- Stocks: Tuesday: Asia down, Europe, US up, Wednesday morning Asia mixed, Europe up
- FX: Rising equities, safety currencies [JPY, USD, CHF in order of safety appeal] generally down Wednesday morning vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], with exceptions, see below
- Main events today: JPY: Bank Holiday, EUR: Various French & German Mfg & Services PMI, GBP:MPC Meeting Minutes, USD: Crude inventories, FOMC statement, Fed Funds Rate
- Big Theme: JPY, NZD strongest, USD, GBP weakest. Rising stocks & commodities, but also rising JPY, US Bond Prices show conflicting risk/safety demands. No explanation yet.
STOCKS
US
A falling dollar drove buying in commodities and commodity-related stocks to help the broader market start the session on positive footing, but it was the financial sector that emerged to provide the most leadership.
In complete contrast to the previous session, the S&P 500 spent the entire session trading in positive territory. Early gains were led by the energy sector (+1.4%), materials sector (+1.2%), and financial sector (+2.3%) after the trio had lagged in the previous session.
Advances by energy stocks and materials stocks were underpinned by sharp gains among commodity prices. Specifically, crude oil futures prices climbed 2.6% to $71.78 per barrel, while gold gained 1.1% to settle at $1015.80 per ounce.
The strong bounce by commodities came as the U.S. dollar slumped. That left the Dollar Index to drop 0.9%, which is its worst single-session percentage loss in nearly two months. However, the Dollar Index could not fully penetrate the 2009 lows that it set last week.
Despite a compelling case for commodities, buyers scooped up financials with conviction. That gave the financial sector a gain of more than 2%, the best of any major sector, and helped it settle near session highs.
Real estate trusts saw some of the sharpest moves as momentum buying took the holdings higher ahead of several REIT initial public offerings, but the influence of diversified financial services stocks (+3.5%) had the most impact on the broader financial sector. Shares of Bank of America (BAC 17.61, +0.36) traded as leaders after the stock had its price target raised by influential bank analyst Richard Bove.
Even though there was plenty of leadership from the financial sector, the broader market was range bound for nearly the entire afternoon. That left it to settle a few points off of session highs.
Treasuries saw strength at the long end of the yield curve after the results from a $43 billion auction of 2-year Treasuries showed a bid-to-cover ratio of 3.2 and a high yield of 1.03%. The 2-year Note tacked on 2 ticks to yield 0.95%, but the benchmark 10-year Note gained 9 ticks to yield 3.44% and the 30-year Bond climbed 21 ticks to yield nearly 4.20%
Asia
Asian stocks are lower Wednesday as investors look to this week's Federal Reserve meeting for more clues about the strength of the U.S. recovery.
Europe
TUESDAY GLOBAL
MARKETS RESULTS NB: Japan closed
Monday, Tuesday
ASIA- DOWN NIKKEI -0.0% HS -0.70% SSEC-1.60 % FTSTI 0.0% AORD +0.0%
EUROPE - UP FTSE +0.16 % DAX +0.72% CAC+0.30 %
US- UP S&P +0.66% DOW +0.52% NASDAQ +0.39%
WEDNESDAY
ASIA MID DAY MIXED
NIKKEI closed HS -0.63 % SSEC -1.89% FTSTI +0.05% AORD +1.50 %
EUROPE: AT OPEN UP
FTSE +0.34 % DAX +0.15% CAC+0.16 %
COMMODITIES
Helped by a falling dollar. The Reuters/Jefferies CRB Index of 19 commodities rose the most in a week yesterday
Oil
Oil fell towards $71 a barrel on Wednesday, giving up some of its previous session gains of 2 percent, as an industry report showing a surprise build in U.S. crude oil stockpiles again stoked concerns over demand revival, though a falling USD limited oil's drop. Rising inventories due to both increased crude imports and slowing refinery production.
Near Term Prospects for Oil: All agree prices will move—but which way?
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.
Gold
SINGAPORE, Sept 23 (Reuters) - Gold extended gains on Wednesday, moving closer to an 18-month high struck last week, after the U.S. dollar tumbled to its weakest in a year against the euro, but worries about heavy liquidation persisted.
The rise has stoked fears of a repeat of last year's selling, when bullion lost more than $100 only a few days after it powered
to a record $1,030.80 an ounce in March. Gold has gone up as much as 16 percent this year.
Some investors were also reluctant to buy heavily before the U.S. Federal Reserve announces the outcome of its two-day meeting later in the day, although markets believe the Fed will signal
CURRENCIES
General: Following stocks, with exceptions. For example, the USD is down against everything, even the JPY and GBP. JPY, NZD were the big gainers Wednesday, with the USD and GBP the big losers.
