Tuesday, September 29, 2009

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


- 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.



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%


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.


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.



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%



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



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


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


$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.


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


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.


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.



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



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