://worldmarketsguide.blogspot.com/

SUMMARY

- Stocks: Thursday: Asia, Europe, US down, Friday morning Asia, Europe futures point to lower opening

- FX: Falling equities, safety currencies [JPY, USD, CHF in order of safety appeal] generally Up Wednesday and Thursday morning vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], with exceptions, RISING USD HITS STOCKS?

- Main events today: USD: Core Durable Goods orders, New Home Sales, ALL: G20 Meeting

- Big Theme: Most markets drop for reasons cited below, at lower end of still tight, flat trading range, but volatile Crude Oil breaking below 2 month support. Long term USD weakness remains, but so does very overbought stock market that could pullback anytime and, given extreme level of USD shorts, cause a wild USD bounce.

STOCKS

US



Down on: disappointing existing home sales, only mild employment improvement, G20 regulation concerns, Chinese & US central banker comments about need to end stimulus, raise rates.



A better-than-expected batch of jobless claims data positioned stocks for a rebound from the previous session's late sell-off, but a disappointing existing home sales report and a sharp rebound in the dollar combined to renew selling pressure and hand stocks their second straight loss.



Stocks dropped 1% in the previous session, but managed to open with a modest gain amid news that the latest initial jobless claims tally fell to its lowest level in two months by totaling 530,000 in the week ending Sept. 19. Economists, on average, had expected initial claims to total 550,000. Continuing claims were also below expectations. They were predicted to total 6.18 million, but came in at 6.14 million, instead.



Though initial claims and continuing claims remain at uncomfortable levels, their direction encouraged market participants. That is, until the midmorning release of August existing home sales data, which showed that home sales pulled back to an annualized clip of 5.1 million units. The unexpected 2.7% decline marked the first retreat since March.



The disappointing home sales data encouraged sellers to step back into the fold. Weakness among stocks was magnified as the U.S. dollar staged a strong advance, which helped the Dollar Index achieve a gain of little more than 1%. The greenback remains near 2009 lows, but renewed strength cuts into the profits of multinationals that bring their earnings back home.

Overall weakness among commodities and stiff selling in the broader equity market weighed heavily on materials stocks. The sector dropped 2.0%, more than any other major sector.



Financials also fared poorly. They dropped 1.8%, as a group. REITs reversed a recent hot streak as investors took profits following a couple of poor IPO turnouts.



Despite this session's broad-based selling effort, blue chips were able to contain losses. That helped the Dow hold up better than the other headline indices.



Defensive-oriented stocks also held up relatively well. As such, utilities and telecom finished just 0.1% lower. Health care fell 0.3%.



Treasuries had a strong showing. The benchmark 10-year Note closed roughly 12 ticks higher, which lowered its yield to 3.37%. Treasuries were supported by weakness among stocks and solid results from 7-year Treasury Note auction, which produced a bid-to-cover ratio of 2.8 and a high yield of 3.05%.

Asia

Down on concerns about G20 financial regulation, Nomura $5.6 bln share offering, concerns over Chinese and US central bank comments on need to reduce stimulus, move to exit strategies. All combine to encourage profit taking



Europe

Opening down following Asia as traders take profits ahead of G20, Chinese and US central bank comments on need to reduce stimulus and move to exit strategies





THURSDAY GLOBAL

MARKETS RESULTS

ASIA- DOWN NIKKEI +1.67% HS -2.52% SSEC+0.38 % FTSTI -0.69% AORD -0.70%

EUROPE - DOWN FTSE -1.17 % DAX -1.70% CAC-1.66 %

US- DOWN S&P -0.95 DOW -0.42% NASDAQ -1.12%

FRIDAY

ASIA MID DAY

DOWN

NIKKEI -2.89 HS -1.24 % SSEC -1.29% FTSTI -0.55% AORD -0.42 %

EUROPE: AT OPEN

DOWN

FTSE -0.82 % DAX -1.24% CAC-1.04 %



COMMODITIES

In NYC, the dollar's gain this session also weighed heavily on commodities, which left the CRB Commodity Index down just over 2% this session and down more than 3% week-to-date. Natural Gas continued higher after inventory levels met expectations.

