Tuesday, September 1, 2009



- Monday stocks: Asia & Europe mixed, US down on China credit concerns Tuesday morning Asia up, Europe mixed.
- Divergence: Commodities follow US stocks down, but risk currencies gain against safe haven JPY, USD, CHF. Very odd.
- Tight trading ranges from past week holding for virtually all instruments
- Main events today: AUD: Building Approvals, RBA Rate Statement, GBP:Manufacturing PMI, EUR: German retail, employment, USD:ISM Manufacturing PMI, Pending Home Sales



1. Both stocks and commodities spent the entire session trading with considerable weakness as a broad-based selling effort took hold following a steep 6.7% sell-off in China's Shanghai Composite Index.

The Shanghai Composite dropped 6.7% on Monday to hit a three-month closing low and log its second worst monthly performance in 15 years amid valuation concerns and fears that tighter lending in China will impede the flow of investment funds. Investors and traders responded to the selling effort by sending many of the major global averages lower. In turn, the Dow Jones World Index lost 0.8%.

The major U.S. indices managed to trim some of their losses into the close, though. The late lift came as consumer staples stocks garnered enough support to finish with a 0.3% gain, the only one seen among the major sectors in the S&P 500.

Weakness among stocks bled into commodities pits and sent oil prices down 3.9% to $69.92 per barrel. Meanwhile, gold prices lost 0.5% to settle at $953.50 per ounce. In a broader measure of the weakness surrounding commodities, the CRB Commodity Index dropped 1.6%.

The decline among basic commodities and weakness in the equity market left materials stocks and energy stocks to suffer some of the worst losses in the broader market.

2. Sell Signal? After spiking above the 50 mark two weeks ago, an index of investor sentiment has dropped sharply in what analysts say is a key signal currently forecasting a turn in the U.S. stock market. (AP)

"Signals are flashing that currencies, commodities and equities are all about to turn. There are too many signals across too many assets to ignore," said T.J. Marta, chief market strategist at Marta on the Markets, drawing attention to the American Association of Individual Investors survey's surge above 50 two weeks and subsequent fallback.

The AAII survey, which measures the percentage of individual investors who are bullish, bearish and neutral on the stock market over the coming six months, last week saw bullish sentiment falling to 34%, beneath the long-term average of 38.9%; neutral sentiment dropping to 17.5%, below the long-term average of 31.1%; and bearish sentiment climbing to 48.5%, above the long-term average of 30%.

During the three previous occasions on which the index behaved in this fashion, the S&P 500 corrected, as it did in early 2007; peaked, as in October 2007; or saw a bear-market rally fail, as was the case in May 2008, Marta said.

Bears can find some solace in the fact that a strong August and ensuing strong September has not occurred since 1982, and two occasions -- 1970 and 1982 -- "appear the only periods where a 4% or more gain in the S&P 500 for August led to positive return in September," said Nick Kalivas, an analyst at MF Global Research.

"On balance, the chart seems to argue for a weak September. This is one reason for the caution in the market," he added.

Going back to 1926, investors have, on average, lost nearly 1% during September, "the only month" with a negative average return, said Yardeni.

He pointed to research, based on data for 18 developed stock markets around the world, which found that in 15 of those markets, "September brought red ink for investors."

But Yardeni believes enough power remains in the rally off March lows to buck the historical trend, in light of what he calls three turbochargers.

First, the Federal Reserve's providing liquidity by pegging the federal funds rate at zero.

Second, the Fed and foreign central banks have been monetizing more than half of the record budget deficit of the U.S. government so far this year.

And third, the Chinese, to keep their economy growing in the face of weak U.S. consumer demand for their exports, are likely to continue providing monetary and fiscal stimulus.


Asian markets rebound after Chinese selloff – AP Asian markets rebounded modestly on Tuesday based on positive China Mfg data, with China's key index edging up after tumbling the previous day, as investors weighed prospects for a global economic recovery.
Shanghai dropped 6.7% on Monday to hit a three-month closing low and log its second worst monthly performance in 15 years amid valuation concerns and fears that tighter lending in China will impede the flow of investment funds. Investors and traders responded to the selling effort by sending many of the major global averages lower.

Hon Hai Precision Industry Co. earnings beat estimates and China’s manufacturing expanded at the fastest pace in 16 months. Hon Hai Precision Industry Co., the world’s No. 1 contract maker of electronics, climbed 6.8 percent in Taipei. Also, Chinese PMI rose from 53.3 to 54. Along with yesterdays rise in Chicago PMI from 43.4 to 50, global mfg seems to have bottomed, with China still expanding.
In sum: Looks like more up and down range trading for now. Cautious tone likely to strengthen ahead of Friday's Us non farms payroll data.