USD : Dropped to new 12 month low against the EUR and fell against everything else, even the safer JPY, as well as the CHF, GBP, EUR. These alone account for over 60% of all fx trade. While Dollar rising stocks/risk appetite hurt the USD, the drop in USDJPY AND USDCHF suggests weakness is more about the USD itself than risk, since the other safe haven currencies are also gaining against it. Bad economic news Tuesday and falling US bond yields mean less reason to hold USD, more reason to sell it as a funding currency. NB Rising stocks suggest growing risk appetite, yet dropping bond yields mean rising bond prices i.e. rising demand for US bonds, which suggests risk aversion? The common denominator to explain it all may be anticipated further USD weakness makes both stocks and T-Bonds more attractive, because stocks are shares in real assets, and T-bonds are a safe haven of sorts if USD crashes.
The Federal Open Market Committee will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflected Fed orders to banks to raise more capital and toughen lending standards, analysts said.
All 93 economists surveyed by Bloomberg said the Fed won’t change interest rates at its two-day meeting ending today. Chairman Ben S. Bernanke and his colleagues may discuss how to wind down purchases of mortgage-backed securities, analysts said.
USD Reserve Status and the G20: Despite currencies not being on the main agenda, there has been a lot of talk about the dollar’s status as a reserve currency ahead of the G20 meeting. Although China also wants a greater role for the Yuan, we don't expect an aggressive attack on the dollar but as the greenback continues to fall, the threat to its role as a reserve currency increases. Whenever the dollar is very weak, central banks and foreign investors start to become very concerned about the notional value of their investments. In a more stable economic environment, the dollar's reserve status would be a greater issue at the G20 meeting, but right now, G20 leaders have bigger concerns, including possible friction over protectionism. In the meantime, foreigners continue to buy dollar denominated assets. Based upon a report from Merrill Lynch, international investors including central banks have boosted up their purchases of U.S. Treasuries because they expect inflation to remain muted. Foreigners encompassed 43.1 percent of the demand for Treasuries this year compared to 27.1 percent in 2008.
EUR- Despite the lack of economic data, the euro managed to hit a new 12 month high against the U.S. dollar. The EUR/USDcurrency pair is inching closer to the psychologically important 1.50 level and based upon the charts, once the currencypair clears the September 2008 high of 1.4867, there is no major resistance until that level. One of the primary reasonswhy the EUR/USD continues to rise is because of the European Central Bank’s willingness to allow the EUR rise. The Eurozone Economic calendar highlight today is the manufacturing sector PMI report.
EUR and the G20: Euro-zone policy makers are expected to be at the forefront of the fight for significant financial regulation at this week’s G-20 meeting. The region has already drawn up plans for the EU as a whole, which includes some rather substantial shifts in regulatory practices. According to these plans, a total of three regulatory divisions will be established with broad based powers over financial institutions. Among the new delegated power includes the ability to reverse national regulatory decisions, perform widespread investigations along with the ability to perform stress tests if needed. Their plan is a small peek into the agenda that will be discussed later this week which is why many expect the meeting to result in some of the broadest initiatives since the Great Depression.
Nevertheless, there is still the question of whether international policy makers will be able to coordinate their approaches. Along the same lines, the OECD announced a push for more European banking stress tests. According to the organization, the tests that were performed originally were not transparent enough and should be repeated. On a good note, Germany’s Bundesbank issued a statement that concludes that German businesses stand to benefit from rising exports. The bank claims that this should offset the now disbanded cash for clunkers program and reflects their lack of concern about the recent strength of the euro. The Eurozone Economic calendar will be light until Wednesday’s PMI reports.
JPY - The Japanese Yen strengthened across the board against other major currencies. Despite a lack of any economic news due to holidays, USD/JPY managed to erase all of Monday’s gains and could be headed lower. Japanese traders do not return until Thursday in Japan, which is Wednesday evening in the U.S. At that time, the trade report could spur some interest in the pair as it will shed light on whether the strength of the yen has crimped exports. Until then we can expect the pair to be highly affected by inflows of risk as well as U.S. economic data. Meanwhile the Asian Development Bank confirmed that Chinese economy will grow faster than previously estimated. As Japan’s largest trading partner, what is good for China is good for Japan.
GBP – With no UK news, the GBP moved up over 1% against the USD in response to the USD decline. However, given that the EURGBP was unchanged, so also is the market's attitude to the GBP. It's fate for the coming days will depend on the FOMC's influence on the USD as well as the BoE minutes, which may provide clues on whether there could be more asset purchases, which would hurt the British pound.