Oil



In NYC trade oil was a primary drag on the CRB as crude contracts closed with prices down 4.4% at $65.93 per barrel, well below multi month $68 support levels



Near Term Prospects for Oil: All agree prices will move—but which way?





Oil Going Down



Oil Options Hit Highs as Verleger Predicts 44% Plunge: If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.”



Right to Sell



Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.



The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.



Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said. “There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”





Oil Going Up



Al-Naimi’s View



Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound, and said demand for crude was rising.



“Economic growth is the name of the game,” Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. “Oil today is a commodity. As long as economic growth is there, the price is going to go up.”



Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.



OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production.





Gold



Gold prices weighed heavily on the CRB; in NYC they closed 1.6% lower at $998.30 per ounce after closing above $1000 in each of the previous six sessions

CURRENCIES



General: Following falling stocks. Strong bias to safety currencies Thursday, thus the safest, JPY, up against USD, the second safest, USD, up against the third safest CHF and also the EUR, AUD, CAD, and NZD. GBP down hard on BoE comments.





USD : Rallying against everything except the JPY Thursday and Friday morning. NB: AS NOTED THURSDAY, SHORT USD POSITIONS AT RECORD 12 MO HIGH>>USD OVERSOLD DUE F/ BOUNCE IN THE SHORT TERM. The G20 meeting could provide the catalyst with its move to regulate capital markets which could well hurt risk appetite and boost the USD.





EUR- Down against safe-havens, including the USD, up against commodity and higher yielding fx, also up against GBP.







EUR and the G20: Euro-zone policy makers are expected to be at the forefront of the fight for significant financial regulation at this week’s G-20 meeting. The region has already drawn up plans for the EU as a whole, which includes some rather substantial shifts in regulatory practices. According to these plans, a total of three regulatory divisions will be established with broad based powers over financial institutions. Among the new delegated power includes the ability to reverse national regulatory decisions, perform widespread investigations along with the ability to perform stress tests if needed. Their plan is a small peek into the agenda that will be discussed later this week which is why many expect the meeting to result in some of the broadest initiatives since the Great Depression.



Nevertheless, there is still the question of whether international policy makers will be able to coordinate their approaches. Along the same lines, the OECD announced a push for more European banking stress tests. According to the organization, the tests that were performed originally were not transparent enough and should be repeated. On a good note, Germany’s Bundesbank issued a statement that concludes that German businesses stand to benefit from rising exports. The bank claims that this should offset the now disbanded cash for clunkers program and reflects their lack of concern about the recent strength of the euro. The Eurozone Economic calendar will be light until Wednesday’s PMI reports.



JPY - Sept. 24 – Following stocks inversely as usual - up against all major fx in flight to safety as stocks, commodities drop on profit taking ahead of G20 and bad US housing data.



GBP – Sterling continued to be an open target after Bank of England's Mervyn King said on Thursday that a weak currency was helping the domestic economy. After dropping 1.8 percent on Thursday, the pound fell a further 0.8 percent to $1.5943.



AUD – Following stocks down as usual against most majors along with other commodity and high yield currencies as traders take profits on concerns of G20 financial market regulation, weak US economic news, US and Chinese central banker comments on reducing stimulus, raising interest rates.



NZD – Following stocks down [see comments on AUD, same applies here]



CAD – Tracking oil first, stocks and risk appetite second. Following oil, stocks down [see comments on AUD, same applies here]



CHF – Following stocks inversely as usual - up against all major fx except JPY and USD in flight to safety as stocks, commodities drop on profit taking ahead of G20 and bad US housing data.