Weakness among stocks bled into commodities pits and sent oil prices down 3.9% to $69.92 per barrel. Meanwhile, gold prices lost 0.5% to settle at $953.50 per ounce. In a broader measure of the weakness surrounding commodities, the CRB Commodity Index dropped 1.6%.

Crude oil price plunged -3.8% to settle at 69.96 Monday amid worries that credit tightening in China would dampen demand outlook. Stock markets also declined. This puts it in the middle of a $75-$65 near term trading range, making range trading more difficult.

China raised some red flags last week as government officials seemed to suggest they would cut back on bank lending in coming months, essentially removing one of the stimuli they have added to the Chinese economy, said PFGBest analyst Phil Flynn.

"The market is concerned whether or not the Chinese government can engineer a soft landing," Flynn wrote in his morning report. "How will the futures markets react as they start to remove this historic stimulus?"

The U.S. Energy Department last week said that U.S. crude stockpiles rose by 200,000 barrels for the week ended Aug. 21. The previous report showed a large and unexpected draw on oil, which sent prices soaring.

Ahead of an OPEC meeting in Vienna next month, oil ministers from the group have indicated they will not push for output cuts -- a sentiment reinforced by a weekend decision of the United Arab Emirates' main oil exporter to sell more crude and ease up on OPEC-led supply curbs

Gold Falls as Global Equity Indexes, Oil Drop; Silver Climbs - Bloomberg, Gold fell the most in a week as crude oil and global equity markets slumped, cutting demand for the metal as an inflation hedge. Silver gained.

Stocks sank in New York on speculation that a rally since early March outpaced prospects for earnings growth. The MSCI World Index of shares fell as much as 1.3 percent. Oil plunged as much as 5 percent and the dollar weakened against the euro. Some investors use oil prices and the dollar exchange rate as indicators of inflation.

“It will be a stock, oil and currency markets-driven week, once again,” Jon Nadler, a Kitco Inc. senior analyst in Montreal, said in a report. Economic Forecasts

“Friday’s nonfarm-payrolls report should imbue the buck with a sense of direction and in turn, the price of gold,” Preston said.

“Gold’s inability to close above $958 an ounce is keeping the market’s bias slanted to the downside,” Preston said. “With prices capped under $958 resistance, I would look for a test of the $930-an-ounce to $925-an-ounce support level sometime this week.”

Currencies: An unusual day--Risk currencies were mostly up against safe haven ones despite mixed-down stocks and dropping commodities. Usually, dropping risk assets would mean the opposite for currencies. For Tuesday--The Australian rate decision, American ISM Manufacturing PMI and Pending Home Sales, British Manufacturing PMI, European Unemployment Rate and many more economic indicators are due today.

Apart from the Japanese Yen that strengthened on the elections results, most currencies didn’t make big moves yesterday. Today's main events include:

Australian Building Approvals started the day with a rise of 7.7%, more than 3.3% that was expected. Also last month’s figure was revised upwards to a rise of 9.9%. On the other hand, Australian Current Account disappointed with a deficit of 13.3 billion, more than the expected 10.3 billion. These were only preludes to the rate statement.

As expected, the RBA held the Cash Rate at 3%, the highest in the West. The RBA Rate Statement was rather optimistic, referring to China’s growth. AUD/USD is trading between 0.84 and 0.8450.

Later in Australia, Commodity Prices are released. They strongly impact Australia's economy.

Contrary to Australia’s strong economy, Swiss GDP is expected to show a continuation of the recession. GDP in Switzerland is predicted to fall by 0.9% in the second quarter.

German Retail Sales are expected to turn positive, and rise by 0.7% after falling by 1.3% last time. The more interesting German release for today is the Unemployment Change, which is predicted to rise again, by 33,000 jobs. A surprise here will boost EUR/USD as well as Merkel’s party.

European Final Manufacturing PMI is also expected to be confirmed at 47.9. The final European release if the all-European Unemployment Rate. It’s expected to rise from 9.4% to 9.5%. This is an important indicator for the ECB.

Moving to the US, ISM Manufacturing PMI is expected to return to expansion numbers, rising to 50.6 from last month’s 48.9. Yesterday’s Chicago PMI surprised and rose to 50. Will we see expansion intensions also here?

