Tuesday, October 27, 2009

GLOBAL OUTLOOK 10/27 Cheat Sheet: TIRED RALLY TO HOLD GAINS?

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS


- Stocks: Monday: Asia up, Europe, US down Tuesday morning Asia down, Europe opening higher

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: GBP: CBI Realized Sales, USD:CB Consumer Confidence, CAD: BoC Gov Carney Speaks, USD earnings: Baidu (BIDU), Bayer (BAYRY.pk), BE Aerospace (BEAV), Boston Properties (BXP), BP plc (BP), Canon (CAJ), Celanese (CE), Daimler AG (DAI), Honda (HMC), Valero Energy (VLO), Wynn Resorts (WYNN)

- Big Theme: Risk Appetite Becomes Nausea? High risk asset prices relative to growth prospects, a series of US bank downgrades oversold USD, uncertainty ahead of US GDP Friday In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine.

STOCKS

US: Stocks fell under the combined weight of doubts about their valuations, disappointing earnings announcements from big names like VZ and BP, legislative threats to end house purchases, uncertainty ahead of Friday's US GDP report. Without any countervailing reason to go long, traders started taking profits, which scared others into also taking profits, etc. S&P is now showing lower highs, lower lows.

Asia: Asian stocks retreated Tuesday, following losses on Wall Street amid rising concerns the markets have gotten ahead of economic realities.

Europe: FTSE 100 share index ended 1% lower on Monday, with mining and energy stocks suffering as the U.S. dollar rose and commodity prices fell, while a sharp decline in ING put pressure on financials.

ASIA UP N225I +0.77% HS +1.71 % SSEC +0.06% FTSTI +0.05% AORD +0.85 %

EUROPE DOWN FTSE -0.97% DAX -1.71% CAC -1.68 %

US- DOWN S&P -1.17% DJIA -1.05% NASDAQ -0.59%

THIS MORNING N225I -1.45% HS -1.46 % SSEC -2.08% FTSTI -0.57% AORD -1.16 %

FTSE +0.20% DAX +0.13% CAC +0.14%

COMMODITIES: Down Monday with stocks as risk appetite retreated and the dollar gained. See weekly analysis for more on all of these.



Oil: Crude oil plummeted -2.3% to settle at 78.68 Monday as strong rebound in USD in NY session reduced appeals of commodity investments. Correction in US stock market with particularly weak financial sector diminished investors' risk appetite as strength in financial market is crucial for economic growth in the US.



Gold: Comex gold plunged to as low as 1038.1 before recovering to 1042.8. The benchmark contract slid -1.3% Monday. Although global economic environment has improved, the yellow metal needs new catalyst to excel further, net speculation long positions remained close to all-time high level. Gold may need to correct further to around 1026 support level in the near term.

CURRENCIES: Bias to safety currencies with falling stocks

USD: . Heavy short positioning on the USD made traders hesitant to continue selling it, and more inclined to unwind existing USD shorts, in the face of falling stocks and risk appetite, which heighten the USD's safe-haven appeal. Most USD crosses lost ground against it.

EUR- In late New York trading, the euro traded 0.9 percent lower at $1.4863 , on track for its worst day since Aug. 7. The single euro zone currency earlier hit a 14-month high at $1.5064 on electronic trading platform EBS. USD is at 1 week high vs. EUR



JPY - Against the yen, the dollar rose 0.1 percent to 92.18 , near a high of 92.29 yen hit earlier on EBS, the highest for the pair in about a month. The yen rose against 14 of the 16 most-active currencies on speculation Japanese companies are bringing back earnings on overseas assets before the end of the month, and retreating risk assets which prompted demand for the safe-haven JPY.



GBP – Stabilizing after Friday's plunge, and was one of the very few currencies to gain against the USD yesterday. Per Goldman Sachs the GBP is the most undervalued since 1999 based on purchasing power parity theory. However, dovish comments from BoE officials, that the economy still needs help and that inflation is not a concern, are undermining a GBP rally.



AUD: Down 0.7% against the USD as it the AUD drops with stocks and other risk assets.



NZD: New Zealand’s dollar, known as the kiwi, fell to the lowest level in almost one week against the U.S. dollar after Prime Minister Key said the very high exchange rate is “helping offset any imported inflation concerns.”



CAD: (fx360.com)Continues to lose ground to the USD after more dovish comments from BoC head Carney, lower oil and stock prices. According to Carney, the Canadian Dollar is resulting in a “significant drag on growth” and will continue to keep prices depressed. Perhaps even more importantly, Carney said that the current level of the Canadian dollar more than fully offsets the favorable developments since July. As a result, the BoC will most likely keep interest rates unchanged throughout the first half of 2010.



CHF: Moving with risk appetite, bias up as risk assets pull in, though SNB intervention remains a threat



CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, GBP/USD for more pullbacks on a sustained break below 1.6300, and crude oil has begun to pull back, no strong support level until about $74 (see daily chart below) , look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order). SEE FULL VERSION FOR DETAILS, LATEST CRUDE OIL CHART.

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 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. Crude oil may be beginning pullback Always use sell stop orders.







Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and a 1 standard deviation Bollinger Band. See chart.





































Daily Chart Crude Oil Oct 27- No strong support until around $74, where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.



01 oct 21



OTHER HEADLINES







(Bloomberg)

India Begins Exit From Monetary Stimulus With Order to Buy Government Debt



•BP's Earnings Decline 34% on Lower Oil Prices Amid Weak Refining Margins



•Asian Stocks Fall on Commodity Price Decline, Hong Kong's Property Curbs



•Honda Triples Full-Year Profit Forecast on China, Japan Stimulus Measures



•Dollar Falls as China Output Report Sparks Demand for High-Yielding Assets



(Seekingalpha.com)



Is Obama Forcing Citigroup to Downsize?



Why Is the Market Going Up When Jobs Are Going Down?



Here's Why Asia Must Eventually Ditch the Dollar



Are Big Banks Better?



Sugar ETN Continues Its Wild Ride



(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP





DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK 10/27 Full Version: Has the Pullback Begun?

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS


- Stocks: Monday: Asia up, Europe, US down Tuesday morning Asia down, Europe opening slightly higher

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: GBP: CBI Realized Sales, USD:CB Consumer Confidence, CAD: BoC Gov Carney Speaks, USD earnings: Baidu (BIDU), Bayer (BAYRY.pk), BE Aerospace (BEAV), Boston Properties (BXP), BP plc (BP), Canon (CAJ), Celanese (CE), Daimler AG (DAI), Honda (HMC), Valero Energy (VLO), Wynn Resorts (WYNN)

- Big Theme: Risk Appetite Becomes Nausea? High risk asset prices relative to growth prospects, a series of US bank downgrades oversold USD, uncertainty ahead of US GDP Friday In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine.



STOCKS

US: Stocks fell under the combined weight of doubts about their valuations, disappointing earnings announcements from big names like VZ and BP, legislative threats to end house purchases, uncertainty ahead of Friday's US GDP report. Without any countervailing reason to go long, traders started taking profits, which scared others into also taking profits, etc.



The big name earnings announcement of the day came from telecom giant Verizon (VZ), which of course "beat earnings" – its Q3 profit fell only 9%--while its stock price is about the same that it was a year ago. Its price fell with the overall market. This has been a common kind of announcement, but it helped drive home the point that the stocks appear at best fully valued and probably overbought given current growth prospects. It also illustrated the waning effect of beating earnings estimates.



It's is no longer impressive to beat earnings estimates. More than ever, most companies control/manage/manipulate much of the information on which analysts base their estimates, so that, surprise, they beat these estimates. Because stock prices drop on earnings misses, companies do all they can to avoid these.



Downgrades of a number of banking stocks (from banking bull analyst Richard Bove) and BP plc's 34% earnings drop provided further though unsurprising excuses



Below is an excerpt from a popular media source that is a typical example of the non-explanations offered.



(Briefing.com) Stocks dropped in broad-based fashion after they failed to extend an early gain and the U.S. dollar made another strong move off of its yearly low.



The major indices were up solidly in the early going, but the S&P 500 struggled to break above the 1090 zone and the Nasdaq 100 ran into resistance when it approached the 2009 highs that it had set last week. As stocks stalled, sellers stepped in and undercut the early advance. That caused stocks to drop sharply and spend the rest of the afternoon trading in negative territory.



A stronger dollar also weighed on stocks. The greenback has now gained ground against a basket of foreign currencies for three straight sessions, the latest of which took it 0.7% higher in its best single-session percentage move of the past month. That made for particular trouble against multinationals and materials stocks, which dropped 2.5%.



Monsanto (MON 70.69, -4.54) created an additional drag on the materials sector. The stock was caught up in chatter that an analyst issued pessimistic comments about the chemical company's pricing efforts.