CONCLUSIONS



Virtually all markets still in tight horizontal trading ranges reflecting the light news week and lack of direction. More of the same expected unless some major surprise from the Fed (none so far) or G20 (none expected). Late week profit taking in stocks & commodities for reasons cited above bringing markets to lower end of multi-month trading ranges (volatile crude already breaking below it



Trading Opportunities: 1. Be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Always use sell stop orders.



Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back.











OTHER HEADLINES



(Bloomberg)



Age of Austerity Awaits G-20 as $9 Trillion Debt Haunts Rogoff, Greenspan

•European Stocks, U.S. Futures Drop; BHP Billiton, Hennes & Mauritz Decline

•King Says Two British Banks Got Within Hours of Collapse on Oct. 6, 2008

•Fed Signals Return of U.S. Growth Insufficient to Withdraw Record Stimulus



(seekingalpha.com) Just one but really worth the read:



http://seekingalpha.com/article/163093-yield-curves-fx-and-libor-trends



DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

Cover Your Assets Against Stock Market Pullbacks: Must-Avoid Misconceptions

Plenty of us are worried about a coming stock market crash, or at least pullback below 900 on the S&P. I and my fellow analysts and bloggers have provided abundant evidence that the current rally is way overdone. Just a few of the reasons widely cited include:




• Valuations are higher than they've been since 2003 when things were actually getting better.



• The fundamental causes of the recession, a banking system loaded with bad real estate loans, continued declining real estate values behind those loans are all still unresolved. Not one major bank managed to beat Q2 earnings estimates on the basis of steady revenues from likely-to-repeat ongoing operations. They did it either with high risk trading or asset sales.



• US consumers, whose spending is 70% of GDP, are getting poorer through job losses and stagnant (at best) incomes. Savings rates are rising as they cut debt, further eating into consumer spending.



• Most of the "good news" we hear is evidence that the contraction is slowing – we're still getting poorer, but more slowly.



• Etc.





In his article Seven Points to Look For in October, my fellow analyst Mr. Simit Patel recently echoed a widespread sentiment about trading commodities, stocks, and currencies in October. As one who spends his days researching and writing about global stock, currency, and commodity markets, and the interrelationships between them, I offer below evidence to debunk these widely held but dubious notions as they apply to the coming month.





Mr. Patel writes:

"Currently, I'm still long… the Australian dollar against the USD… "

"If the market crashes…will the dollar rally as well? That is what we saw in 2008. However at some point the market will not be able to buy US dollars, especially with the Fed continuing to print more money. So, if US equities crash, we will see a flight to safety -- though I think it's still unclear whether safety means US dollars (like it did in 2008) or if it means something else, particularly gold and silver."

1. If you are worried about a stock pullback then do NOT short the USD, unless you're using it to hedge long stock or other risk asset positions. Over the past few years, the dollar goes up when stocks drop. Most other currencies except for the JPY and CHF go down along with stocks, especially the commodity based growth dependent currencies like the AUD, or the anti-dollar EUR.







Over the past 2 years the USD has reliably moved in the opposite direction of stocks, not just in 2008, but throughout 2009 with rare exceptions. This relationship did not exist at other times in the past, and may well cease once again, but there is no reason to believe it will cease any time soon. The Fed's money printing is old news, and the USD's inverse relationship to stocks has still held solid. Indeed, international demand for US Government bonds has held up very well, and those bonds pay in dollars.

In addition, beware that USD shorts are at a record 12 month high (similar to stocks). Currencies always trade in pairs, one valued against another. Most of these dollar short positions ultimately come from traders buying / going long pairs such as the EUR/USD, which alone comprises about a third of all forex trade, or other popular pairs like the GBP/USD or AUD/USD. Together just these three pairs comprise about half of all currency trades, so they can move currency prices – a lot.

Buying these pairs involves selling the USD and in order to buy the other currency. Traders buy these pairs when stocks are rising and there is optimism. They sell these pairs (and thus need to buy USD) when stocks pull back. Reasons for this behavior vary a bit with each pair, but this is what has reliably happened over recent years.

