Wednesday, September 30, 2009

GLOBAL OUTLOOK SEPT 30: Packed Calendar + US Jobs Reports = Tight Trading Ranges


- Stocks: Tuesday: Asia up, Europe, US down, Wednesday morning Asia mixed, Europe up

- FX: Flat equities mean no clear bias to safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD up against JPY, EUR, down against GBP see below for details

- Main events today: AUD: Building Approvals, Retail Sales, NZD: Busniness Confidence, CHF: KOF Econ. Barometer, USD: ADP NFP, Chicago PMI, Crude Inventories, CAD: GDP, JPY: Tankan Mfg. & Non-Mfg. Index, Retail sales

- Big Theme:Despite potential for a volatile week, tight trading ranges thus far in most markets. News will be climaxing in Friday's US jobs data, Special importance to events that hint at its result. ADP and employment component of Chicago PMI will provide that, possibly move markets if surprising (i.e. +30% above or below expectations). Stocks, Gold, Oil still in extended rallies. Gold long futures at 12 mo. High



Tuesday's trade concluded in lackluster fashion as an absence of leadership left stocks to drift during the afternoon, unable to reclaim their initial gains.

Stocks had started the session in higher ground as a better-than-expected S&P/Case-Shiller Home Price Report for July brought about some modest support. The report's 20-City Composite showed a 13.3% year-over-year decline, which wasn't as bad as the 14.2% decline that was expected.

However, the solid state of things quickly became unsettled by news that the September Consumer Confidence Index pulled back to 53.1 from 5.4.5 in August. The dip was unexpected; economists, on average, had been expecting a reading of 57.0.

The major indices were unable to fully recover from the flurry of selling that followed the disappointing consumer confidence reading.

News that the FDIC will require insured institutions to prepay estimated quarterly risk-based assessments into 2012 seemed to weight on bank stocks, though the announcement was generally expected. Diversified bank stocks fell 1.9%.

Consumer finance stocks were hit just as hard. They fell 1.9% amid news that the Fed has approved rules amending the transparency and disclosure of terms in credit card agreements


Japan's Nikkei average was flat in cautious trade on Wednesday, with investors hesitant to actively take positions ahead of a series of economic data releases, Hong Kong shares down on thin trade and profit taking ahead of the National Day holiday


Down on US data, weaker oils outweigh gains in banks



ASIA- UP N225I +0.91% HS +2.06 % SSEC +0.90% FTSTI -0.39% AORD -0.17 %

EUROPE - DOWN FTSE -0.12 % DAX -0.40% CAC -0.28 % MIBTEL -1.09%

US- DOWN S&P -0.22% DOW -0.48% NASDAQ -0.31%



N225I +0.33% HS -0.28 % SSEC -0.33% FTSTI +1.38% AORD +1.50 %



FTSE +0.16 % DAX +0.25% CAC +0.45 %


Trading in tight flat range over the past week along with stocks


Oil prices fell slightly on Tuesday following stocks as U.S. consumer confidence data weighed on markets, with added pressure from the government revised downward U.S. demand for July.

U.S. consumer confidence fell unexpectedly in September as the worst job prospects in 26 years fueled worries over personal finances, according to an industry report.

Oil markets have looked to wider economic data and equities markets for signs of a turnaround in the economy that could lift slumping fuel demand.

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.


Despite falling stocks, gold futures gained slightly, though precious metals remain under pressure as stagnating stocks, strengthening USD and the weight of the largest # of long speculative positions in a year. These longs will need to take profits at some point, adding downward pressure to gold. The noncommercial net long position -- buying to profit from further gains -- in gold futures on the COMEX division of the New York Mercantile Exchange stood at an all-time high of 236,749 lots for the week ended Sept. 22.

"These (long positions) make the metal vulnerable to the downside, if upside momentum slows down further and weak longs start liquidating," said Alexander Zumpfe, senior precious metals trader at Heraeus in Germany.


General: Stocks flat, no clear bias to risk or safety currencies, AUD up on news, EUR/USD down. We suspect stagnant stocks and uncertainty ahead of Friday gives preference to safe haven currencies, but not seeing it in charts at this time.

USD: Gaining as stocks fall on bad consumer confidence data, rose from 8 month low against the JPY on pro-intervention remarks by MoF Fuji, near 88, also gained 0.3% against the EUR, though dropping 0.4% against the GBP on news that the BoE may well decide to not increase stimulus. Big news day (see above) for the USD.

