Thursday, September 10, 2009

GLOBAL MARKETS OUTLOOK THURSDAY SEPT 10th: Forward Momentum Despite No News

- Stocks: Wednesday Asia down, Europe, US up as Western markets continue to focus on positive, Thursday Asia up near closing, Europe futures point to higher opening
- Safety currencies [JPY, USD, CHF in order of safety appeal] generally vs. higher risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD hitting or approaching annual lows as stocks, commodities rise, but exceptions exist.
- Main events today: JPY: Core Machinery orders, AUD: Employment Change, Unemployment Rate, EUR: French Industrial Production, GBP: Halifax HPI, Asset Purchase Facility, MPC Rate St., Official Bank Rate, CAD: Trade Bal., BoC Rate St., Overnight Rate, USD: Trade Bal, Unemployment Claims, Crude Inventories


Buyers came in to reverse initial losses, stocks close higher. Stocks fell again following a disappointing Fed Beige Book, but participants shrugged off the commentary and pushed stocks broadly higher into the close. Once again, market willingness to focus on the positive despite negative news, continuing stimulus, and signs of bottoming suggest equities may yet have more upside before hitting a pullback.
There weren't many news items to drive action in the early going, but that didn't stop participants from looking to continue the stock market's recent ride higher. Their efforts helped take the stock market back above last week's highs, but gains stalled as the S&P 500 came within close range of 2009 highs near 1039.

The only positive news from the Beige Book came from the manufacturing sector, which has seen an increase in orders, but improvements for the rest of the economy have largely been mediocre and show a slowing decline in economic activity, not an increase. The Fed's commentary also indicated that downward pressure on home prices continued in most districts.

Though stocks were initially let down by the Fed's commentary, it didn't take long for participants to brush the report aside to support a broad-based rebound, which ensured a fourth straight gain for the stock market

Industrial stocks showed leadership for the entire session. As a group, they settled 1.6% higher.

Thanks to a late rebound by the broader market, energy and materials stocks were able to close with strength. They had faltered after energy prices and precious metals prices finished in weak fashion

Stocks showed little reaction to the results of a $20 billion 10-year Note auction, which showed a high yield of 3.51% and a bid-to-cover ratio of nearly 2.8, which is well above the 2009 auction average of 2.5. The benchmark 10-year Note moved lower a while after the results were released, but it eventually made its way to a fractional gain before the closing bell.

Down Wednesday, up Thursday as Nikkei posts biggest gain in 2 Weeks, Banks up in Japan, China

Europe up Wednesday on oils, banks, futures suggest higher opening.

ASIA- DOWN NIKKEI -0.78% HS -1.04% SSEC -0.54% FTSTI +0.64% AORD -0.02%
EUROPE - UP FTSE +1.15% DAX +1.69% CAC +1.28%
US- UP DJIA +0.53% S&P +0.78% NASDAQ +0.94
Closed Monday
NIKKEI +1.95 % HS +1.92 % SSEC -0.73 % FTSTI +1.58 % AORD +1.02 %

New York: Gold prices closed pit trade at $997.10 per ounce, down nearly 0.3%, and silver prices settled down 0.2% at $16.47 per ounce. Crude oil prices showed considerable strength early on, but finished with a 0.5% gain at $71.49 per barrel. The gyrations came ahead of the latest OPEC meeting, which is expected to culminate with oil output unchanged. Meanwhile, natural gas prices settled 1.2% higher at $2.84 per contract after being up nearly 7%.

Oil prices rallied for a fourth day running on Thursday, edging above $71.50 a barrel after bullish inventory data and soothing words from OPEC whetted investor appetite for crude.
The oil producers cartel left output unchanged, as expected, with Saudi Oil Minister Ali al-Naimi saying prices were being driven by economic recovery, and that high levels of inventory had become irrelevant to the market.
"The lack of more aggressive action reflected a belief that demand will be sufficient in pulling down the overhang in the market," David Kirsch, director of market intelligence services at PFC Energy in Washington, said.
Also bullish was a big fall in U.S. crude stocks, with the American Petroleum Institute reporting a 7.2 million barrels drawdown in the week to Sept. 4, far more than the 1.5 million barrel forecast in a Reuters poll. [API/S] [EIA/S]
However, this was partly offset by a 3.3 million barrels jump in distillate stocks, far exceeding the forecast for an 800,000 barrel increase, while gasoline stocks rose 571,000 barrels against the forecast for a 1.3 million barrel drawdown.
More inventory data lands on Thursday with the Energy Information Administration's report at 1500 GMT.
On Wednesday the government body predicted global oil demand through next year will be will be weaker than previously forecast while supplies will be higher.
The EIA cut its forecast for world oil demand growth in 2010 by 30,000 barrels per day and raised its forecast for global oil production growth by 150,000 bpd
Traders noted rising interest in front-month WTI versus longer dated futures in the past month or so and a narrowing in the contango, or discount for near-dated oil.
"The one lesson we all learnt from the great price crash is that all markets are correlated. The gains we are seeing in oil right now are driven by equities as much as anything and people are buying prompt crude to ride the wave we are seeing in stocks," a Sydney-based energy trader said.