Thus when stocks pull back, the USD rises against almost every other major currency except the JPY.

For example, look at the following chart of the most popular currency pair, the AUD/USD. When this rises, the AUD is gaining value against the USD. When it falls, the opposite occurs, and the USD gains against the AUD Compare this chart with the one that follows of the S&P 500 for roughly the same period. Note especially the similarities for 11/08, 3/09-Present.

AUD/USD Daily Chart: 8/09-9/09 Courtesy of AVAFX: Note how this pair closely follows the movements of the S&P as shown below. 10 sep 24

S&P 500 Daily Chart: 8/19/2008-24/09/09 Chart Courtesy of AVAFX 08 sep 24

For an even simpler illustration, look at how the UUP (an ETF that tracks the USD) moves compared to the S&P. They move in opposite directions. Not the best comparison, but a simple one for illustration.

UUP (Blue) vs. S&P (Red) 2-year Daily Chart 06 sep 24







LESSON 1: DO NOT BE SHORT THE USD WHEN STOCKS ARE PULLING BACK. That means do not be long the EUR/USD, AUD/USD or other pair with the USD on the right side of the slash mark. Unless perhaps you want to use these as a hedge against long stock or commodity positions.





Mr. Patel writes:

"Currently, I'm still long gold, silver, … "

2. If you are worried about stocks pulling back, then do not be long commodities, including precious metals. These also move in the same direction as stocks.

This makes sense, because commodity prices, like equity prices, rises with growth prospects, either because growth brings greater consumption, or in the case of precious metals, because they retain value in times of inflation. Growth tends to cause inflation, as more spending means relatively more currency is chasing relatively fewer goods than before. The only case in which precious metals have risen when stocks didn't is in times of extreme fear of financial collapse.

So are many traders, and these positions have been good over the past months, and are widely believed to be good positions for the coming years.

However, for the past few years at least, precious metals and other commodities have generally moved in the same direction as global equity markets. As with currency pairs, the relationship isn't always lock-step, there can be variations in timing and scale in the short term, but the long term direction and magnitude correlates well.

For example in the chart below for silver we see that while silver did hedge against stocks in the early part of 2009, it has followed the overall direction of stocks from 3/09 onward.

Silver Daily Chart: 8/19/2008-24/09/09 Chart Courtesy of AVAFX. 09 sep 24



Again, like the AUD/USD, it mirrors the S&P 500 index.



LESSON 2: DO NOT BE LONG COMMODITIES IF YOU BELIEVE STOCKS WILL PULL BACK, BECAUSE COMMODITIES TEND TO FOLLOW STOCKS.

Finally, Mr. Patel writes:

"Non-US equities, in my opinion, remain safer than US equities. Many non-US equities have rallied more so than US equities."

At best partly true. Compare the above S&P 500 chart to that of any major international index, and see that the overall direction and timing is very similar. Diversifying into international stocks will not provide much, if any, protection from stock market risk ( though it should give some currency risk protection via diversification). Global stocks move together. This makes sense. Export oriented economies like China depend on the US and other net importers to buy their goods. The US depends on the export countries to buy its bonds and other financial assets. An oversimplification, but that's the basic idea. What's good or bad for one market tends to affect the others the same way.

Mr. Patel admits the chance of a USD rally in October, but many readers may miss this underemphasized possibility.

LESSON 3: GLOBAL STOCK MARKETS TEND TO MOVE TOGETHER. DIVERSIFICATION AMONG THEM IS A VERY PARTIAL DEFENSE AGAINST STOCK MARKET RISK, THOUGH A GOOD WAY TO HEDGE CURRENCY RISK.

DISCLOSURE AND DISCLAIMER: The author's opinions are not necessarily those of AVAFX. The author holds positions in the above mentioned instruments.