GLOBAL STOCK INDEXES: SEPTEMBER BLUES
As mentioned last week, September tends to be a down month for stocks, especially after a winning August. As if on cue, global equities started the traditionally losing month with 2% drop on high volume on the bell weather S&P, leading us to believe more of the same is coming. The unconvincingly low volume gains toward the end of the week didn’t change our view.
However, what really gives concern is gold’s sudden decoupling from stocks. and moving higher, signaling renewed demand as a safe haven
COMMODITIES—A SOLID GOLD WARNING OF PULLBACK IN FINANCIAL ASSETS?
While crude continued to take direction from stocks, gold disconnected from its normal role of following stocks. The rational was that as stocks rose with optimism, so did gold as an inflation hedge. Yet when ADP non farms payrolls ( a leading indicator of the US governments figure coming a few days later) came out below expectations, gold shot higher. After stunned silence , this led many to believe some big players are becoming risk averse but want a hard asset safe haven. This is a no-confidence vote in the JPY, USD, and CHF if there ever was one. We suspect major sovereign funds from the East or Mideast who seek safety via hard assets and who have enough currency to meet near term liquidity needs.
Will Illiquid Labor Day Trade--Or The Increased Volume That Follows-- Trigger A Traditional September Pullback in Risk Assets & Bring A USD Rally? Does Gold Suggest Otherwise?
Summary of Past Week’s Events
-Gold’s rise & USD mild reaction to Tuesday’s drop may cast doubt on the USD’s safe-haven role
-Nonfarm payrolls contracted at a slower pace in August, but the jobless rate jumped to a new 26-year high, markets focus on the positive
- Sentiment likely to influence more than news
- Majors tax dollar support as the threat of a breakout looms next week
- S&P has LOST an average of 30 points in Sept. over the past 10 years . A bad month for stocks would likely boost USD demand as traders seek a safe haven at the expense of commodities and risk currencies [AUD, NZD, CAD, and EUR]
- Extreme oversold USD, overbought risk assets situation is ripe for such a reversal, but could market resilience continue to overcome negative news?
- Key Events: See Part I
The disparity between the weak growth potential and the capital market’s steady rally over the past six months has only increased with time. It is already clear that the recovery will be slow; so it is not likely that market optimism can hold up long enough for data to catch up. Odds continue to favor a pullback in stocks, which would probably help the USD unless the catalyst is horrific US economic news, which is unlikely.
Main Events & Possible Results
As the above calendar suggests-not a huge news week for the USD.
EUR: Barring Major Surprises, More Range Trading, Following Stocks
Summary of Past Week’s Events
- Euro technically fails at former support line
- European Producer Prices fall most on record
- Euro sold following European Central Bank rate decision
Summary Table of Key EUR Events
Sentix Investor Confidence
German Factory Orders
German Trade Balance
German Industrial Production
Expected to see growth
German CPI y/y
German Wholesale Price Index m/m
The Euro largely ignored significant economic event risk and remained nearly unchanged against the US Dollar. Early-week declines in the US S&P 500 and broader risk sentiment initially pushed the European currency lower against its safe-haven US counterpart. Yet traders showed little desire to break key asset classes from important ranges, and the S&P recovered much of its earlier declines.
The clear exception came on a sharp rally in Gold prices, which finished just short of fresh year-to-date highs. Impressive strength in the precious metal suggests investors are once again seeking stores of value, and such ostensibly risk-averse behavior bodes poorly for global equity markets and key risk-linked currencies. Indeed, the gold rally comes despite relative US dollar stability and underlines the recent shift in market sentiment. Moreover, the EURUSD’s failure to challenge recent highs leaves near-term risks to the downside.
The first of September saw equities and the Euro fall sharply to start off the month of trading. Equities have since partially recovered, but indices such as the S&P 500 remain well off their very recent 2009 highs. We continue to argue that an equity market correction is likely; if nothing else, their seasonal tendency to decline in September leaves previously impressive rallies at risk of pullback.
The European economic calendar is light in the week ahead, with a number of German fundamental data releases unlikely to force major moves across Euro pairs.
Coming Main Economic Events
The coming week’s EUR calendar is light. We suspect that the greater influence may come from global stocks or moves in commodities. Either or both suggest growing risk aversion, which would normally mean pressure on the EUR as the safe haven USD gains against it.