Financials were also among the worst performers this session. The sector sank 2.5% as bank stocks tumbled 4.1%, based on the KBW Banking Index. Weakness surrounding banking issues stemmed from a downgrade by Rochdale of regional lenders Fifth Third (FITB 9.52, -0.82) and SunTrust (STI 19.85, -1.14).



There weren't any real leaders for participants to follow this session. Dow component Verizon (VZ 28.64, -0.21) was one of the only widely-held companies to report its latest results this morning. The integrated telecom giant posted better-than-expected adjusted earnings of $0.60 per share for the third quarter, but they were largely dismissed, leaving telecom to fall to a 1.3% loss.



All 10 major sectors finished the session in the red. Seven of them suffered losses in excess of 1%.



Despite widespread weakness in the equity markets, Treasuries suffered. As such, the benchmark 10-year Note dropped roughly 18 ticks, which took its yield above 3.5% for the first time since August. Its weakness seemed to worsen in the wake of better-than-average results for an auction of 5-year TIPS.



Meanwhile, Rochdale Securities bank analyst Richard Bove lowered his ratings on Fifth Third Bancorp, SunTrust Banks Inc. and US Bancorp. Fifth Third fell 82 cents, or 7.9 percent, to $9.52 and SunTrust slid $1.14, or 5.4 percent, to $19.85. US Bancorp fell 80 cents, or 3.2 percent, to $24.15.





Advancing Sectors: (None)

Declining Sectors: Financials (-2.5%), Materials (-2.5%), Energy (-1.5%), Telecom (-1.3%), Utilities (-1.3%), Health Care (-1.1%), Industrials (-1.0%), Consumer Staples (-0.8%), Consumer Discretionary (-0.5%), Tech (-0.3%)DJ30 -104.22 NASDAQ -12.62 NQ100 -0.4% R2K -1.2% SP400 -1.1% SP500 -12.65 NASDAQ Adv/Vol/Dec 763/2.33 bln/1914 NYSE Adv/Vol/Dec 713/1.39 bln/2317



Asia: Asian stocks retreated Tuesday, following losses on Wall Street amid rising concerns the markets have gotten ahead of economic realities.

Europe: FTSE 100 share index ended 1% lower on Monday, with mining and energy stocks suffering as the U.S. dollar rose and commodity prices fell, while a sharp decline in ING put pressure on financials.



GLOBAL

MARKETS Monday

ASIA- UP N225I +0.77% HS +1.71 % SSEC +0.06% FTSTI +0.05% AORD +0.85 %

EUROPE DOWN FTSE -0.97% DAX -1.71% CAC -1.68 %

US- DOWN S&P -1.17% DJIA -1.05% NASDAQ -0.59%

THIS MORNING

ASIA DOWN

N225I -1.45% HS -1.46 % SSEC -2.08% FTSTI -0.57% AORD -1.16 %

EUROPE:

FTSE +0.20% DAX +0.13% CAC +0.14%



COMMODITIES: Down Monday with stocks as risk appetite retreated and the dollar gained. See weekly analysis for more on all of these.



Oil: Crude oil plummeted -2.3% to settle at 78.68 Monday (intra-day low: 77.97) as strong rebound in USD in NY session reduced appeals of commodity investments. Correction in US stock market with particularly weak financial sector diminished investors' risk appetite as strength in financial market is crucial for economic growth in the US.



Gold: Comex gold plunged to as low as 1038.1 before recovering to 1042.8. The benchmark contract slid -1.3% Monday. Although global economic environment has improved, the yellow metal needs new catalyst to excel further. Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.

CURRENCIES: Bias to safety currencies with falling stocks. Heavy short positioning on the USD made traders hesitant to continue selling it, and more inclined to unwind existing USD shorts, in the face of falling stocks and risk appetite, which heighten the USD's safe-haven appeal. Most USD crosses lost ground against it.



Data on Friday showed currency speculators increased bets against the greenback, with the dollar's net short position rising to $18.65 billion in the week ending Oct. 20 from a $17.99 billion net short the prior week.



Commodity-linked currencies declined as oil fell to below $79 a barrel on concerns over a sluggish economic recovery.

The U.S. dollar rose 1.2 percent against the Canadian dollar , while the Australian dollar fell 0.7 percent against the greenback and the New Zealand dollar was down 0.9 percent.

Canada's central bank governor Mark Carney on Monday repeated concerns about the adverse impact of a strong currency on the economy.



USD: The U.S. dollar rose broadly on Monday, rebounding from a 14-month low against the euro as falling stock and commodity prices prompted investors to lock in recent gains in other currencies. It strengthened against all majors, driving the EURUSD down 125 pips in US trade

Traders were also reluctant to push the euro higher given the huge amount of bearish trades on the dollar, which suggests a near-term rebound in the U.S. currency could be on the horizon. It was a turnaround for the dollar, which struggled earlier partly due to a report saying China should increase holdings of euros and yen in its foreign reserves.



The dollar rose against 12 of its 16 major counterparts on speculation U.S. lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will sell shares to pay back its government bailout. Both are negative for risk appetite. However, the lack of a strong fundamental catalyst for the USD (stock market crash, heightened prospect of interest rate increase, very negative EUR news, significant new geopolitical threats), SUGGESTS THIS IS PROBABLY A RELIEF RALLY, though one that could last some weeks. Much depends on how stocks respond to news and earnings, especially the major events for the coming weeks: this Friday's US GDP and next Friday's US NFP report.







EUR- In late New York trading, the euro traded 0.9 percent lower at $1.4863 , on track for its worst day since Aug. 7. The single euro zone currency earlier hit a 14-month high at $1.5064 on electronic trading platform EBS. USD is at 1 week high vs EUR



Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said the euro peaked after the Chinese reserves diversification story and that its failure to make new highs triggered selling, which accelerated after stops were hit.

"Today's price action is inflicting technical damage on the euro chart," he said. He added the next level of support for the euro is seen near the $1.4830-to-$1.4840 range and a convincing break of that area would open the way to $1.4675.



However, the EURUSD could drop to about 1.4600 and still have its uptrend intact.



JPY - Against the yen, the dollar rose 0.1 percent to 92.18 , near a high of 92.29 yen hit earlier on EBS, the highest for the pair in about a month.



The yen rose against 14 of the 16 most-active currencies on speculation Japanese companies are bringing back earnings on overseas assets before the end of the month.



Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.



“There’s talk that exporters are buying the yen,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is causing the dollar-yen to dip.”





GBP – Stabilizing after Friday's plunge, and was one of the very few currencies to gain against the USD yesterday. Per Goldman Sachs the GBP is the most undervalued since 1999 based on purchasing power parity theory. However, dovish comments from BoE officials, that the economy still needs help and that inflation is not a concern, are undermining a GBP rally.





AUD: Down 0.7% against the USD as it the AUD drops with stocks and other risk assets.





NZD: Fell 0.9% to the lowest level in almost one week against the U.S. dollar after Prime Minister Key said the very high exchange rate is “helping offset any imported inflation concerns.”



“I would personally be surprised if they raise rates in 2009,” Key said, speaking of policy makers at the nation’s central bank.



The New Zealand dollar rose to a 15-month high of 76.35 U.S. cents last week.



The Reserve Bank of New Zealand, which acts independently of the government, will announce its next rates decision on Oct. 29.



CAD: USDCAD up 1.2% in US trade yesterday, trend up continues this morning. Losing ground to the USD due to declining stocks, more dovish comments from BoC head Carney, lower oil and stock prices. According to Carney, the Canadian Dollar is resulting in a “significant drag on growth” and will continue to keep prices depressed. Perhaps even more importantly, Carney said that the current level of the Canadian dollar more than fully offsets the favorable developments since July. As a result, the BoC will most likely keep interest rates unchanged throughout the first half of 2010. Of all the major central banks, the BoC has been the most vocal about the negative impact of a strong currency. These are the words of a dovish central bank who will most likely stall any plans to tighten monetary policy. If Carney’s main purpose was to talk down the currency, he may very well have been successful. The combinations of renewed talks on excessive CAD strength and keeping rates low should offer a one-two punch for the loonie. For the most part, Carney refrained from painting a “rosy picture”, but announced that they are “on track at the start of a very long road.” Canadian data will continue to be light for the next couple of days.



CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely. As of early Monday GMT the CHF is recovering most of its losses against the USD from Friday.





CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, GBP/USD for more pullbacks on a sustained break below 1.6300, and crude oil has begun to pull back, no strong support level until about $74 (see daily chart below) , look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order).



Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 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. Crude oil may be beginning pullback Always use sell stop orders.







Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and and a 1 standard deviation Bollinger Band. See chart.
























Daily Chart Crude Oil Oct 27- No strong support until around $74, where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.