Key Points on OPEC Meeting
OPEC is leaving its production quotas unchanged, opting to take a cautious approach in a market awash in crude and a global economy still in the early stages of recovery.--
The meeting's closing communiqué said "whilst there are signs that economic recovery is under way, there remains great concern about the magnitude and pace of this recovery," especially in the West. The group noted uncomfortably high crude and refined product levels, which reflect that refiners are not eager to churn out additional product.
"Since the market remains oversupplied and given the downside risks associated with the extremely fragile recovery, (OPEC) once again agreed to leave current production levels unchanged for the time being," the statement said.
Analysts noted a shift in policy for the group.
Whereas earlier this decade, OPEC "would have moved proactively, this time they chose not to," said David Kirsch of Washington-based consultancy PFC Energy. "The ministers all acknowledged downside risks to both demand and prices."
OPEC "is really hoping that the economy turns around and takes care of the current overhang in distillates somewhat naturally" instead of them intervening directly, he said.
The group -- excluding Iraq -- has set a production target of slightly under 25 million barrels per day, but has been overshooting that mark by about 1 million barrels per day, according to analysts.
The increase in inventories is a major challenge for OPEC, especially as the U.S. driving season winds down and refiners gear up for the winter heating-oil season with refined product inventories also high.
"When we look at fundamentals, we see this overhang with great concern," OPEC Secretary General Abdulla Salem el-Badri said.

Gold inched up over $994 on Thursday after falling on negative US Fed Beige Book news, with investors focused on the dollar as further weakness in the greenback is likely to benefit the precious metal. See our special report: Why Gold's Sudden Move?" at:

General: Wednesday FX trade shows bias to risk currencies against safer ones, continuing into Thursday Asian and early European FX trade. Exceptions exist: EURCHF down/flat, USDCAD flat (bad CAD building permits news), EURAUD rising (negative AUD news Wed, Thurs)

USD – The dollar held steady against the euro, trading around $1.4560 after the greenback plunged to it lowest this year earlier this week and sent oil prices soaring. It remains on the defensive against rising risk appetite, stocks, commodities, and no sign of stimulus ending.

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- Despite cautious ECB commentary, the euro will likely remain supported against the USD, JPY, and CHF until risk assets lose momentum. Bias to further upside against USD

JPY - Mixed: Up against the USD, flat against the AUD, down against the EUR. Only minor news items recently, mixed results.

GBP – BoE Decision Due: We do not expect a change in the QE program or the BoE policy rates though we do still expect an expansion of ?25 bn of the QE program in November. The BoE could also announce a penal interest rate on central bank reserves to encourage banks to divert reserves balances to other assets. The exit strategy will also be a major focus. Our economists believe the BoE will initiate the exit policy through open market operations in 2010 H1, before embarking on policy rate hikes and gilt sales in 2010 H2. But there is a risk of early rate hikes if they focus on rising housing prices or inflation expectations.

AUD –Very disappointing home loans and retail sales data fell below both expectations and prior month results, and could lessen the chance of interest rate hikes in the near term, AUD is mostly flat/down in Wed-Thursday trade.

NZD – The RBNZ left the OCR unchanged as expected and retained its easing bias. The RBNZ's Bollard said further rate cuts are possible as the medium term growth outlook remains weak and the RBNZ expects to keep the OCR unchanged through late 2010. He also made several comments on NZD, as he said the rising currency strength curbs profits and investments and the NZD rise versus AUD is at odds with fundamentals. After surprisingly adding 32k jobs in July, with part time up 48k and full time down 16k, our economists have penciled in a fall of 25k, and a 0.2% rise in the unemployment rate to 6.0%. The ANZ job ads series will also be closely watched for any evidence of a recovery already flagged by other indicators. We marked out short-term AUDNZD forecasts to market with our 1m and 3m forecasts at 1.24.

CAD – Possible BoC Verbal Intervention to Weaken the CAD: We do not expect a change in the BoC's official rate and with some recent improvement in credit conditions; we do not expect any implementation of credit/quantitative easing. But with USDCAD trading below 1.09 at the time of writing and the possibility of a subdued trade balance figure, the BoC could once again caution on currency strength as an impediment to growth though it will not likely conduct any actual intervention. A BoC warning will likely cause USDCAD to jump but if risk-seeking continues we could see USDCAD come down again. Our new 1m USDCAD forecast is 1.05, reflecting USD weakness amid higher risk assets.

CHF – Up vs. the USD, EUR, unemployment beat expectations, continues to be range bound against most majors, especially the EUR.


The theme Wednesday was continued USD weakness, commodity and equity strength despite lack of positive news, 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

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 bullish EURUSD. GBPUSD, USDCAD, AUDUSD all have lots news today that could move these pairs. USD ripe for bounce, but best to wait for weakness in equities.


Japan Machinery Orders Fall More-Than-Estimated 9.3% as Recovery Weakens
Economy Is Stable or Improving in Most of U.S., Fed Regional Survey Finds


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