JPY: Like the USD, Ready to Benefit from a Drop in Risk Appetite – If Gold Doesn’t Take Over That Role. Range Trading Likely
- Japanese industrial production rose 1.1% in July, annual rate still deeply negative
- Retail trade fell 2.5% in July from a year ago, marking the smallest drop since January
- Japanese capital spending rebounds in the second quarter
- Main Events: Core Machine Orders Thursday, Final GDP Friday. See Part I for more
The power shift from the elections was already priced in, no big news this week, JPY likely to go with overall risk sentiment.
GBP: Despite Poor Growth Prospects, Risk Aversion Might Support
- British consumers make the biggest repayment on credit on record
- European finance ministers call for global regulation to limit the size of banks, compensation
- GBP/USD approaching possible breakout, months of narrow range trading is excessive for a volatile pair like GBPUSD
- See Part I for more on GBP Events
Over the past few weeks, data has confirmed a deepening recession, policy groups have projected a significant lag in its recovery relative to its peers and ballooning asset purchases by the central bank means rate hikes are the furthest thing from their mind.
Yet, despite all of this, the pound could still break above 1.66 against the dollar, push the EURGBP exchange rate below 0.87 once again and even climb back towards a nine-month highs of 163 against the Japanese yen should risk appetite continue its march higher.
Why? It’s speculation in risk appetite. Looking past the reality of deteriorating British fundamentals, a rally in stock, commodities and other risk-related assets can encourage capital to the relative high returns in the UK (they have to be to encourage investment). The most bullish case for the currency would be a rally in risk appetite that spurs all the markets in tandem.
The fundamental health of the economy will act as a constant drag; and even the advance of risk appetite itself is starting to fade.
Coming Main Economic Events
Economic data due over the coming week could not only add fundamental weight to the pound; but it could also alter the currency’s relationship to risk appetite. The many economic releases cover the gamut of total economic health. For the consumer, the BRC retail sales monitor and Nationwide consumer confidence survey will measure willingness to spend (their contribution to overall growth). Visible trade, industrial production and factor-level inflation will take the temperature from the business level. Even the NIESR GDP estimate will hold a little more influence with the focus so intense on a recovery.
All the data aside, the most influential piece of event risk through the week is the BoE policy announcement. Neither economists nor the market is predicting any change to the benchmark rate; but once again, it is their forecasts for when interest rates will change that is important for speculators. It is important to take note of the asset purchasing program which was recently lifted well beyond what its cap was initially set out for. There is very little chance that they will change the size of this program, but clues regarding their next move and timing could be very influential. The more uncertainly factors are forecasts for growth, inflation, financial health. Changes to these bearings will no doubt adjust the bearing on when the MPC can once again entertain the thought of a rate hike.
CHF: Sentiment, Technical Indicators are Main Drivers
- Consumer Prices declined 0.8% from a year ago surpassing estimates of -0.7%
- The Swiss recession slowed as 2Q growth contracted 0.3% versus 0.9% the quarter prior
- Franc Looking To Bounce From Range Lows
- Events: The only significant one is Tuesday’s unemployment (expected 4.1% vs. 3.9% prior)
The Swiss Franc finds itself relatively unchanged despite a week of improving fundamental data. Swiss growth figures from the second quarter confirmed expectations that the country’s recession had eased with the rate of contraction slowing to 0.3% from 0.9%.
SNB to keep CHF from appreciating against its major trading partners, so expect solid support for the EUR and USD against the CHF, so wait for tests of support before playing the upside.
CAD: Volatility Possible Given Risk Trends, Rate Decision
- Possible Coming Bias to Hard Assets Suggested by Gold’s Rise Could Support CAD (AUD too)
- Canadian Economy Shrinks More than Expected in the Second Quarter
- Employment Unexpectedly Rises – But It’s from a Surge in Part-time Hires Only
- Events: See Part I, Housing data the only real unknown, but risk sentiment is a stronger influence
Though an interest rate decision is due this week, no one believes rate increases are coming in the foreseeable future, given the CAD’s recent strength against the USD. BOC Governor Mark Carney has said that the currency’s appreciation over recent months has been a major obstacle for economic growth, adding that he has the “flexibility” to deal with it. Finance Minister Jim Flaherty echoed Carney’s comments, saying “steps could be taken” to check the currency’s ascent.