01 oct 21



OTHER HEADLINES







(Bloomberg)

India Begins Exit From Monetary Stimulus With Order to Buy Government Debt



•BP's Earnings Decline 34% on Lower Oil Prices Amid Weak Refining Margins



•Asian Stocks Fall on Commodity Price Decline, Hong Kong's Property Curbs



•Honda Triples Full-Year Profit Forecast on China, Japan Stimulus Measures



•Dollar Falls as China Output Report Sparks Demand for High-Yielding Assets



(Seekingalpha.com)



Is Obama Forcing Citigroup to Downsize?



Why Is the Market Going Up When Jobs Are Going Down?



Here's Why Asia Must Eventually Ditch the Dollar



Are Big Banks Better?



Sugar ETN Continues Its Wild Ride



(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP





DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

Monday, October 26, 2009

GLOBAL OUTLOOK 10/26:Full Version TIRED RALLY TO HOLD GAINS?

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS


- Stocks: Friday: Asia up, Europe, US down Monday morning Asia up, Europe up

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: AUD:PPI m/m, EUR: Gfk Consumer Climate, USD earnings: Monday 10/26: Corning (GLW), Electrolux AB (ELUXY.PK), Lorillard (LO), Plum Creek Timber (PCL), RIOCAN REIT, SOHU.com (SOHU), Sunoco Logistics Partners LP (SXL), Verizon (VZ), Winn-Dixie Stores (WINN)

- Big Theme: Falling risk appetite indicate tired rally? In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine.



STOCKS

US: (Briefing.com) Weekly Recap - Week ending 23-Oct-09 Following a volatile week of trade, U.S. equity markets closed with modest declines. Small cap stocks notably underperformed, though, as evidenced by a 2.5% decline in the Russell 2000. The S&P 500 lost a more modest 0.7%.



The declines were broad-based as nine of the ten sectors that make up the index ended lower, led by Materials (-1.8%). Only IT finished in positive territory (+1%), benefitting from blowout results from the likes of Apple (AAPL) and Amazon.com (AMZN).



Third quarter earnings results remained in focus, and the list of companies that surprised to the upside this week goes on and on, including names such as Amazon.com, American Express (AXP), Apple, AT&T (T), Capital One (COF), Caterpillar (CAT), McDonald's (MCD), Texas Instruments (TXN), UPS (UPS) and Yahoo! (YHOO). Overall, however, there was not enough top line revenue growth or sufficiently upbeat Q4 guidance to convince markets that stocks merited higher prices.



Thus, the better-than-expected results did not translate to market gains. Once again corporate America demonstrated a unique ability to wring out operating costs. In the process it also revealed just how chubby operating budgets had gotten in the credit-driven bacchanal of recent years.



Basically, it appears as if we're seeing a tired market. That was never more evident than on Wednesday afternoon when the market plunged in the final 45 minutes of trade, with the move attributed to a late-session downgrade of Wells Fargo (WFC).



The ease with which the market broke, however, suggested to us that investors knew they was operating on borrowed time, trying to climb a wall of worry while staring at $81 a barrel oil, digesting word of government mandated pay cuts for select companies receiving bailout funds and realizing that the 1,100 mark for the S&P 500 proved to be another tough nut to crack earlier that day.



There were also disappointing pieces of economic data this week, particularly Initial Jobless Claims, which after falling the prior two weeks climbed in the week ended Oct. 16 (531,000 vs. 515,000 consensus). Housing data was mixed, as a jump in Existing Home Sales in September (5.57 million vs. 5.35 million consensus) offset weaker-than-expected Housing Starts and Building Permits.



Looking ahead to next week, third quarter earnings results and economic data, particularly the Advance reading for third quarter GDP on Thursday (10/29), will be in focus. There is also another potential catalyst as the calendar is full of Treasury auctions -- 5-year TIPS reopening Monday (10/26), $44 billion in 2-year Notes Tuesday (10/27), $41 billion in 5-year Notes Wednesday (10/28) and $31 billion in 7-year Notes Thursday.



Stock bulls may hit the pause button again this week if a wave of earnings due from marquee names such as Exxon Mobil and a slew of economic data offer no new incentives to extend Wall Street's seven-month rally.

Even though the profits that have come in so far have proven to be surprisingly strong, U.S. stocks have made very little headway, as investors search for more definitive signs the economic recovery is gaining strength.

In a sign of growing uncertainty about the pace of the U.S. recovery, the market volatility index <.VIX> was up 7.64 percent on Monday.



Asia: Asian markets mostly rose Monday, shrugging off a fall on Wall Street as South Korea's fastest growth in seven years underscored the region's strengthening economic recovery.

Europe: Opening higher following Asia.



GLOBAL

MARKETS FRIDAY

ASIA- UP N225I +0.15% HS +1.71 % SSEC +1.85 FTSTI -0.10% AORD +0.85 %

EUROPE DOWN FTSE +0.68% DAX -0.39% CAC -0.33 %

US- DOWN S&P -1.22% DJIA -1.08% NASDAQ -0.50%

THIS MORNING

ASIA UP

N225I +0.15% HS +1.71 % SSEC +1.85 FTSTI -0.10% AORD +0.85 %

EUROPE: UP

FTSE +0.23% DAX +0.73% CAC +0.40%



COMMODITIES: Down Friday with stocks as the dollar gained. See weekly analysis for more on all of these.



Oil: Down 1.91% in Friday US trade, but up on the week. Oil fell for the third day, to below $80 a barrel on Monday, extending the previous session's decline, as investors took profit amid renewed concerns about the strength of the global economic recovery.

Buoyed by a rise in global stock indices and a weak dollar, oil prices rallied to a one-year high of $82 earlier last week.

But they wobbled and fell late in the week as weak earnings results from the U.S. and a rise in U.S. jobless claims drove investors to reconsider the pace of the economic recovery and its impact on energy demand.



"Asian speculators are cutting their positions after the fall on Wall Street last week. But a rebound in the Dow Jones futures this morning has helped limit the drop in oil prices," said Ryuichi Sato, an analyst at Mizuho Corporate Bank.

"But overall, the market is cautious about pushing oil prices higher because the demand fundamentals are still weak and the world economy is still fragile."

Comments from producer group OPEC last week that it would raise output targets at a December meeting has also cast a pall on the oil market, analysts said.

Gold: Down 0.38% in Friday US trade, Gold inched up towards $1,060 on Monday as the dollar fell to a 14-month low against the euro, but weak physical demand capped the upside for bullion. NB: Nuriel Roubini was quoted this weekend that he believes gold prices are at "bubble levels" since it is only in demand when markets collapse or there is extreme inflation.

After hitting record highs above $1,070 per ounce on Oct. 14, gold prices have traded in a narrow range, centering around $1,060, with support near $1,040.

Gold has gained on the dollar's decline because a weaker dollar boosts investor interest in gold as a hedge and makes bullion cheaper for non-dollar holders, but buying momentum has lost some of its steam given weak jewellery demand and high prices spurring scrap sales.

"Gold remains in an uptrend as long as the dollar is in a downtrend, but with physical demand weak, bullion lacks incentives to test new highs," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute.

"The market is moving in tandem with the euro/dollar moves."

Expectations for U.S. interest rates to stay low well into next year will likely push the euro higher, with some forecasting the single currency to reach $1.52 in the coming three months.

The euro may hit $1.52 and even higher in the coming three months and euro zone officials may not express serious concerns, as the single currency is not extremely strong on the basis of a trade-weighted average, said Masafumi Yamamoto, chief foreign exchange strategist for Japan at Barclays Capital

CURRENCIES: Bias to safety currencies with falling stocks, … START W CURRENCIES



USD: Risk aversion, coupled with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.

Against a basket of currencies, the dollar <.DXY> was at 75.078, having hit a fresh 14-month low of 74.94. The next key level is seen at 74.50, the intra-day low hit on Aug 8 last year. Despite the greenback's battering over the past few months, U.S. officials have stepped up rhetoric about a strong dollar. But they also want to see a correction in imbalances between exporter and importer nations, a move analysts felt would require the greenback to fall even further.



Yields on Treasuries spiked late last week ahead of record issuances this week and on speculation the Federal Reserve may change its tenor to a slightly more hawkish bias.

That view got a boost from a Financial Times article highlighting discomfort among some Fed officials with language that U.S. interest rates would remain low for an extended period.



EUR- Edging lower in Monday morning trade, after recovering Friday's small pullback after a Chinese report saying China should raise holdings of EUR and JPY in its foreign currency reserves prompted dollar selling, currently hovering around $1.5030. The report noted, however, that the USD should remain the principal currency in Chinas fx reserves.



JPY - The U.S. dollar rose to 92.14 yen from 92.08 yen late on Friday in New York, with traders expecting the Japanese currency to stay on the defensive as U.S. Treasuries yields rose.



