Tuesday, October 20, 2009

GLOBAL MARKET OUTLOOK Full Version 10/20: Valuations? What Valuations?


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

- FX: Monday higher equities, 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 falls against most everything

- Main events today: AUD: Monetary Policy Meeting Minutes, USD Building Permits, PPI m/m:, major earnings Tuesday: BIIB (biotech), CAT (building equip.), DD (chemicals), PFE (drugs), SNDK (tech), SYK (medical), CO (consumer), UALUA (airlines), YHOO (internet), CAD: BoC Rate St., Overnight Rate, , GBP: BoE Gov. Speaks, WEDNESDAY: GBP: MPC minutes, US earnings

- Big Theme: Rising risk appetite as latest big name earnings of AAPL and TXN overall please markets. Further gains in risk assets will depend on how mkt responds to earnings & if leaders can show increasing revenues and upbeat Q4 guidance, as markets are continue to shake off bad US employment and banking news.


US: (Briefing.com) Broad-based but low volume buying helped stocks bounce back from a dip at the open to log fresh highs for 2009, but the S&P 500 met resistance when it hit the 1100 mark, which was last seen just over one year ago. AAPL's post market announcement set up Asia for a higher opening as it blew away expectations with 47% earnings increase and revenues up to $9.87B vs.$9.2B estimates

Apple's financial report "reinforces my view that Apple is hands down the best technology company on the planet," said Broadpoint AmTech analyst Brian Marshall in an interview. TXN also beat sales and earnings estimates, though both were down from Q3 last year, but gave upbeat guidance. NB: TXN's price is far higher than Q3 despite worse results. Valuations, anyone?

Like Intel (INTL), TXN is seen as a barometer for the tech sector, and provides core components for cellphones (including the Palm Pre, and the coming highly touted Droid phones of Google/Verizon/Motorola, that is expected to pose a serious challenge to the iphone) and other electronic devices.

Strong gains in overseas markets helped set a positive tone for participants in the early going, but weakness in the financial sector quickly undercut the broader market's opening gain. Regional banks (-1.7%) were the primary source of weakness for the financial sector. Their losses came after BB&T (BBT 27.03, -1.22) unveiled its latest quarterly results, which actually featured better-than-expected earnings of $0.23 per share. However, the regional lender also reported a sharp year-over-year rise in loss provisions and couldn't confirm whether its charge-offs have peaked.

Though stocks stumbled in early trade as a result of weakness among financial issues, it didn't take long for participants to step in and bid stocks higher. Ensuing gains were strong and broad-based and pushed all three major indices to new highs for the year.

Stocks in the S&P 500 weren't able to push through the psychologically significant 1100 level, but they didn't roll over after being rebuffed, either. Some of the best gains were had by consumer discretionary stocks and materials stocks. Both advanced 1.4%.

Gains by the consumer discretionary sector came even though Hasbro (HAS 28.42, -1.10) traded as a laggard. Shares of the company were sold off after the stock had pushed considerably higher in the sessions leading up to this morning's earnings report, which featured an upside earnings surprise, but with shrinking revenues.

Meanwhile, materials stocks benefited from both broader market interest and higher commodity prices, which sent the CRB Commodity Index to a fresh high for the year.

A weaker dollar proved beneficial for both commodities and stocks this session. The greenback shed 0.3% against a basket of major foreign currencies this session. That has left the Dollar Index fractionally above its 12-month lows.

Trading volume was unimpressive this session. Hardly 1 billion shares traded hands on the NYSE. Recent averages stand above 1.2 billion shares.

Advancing Sectors: Utilities (+1.5%), Materials (+1.4%), Discretionary (+1.4%), Energy (+1.2%), Health Care (+1.0%), Tech (+1.0%), Consumer Industrials (+0.9%), Telecom (+0.8%), Consumer Staples (+0.5%), Financials (+0.5%)

Declining Sectors: (None)DJ30 +96.28 NASDAQ +19.52 NQ100 +1.0% R2K +1.0% SP400 +1.1% SP500 +10.23 NASDAQ Adv/Vol/Dec 1715/1.97 bln/943 NYSE Adv/Vol/Dec 2240/1.08 bln/799

Asia: Up Tuesday morning after US earnings,

Europe: Opening higher on follow through from US gains



ASIA- MIXED N225I -0.21% HS +1.23 % SSEC +2.07 FTSTI +0.13% AORD -0.84 %

EUROPE - UP FTSE +1.12 % DAX +1.90% CAC +1.60 %

US- UP S&P +0.94% DJIA +0.96% NASDAQ +0.91%



N225I -0.21% HS +0.39 % SSEC +1.83 FTSTI -0.25% AORD -0.84 %


FTSE +0.93 % DAX +0.84% CAC +0.80%

COMMODITIES: Gold nearing record highs, oil breaching $80 on rising stocks, sinking USD.