As the Swiss recently demonstrated, it should not be too difficult for policymakers to make good on such threats because they can simply print more money and let it loose into circulation, so the traders are unlikely to try to fight the BoC, with those who challenged the SNB still licking their wounds.
Thus traders will likely sell the Canadian Dollar should the likelihood of BoC intervention grow. Alternatively, the BoC could just extend the commitment to keep rates on hold deeper into next year.
Of course, a stock pullback would also pressure the CAD. The Canadian Dollar’s sensitivity to changes in risk sentiment is well documented, and any meaningful reversal here could prove to weigh heavily on the currency. Trading volumes have steadily declined for the last five of the six-month equity rally that began in March. While some of this can surely be attributed to a seasonal slowdown that is typical for the summer months, it may also be hinting at waning conviction behind the up move and forthcoming reversal as traders return from holiday and volumes pick up in September. A comparison of stock trading volume for this Tuesday’s plunge vs. that of the following days supports the idea of growing risk aversion.
AUD: Testing Highs on Rate Expectations, Vulnerable to Disappointments on Rates, Sentiment
- Vulnerable to pullback, But Does Gold Provide Support?
- Reserve Bank of Australia Holds Interest Rates Steady for Fifth Month
- 2Q GDP Tops Market Expectations
- Australian 2Q Operating Profits Fall the Most Since 2003
Recovered from dashed hopes of immanent interest rate increases, but as long as traders believe an increase is coming in the next year the AUD may well hold its ground against the USD and others. Australia is major gold supplier, so any continued gold rally should also support the AUD.
Week’s Main Events
Meanwhile, the coming week’s economic docket is likely to increase volatility in the Australia cross rates as economists anticipate the labor market to weaken further. The $1T economy is expected to shed 15K jobs in August, with the jobless rate anticipated to reach a six-year high of 5.9%, and fading demands for employment may weigh on economic activity going forward as households continue to face tightening credit conditions paired with fears of a slower recovery. However, retail spending is expected to rise 0.5% in July as the government commits more than A$20B in public hangouts to stimulate domestic demands, while home loans are expected to fall 1.0% during the same period as banks remain reluctant to lend, and the slew of data is likely to spark mixed reactions as the outlook for global growth remains weak
NZD: Moving With Risk Sentiment, Thus Vulnerable to Global Stock Pullback, Interest Rate Disappointment
- New Zealand Dollar gains on S&P Rally
- Reserve Bank of New Zealand rate decision key event in week ahead
Tightly correlated with the S&P, which is more likely to drop than advance in the near term. RBNZ could well choose to be cautious and dampen hopes for rate increases. Given its lofty levels, those with long NZD positions may want to consider tight stop losses.
CONCLUSIONS: What to Do if We’ve a Solid Gold Warning to Go Short?
We continue to view most markets as overbought compared to growth prospects. Ongoing failure to resolve the root causes of the current slowdown – weakness in the financial sector and employment, strengthens our belief that the next move is likely to be down, though markets have been resilient thus far.
Gold’s sudden move up this week in the absence of new evidence for growth driven inflation adds to our concern. Demand for gold has 2 primary drivers:
- Growth driven concerns for inflation—not on the scene with growth expected to be anemic over the coming year
- A major crisis in confidence – usually driven by a major dive in stocks and other risk assets
Choice #2 seems the better choice. Have we seen a solid gold warning?
If so, currency traders might:
short risk currencies: AUD, NZD, CAD, and EUR
go long JPY, USD, CHF
Options and futures traders should consider shorting stock indexes and commodities
Those preferring to work through ETFs should consider shorting:
(FXA), (FXB), (FXC), (FXE), (FXF), (JYF), (FXY),(UUP), (UDN), (CYN), (CYB), (DBV), (YCL), (ULF), (URR), (YCS), (EUO), (DRR), (FXEN), (GLD) (SLV) (USO), (UNG), (GSG), (DBA), (SPY),(DIA),(QQQ)
Long (SDS), (DUG)
Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.