Monday, October 5, 2009

Global Market Oct 5th: Stocks Down, Risk FX Up, Commodities Steady


- Stocks: Friday: Asia, Europe, US down, Monday morning Asia down, Europe futures mixed

- FX: Despite lower equities Friday, US trading session ends with bias against 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 down against most riskier majors Friday, this trend continuing in Monday Asian trade.

- Main events today: GBP: Services PMI, EUR: Retail Sales m/m, USD: ISM Non-Manufacturing (Mfg) PMI, NZD: NZIER Business Confidence, AUD: Trade Balance, Cash Rate, RBA Rate Statement

- Big Theme: See how market digests US NFP, light news week awaits Q3 Earnings for next major clue on the Global Recovery



Recap - Week ending 02-Oct-09Despite a strong start on Monday, U.S. equity markets closed lower for the second straight week as a raft of poor data suggested the economic recovery may be losing momentum. The S&P 500 declined 1.8% for the week and probed key resistance around 1,020 on Friday, near its 200-day moving average.

Nine of the ten sectors that make up the index declined this week, led by Industrials (-3.5%). Consumer Staples played defense, rising a modest 0.7%.

The relatively minor S&P 500 drop Friday suggests most of the bad news from the unemployment reports was already priced in.

But that just shows how sharp the decline was over the remainder of the week. Most of the damage was done on Thursday, when back-to-back days of poor employment data painted a bearish picture for Friday's highly-anticipated Nonfarm Payrolls figure. Specifically, the ADP Employment change showed a larger-than-expected decline of -254,000 on Wednesday vs. the consensus of -200,000 and Initial Jobless Claims rose by a larger-than-expected 551,000 on Thursday vs. the consensus of 535,000.

Investor fears were realized this morning, when Nonfarm Payrolls showed a 50% larger-than-expected decline of -263,000 vs. the consensus of -175,000. Surprisingly, it looks like the market had already priced in a poor number on Thursday, as the S&P followed up its 2.6% plunge with a much more modest 0.5% decline.

This is surprisingly small decline considering that the rest of the reports Friday were as bad or worse. Highlights include:

Unemployment rate rose from 9.7% to 9.8%, the highest in 26 years

Average hourly earnings and weekly hours also fell, meaning Americans are working less and making less

The worst part of all was the Bureau of Labor Statistics’ announcement that they revised down job losses between March 2008 and March 2009 by 824k. This means that on average, there was approximately 70k more job losses each month during that period than initially reported. Note that these official statistics are widely believed to underestimate true unemployment due to technical flaws in how they calculate their data.

But it wasn't just employment data that was poor this week, as investors were more attentive to weaker-than-expected data, when in past weeks it was quick to dismiss any disappointments in favor of a belief that future reports would only show improvement.

Specifically, the market saw quick moves downward following disappointing Consumer Confidence (53.1 vs. 57.0 consensus), Chicago PMI (46.1 vs. 52.0 consensus) and ISM Manufacturing (63.5 vs. 66.0 consensus) figures throughout the week.

There will be little chance of changing that economic perspective next week, as the calendar is very thin. But we will see another round of key Treasury auctions, including $39 billion in 3-year Notes, $7 billion in 10-year TIPS reopening, $20 billion in 10-year Notes reopening and $12 billion in 30-year Bonds reopening. They all precede this weekend's G-7 meeting in Istanbul, which already had a positive effect on the dollar , as euro region finance ministers and central bankers will reportedly discuss the euro's strength and signal that further dollar weakness is unwelcome.Index Started Week Ended Week Change % Change YTD %


Asian stocks fell Friday on caution ahead of US employment data, weak indicators in prior days


Down on weak leading indicators about US jobs data, caution ahead of US jobs data


ASIA- DOWN   N225 -2.47% HS -2.77 % SSEC +0.90% FTSTI -1.99% AORD -2.04 %

EUROPE - DOWN   FTSE -1.17 % DAX -1.56% CAC –1.90 %

US- DOWN S&P –0.45% DOW -0.23% NASDAQ -0.46%



N225I -0.59% HS -0.17 % SSEC +0.90% FTSTI -0.92% AORD -0.30 %

EUROPE:Futures Mixed

FTSE -0. % DAX -0.% CAC – 0%


Crude down in New York on Friday, gold up


Down -1.61% Friday in NYC with stocks, bleak employment/growth picture from US jobs report. Steady near $70 in Monday Asia trade. "The market is cautious after the poor U.S. jobs data on Friday. But the overall trend of an economic recovery hasn't changed and I think investors are using such weaker-than-expected data as an opportunity to take profits," said Ben Westmore, a commodities analyst at the National Bank of Australia.


Up in NYC on Friday +0.37% despite falling stocks, terrible jobs data that does not suggest inflation, suggesting the gold move was more technically than fundamentally driven. Gold daily chart suggests continued uptrend.