Oil: In rose over $80/bbl Tuesday in Asia, extending a 2 week rally as positive US earnings news boosts confidence, next resistance around $83/bbl, but no major price resistance until $95, though it will need continuing rally from stocks to get there.

(fx360: Will $100/bbl Oil Kill the Recovery?) Oil hit $80/bbl in overnight trade reaching that level for the first time since November. The rise in crude has been sparked by a combination of expanding risk appetite and a surprising decline in gasoline inventories last week that prompted the breakout from the $70-$75/bbl consolidation channel.

If oil holds these levels for the rest of the year or worse tries to gun towards the $100/bbl barrier, it could prove to be a massive drag on the nascent US recovery. The gas pump will become the primary point of pain for the US consumer if price begins to creep towards the $3.00/gallon level. For the time being national gas prices continue to hover around the $2.50/gallon level but the recent spike in oil triggered the biggest jump since Aug. 10, as price climbed 8.5 cents to $2.574 a gallon.

The rise in gasoline prices and the concomitant increase in heating oil bills would come at the worst possible time of the year, cutting into US consumers discretionary income just ahead of the key Christmas shopping season. Furthermore, energy costs are the single greatest transmitter of inflation throughout the economy and if oil price heads towards $100/bbl the Fed may be facing a devils dilemma as price pressures escalate at the same time as consumer demand cools. In short, a sudden spike to $100/bbl could be the catalyst for a double dip recession in the US economy and is clearly a scenario that US policymakers will want to avoid.

Many analysts have made the point that oil prices these days are driven primarily by the weakness in the US dollar rather any underlying fundamental factor. With supplies plentiful and global demand still relatively contained, the run up in oil clearly appears to be speculative in nature. However, if US monetary officials do not nip this move in the bud, the economic ramifications for the US economy going into 2010 could be very significant.

Up to now the US policy of benign neglect towards the dollar has not had any meaningful negative impact on US economic activity and has in fact helped fuel growth in exports. However, the current situation could quickly get out of hand by dampening domestic demand at a time when US economy could least afford it. Therefore, instead of focusing strictly on economic data, it would behoove the Fed to consider the rising price of oil as the greatest threat to US recovery. Trichet & EU officials will travel to China soon to push China to revalue the yuan, a move which China thus far has resisted.

Gold: Gold surged past $1,060 an ounce on Tuesday and headed back toward last week's record highs, boosted by a falling U.S. dollar. The dollar sank to near 14-month lows after currency investors bet the Federal Reserve would hold U.S. interest rates near zero well into 2010. Gold is regarded as a hedge against the weakening value of paper assets due to currency depreciation

CURRENCIES: Dollar struggles, euro not far from 14-month high Analysts say Fed thought likely to keep rates low Market watches euro zone meeting for FX comments. Trichet & other EZ finance ministers expressed concern over the USD weakness vs. the EUR after a meeting of EZ MoF's in Luxembourg Monday

USD: The dollar hovered near a 14-month low against the euro on Monday as investors bet the Federal Reserve will hold U.S. interest rates near zero well into the coming year. Though the U.S. economy is expected to have exited recession in the third quarter, investors expect rising unemployment will keep the Fed from lifting interest rates quickly. That would diminish the dollar's appeal and encourage investors to buy higher-yielding, higher-risk currencies and assets instead. The EUR and commodity currencies are all near mutlimonth highs against the USD

The New York Fed added to dollar woes on Monday when it said reverse repo tests did not mean it was ready to use this tool to drain money from the banking system.

In a reverse repo, the Fed sells assets such as Treasuries for cash with an agreement to buy them back later, effectively tightening policy by draining money from the banking system.

The Fed has also been buying assets such as mortgage-backed debt, and some analysts said it could lend the dollar modest support by winding down those purchases while still holding rates near zero.

"Such a move would steepen the yield curve and make the dollar more attractive versus the yen on an interest rate differential basis, possibly pushing the pair to 95 yen," said Boris Schlossberg, research director at GFT Forex in New York.

Comments from Federal Reserve Chairman Ben Bernanke had little impact on currency markets.

EUR- The euro rose as high as $1.4965, according to Reuters data, and was last at $1.4942, up 0.3 percent from late Friday. Analysts said a test of $1.50 was still likely in the days ahead.