At the same time, another major American figure is released: Pending Home Sales are expected to rise by 1.7%, following on last month’s 3.6% rise.

Construction Spending and ISM Manufacturing Prices will also be published at the exact same time, 14:00 GMT, but will be overshadowed by the previous numbers.

USD – Generally down Monday despite stock market declines. A possible reason: Chicago PMI hit 50 (neutral- no contraction) vs. forecasted 47.4, giving further evidence that manufacturing may have ceased declining. However, there is debate as to whether this was due to real increased demand or depleted inventories. Tuesday key USD events are ISM Manufacturing PMI and pending home sales. We look for any further details on the future of the mortgage purchase program and other stimulus from Wednesdays' Fed minutes, crude inventories and ADP payroll will provide further hints as markets await Friday's change in non farm payrolls, forecasted to beat last month's -247K with a reading between -215 to 223K.

EUR - Euro zone flash CPI estimate was slightly better than expected at -0.2% y/y versus consensus -0.3% y/y and improved upon the previous -0.7% y/y. The upside surprise is consistent with stronger than expected CPI data seen out of Germany last week, and suggests that deflationary pressures have begun to recede, at least amongst the largest Euro zone economies.

Upcoming data releases include German and Euro zone Manufacturing PMIs, likely to be unchanged, and unemployment rates, both of which are expected to increase by 0.1%. We expect the EUR to come under pressure should risk appetite turn.

European CPI Flash Estimate is expected to drop in an annually adjusted rate of 0.4%, less than last month’s fall. Deflation is hurting EUR/USD. Signs of hope in this field were seen last week in the German Prelim CPI.

Otherwise, CPI is expected to improve slightly to -0.3%y/y from -0.6% previously, easing further deflation fears in the currency union.

Euro zone GDP is also expected to be confirmed at -0.1%y/y for a -4.7% annualized print. Germany will release manufacturing PMI, which may edge close to the 50 level.

We expect the EUR to remain under pressure should risk appetite turn, but near term likely to stay within 1.4100—1.4400. Over the longer term, we expect the current uptrend to continue barring a major drop in stocks.

JPY - Despite good news and early advances, JPY drops with other safe haven currencies on Monday, as the USD/JPY rose. Japan’s Preliminary Industrial Production surprised and rose by 1.8% instead of 1.4% that was expected. Also Retail Sales did well and fell by “only” 2.5%, less than 3.3% that was expected. Average Cash Earnings were -4.3%, beating a predicted fall by 6.3%.

The opposition DPJ Party won about 75% of the Lower House seats. Over the longer term, the USD/JPY could be hurt if the DPJ acts on its intentions to increase government spending and debt (could increase JPY interest rates) and to reduce US bond purchases.

GBP – Housing data due Following the UK holiday, there are several housing data releases due. We expect an increase in mortgage approvals and no change in net lending secured on dwellings. The Halifax index may show a pick up in home prices, in line with other house price indexes, and provide another signal that the housing market could be bottoming out. We expect the pound to remain under pressure in the short-term as BoE policy expectations need to stabilize.

AUD - The RBA left rates unchanged, and, seeking to avoid further rise in the AUD, gave no indication of rate increases coming soon, though most believe this will happen in Q2 of 2010. Q2 GDP due Wednesday.

We believe broad-based resilience across various components means that another positive print is likely for Q2 GDP and forecast 0.5% q/q, with the risks lying to the upside.

NZD – Like the AUD, US & Global stock news likely to overwhelm local news, since this has been trading mostly on risk sentiment Monday's NBNZ Business Confidence was 34.2 vs. 18.7 prior.

CAD –The latest GDP figure for June broke a string of ten monthly declines in a row. The m/m June figure was 0.1% and the annualized Q2 figure -3.4%, slightly below expectations of -3.0%. The Bank of Canada continues to see Canada emerging from the recession in Q3 2009. We maintain our 1m USDCAD forecast of 1.15 on the outlook for a possible return to risk aversion though we recognize the risk that continued investor risk-seeking could put pressure on the pair.

American releases will dominate USD/CAD during Tuesday, Wednesday and Thursday, when nothing is released from Canada.

The pair may shake during Friday, when both countries release the all-important employment figures.

Stocks continue to focus on positive, pulling other risk assets along, but with a weak recovery already priced in, many believe the next significant move may be down as asset prices appear high relative to growth prospects over the coming year. Low stock market trading volume suggests that the big money does not believe risk assets are a good value.

Trading Opportunities
1. Be prepared to play a pullback in risk assets by selling 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. Always use sell stop orders.


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