General: Despite horrific US jobs data, clear bias to riskier currencies over the safe-havens, as stocks barely dropped and the markets seemed to have already priced it in. This bias continues in Monday Asian trade. SEE WEEKLY PREVIEW

USD: Dropping in Monday Asia trade after the G7 meeting produced no surprise USD support. Despite dropping stocks Friday, the USD finished the day higher against the JPY and lower against most of the higher yielding currencies, including the EUR. The EUR/USD was up 0.25% Friday. Per Kathy Lien, over the past 10 months the EUR/USD continued in the same direction it had at the end of NFP Friday 60% of the time and 80% of the time in the last 5 months, suggesting the USD is due for further declines Monday, which is exactly what is happening in Monday morning Asia trade.

The latest CFTC report of forex positioning in the futures market reveals that traders trimmed their short dollar positions against the Japanese Yen, Swiss Franc, Australian and Canadian dollars. Considering that the dollar has been strengthening the profit taking was not surprising. However what was peculiar is the increase in long euro, short dollar positions to the highest level since March 2008. Looking ahead, there is a G7 meeting of finance ministers and central bankers this weekend with the communiqué scheduled for release on Saturday. Currencies are expected to be mentioned but the G7 will most likely repeat the language that they used in April ("Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.") As for economic data, the U.S. calendar is relatively light with only service sector ISM and the trade balance due for release.

5 Reasons the USD Could Fall

There are many reasons why we believe that the dollar will continue to fall but they center around 5 key factors.

1. Don’t Expect a Fed Exit Anytime Soon – Based upon 3 month LIBOR rates, the U.S. dollar is the lowest yielding G10 currency. Comments from Fed officials suggest that they are in no rush to exit from their unconventional monetary policy and will therefore leave the dollar as a cheap funding currency. Atlanta Fed President Lockhart said this morning that it will be some time before a comprehensive exit is needed while Kohn said that low inflation and slack demand will allow the Fed to keep interest rates around zero for an extended period of time. There is a good chance that the Federal Reserve could be one of the slowest central banks to tighten monetary policy because of the extreme slack in the U.S. economy. Last week, we talked about how the difference between the current unemployment rate in the U.S. and that of its 17 year average is the highest amongst the G10 nations. The countries with the least slack should be the first to hike rates while the ones with the most could be the last.

2. Reserve Diversification – According to the latest IMF report, foreign exchange reserves around the world rose 4.8 percent to $6.8 trillion. The dollar’s share of global reserves however has fallen from 65 to 62.8 percent as central banks around the world boosted their holdings of euros, yen and sterling. This report follows Russia’s announcement yesterday that they plan on adding Canadian and Australian dollars to their reserves. Reserve diversification threats slowed during the global financial crisis but if the recovery continues the talk will return. If there is one lesson that investors around the world should have learned from the crisis, is the need for diversification.

3. Strong Q3 Earnings – The weakness of the U.S. dollar should be very positive for third quarter earnings which could help to drive stocks to new highs. Not only does a weak dollar help U.S. exporters but it also increases the foreign earnings of U.S. multinational corporations. Since the EUR/USD has had a more than 85 percent positive correlation with the S&P 500 since the beginning of the year, a rise in the stock market should translate into gains in the euro and weakness in the U.S. dollar.

4. Twin Deficits – Don’t forget the trade and budget deficits that have plagued the dollar for years. The U.S. government has spent a lot of money propping up the economy and this will only burden the budget deficit. At the same time, a recovery in the U.S. economy could boost imports which could increase the trade deficit.

5. Price Patterns – Finally, price patterns also suggest that the dollar should continue to fall. At the beginning of September we talked about how the price action of the EUR/USD and USD/JPY this month could set the tone for the rest of the year. At that time, we showed two tables illustrating how in 7 out of the last 10 years, the EUR/USD moved in the same direction between October and December as it did in September. For USD/JPY, the odds were even higher with the currency seeing follow through 8 out of the past 10 years. Therefore based upon past price patterns, we have more reasons to believe that the dollar will fall against the euro and Japanese Yen over the next 3 months.

EUR- The Euro ended the U.S. trading session higher against the dollar as the market shrugged off the weak non-farm payrolls report. It can be argued that some investors look at the weak report as a guarantee that U.S. rates will remain low which is the reason why they bid up euros, Australian and New Zealand dollars, but that does not explain the rise in the dollar against the yen and the increase in bond yields. The euro also benefitted from a rise in producer prices and speculation that the ECB is considering moving to a tightening bias courtesy of a report from Market News. Given their recent jawboning of the euro and explicit comments that now is not the time to exit, we do not believe that this speculation has any validity. The ECB is generally less dovish than the Fed but that does not mean that they are ready to unwind their stimulus. Looking ahead, it will be a big week in the Eurozone with an ECB monetary policy announcement, Eurozone retail sales, final Q2 GDP, factory orders, German trade and industrial production due for release. What we will be looking for from the ECB are comments about the euro.