"The global growth story is getting better. The U.S. economy has improved, so everyone is selling dollars and buying emerging markets. The data justifies the risk," said Sebastien Galy, senior currency strategist at BNP Paribas in New York.

Traders were on the lookout for possible remarks on euro strength and dollar weakness at a gathering of euro zone finance officials in Luxembourg, although analysts said the group was unlikely to significantly talk down the euro. [ID:nLJ707781].

"Maybe we will discuss the euro, but it's not the main focus point this evening," said Austrian Finance Minister Josef Proell.

JPY - The dollar was down 0.3 percent at 90.60 yen. Tuesday morning, as BoJ minutes suggest it's considering exit strategies. One of the big breakout moves in the currency market this week was the rally in USD/JPY. The currency pair has been tracking U.S. bond yields for the past year and the recent uptick in 10 year bond yields coincided perfectly with the breakout in USD/JPY. It may be fruitful for USD/JPY traders to keep an eye on this correlation. Reasons to question yen strength going forward include:

• Policy makers' conflicting statements about favoring or discouraging yen strength

• Stronger risk appetite

• Growing interest rate differentials as other G10 central banks get closer to rate increases

• Increasing demand by Japanese banks and investors for higher yielding currencies

• Recent moves by competing Asian exporters to weaken their currencies against the USD to gain cost advantage for their exports may lead Japan to do likewise.

GBP – Sterling climbed to a four-week high against the dollar on Monday, with market positioning, strength in global stocks and a report on the UK housing market all helping the pound claw back earlier losses.

Sterling had traded lower against the dollar and euro for most of the European session on Monday after a Bank of England policymaker said the central bank should continue its quantitative easing programme because the financial system has yet to fully recover.

Sterling last traded up 0.1 percent against the dollar at $1.6368

AUD: The Australian dollar last traded 1.2 percent higher to $0.9276 after going as high as $0.9285, a 14-month peak, after a central bank official said a return to normal monetary policy was appropriate.

While in solid uptrend, retreated against the USD as stocks and risk appetite in the US pulled back. Fundamentals are perhaps the best in the developed world, rate increases expected, but considered very overbought and vulnerable to pullback.

NZD: Like the AUD, considered very overbought and vulnerable to pullback, despite very positive economic news last week that increased the likelihood of rate increases coming sooner.

CAD: BoC Decision Time: Like all the commodity currencies, lost ground against the USD Friday as stocks pulled back. Consumer prices held steady in the month of September, which actually drove annualized CPI growth from 0.8 percent down to 0.9 percent. This week is a big week for Canada. The Bank of Canada has a monetary policy decision and even though they are not expected to lift interest rates from their record low level of 0.25 percent, there could still be a great deal of volatility in the Canadian dollar. The BoC will be faced with the tough of decision of deciding whether to put greater emphasis on the improvements in the economy or on the rapidly appreciating Canadian dollar. Last month Canada reported the second month of positive job growth with the unemployment rate dipping from 8.7 to 8.4 percent. If the BoC emphasizes the damaging impact of their currency over the improvements in economy, we could see a near term peak in the Canadian dollar. Alternatively, if they downplay the constraints brought by a strong currency, the CAD could accelerate its move towards parity.

CHF: The USD slipped 0.6 percent lower to 1.0124 Swiss francs Tuesday morning. 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.

CONCLUSIONS: Stocks shake off Friday pullback as earnings provides enough excuse to rise further. Stay w/ trend, but be ready for pullback SEE DAILY FOR DETAILS ON TRADING OPPORTUNITIES IN CRUDE, GBP/USD, USD/CAD

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 breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

Crude Oil

Near new highs at $80, up from $74 at the start of last week. OPEC officials have said before they are comfortable with up to $80/barrel, suggesting that playing the pullback is the higher probability play- beginning pullback Tuesday morning- watch it. ONCE IT BEGINS (NOT BEFORE).

FX Pair of the Day: GBP/USD

Made huge 10% + move, consolidating at upper BB, higher probability of some kind of pullback test (note on daily chart how the pair rarely stays long at the upper BB. News today for both pairs, earnings is the big one, though, and the GBP isn't much of a risk appetite play. Now that the short squeeze that fueled the move up is done, is overbought per the BBs AND if stocks pull in could GBP could drop hard against USD.


03 OCT 20

Also: USD/CAD: IF BoC st. does not show concern about CAD rise, the pair could drop about 300 pips to parity.



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