GBP – The pound extended losses on Monday after data showed the UK economy was still struggling, disappointing investors who had been paring short positions betting for an early return to growth. Traders say investors are set to aggressively sell the pound on expectations that a sluggish road to recovery would prompt the Bank of England to keep rates near zero for a long period of time.

The drop in the pound, along with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.

Data this week could show the U.S. economy grew more quickly than forecast in the third quarter, which could raise speculation that the Federal Reserve may tighten monetary policy sooner than previously thought.

"Maybe the advance GDP will help bolster the dollar, where nothing else could," RBC currency strategist David Watt said.

"But, after the UK GDP surprise last week one has to be wary of undershooting the consensus."

The data which is out on Thursday, is expected to show U.S. gross domestic product (GDP) grew 3.3 percent in the third quarter.

The pound broke past support at $1.6300 to fall to $1.6272 from $1.6313 late on Friday when it lost nearly 1.9 percent.



Last week, sterling enjoyed a reprieve after minutes from the Bank of England's latest meeting stirred hopes that policy rates could be pushed up from record lows in coming months amid worries about inflation.



AUD: The Australian dollar edged lower to $0.9211 amid growing speculation on whether rates will move up by 25 or 50 basis points next month. Third-quarter producer price index (PPI) numbers were lower than expected, reducing the threat of inflation and pressure to raise rates. These figures come ahead of consumer price numbers on Wednesday.





NZD: Continuing to pull back against the USD in early Monday GMT trade, bank holiday leaves NZD to move with broad market sentiment. Given the very light news day, US earnings are likely to provide the main events to move markets Moday



CAD: Continues to lose ground to the USD after dovish BoC comments, lower oil and stock prices.



CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely. As of early Monday GMT the CHF is recovering most of its losses against the USD from Friday.





CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch USD/CAD for more rally, GBP/USD for more pullbacks if break below 1.6300 from recent news driven moves, crude oil has begun to pull back, no strong support level until about $74, look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order).



Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 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. Crude oil may be beginning pullback Always use sell stop orders.







Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and and a 1 standard deviation Bollinger Band. See chart.











Daily Chart Crude Oil



01 oct 26



OTHER HEADLINES







(Bloomberg)

Geithner Making Bills-to-Bonds Yield Gap Unprecedented by Increasing Sales



(Seekingalpha.com)



Carlos Valdecantos We're Living Through the Best of Times

John Mauldin Too Big to Fail: Now It Gets Interesting

Jason Schwarz Nouriel Roubini, One on One: More Doom and Gloom



(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP





DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK CHEAT SHEET 10/26: TIRED RALLY TO HOLD GAINS?

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS


- Stocks: Friday: Asia up, Europe, US down Monday morning Asia up, Europe futures pointing higher

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: AUD:PPI m/m, EUR: Gfk Consumer Climate, USD earnings: Monday 10/26: Corning (GLW), Electrolux AB (ELUXY.PK), Lorillard (LO), Plum Creek Timber (PCL), RIOCAN REIT, SOHU.com (SOHU), Sunoco Logistics Partners LP (SXL), Verizon (VZ), Winn-Dixie Stores (WINN)

- Big Theme: Falling risk appetite indicate tired rally? In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the next big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine. See weekly

STOCKS

US: Following a volatile week of trade, U.S. equity markets closed with modest declines. It appears as if we're seeing a tired market. That was never more evident than on Wednesday afternoon when the market plunged in the final 45 minutes of trade, with the move attributed to a late-session downgrade of Wells Fargo (WFC). The ease with which the market broke, however, suggested to us that investors knew they was operating on borrowed time, trying to climb a wall of worry while staring at $81 a barrel oil, digesting word of government mandated pay cuts for select companies receiving bailout funds and realizing that the 1,100 mark for the S&P 500 proved to be another tough nut to crack earlier that day. The S&P 500 lost a more modest 0.7%.

Asia: Asian markets mostly rose Monday, shrugging off a fall on Wall Street as South Korea's fastest growth in seven years underscored the region's strengthening economic recovery

Europe:  Higher opening following Asia

ASIA- UP N225I +0.15% HS +1.71 % SSEC +1.85% FTSTI +1.24% AORD +0.85 %

EUROPE – DOWN FTSE +0.68% DAX -0.39% CAC -0.33 %

US- DOWN S&P -1.22% DJIA -1.08% NASDAQ -0.50%

THIS MORNING N225I +0.77% HS +1.71 % SSEC +1.85 FTSTI +0.04% AORD -0.56 %

 FTSE +0.29%  DAX+0.73 %   CAC 0.40% %

COMMODITIES: Down Friday with stocks as the dollar gained. See weekly analysis for more on all of these.

Oil: Down 1.91% in Friday US trade, but up on the week. Oil fell for the third day, to below $80 a barrel on Monday, extending the previous session's decline, as investors took profit amid renewed concerns about the strength of the global economic recovery, weak US stocks, rising jobless claims, comments from OPEC that it might raise production

Gold: Down 0.38% in Friday US trade, Gold inched up towards $1,060 on Monday as the dollar fell to a 14-month low against the euro, but weak physical demand capped the upside for bullion. NB: Nuriel Roubini was quoted this weekend that he believes gold prices are at "bubble levels" since it is only in demand when markets collapse or there is extreme inflation.

CURRENCIES: Bias to safety currencies given falling stocks, oil. See Full Version of Daily, Weekly analysis for more.

USD: Risk aversion, coupled with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.That view got a boost from a Financial Times article highlighting discomfort among some Fed officials with language that U.S. interest rates would remain low for an extended period.



EUR- Edging lower in Monday morning trade, after recovering Friday's small pullback after a Chinese report saying China should raise holdings of EUR and JPY in its foreign currency reserves prompted dollar selling, currently hovering around $1.5030. The report noted, however, that the USD should remain the principal currency in Chinas fx reserves.



JPY - The U.S. dollar rose to 92.14 yen from 92.08 yen late on Friday in New York, with traders expecting the Japanese currency to stay on the defensive as U.S. Treasuries yields rose.



GBP – The pound extended losses on Monday after data showed the UK economy was still struggling, disappointing investors who had been paring short positions betting for an early return to growth. Traders say investors are set to aggressively sell the pound on expectations that a sluggish road to recovery would prompt the Bank of England to keep rates near zero for a long period of time.

The pound broke past support at $1.6300 to fall to $1.6272 from $1.6313 late on Friday when it lost nearly 1.9 percent.



AUD: The Australian dollar edged lower to $0.9211 amid growing speculation on whether rates will move up by 25 or 50 basis points next month. Third-quarter producer price index (PPI) numbers were lower than expected, reducing the threat of inflation and pressure to raise rates. These figures come ahead of consumer price numbers on Wednesday.



NZD: Continuing to pull back against the USD in early Monday GMT trade, bank holiday leaves NZD to move with broad market sentiment. Given the very light news day, US earnings are likely to provide the main events to move markets Monday

CAD: Continues to lose ground to the USD after dovish BoC comments, lower oil and stock prices.

CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely. As of early Monday GMT the CHF is recovering most of its losses against the USD from Friday.

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch USD/CAD for more rally, GBP/USD for more pullbacks HAS BROKEN $1.6300 SUPPORT, crude oil has begun to pull back, no strong support level until about $74, look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order). SEE DAILY FOR MORE ON CRUDE, CHART, HEADLINES

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 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. Crude oil may be beginning pullback Always use sell stop orders.







Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and a 1 standard deviation Bollinger Band. See chart.




Daily Chart Crude Oil



01 oct 26



OTHER HEADLINES







(Bloomberg)

Geithner Making Bills-to-Bonds Yield Gap Unprecedented by Increasing Sales



(Seekingalpha.com)



Carlos Valdecantos We're Living Through the Best of Times

John Mauldin Too Big to Fail: Now It Gets Interesting

Nouriel Roubini, One on One: More Doom and Gloom



(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP





DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

Sunday, October 25, 2009

Global Markets Outlook Oct 26-30 Full Version: Markets Reversing?

STOCKS




Last week we questioned whether last Friday's market pullback, despite overall upbeat earnings reports, suggested that the risk appetite was losing steam, if for no other reason than that stock prices were already high and that the recovery picture was already priced in. This week's action seems to confirm our impression that at minimum the market needs some time to digest gains and/or get some news to raise expectations further. While we believe a pullback is due, markets have been very resilient, and so a period of range trading rather than strong pullback is quite possible as well if nothing comes along to move sentiment in either direction.





GOLD AND OIL



Gold

Gold continues to rally, though at a slowing pace. It has yet to significantly retrace its surge over the past two weeks and yet neither have we seen a new record high after the $1,070.80 benchmark was set back on the 14th. A steady, rising trend channel calls up congestion at the end of a very prominent bull run.