AUD – No news Tuesday or Wednesday, it's moving with risk sentiment.
NZD – The NZDUSD continues to rise on very good news of genuine expansion. Tuesday's surprise: an anticipated current account deficit-turned into a surplus due to a sharp surge in milk prices which boosted dairy exports in the second quarter. It appears that so far, the strength of the NZD/USD has not had a materially detrimental effect on exports. Wednesday the NZD dollar rose against all of the 16 major currencies after a report that the GDP grew 0.1 percent in the three months to June 30, following a 0.8 percent drop in the first quarter. A Bloomberg News survey of economists forecast a 0.2 percent contraction.
Traders are betting the Reserve Bank of New Zealand will raise its benchmark interest rates by 1.51 percentage points over the next 12 months, compared with a prediction for 1.36 percentage points yesterday, according to a Credit Suisse Group AG index based on overnight swaps.
CAD – Tracking oil first, stocks and risk appetite second. A major disappointment from Canada. Retail sales fell 0.6 percent, the first drop since April due to a sharp decline in gas station receipts. Cuts were also made on extraneous spending for furniture, electronics, food and beverage. Core consumer spending which excludes autos dropped 0.8 percent, the sharpest decline since December 2008. Although
consumer spending contracted materially and the Canadian dollar fell on the heels of the report, it is important not to get
too caught up on July data. Canada reported job growth in the month of August and gas prices increased materially which
suggests that we should see a healthy rebound in next month's report.
CHF – USD/CHF has now dipped below intervention levels and so far there has been no sign of the Swiss National Bank. Perhaps the SNB is watching EUR/CHF and not USD/CHF. Switzerland’s trade surplus fell from2.21B to 1.79B in the month of August with exports rising 2 percent and imports falling 2.5 percent.
CONCLUSIONS
The big news so far this week is surprising real growth in New Zealand. Wednesday's FOMC meeting and Friday's G20 may provide some news and volatility, though we suspect not. FOMC faces the same fundamental problems, despite improvements in manufacturing. Banks and employment are still far from recovery, though the Fed may try to sound upbeat enough to prevent further hits on the USD.
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 pair in play for the next 24 hours. German Services PMI and Manufacturing PMI are due for release at 7:30GMT or 3:30AM EST followed by the European PMI Composite at 8:00GMT or 4:00AM EST. The Bank of England on the other hand will release the Minutes from the previous meeting at 8:30GMT or 4:30AM EST. Since early August, EUR/GBP has staged an impressive rally. The pair is currently trading within the Buy Zone, which we determine using Bollinger Bands. However, the rally has taken the currency pair deep into overbought territory which suggests that a retracement is needed before we can see further gains in EUR/GBP. As long as a dip does not fall below the 0.8950 level, the uptrend remains intact. The 0.9080 to 0.9100 level on the other hand serves as near term resistance for the currency pair.
Crude Oil: Two Ways to Play
From a technical perspective: As shown in the below chart, Crude is in a multi-month up trend and forming a bullish rising wedge.
Crude Oil Daily Chart: Forming Bullish Rising Wedge. Chart Courtesy of AVAFX
From a fundamental perspective: Oil has tended to rise with stocks and risk sentiment, both of which are moving up for now. There are excellent arguments for a coming pullback in stocks, which would likely mean a drop for oil too. Moreover, there is near term oversupply, which could pressure prices near term. However, markets are look to the future, and sentiment has generally overridden near term inventory data.
Trading Ideas
Play the momentum: buy on breaks above $74, or sell on breaks below the rising trend line of the bullish wedge
Play the range. Simply try to buy near $68, sell near $74, with stop losses not far from these levels to minimize losses if the reversal doesn't occur. If that's the case, use this as a signal to jump in and play the other direction.
Always use stop loss orders
OTHER HEADLINES
(Bloomberg)
Bernanke Effort to Accelerate Growth May Be Undermined by Loan Contraction
Former Pariah Qaddafi's U.S. Trip Seals Courtship of Libya Over Oil Deals
Pittsburgh Rising From Urban Decay May Offer Some Lessons for G-20 Leaders
Exxon Mobil Plans Chemicals Expansion in Bet Chinese Demand Will Increase
Russia to Resume State Asset Sales as Budget Revenue Slides, Shuvalov Says
Stocks Likely to `Catch Up' With Corporate Bond Rally: Chart of the Day
Beatles Shatter Sales Records for First Week of September- Over 40 Years After Breakup
DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS
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