Monday, September 14, 2009


- Stocks: Friday Asia mixed, Europe up, US down
- FX: Generally following stocks. Safety currencies [JPY, USD, CHF in order of safety appeal] generally up vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD hitting or approaching annual lows as stocks, commodities rise
- Main events today: NZD: retail sales, CHF: PPI, EUR: Industrial Production, USD: FOMC members speak at various conferences
- Big Theme: A light news week makes range trading more likely, especially after recent gains in risk assets. Higher chance of pullback than further advance, but markets have managed to advance for months on mixed data, so further advances can't be ruled out, especially if the USD continues to weaken.


Friday US stocks saw small retreat on average volume on profit taking.

Weekly Recap - Week ending 11-Sep-09Market participants drove the S&P 500 up 2.6% during the holiday shortened week, with gains seen on three of the four sessions, and the benchmark index hitting fresh highs for 2009. The advance came despite a relatively slow week, with only a handful of earnings and economic reports. Investors showed increased risk appetite, with cyclical and small cap stocks leading the way.

Buying interest was broad-based, with nine of the ten sectors posting gains. Cyclical sectors rose the most, with industrials (+4.2%) and energy (+4.3%) both logging more than 4% gains. Defensive sectors underperformed on a relative basis, with utilities shedding 0.3%.

In economic news, weekly jobless claims fell to 26,000 to 550,000, topping the 560,000 consensus. Although the beat was welcome, the claims still remain at elevated levels and will result in the unemployment rate ticking upward. Continuing claims declined 159,000 to 6.088 million. The consensus expected continuing claims to decline a more modest 34,000. But the drop in continuing claims is not due to a decrease in jobless workers -- rather workers are running out of unemployment benefits.

The Fed's Beige Book, a collection of anecdotal economic data from the Fed districts, continued to show that the rate of economic decline is slowing, with manufacturing showing improvement. But areas such as employment, consumer spending, and construction remain weak.

In other news, Treasury Secretary Geithner aided stocks during his testimony before congress. He said that policymakers are in a position to evolve their strategy with the goal of repairing and rebuilding the economy's foundation for future growth. Geithner also said that it is unlikely more bank bailout money will be needed, so its contingency provision can be removed from the budget.

Strong yen worry caps gains, but sentiment still strong. China data shows Aug output and investment accelerated

Britain's top share index drifted lower on Thursday, weighed down by energy and bank stocks, consolidating below the psychologically important 5,000 level.

ASIA- MIXED NIKKEI -0.66% HS +0.44% SSEC +2.22% FTSTI -0.04% AORD +%
EUROPE - UP FTSE +.048 DAX +0.52% CAC +0.78%
US- DOWN DJIA -0.23% S&P -0.14% NASDAQ -0.15

NIKKEI -2.32. % HS -1.30 % SSEC + 1.24% FTSTI -1.35 % AORD -1.31 %


In commodity trading, commodities saw a busy weak. Oil rallied last week on news that OPEC is keeping its output unchanged, IEA raised its demand forecast and weekly inventories showed an unexpected decline. Crude settled the week up only +1.8%, however, after giving up more than 3% on Friday. Meanwhile gold settled at $1006.70, crossing the $1000 mark for the first time since February.
Oil fell nearly 4 percent toward $69 a barrel on Friday, paring most of its gains earlier in the week, as U.S. equities fell pray to profit-taking following five days of gains, raising concerns about the sustainability of its recent rally and the strength of an economic recovery in the U.S. Oil prices dropped below $69 a barrel Monday in Asia amid a stronger U.S. dollar and a slide in regional stock markets.
Dropping with stocks and crude but still holding on above $1000. –
Gold prices erased earlier gains and fell on Monday, as the dollar rebounded on short-covering and dragged down other commodities' prices and equities.
Gold prices topped $1,000 per ounce last week and closed above that level on Friday for the first time since March 2008, as investors sold the dollar to buy higher-yielding and riskier assets on growing optimism about the outlook for the global economy.
Some traders have questioned whether gold's current high levels can be sustained, as much of its recent rally has been driven by funds emboldened by favorable technical charts although physical demand and demand from individuals remain weak.
"The dollar's rebound was the trigger," Ben Westmore, commodities economist at National Australia Bank, said of the
Gold's retreat. "Gold may be pressured by some unwinding of holdings by funds."
Westmore said investors were likely adjusting their outlook for demand, refocusing on the view that growth was likely to wane after stimulus measures from governments fade and that a V-shaped recovery is unlikely.
He added that investors may be reassessing commodities' stockpile data that suggests fundamentals remain weak, as well as their attitude towards China, whose imports have helped push up prices across the markets.