EUR- Down again, $4.4572 (-0.3).as USD strengthens on weakening stocks. German unemployment change data due today could move EUR, because spending has contracted in Germany & Italy

JPY - Dropped against the USD after MoF Fuji pro intervention remarks (as we predicted would happen in staff briefing). Japan is still an export economy trying to export its way out of recession against weak global demand. Many believe is just a technical correction because there were so many short the USD/JPY, though others believe there is not fundamental reason for the JPY's recent strength. IP up ahead Industrial production is expected to improve again but the focus will be on the outlook for October, which provides the first insight into the Oct-Dec quarter GDP. Our economists think output will continue to grow into Oct-Dec that translates into 3% q/q annualized GDP growth. The October IP outlook should provide confirmation

GBP – Gains against USD, EUR and others on news that the BoE may well decide to not increase stimulus.

Mixed messages from the Bank of England are beginning to undermine the central bank’s credibility. This morning, the BoE revealed to economists that they are not planning to cut the deposit rate anytime soon, which was something that they hinted at earlier this month. They also addressed the confusion about their stance on the British pound. The BoE said the market misinterpreted and overreacted to Central Bank Governor King’s comment about a weak sterling being helpful as benign neglect for the pound. Their policy is unchanged and if the pound fell significantly, it would become a concern. Although we continue to believe that the BoE is in denial and really wants the pound to fall and would ideally like to cut the deposit rate if it did not have consequences on market expectations, their latest comment on the deposit rate soothed immediate fears. Meanwhile the final GDP report reveals that the economy contracted by 0.6 percent in the second quarter, leaving the annualized GDP rate at 5.5 percent. The current account deficit ballooned to -11.4B from -4.1B in the second quarter which supports our belief that the U.K. really needs a weaker currency

AUD – Better than expected retail sales keep hopes alive for rate AUD interest rate hike before year end. Had the result been, negative, this would have been the third consecutive negative monthly retail sales figure and would have made a rate increase before year end more unlikely.

NZD – Steady vs. the USD in thin trade, as local news focuses on a large earthquake in Samoa, small tsunami expected for NZ coast. NBNZ Business Confidence prints at 49.1 vs. 34.2 in the prior month

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 – Meanwhile, the Swiss Franc has sold off against the U.S. dollar and Euro on the heightened fear of intervention from the Swiss National Bank. There has not been a warning from the SNB and the Swissie did not rise to new highs, but the last time the SNB intervened was when the ECB conducted their first ever one year tender. They are set to conduct their second tomorrow and therefore Swiss traders are on intervention watch. According to the latest UBS Consumption Indicator which fell to a 5 year low, plans for consumer spending have retreated as rising unemployment forces consumers to cut back.

KoF indicator due The KoF leading indicator will be released tomorrow and the market is expecting the figure to return to positive territory (cons. 0.3 vs. -0.04 prev.) Two major rounds of EURCHF buying by the SNB on March 12 and June 25 coincided with the ECB holding long dated liquidity tenders. The next 12m ECB tender is on September 29-30. If we do see SNB intervention push EURCHF back towards 1.53-1.54, we'd sell the cross again as Swiss banks need to keep shrinking balance sheets.

Counting Down to Non-farm Payrolls: Insights from Kathy Lien

Tomorrow the release of the ADP employment report will shift the market’s focus to Friday’s non-farm payrolls report. The market expects the ADP number to confirm their overall belief that the pace of job losses is slowing. There is a good chance that the consensus is right because less people have been filing for jobless claims on a weekly basis.

However with many people still wary of a double dip recession, the risk certainly lies with a weaker report. This morning’s surprise decline in consumer confidence and corresponding drop in the labor differential suggests that there has only been a limited improvement in the labor market – i.e. continued but slowing job losses.

An environment where jobs are being created is very different from an environment where people are still falling under the axe, albeit at a slower pace. It is important to be aware of the risks, but there are still many reasons to be optimistic about Friday’s report. The following chart illustrates the strong correlation between the U.S. unemployment rate and the difference between the consumers’ assessment of current business conditions. We subtracted the number of people who believe that business conditions are still bad with the number of people who believe that current business conditions are good and compared that with the unemployment rate going back to 1966. As you can see, extreme pessimism about current business conditions has coincided with a high unemployment rate. The index of business conditions is beginning to peak which suggests that we may be nearing a similar situation in the unemployment rate. Aside from ADP, the final release of second quarter GDP and the Chicago PMI report is due for release on Wednesday.

Unemployment and Consumer Sentiment-A Strong But Unsurprising Correlation


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. Long gold futures are at 12 month highs among traders small and large, short gold futures are at a 12 month high for commercial traders. This implies extreme risk appetite/bullish sentiment, which is considered bearish. See report: What Pro Traders Think of Gold: COT Report of Sept. 22.

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.



Bank of Japan Said to Consider Ending Corporate Debt Purchases on Recovery

•European Stocks Rise, Extending Best Quarter This Decade; Infineon Climbs

•CIT Said to Consider Financing From Citigroup, Barclays as Deadline Nears

•IMF Cuts Forecast for Global Losses on Loans, Investments to $3.4 Trillion

•Pimco Save More, Spend Less Economy Brings New Normal's Total Return to 5%:



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