This is the same general chart pattern that can be seen in the Dow Jones Industrial Average and (the inverse of) the US dollar. From this, it is clear that all three are responding to the same driver: sentiment. Should optimism give way, the lack of any yield income to offset the potential capital losses will likely mean a sharp correction from profit taking. At these levels, demand is largely speculative. According to the COT figures, commercial positioning is 383,718 short contracts to 86,225 long. Non-commercial long positions, however, have hit a record high of 286,864 contracts.



Oil

Crude closed its fourth consecutive bullish week, extending the initial surge sparked last week, pushing to new 12-month highs. A closer look at market’s health however, reveals that doubts and suspicions may have started to weigh on the steady rally. We can see the hesitation to carry prices to new highs, with congestion below the recent high of $82 and the trend low $80. A break is inevitable; but direction is uncertain.



The affects of fundamentals on oil has not been very clear lately. If underlying supply and demand were the only facet of price determination, crude would likely have collapsed these past two weeks rather than rally to new highs. This past week’s US Energy Department inventory figures reveal the glut of supply that has refiners reducing imports. Through the week ending October 16th, crude stockpiles rose 1.31 million barrel to 339.1 million – 9.4 percent above the average levels for this period over the past five years. Further down the refinement line, gasoline supplies unexpectedly contracted 2.3 million barrels to 8.95 million; yet supplies are still significantly higher than the five year average. If demand were robust enough to absorb excess inventories while production levels continued unchanged, there would be a reasonable argument to be made for further appreciation. However, demand for fuel actually dropped 1.4 percent last week and consumption has largely struggled to recover despite the consensus that an economic recovery is underway.



Clearly the true driver for price action will almost certainly be risk appetite and the pace of the US dollar. With the broader market recovery, confidence has led funds not only to yield bearing assets but also to those that can only provide capital gains. An optimistic outlook for steadily advancing markets is the foundation to stability. Should risk appetite falter, profit taking and a fundamental equilibrium set well below current price would act to accelerate crude’s plunge.



CURRENCIES





USD

Ready to Rise on Tired Stock Market?



Summary

Outlook for US Dollar: Bullish/Neutral



- The Fed’s Fisher maintains the bank’s efforts to deflate any and all rate speculation

- Risk appetite continues to drive the USD

- Is there an extreme to the dollar’s steady tumble?



Analysis

Now considered the ideal funding currency to the recuperating carry trade, the USD continues to move in the opposite direction of risk appetite, and is unlikely to shake that role and its downtrend until there is a fundamental reason to hold the currency, or to dump its chief crosses. While the downtrend to new lows with rising risk appetite continues, this week’s action in equities could signal the first stage of a reversal in yield appetite, recovery in the US dollar, and allow a positive surprise for the Q3 GDP to raise hopes for US recovery, an increase in US interest rates, and provide fundamental justification to hold the USD.



The Big USD Event – Advanced GDP

We’ve just seen two very contrasting third quarter growth readings from major economies. China missed expectations with annual growth of “only” 8.9%. while, the UK surprised the market by reporting “only” a 0.4 % contraction through Q3, extending the economy’s worst recession on record. This Thursday the US reports Q3 GDP. If it can meet the projected 3.2% annualized pace of growth, which would be the best in 2 years, it might show the markets that it really is shaking the recession and boost hope for a solid recovery.



To determine whether the US is really growing, we need to see the breakdown of growth in the major sectors. While government spending can temporarily fill a gap, recovery in jobs, consumer spending, house prices and the financial sector are essential for real sustained growth. Housing sales are improving and construction activity is stabilizing. Earnings through the second and third quarters suggest businesses will pick up production and start spending once gain. Yet consumer spending is about 70% of US GDP. Confidence seems to have already turned the corner; but without substantial improvement in employment and personal income, consumption and planned purchases will remain weak, and so will the banks that ultimately depend on these.



Adding another complication to the high level release, we need to determine whether the dollar will respond in its usual safe haven role (down on good US news, up on bad), or based on how the GDP result depicts the underlying US economy. The answer depends as much on what is happening in the markets heading into the release as on the data itself. For example, if risk appetite is in retreat and GDP disappoints, the USD would likely rally as a needed safe haven and repayment currency to unwind carry trades. If there is some other mix of sentiment and GDP result, the affect on the USD will be harder to divine.



Remember that the dollar does not have the characteristics of a long-term funding currency. Depressed market rates and benchmark yields are temporary; and policy officials will eventually be able to work down deficits when they have the will to do so. Also, the US is not an export based economy and thus does not depend on a cheap currency as part of its basic business model. Should the US return to growth with this 3Q reading, roles will start to reverse as fundamental realism dawns. On the other hand, a disappointment like of the UK’s GDP could strengthen the unwanted inverse correlation to risk appetite in the short-term.



Note that whatever happens with the advanced GDP reading, the following week climaxes with Non Farms Payrolls. Even if GDP this week meets expectations, the NFP report can outweigh it, especially if it disappoints again. Sustained US GDP growth requires consumer spending, which in turn requires improving employment and incomes. No one will believe in sustainable GDP growth if unemployment stays dismal.



T-Bond Auctions

Note also that it's a busy week for Treasury bond auctions, and any signs of slackening demand could quickly introduce volatility, though it's unclear how the scenario would play out. Would markets see rising rates and thus a rising USD? Would they see another blow to US recovery, falling stocks, and a flight to safe haven currencies like the dollar? Or would the blow to the underlying fundamentals of the US economy hurt the dollar further still?







Prominent earnings announcements for the coming week include:

Monday 10/26: Corning (GLW), Electrolux AB (ELUXY.PK), Lorillard (LO), Plum Creek Timber (PCL), RIOCAN REIT, SOHU.com (SOHU), Sunoco Logistics Partners LP (SXL), Verizon (VZ), Winn-Dixie Stores (WINN),

Tuesday 10/27: Baidu (BIDU), Bayer (BAYRY.pk), BE Aerospace (BEAV), Boston Properties (BXP), BP plc (BP), Canon (CAJ), Celanese (CE), Daimler AG (DAI), Honda (HMC), Valero Energy (VLO), Wynn Resorts (WYNN)

Wednesday 10/28: Aflac (AFL), Coca-Cola Ent. (CCE), ConocoPhillips (CON), Eni (E), General Dynamics (GD), GlaxoSmithKline (GSK), Goodyear Tire & Rubber (GT), SAP (SAP),

Thursday 10/29: Aetna (AET), Colgate-Palmolive (CL), France Telecom (FTE), Hertz Global (HTZ), Hitachi (HIT), MetLife MET), Moody’s Corp. (MCO), Motorola (MOT), Proctor & Gamble (PG), Taiwan Semiconductor (TSM), Waste Management (WM),

Friday 10/30:





EUR

The EURUSD Continues to Defy Expectations for a Pullback, Awaits ECB Rate Forecasts



Summary

Outlook for Euro: Bearish on overextended rally



- Riding Risk Sentiment Higher

- Hits fresh annual highs on bullish Euro Zone economic data

- European Central Bank (ECB)on alert as key indicators continue to show recovery

- EUR, Dow stay above key levels



Week’s Recap

The Euro finally broke above the psychologically significant $1.50 mark for the first time in 14 months. Unlike previous weeks, however, the EUR held up against the safe-haven US Dollar despite a struggling S&P 500 and other key risk sentiment barometers. We have repeatedly said that the EURUSD needed support from risky assets to continue its impressive rallies. Yet the S&P 500 finished the week 0.75 percent lower and yet the Euro traded higher.



A surprisingly bullish run of key European economic data seems to have made the difference, and fundamental forecasts for domestic growth remain bullish. A relatively important string of economic releases could force shifts in Euro forecasts.



Solid German IFO Business Confidence figures and Euro Zone Purchasing Manager Index numbers have supported optimistic growth forecasts which in turn have led traders to price in rate hikes from the European Central Bank.



Events

The lure of higher yields has undoubtedly played a part in Euro/US Dollar rallies, but the extent of Euro appreciation leaves it at clear risk of pullback. ECB watchers will keep a close eye on the coming week’s German and Euro Zone Consumer Price Index figures for important surprises. Current consensus forecasts call for yet another negative year-over-year change in Euro Zone Consumer Prices, but the rate of contraction is expected to narrow to a meager 0.1 percent. Suffice it to say, any material disappointments could make a considerable dent on ECB interest rate expectations. Wednesday’s German CPI figures could subsequently set the tone for near-term Euro/US dollar trading.