General: Overall following stocks, though USD, AUD weakness and JPY strength are creating some exceptions. See Weekly Outlook for details on each major currency, as well as what how the FX markets interact with stocks and commodities.

USD – Rebounding slightly after last weeks beating. Rising risk asset markets(stocks, commodities and risk currencies), which implies rising risk appetite, combined with falling USDJPY, which implies decreasing risk appetite may suggest deeper USD weakness. However, there are also hints of a possible weakening of risk appetite.
• Oil failed to break over $73 despite gold and stocks moving up to new highs
• Demand for US Treasury bonds remains strong
If in fact risk assets pull back, AND the USD fails to rally, these events would suggest the USD is losing its safe haven status and could thus be entering a new period of sustained declines.

Meanwhile, like the overall FX market, the USD is taking direction from equities, and thus could see further near term downside. Equities may well continue higher because:

--the flow of macro data doesn't seem likely to worsen soon
--markets remain firmly focused on the positive news even when there is plenty of negative to balance it
--policy stimulus remains in place
--production should continue to recover from last year's depressed levels
--final demand in the global economy may start to rise again

In addition, many experts are expecting certain central banks like Australia and Norway to raise interest rates this year. The combination of risk seeking US investors diversifying their portfolios and equities rallying further may well keep the USD weak near term. As a result we lower our one and three month foreign exchange forecasts for the greenback and expect the EUR to trade in a higher 1.40-1.50 range for now, before a broader correction in risk assets later this year causes the EUR to fall back into a lower 1.30-1.40 range again. The latter would provide better levels for longer term USD bears looking to sell the greenback

EUR- Benefitting from USD decline more than anything else, because it tends to move in the opposite direction of the USD. In comments published in a German paper, ECB President Trichet said the ECB must remain alert on both inflation and deflation, but noted that the ECB has prevented deflation in the Euro region. His stress on the need to remain 'alert' on price developments may support interest rate expectations up ahead, even if it comes at the expense of growth.

JPY - USDJPY may be oversold, but ready to benefit if risk assets pull back. It is a problem for exporters, but no BoJ action until new government settles in. The JPY has been benefitting from the Japanese government announced earlier this year that it would waive taxes on repatriated profits from April 1 to help support the economy. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings.

GBP – Last week's weakest currency after the USD. An eventful week in the UK looms and the BoE will feature heavily throughout. Governing King and several MPC members are scheduled to testify to lawmakers on Tuesday and there are bound to be tough questions on the MPC's future plans for quantitative easing.

Our economists continue to expect another ?25bn expansion of its purchases and may also announce a penal interest rate on central bank reserves to encourage banks to divert reserves balances to other assets. Thereafter, the focus will be on exit strategies, but we believe the BoE is still not ready to purse these steps due to the current climate.

AUD –Due mostly to USD weakness, able to finish the week higher against the USD despite poor data and reduced expectations for a rate increase before years' end

NZD – Firm near 1 year highs against the USD. Improving economic data and company earnings added to growing investor confidence and kept the New Zealand dollar near its highest since late August last year

CAD – Moving with risk appetite, looming threat of intervention if USDCAD drops too low is expected to keep a floor on the USDCAD

CHF – May see heavy volatility ahead of SNB monetary policy announcement, which may provide hints concerning SNB intervention


The theme last week until Friday was continued USD weakness, commodity and equity strength on positive news from China and US, UK, and Canadian central banks, with currencies generally following equities in expected fashion, with exceptions. Even popular financial TV noting big action is not in stocks but currencies and commodities. Risk assets, especially crude oil, pulled back Friday amid a mild US stock pullback on average volume

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.


China's Recovery Strengthens as Industrial Production, New Lending Advance
Japan's Economy Grew 2.3% Last Quarter, Less Than Initially Estimated 3.7%


Economic Donkeys
10 Notes on Risk in the Markets
There Are No Good Choices for the Fed
U.S. Median Income from 1999-2009: No Gain, Much Pain Sep 13, 2009
Cochrane Lambasts Krugman's View of Macroeconomics Sep 13, 2009
Confidence Game: Consumer, CEO and Investor Confidence (Sept. 2009) Sep 13, 2009
10 Notes on Risk in the Markets Sep 13, 2009 Economic Donkeys Sep 13, 2009


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