JPY - Jobs Data Beats Expectations.Fell against the USD despite falling stocks. The yen’s determination to stage new rallies did not manage to last to the end of the day. USD/JPY ended up only slightly higher after facing losses of almost 100 pips. Japanese data came out shockingly good today, with the employment report exceeding all estimates. The unemployment rate in Japan shrunk to 5.5% as the economy added jobs for the first time in ten months. In addition, the Job-to-Applicant ratio was able to hold steady at 0.42 for the first time since early-2008. However, it is important to proceed with caution. Yesterday’s Tankan report managed to spook many traders because it called for continued spending cuts, something that will surely eat into future hirings. Nevertheless, the BoJ’s Shirakawa was pleased with the Tankan’s results, and said that it backed his view that the economy is recovering. The sharp gains in the yen are starting to show damaging results. Toyota is holding on for dear life as it expects to report a second consecutive annual loss. The country’s largest automaker said that even increased sales would not be able to offset the yen and boost it toward profitability. Next week should be light in terms of data with only Eco Watchers and the Trade Balance for Wednesday.

GBP – House Prices Continue Rebound: The pound came dangerously close to new 4-month lows, but managed to see a mid-day rally that reversed all of its early losses. UK stock markets were not as lucky and posted their 4 th straight loss, and subsequently, their longest stretch of weakness in seven months. Despite the slide there was uplifting news in the form of the Nationwide’s House Price Index. The Nationwide survey confirmed similar improvements in the Hometrack and Rightmove House Price reports. Even though price increases have slowed from September’s 1.4%, we are still looking at the fifth month of gains. Even more impressive was the fact that annualized prices were unchanged, for the first time since early-2008. In response, Nationwide confidently proposed that the “most intense phase of the financial crisis has passed.” However, they did note that it would take a good year and a half before house prices could return to their pre-recessionary levels. Unfortunately, a decline in Construction PMI to 46.7 managed to offset some of the good news provided by home prices. The stage is set for a big upcoming week with Services PMI for Monday, Industrial Production for Tuesday, the BoE Rate Decision on Thursday, and Producer Prices for Friday. Obviously, the BoE’s meeting should steal the show, as many are still convinced the bank will expand asset purchases further.

AUD: Fell Friday,Rising in Monday Asian trade on mounting speculation that the RBA could raise rates soon after 2 Australian journalists claimed a move to 3.25% was now likely at Tuesday's meeting.

RBA To Lead Rate Hikes? Interestingly enough, the Australian dollar was one of the few currencies to end the day lower against the greenback as both the Canadian and the New Zealand dollars appreciated. There was no major economic data from any of the 3 commodity producing countries. The reason why we are surprised by the weakness of the Aussie is because of the economy has been on a roll and because of that, the Reserve Bank of Australia is expected to pave the way for a rate hike next week. Of all the major central banks, the RBA is the closest to raising interest rates. If they satisfy the market by delivering hawkish comments, we could see a fresh 13 year high in the AUD/USD, but if they disappoint by being neutral on tightening, there could be an ugly sell-off. Aside from the rate decision, Australia also has service sector PMI and employment numbers due for release next week. Although the New Zealand economic calendar is devoid of any market moving events, this does not mean that there will be no action in its currency. The NZD/USD should track the direction of the AUD/USD. As for the Canada, IVEY PMI and employment numbers are due for release.

NZD – Gained against the USD in NYC trade Friday.

CAD – Generally tracking oil first, stocks and risk appetite second, yet gained on the USD despite both falling oil and stocks.

CHF – Moving with risk appetite, SNB keeping it from rising against EUR.

Currency Trade of the Day: EUR/GBP

EUR/GBP will be the currency pair in play for Monday. To start the week, we are looking at German Retail Sales, EZ Services PMI at 4:00 am ET or 8:00 GMT, and Sentix Investor Confidence at 4:30 am ET or 8:30 GMT for the Euro-zone. For the UK, there will be Services PMI at 4:30 am ET or 8:30 GMT.

EUR/GBP was unable to sustain its significant move into the Buy Zone, which we determine using Bollinger bands. However it is at the cusp of entry and should the pair regain some momentum, there is a good chance that it could challenge the recent high of 0.9300. In addition, since prices stalled at the upper one-standard deviation Bollinger band, it should provide immediate resistance. On the way down, 0.9080 looks like prime support because it was not only highs from September 24 th but also lows from the last two days.

 Daily Chart EUR/GBP RESISTANCE AT 0.9300 SUPPORT AT 0.9080


Quiet news week, which suggests horizontal range trading, downward bias on risk assets as markets take time to digest very poor US jobs news and its implications for US and global recovery. Expect risk assets to continue to follow stocks in horizontal range trading

Trading Opportunities: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Always use sell stop orders.

Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back.



Service Industries in U.S. Probably Steadied After Shrinking For 11 Months

•Roubini Says Stocks, Commodities Have Risen `Too Much, Too Soon, Too Fast'

•G-7 Avoids Criticism of Dollar, Warns Against `Disorderly' Currency Shifts,

G7 urges China to move to a more flexible exchange rate that would allow the Yuan/Renminbi to rise in order to help correct imbalances in global trade.

•Greenspan Opposes New Stimulus Even With Jobless Rate Likely to Reach 10%

The Economic Recovery That Isn't

How to Reform the Credit Rating Agencies

Ugly Jobs Report Puts a Dent in V-Shaped Recovery Scenario

Ten Reasons for an Imminent Stock Market Crash
The Next Major Crisis Brewing

CIT's Failure Could Threaten Financial Sector's Overall Recovery


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