Traders will otherwise keep a close watch on global risky asset classes—especially with the Euro’s correlation to the S&P 500 trades near record highs. The US Dow Jones Industrial Average’s close below the psychologically significant 10,000 mark suggests that financial market risk appetite is not quite as robust as previously believed. Yet we would hardly call for a market top without a more substantive pullback across a broad swath of indicators. FX Options market volatility expectations have come down since last week’s peak, but it should be yet another week of eventful price action out of the Euro and US Dollar in the face of noteworthy event risk.



JPY

Losing Ground on EUR, USD



Summary



Outlook for Japanese Yen: Bearish



- USDJPY rises as stocks fall now that USD is new safe haven king

- Is the dollar to remain the top funding currency?

- Key Events: Retail Trade m/m, Industrial Production m/m, Jobless rate, Housing Starts



The Japanese Yen fell against major forex counterparts for the third week in a row, slipping further on outperformance across key risky asset classes. Yet the 20-day correlation between the US Dollar/Japanese Yen pair and S&P 500 actually turned negative for only the second time in two years—emphasizing the dollar’s new role as premier safe haven and funding currency for carry trade. Until recently, the Yen was the reigning safe haven currency and, by extension, the first to fall through financial market booms. As the lowest-yielding currency in the industrialized world, investors aggressively borrowed JPY to fund investments in sources of higher income. The surprising shift is the central reason for the USDJPY pair’s new inverse correlation to key risky assets, and it will likely remain a major factor for the Japanese Yen through the foreseeable future.



We have repeated that financial market risk sentiment, as perhaps best represented by the S&P 500, would be the major determinant of USDJPY price action. With stocks moving down, and the USD as the new prime safe haven currency, the USDJPY should indeed rise.



Against other counterparts, the Yen’s continued losses are typical for the lower yielding currencies when risk sentiment is up. FX traders avoid buying Yen unless they absolutely must, that is, when they are forced to cover JPY short positions. Then, they typically do so in a hurry. Thus we believe that the Japanese Yen is likely to continue drifting lower against the Euro, British Pound, Australian Dollar, and New Zealand Dollar, though there may be some hard fast rallies when fear takes over. The wildcard remains whether we can expect a noteworthy correction in broader financial market risk sentiment.



Impressive performance and fresh highs across key barometers leaves markets at prime risk of pullback and likely yen rally against the higher yielders. However, until we see plausible signs of market turnaround, we have little reason to believe in a yen recovery. The admittedly unpredictable dynamics between the US Dollar and Japanese Yen make the USDJPY an especially challenging pair to trade. If nothing else, however, its recently bullish momentum is likely to keep it aloft through the coming week of trade.





GBP

BoE “Hawk Talk” is Not Enough-GBP Jawbone Driven Rally Collapses Under the Weight of Reality



Outlook for British Pound: Neutral



Summary

- GBP rallied on pure BoE spin, plunges when Q3 GDP shows “hawk talk” is just that

- Bank of England’s October meeting minutes signal neutral interest rate policy

- The UK economy unexpectedly contracted in Q3, dashing hopes for recovery

- GBPUSD rallied too far, too fast, on too little. What is the technical picture of this major pair?



Analysis

When currencies (or any assets) are badly oversold, they can rally on the slightest good news because there are usually some nervous traders ready to take profits ahead of the growing herd. That’s the main explanation for the pound’s recent rally. All the BoE did was restate the obvious, that one day, it too would raise interest rates. However, once confronted with actual facts to the contrary, the deception fails and the real trend resumes. In this case, the unpleasant reality was that UK GDP stank and rate increases still lay in the distant future.



When the news came out, the reaction was immediate and the candlesticks got very red, very long, very fast. The British pound racked plunged 1 % against the Japanese yen and nearly 2 % against the US dollar, after UK GDP unexpectedly showed that the nation did not emerge from recession during Q3, and instead, the economy contracted for the sixth straight quarter at a rate of -0.4 percent. Likewise, the annual rate of growth edged up to -5.2 percent from -5.5 percent, falling short of expectations for a move to -4.6 percent.



A breakdown of the GDP report showed that nearly every UK business sector remained in recession, as the services industry component fell by 0.2 percent while the production industry component tumbled 0.7 percent.



Note that GDP is a lagging indicator and the release’s impact on interest rate expectations is the most important part. Indeed, the British pound fell sharply because Credit Suisse overnight index swaps shifted to price in a 10 percent chance of a 25 basis point cut by the BOE during their next meeting. Furthermore, expectations for rate increases over the next 12 months fell to 88.1 basis points from 93.4 basis points.



The Monetary Policy Committee (MPC) is looking for reasons to justify either winding down or expanding their target level of asset purchases. The minutes from their October policy meeting showed that the "forecast round ahead of the November Inflation Report would provide an opportunity to assess more fully how the medium-term outlook for activity and inflation had evolved since August," and if the latest economic data has any bearing on the MPC’s bias, it looks there is still some bearish potential for the British pound.



Events

Looking ahead to the next week, UK data shouldn’t have too much of an impact on rate expectations, but there is always the lingering risk that BOE MPC members will make comments that could impact trade. Thursday is really the only day with scheduled indicators on hand. Net consumer credit in the UK is anticipated to remain negative for the third straight month at -0.2 billion pounds, but on the other hand, UK mortgage approvals are projected to hit a more than one-year high of 53,600, suggesting that lending levels remain low but housing demand is growing. Meanwhile, GfK consumer confidence is forecasted to climb to a nearly two-year high of -14 from -16, indicating that sentiment is still pessimistic but improving, albeit at a slow pace. The GBPUSD’s direction in the coming week will likely have more to do with US dollar trends than UK fundamental forces, but a break below the 50 SMA at 1.6265 opens the door to much steeper declines.





CHF

Will SNB Intervene or Let the CHF Hit Parity with the USD?



Summary

Outlook for Swiss Franc: Bearish/Neutral



- Rising with risk appetite, likely to fall with it if stocks continue down

- Swiss exports fell 2.3% in September following a 2.0% rise the month prior

- Technical outlook calls for potential USD/CHF reversal



Analysis

The Swiss Franc trended higher against the dollar over the past week as risk sentiment continued to drive price direction. Strong corporate earnings from Apple, JP Morgan and DuPont sparked risk appetite to start the week but concerns over valuations led to diminishing returns for bullish investors as equities struggled to hold onto gains. A disappointing U.K.3Q GDP reading, -0.4% versus 0.2%, has raised concerns that other G-7 nations will follow with dour growth results. The U.S. GDP report will cross the wires next week and a similar result could lead to support for the pair. Although Swiss fundamentals have little sway over Franc direction, the 2.3% drop in exports and 3.1% gain in imports during September could be influential if they lead to more SNB intervention.



Events

Two significant fundamental releases are on this week’s economic docket with the UBS consumption indicator and the KoF leading indicator on tap. Rising unemployment hurt domestic demand as the labor market remains weak as declining orders keep companies in cost cutting mode. Nevertheless, the outlook for the next six months is forecasted to rise to 1.10 from 0.85 on the back of an improving global economy. Regardless, traders should take their cue from risk sentiment as depicted by the S&P 500,



If risk appetite returns the pair could test parity, but reversals can often follow tests of significant psychological levels. Also, traders must beware of possible intervention from the Swiss National Bank as they continue to fight against Franc appreciation and its negative implications for the economy.





CAD

Moving with Oil, then Risk Appetite, But May Feel Pressure from BoC Decision



Summary

Outlook for Canadian Dollar: Bearish



- How far can the USDCAD rally?

- The Bank of Canada warns interest rates will held “until the end of the second quarter of 2010,” but its Monetary Policy Report raises its exchange outlook, warns of intervention





Analysis

What has been the fundamental basis for the Canadian dollar’s strength over the past weeks and months? Most analysts will say:



• Rising energy prices

• Much stronger underlying economy than most

• USD weakness prompting US capital to head north







However, the comprehensive assessment from the central bank indicates that growth seems to be at the heart of the matter.



Referring to the central bank’s forecasts this past week, it seems the world’s eighth largest economy is on track for an impressive recovery. A 2 %annualized pace of growth in the third quarter and 3.3 percent in the fourth quarter is a considerable improvement over Canada’s performance through the first half of the year, much of it due to rising energy prices. As domestic conditions further improve and the US enjoys its own recovery, the economy is seen further expanding 3 percent through 2010 and 3.3 percent in 2011.



Events

This Friday, Canada will report its GDP report for the month of August. A modest 0.1 percent increase is projected for the August reading; but there were hurdles to overcome over this period.



• The US ‘Cash-for-Clunkers’ program expired during this month and the impact on Canadian manufacturing will be significant

• the economy ran a record trade deficit

• the unemployment rate hit an 11 year high



Scanning the rest of the Canadian economic calendar, there are no other major market moving economic indicators to be concerned with; but that doesn’t mean fundamental activity will start and end with the Friday release. It is important to recall two more highlights from this past week’s policy announcements.



