Wednesday, September 9, 2009



- Stocks: Tuesday Asia, Europe, US up as Western markets continue to focus on positive, Asia on good China stock market, credit and increased limits on foreign fund investment news. Wednesday Asia closing mixed, Europe opening down
- Despite stock, commodity strength, only slight bias against Safety currencies [JPY,USD, CHF in order of safety appeal] vs. higher risk currencies [AUD,NZD, CAD, EUR, GBP in order of risk appetite appeal], USD hitting or approaching annual lows.
- Main events today: CAD: Housing Starts, USD: Beige Book, GBP: Trade Balance, NZD: Cash Rate, RBNZ Press Conference, Rate and Monetary Policy statement, AUD: Employment Change, Unemployment Rate


Equities continue to defy expectations for a pullback. The S&P 500 made solid gains in its first trading session of the week on broad based buying, but the broad market benchmark encountered resistance as it approached last week's highs. Still, stocks settled near their best levels of the session, a good sign, though the credibility of the current recovery to August highs has been undermined by below average volume. The big Sept 1st drop was the only recent high volume day, which suggests there is more down side to come. So does continued demand for safe but low yielding US Treasuries despite higher stocks, signaling that there are big players who doubt the current rally.

Still, most of the rally since March has been on low volume.
Energy stocks and materials stocks led gains for the entire session. They settled 2.6% and 1.5% higher, respectively. Their gains were largely underpinned by strong moves among basic commodities and natural resources as the International Monetary Fund fed economic hopes by saying that the global recovery may begin early next year, sooner than it had previously expected. Commodity prices were also helped by a weaker U.S. dollar, which fell 1.0% against a basket of major foreign currencies to hit an 11-month low after the U.N. said that the greenback should be replaced by a new global reserve currency.

The confluence of positive factors drove gold and oil higher – see the Commodities section below for more.

Asia up Tuesday following Europe, India, Mixed Wednesday. Japanese shares were hit by concerns about the high yen’s impact on exports, brokerage downgrades of banks, and sliding Shanghai and Hong Kong stocks.

Europe opening down

ASIA- UP NIKKEI +0.70% HS +1.14% SSEC +1.71% FTSTI +0.64% BSESN +0.67%
EUROPE - UP FTSE +0.29% DAX +0.33% CAC +0.22%
US- UP DJIA +0.59% S&P +0.88% NASDAQ +0.94
Closed Monday
NIKKEI -0.78 % HS -0.89 % SSEC +0.55 % FTSTI -0.47 % BSESN +0.13 %
FTSE -0.25 % DAX -0.42% CAC -0.30 %

A weakening USD, an upward revision in the IMF’s global growth forecast and a call from the UN to replace the dollar as the world reserve currency all helped commodity prices continue upward

Oil rises from around $68.50 to over $71 ahead of OPEC, inventory data, investors sidelined ahead of OPEC meeting and the delayed US inventory data eyed later in week. Most analysts expect OPEC, the source of more than a third of the world's oil supply, to maintain its official output target stable around $70. Some analysts believe that over-production and high supply levels will reduce oil prices in the near term, with oil remaining in the lower end of its $75-$65 range, though a break above could send it into the $80s.

Delayed a day by the US Monday holiday, US oil inventory data from the API will come out Wednesday and from the EIA on Thursday. Distillate stocks, still quite high will be watched closely as an indicator of short term demand.

Gold surged past $1,000 per ounce on Tuesday on pent-up technical momentum and dollar weakness, but market watchers were
mixed on whether the yellow metal could stay above that level.

Our analysis: analysts are divided and appear unclear on the cause of the sudden rise. Reasons given include
• The USD’s weakness: nothing new, so this doesn’t explain the sudden move
• Concerns about the sustainability of the global economic recovery and worries about inflation: These are contradictory reasons. Recovery would feed inflation, so worries about recovery would ease inflation concerns and weaken demand for gold

Gold demand rises on fear of loss of currency purchasing power, implying either belief in recovery fueled inflation OR some other cause for a major decline in purchasing power of currencies, especially of the USD in which gold is priced. That may well be the reason, but why the sudden move now? What changed? No one seems to know at this time.

The only likely conclusion is that the rise in gold suggests fear driven lack of confidence in any safe haven currencies, not just the USD in which gold is priced but also in the JPY and CHF, neither of which has seen major movement along with gold.

Note that spot gold prices do not always follow futures prices Futures have topped $1,000 nine times -- three times this
year and six last years, including a record $1,033.90. Spot prices have risen above $1,000 just four times - once in February and
three times in March 2008, when they hit a record $1,030.80.

In the longer term, gold remains well supported by fundamentals on fears of both inflation (if recovery continues) and financial crisis (if they don’t) and emerging market buying.

General: Tuesday FX trade shows only slight bias to risk currencies against safer ones, continuing into Wednesday Asian and early European FX trade. Despite rising global stocks, as news items created many exceptions to the normal FX behavior when stocks and commodities rise. USD hitting yearly lows against EUR, AUD, and NZD, approaching them against others.

USD – The dollar was broadly weaker across the board though it later pared some losses as the latest 3y Treasury auction was well-received. The last Beige Book reported that, "economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated … or that activity has begun to stabilize..." We expect that relative improvement to continue in the report for August. We maintain our 1m 1.40 EURUSD forecast but closely monitor developing risks to our near-term view.

EUR- Mixed-Up against USD, JPY, down against CAD, CHF, flat against the GBP. German industrial data was mixed, but the trade surplus widened. ECB’s Weber said it was too early to end stimulus but not too early to consider exit strategies, and that inflation was not a threat. The EUR is likely to remain steady until risk appetite fades.

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

GBP – Industrial production and manufacturing data beat expectations, which with upward revisions of older data helped lift the GBP. Chancellor Darling cautioned against thinking that the job is done on the economy though he did say the BoE asset purchase plan is working

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

NZD – Generally up with other high yield & commodity FX. Investors will be watching the RBNZ decision this week for any hints on whether or not the easing bias will be retained. Our economists do not expect any change in the official rate and think it is still too early to give the market the green-light to price in rate hikes by the RBNZ.

CAD – Building permits dive to -11.4% vs. +0.5% expected, leaving CAD flat against even the weak USD, down against the EUR AND AUD. Wednesday brings housing starts data which could confirm or balance Tuesday’s weak results

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


The theme Tuesday was USD weakness, commodity and equity strength, which currencies often did not follow in the expected fashion due to news items, as noted above.

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.


China Growing 9.5% Evident With New Vehicles Exceeding U.S. for First Time
OPEC Committee to Recommend Keeping Quotas Unchanged, Kuwait Minister Says
Record Plunge in U.S. Consumer Borrowing Signals a Slow Recovery in Demand


Is a Crash Impending?
UNG Trading 101
China to Buy Up to $50 Billion in IMF SDRs
China's Stock Market: The A vs. H Premium
The Shanghai Market Calls the Tune
Did Chinese Government Stimulus Drive the Latest Rally?


No comments:

Post a Comment