Interest rate plans: The first is the reiteration by the Bank of Canada that the benchmark lending rate would be maintained at its current level “until the end of the second quarter of 2010”on the condition that inflation does not force their hand. While inflation is at a 56-year low and core pressures are tame, overnight index swaps are pricing in 85.4 basis points of tightening over the coming 12 months. This is generally on the same level as the dollar, euro and pound; and yet the Canadian dollar is still showing general strength against these counterparts.



Intervention threats: Repeating concerns from the past; the central bank said the high level of the national currency could offset other, positive growth factors going forward. This is a relatively weak effort to talk the currency down – one that speculators have become acclimated to. So, to increase pressure on the CAD, BoC Governor Mark Carney said in commentary following the release of the Monetary Policy report that “intervention is always a possibility.” While the threat remains low for now, this stronger language suggests a level of frustration that could lead to action later.





AUD

Expectations for Coming Rate Increases Keep AUD Rising



Summary

Outlook: Bullish/Neutral



- Events could keep AUDUSD confined to narrow range

- RBA Minutes Spark Speculation For Further Rate Hikes

- Keep watch on the S&P, the pair continues to follow it regardless of other news events



The Australian dollar rose to a fresh yearly high of 0.9326 against the USD and the Aussie may continue to appreciate going into the following month as investors speculate the Reserve Bank of Australia to tighten policy throughout the second-half of the year. Credit Suisse overnight index swaps shows market participants are pricing a 131% chance for a 25bp rate hike in November and expect the central bank to raise borrowing costs by more than 200bp over the next 12-months, and the Aussie may continue to retrace the sell-off of the prior year as policy makers hold and improved outlook for the economy.



The Reserve Bank of Australia Minutes has plenty of hawk talk to please Aussie bulls. Saying:



• the “very expansionary setting of policy was no longer necessary”

• it may be “imprudent” for the central bank to hold the interest rate at the 49-year

• keeping borrowing costs at “very low levels” could raise the risks for inflation

• the “trough in inflation was significantly higher than earlier thought”



Moreover, RBA Assistant Governor Philip Lowe stated that the rebound in economic activity would “gradually lead to a normalization of interest rates,” and said that the country is likely to have “a higher average exchange rate than we’ve had over the past couple of decades.” However, the central bank expects the marked appreciation in the Australian dollar to temper the risks for inflation, and the central bank may adopt a wait-and-see approach over the remainder of the year as the outlook for global growth remains uncertain.





Events

The following week is likely to spark increased volatility for the Australian dollar and may drag on the exchange rate as market participants anticipate price pressures, and thus the need to raise rates, to weaken further in the second-half of the year. Consider:



• economists forecast consumer prices to grow at an annual pace of 1.2% in the third quarter after rising 1.5% during the three-months through June

• producer prices are project to fall to an annualized rate of 0.5% from 2.1% in the second-quarter

• private-sector credit is anticipated to increase 0.2% in September following the 0.1% rise in the previous month

• bank lending is expected to grow at an annualized pace of 2.0% from the previous year



As a result, the slew of mixed data may leave the AUD/USD confined in a narrow range as investors weigh the outlook for future policy but nevertheless, as risk trends continue to dictate price action in the currency market, a rise in risk appetite may lead the Aussie to hold above 0.9300 over the following week.





NZD

Rally Vulnerable to Pullback in Stocks, or Rate Disappointment



Summary



Outlook for New Zealand Dollar: Neutral/Bullish



- Weekly Technical Outlook: New Zealand Dollar Top May Be Ahead – Depends on Global Stocks

- Sentiment Outlook Undecided as Speculators Vacillate





Analysis & Events

The interest rate announcement tops the news calendar. As is so often the case, the market moving news or surprises will be in the accompanying policy statement, which may provide hints about future rate hikes. Few believe a rate hike is coming, with a Credit Suisse index of priced-in expectations showing traders see no chance of a hike this time around.



Specifically, traders will be looking to gauge whether the timetable for the withdrawal of monetary stimulus has been accelerated from the previously given “latter part of 2010” estimate after consumer prices unexpectedly surged in the third quarter.



The hawks may be in for a disappointment however considering policymakers will be wary of acting on rates to protect the still very fragile export sector. As we have noted in the past, New Zealand is not Australia in that its recovery is not as robust. Indeed, both the central bank and government have warned about the detrimental effects of a higher Kiwi dollar in driving away foreign demand. Overseas sales make up over 30% of the economy’s total output, so any policies that stand to hurt firms catering to foreign markets will likely stunt the fledgling economic recovery of recent months.



September’s Trade Balance figures are set to be released less than two hours after the central bank announcement crosses the wires, with exports expected to match the 23-year record drop recorded in the previous month even as the overall deficit narrows on lackluster import demand.



In fact, the RBNZ may have already embarked on a somewhat covert tightening campaign aimed at checking inflationary pressure while minimizing the impact on the NZD exchange rate. The central bank “leaked” an announcement that it would end some of its emergency lending programs enacted amid the credit crunch in November, a fact that it did not officially confirm via an official news release until about a day later. This move will gradually slow the flow of liquidity into the economy, reduce the pace of money supply growth and act against inflation.



This subdued approach suggests that they were consciously trying to avoid sending the New Zealand Dollar higher. It also hints that perhaps this approach to tightening will be seen as sufficient to keep rates at current levels until the second half of next year as scheduled.



Looking beyond the economic calendar, the outlook for risk sentiment is likely to remain a key catalyst for price action. Indeed, a trade weighted average of the New Zealand Dollar’s value remains over 95% correlated with the MSCI World Stock Index as traders’ appetite for returns boosts stocks, commodities and high-yielding currencies alike. Thus traders should keep an eye on a handful of high profile third-quarter earnings reports including those from consumer goods giant Procter & Gamble, big oil names including Exxon Mobil and Chevron, and US Steel.



Conclusions

Barring major news surprises, expect risk assets and currencies to follow market response to the big name earnings announcements detailed above. If stocks can beat estimates AND grow top line revenues, risk appetite could continue to rule the day. Anything less makes the long extended rally in stocks, commodities, and higher yielding and commodity currencies very vulnerable to short squeeze driven pullbacks. The signs of waning risk appetite have already been showing for the past week, as earnings beat estimates but revenues and valuations remain a concern for stocks and other risk assets.



With US GDP this coming Friday, and Non Farms Payroll the next, earnings news has another few days to hold center stage before regular news events once again hold sway over global markets.



For now, stay with the rising trends, but be ready to take profits and / or take short positions on most risk assets and get long on the safe haven currencies.









Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.

Global Markets Outlook Oct 26-30 Short Version: Markets Reversing?

STOCKS




Last week we questioned whether last Friday's market pullback, despite overall upbeat earnings reports, suggested that the risk appetite was losing steam, if for no other reason than that stock prices were already high and that the recovery picture was already priced in. This week's action seems to confirm our impression that at minimum the market needs some time to digest gains and/or get some news to raise expectations further. While we believe a pullback is due, markets have been very resilient, and so a period of range trading rather than strong pullback is quite possible as well if nothing comes along to move sentiment in either direction.





GOLD AND OIL – see Full Version for Details



Gold

A steady, rising trend channel calls up congestion at the end of a very prominent bull run.



This is the same general chart pattern that can be seen in the Dow Jones Industrial Average and (the inverse of) the US dollar. From this, it is clear that all three are responding to the same driver: sentiment. Should optimism give way, the lack of any yield income to offset the potential capital losses will likely mean a sharp correction from profit taking. At these levels, demand is largely speculative.

Oil

We can see the hesitation to carry prices to new highs, with congestion below the recent high of $82 and the trend low $80. A break is inevitable; but direction is uncertain.



Supply demand fundamentals do not support current price levels. Clearly the true driver for price action is risk appetite and the pace of the US dollar. Should risk appetite falter, profit taking and a fundamental equilibrium set well below current price would act to accelerate crude’s plunge.



CURRENCIES





USD

Ready to Rise on Tired Stock Market?



Summary

Outlook for US Dollar: Bullish/Neutral



- The Fed’s Fisher maintains the bank’s efforts to deflate any and all rate speculation

- Risk appetite continues to drive the USD

- Is there an extreme to the dollar’s steady tumble?



Analysis

Now considered the ideal funding currency to the recuperating carry trade, the USD continues to move in the opposite direction of risk appetite, and is unlikely to shake that role and its downtrend until there is a fundamental reason to hold the currency, or to dump its chief crosses. While the downtrend to new lows with rising risk appetite continues, this week’s action in equities could signal the first stage of a reversal in yield appetite, recovery in the US dollar, and allow a positive surprise for the Q3 GDP to raise hopes for US recovery, an increase in US interest rates, and provide fundamental justification to hold the USD.



The Big USD Event – Advanced GDP

This Thursday the US reports Q3 GDP. If it can meet the projected 3.2% annualized pace of growth, which would be the best in 2 years, it might show the markets that it really is shaking the recession and boost hope for a solid recovery. Will the USD respond to results like a safe-haven currency or according to what the data says about the US economy? Also, much will depend on the breakdown of growth in the major sectors of the economy. See full version for more on this, the USD's long term prospects, T-bond auctions, earnings reports this week, and coming NFP data.





EUR

The EURUSD Continues to Defy Expectations for a Pullback, Awaits ECB Rate Forecasts



Summary

Outlook for Euro: Bearish on overextended rally



- Riding Risk Sentiment Higher

- Hits fresh annual highs on bullish Euro Zone economic data

- European Central Bank (ECB)on alert as key indicators continue to show recovery

- EUR, Dow stay above key levels



Week’s Recap

The Euro finally broke above the psychologically significant $1.50 mark for the first time in 14 months. Unlike previous weeks, however, the EUR held up against the safe-haven US Dollar despite a struggling S&P 500 and other key risk sentiment barometers. We have repeatedly said that the EURUSD needed support from risky assets to continue its impressive rallies. Yet the S&P 500 finished the week 0.75 percent lower and yet the Euro traded higher. Positive news helped a lot. The EUR is likely to continue to follow risk appetite as represented by global equities. See full version for details and events this week



JPY

Losing Ground on EUR, USD



Summary



Outlook for Japanese Yen: Bearish



- USDJPY rises as stocks fall now that USD is new safe haven king

- Is the dollar to remain the top funding currency?

- Key Events: Retail Trade m/m, Industrial Production m/m, Jobless rate, Housing Starts



The Japanese Yen fell against major forex counterparts for the third week in a row, slipping further on outperformance across key risky asset classes. Yet the 20-day correlation between the US Dollar/Japanese Yen pair and S&P 500 actually turned negative for only the second time in two years—emphasizing the dollar’s new role as premier safe haven and funding currency for carry trade.

We have repeated that financial market risk sentiment, as perhaps best represented by the S&P 500, would be the major determinant of USDJPY price action. With stocks moving down, and the USD as the new prime safe haven currency, the USDJPY should indeed rise.



Against other counterparts, the Yen’s continued losses are typical for the lower yielding currencies when risk sentiment is up.



Impressive performance and fresh highs across key barometers leaves markets at prime risk of pullback and likely yen rally against the higher yielders. However, until we see plausible signs of market turnaround, we have little reason to believe in a yen recovery.



GBP

BoE “Hawk Talk” Is Not Enough-GBP Jawbone Driven Rally Collapses Under the Weight Of Reality



Outlook for British Pound: Neutral



Summary

- GBP rallied on pure BoE spin, plunges when Q3 GDP shows “hawk talk” is just that

- Bank of England’s October meeting minutes signal neutral interest rate policy

- The UK economy unexpectedly contracted in Q3, dashing hopes for recovery

- GBPUSD rallied too far, too fast, on too little. What is the technical picture of this major pair?



Analysis

When currencies (or any assets) are badly oversold, they can rally on the slightest good news because there are usually some nervous traders ready to take profits ahead of the growing herd. That’s the main explanation for the pound’s recent rally. All the BoE did was re-state the obvious, that one day, it too would raise interest rates. However, once confronted with actual facts to the contrary, the deception fails and the real trend resumes. In this case, the unpleasant reality was that UK GDP reeked and rate increases still lay in the distant future. We expect further retracement, especially if stocks continue to waver.





Events

Looking ahead to the next week, UK data shouldn’t have too much of an impact on rate expectations, but there is always the lingering risk that BOE MPC members will make comments that could impact trade. Thursday is really the only day with scheduled indicators on hand. The GBPUSD’s direction in the coming week will likely have more to do with US dollar trends than UK fundamental forces, but a break below the 50 SMA at 1.6265 opens the door to much steeper declines.





CHF

Will SNB Intervene or Let the CHF Hit Parity with the USD? Depends on Risk Appetite, and the SNB



Summary

Outlook for Swiss Franc: Bearish/Neutral



- Rising with risk appetite, likely to fall with it if stocks continue down

- Swiss exports fell 2.3% in September following a 2.0% rise the month prior

- Technical outlook calls for potential USD/CHF reversal



Analysis

The Swiss Franc trended higher against the dollar over the past week as risk sentiment continued to drive price direction. The U.S. GDP report will cross the wires next week and a similar result could lead to support for the pair. Although Swiss fundamentals have little sway over Franc direction, the 2.3% drop in exports and 3.1% gain in imports during September could be influential if they lead to more SNB intervention.





CAD

Moving with Oil, then Risk Appetite, But May Feel Pressure from BoC Decision



Summary

Outlook for Canadian Dollar: Bearish



- How far can the USDCAD rally?

- The Bank of Canada warns interest rates will held “until the end of the second quarter of 2010,” but its Monetary Policy Report raises its exchange outlook, warns of intervention





Analysis

What has been the fundamental basis for the Canadian dollar’s strength over the past weeks and months? Most analysts will say:



• Rising energy prices

• Much stronger underlying economy than most

• USD weakness prompting US capital to head north







However, the comprehensive assessment from the central bank indicates that growth seems to be at the heart of the matter.





Events

This Friday, Canada will report its GDP report for the month of August. A modest 0.1 percent increase is projected for the August reading; but there were hurdles to overcome over this period.



• The US ‘Cash-for-Clunkers’ program expired during this month and the impact on Canadian manufacturing will be significant

• the economy ran a record trade deficit

• the unemployment rate hit an 11 year high



Scanning the rest of the Canadian economic calendar, there are no other major market moving economic indicators to be concerned with; but that doesn’t mean fundamental activity will start and end with the Friday release. It is important to recall two more highlights from this past week’s policy announcements, interest rate plans and SNB intervention. See full version for details.







AUD

RBA Hawk Talk Fuels Expectations for Coming Rate Increases, Keep AUD Rising



Summary

Outlook: Bullish/Neutral



- Events could keep AUDUSD confined to narrow range

- RBA Minutes Spark Speculation For Further Rate Hikes

- Keep watch on the S&P, the pair continues to follow it regardless of other news events



The Australian dollar rose to a fresh yearly high of 0.9326 against the USD and, barring any major stock pullback the Aussie may continue to appreciate going into the following month as investors speculate the Reserve Bank of Australia to tighten policy throughout the second-half of the year

The Reserve Bank of Australia Minutes has provided plenty of hawkish talk to please Aussie bulls. See full version for details.



Note that if news this week shows low inflation, that may reduce already high hopes for impending rate increases and keep the AUD in a trading range.





NZD

Rally Vulnerable to Pullback in Stocks, or Rate Disappointment



Summary



Outlook for New Zealand Dollar: Neutral/Bullish



- Weekly Technical Outlook: New Zealand Dollar Top May Be Ahead – Depends on Global Stocks

- Sentiment Outlook Undecided as Speculators Vacillate





Analysis & Events

The interest rate announcement tops the news calendar. As is so often the case, the market moving news or surprises will be in the accompanying policy statement, which may provide hints about future rate hikes. Few believe a rate hike is coming, with a Credit Suisse index of priced-in expectations showing traders see no chance of a hike this time around.



Specifically, traders will be looking to gauge whether the timetable for the withdrawal of monetary stimulus has been accelerated from the previously given “latter part of 2010” estimate after consumer prices unexpectedly surged in the third quarter.



See full version for details



Looking beyond the economic calendar, the outlook for risk sentiment is likely to remain a key catalyst for price action. Indeed, a trade weighted average of the New Zealand Dollar’s value remains over 95% correlated with the MSCI World Stock Index as traders’ appetite for returns boosts stocks, commodities and high-yielding currencies alike. Thus traders should keep an eye on a handful of high profile third-quarter earnings reports including those from consumer goods giant Procter & Gamble, big oil names including Exxon Mobil and Chevron, and US Steel.



Conclusions

Barring major news surprises, expect risk assets and currencies to follow market response to the big name earnings announcements detailed above. If stocks can beat estimates AND grow top line revenues, risk appetite could continue to rule the day. Anything less makes the long extended rally in stocks, commodities, and higher yielding and commodity currencies very vulnerable to short squeeze driven pullbacks. The signs of waning risk appetite have already been showing for the past week, as earnings beat estimates but revenues and valuations remain a concern for stocks and other risk assets.



With US GDP this coming Friday, and Non Farms Payroll the next, earnings news has another few days to hold center stage before regular news events once again hold sway over global markets.



For now, stay with the rising trends, but be ready to take profits and / or take short positions on most risk assets and get long on the safe haven currencies.









Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.