Wednesday, October 21, 2009

GLOBAL MARKET OUTLOOK Full Version 10/21:Bubble, Bubble, Valuation Trouble?


- Stocks: Tuesday: Asia up, Europe, US down, Wednesday morning Asia closing lower, Europe opening higher

-FX: Tuesday lower US, Europe 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 most currencies though still near lows

-Main events today: GBP: MPC Meeting Minutes, USD EIA Crude Oil Inventories, Fed Beige Book:, major earnings Wednesday: : MO (consumer), AMGN (biotech), AMR (airlines), EBAY (ecommerce), LLY(drugs), (int’l autos), FNF (financial services), FCX (copper), GNZ (biotech), NVLS (chips), BA (aerospace), USB (financial)

- Big Theme: Consolidating risk appetite as latest US big name earnings and economic data prompt profit taking. 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. Thus far, many companies still failing to grow revenues, beating already conservative estimates on cost cutting.

STOCKS – Too Expensive?

US: (Positive earnings surprises from Apple (AAPL), Texas Instruments (TXN), Caterpillar (CAT), Pfizer (PFE), Yahoo (YHOO) and UnitedHealth (UNH) couldn't keep the broader market from slipping to a loss as a stronger dollar pressured stocks and commodities alike. NB: TXN, CAT earnings and sales were down from q3 08, PFE also had lower sales but managed to raise income from $0.34-0.43 EPS by slashing costs in manufacturing, marketing, R&D, and more. Share prices of TXN, CAT and YHOO are all substantially higher than in Q3 of 08. For example, CAT was at $38.83/sh last year, $57.85 as of yesterday, TXN: $16.85 a year ago, $23.66 today, the price for PFE's weaker business rose more modestly from $17.34, now $17.93 YHOO tripled profits but on cost cutting and sales down 14% but in line w/ analyst expectations. Stock price is up over the past year from $12.07 to $17.17

Stocks looked poised to start the session on strong footing and extend the previous session's gains, but the positive tone among participants dwindled in the opening minutes as enthusiasm faded for the strong earnings of several widely-held companies. A bounce by the U.S. dollar also undercut stocks; basic materials stocks (-1.1%) and energy stocks (-0.9%) were hit particularly hard, given their correlation to commodity prices.

Health care stocks also struggled this session. The sector shed 1.0% as Boston Scientific (BSX 8.57, -1.59) slumped in the wake of its quarterly earnings report, which actually contained a positive earnings surprise and an in-line earnings forecast. That couldn't stop a Wells Fargo downgrade from dragging down the stock, though.

Meanwhile, managed care providers (+2.2%) looked strong following better-than-expected earnings and reaffirmed upside guidance from UnitedHealth, but their gains couldn't overcome weakness in the rest of the health care sector.

Tech stocks settled as the best performing sector, even though it closed unchanged. The sector found strength as participants flocked to shares of Apple in the wake of its strong quarterly results. Apple was also a primary leader in the Nasdaq.

In economic news, the Producer Price Index for September made a surprise month-over-month drop of 0.6%, while core producer prices made a surprise 0.1% slip. Housing starts for September came in at an annualized rate of 590,000, which is below the rate of 610,000 units that was widely expected. DJ30 -50.71 NASDAQ -12.85 NQ100 +0.0% R2K -1.4% SP400 -0.9% SP500 -6.85 NASDAQ Adv/Vol/Dec 726/2.14 bln/1965 NYSE Adv/Vol/Dec 1051/1.24 bln/1996

Asia: Down on Wednesday profit taking prompted by mixed earnings news and weak US home and producer price data.

Europe: Down Tuesday led by weaker financials on profit taking after mixed earnings news and weak US home and producer price data



ASIA- UP N225I 0.98% HS +0.83 % SSEC +1.52 FTSTI +0.13% AORD +1.06 %

EUROPE - DOWN FTSE -0.72% DAX -0.70% CAC -0.24 %

US- DOWN S&P -0.62% DJIA -0.50% NASDAQ -0.59%



N225I -0.03% HS -0.28 % SSEC -0.45 FTSTI -0.21% AORD -0.14 %


FTSE +0.31 % DAX +0.26% CAC +0.13%

COMMODITIES: With the Dollar Index climbing 0.4% this session, the CRB Commodity Index retreated to a 0.5% loss

Oil: Oil futures prices in US trade Tuesday fell 0.7% to $79.09 per barrel. Oil prices fell for a second day Wednesday in Asia to below $79 as investors eyed a bigger-than-expected U.S. crude inventory increase and weak economic data.

There is plenty of oil around at the moment and the current price is associated with tight supply so I am a little bearish and I suspect it will adjust lower," said David Moore, commodities strategist at Commonwealth Bank in Sydney.

"However the market sentiment is still very positive and it's hard to dispel that without a trigger. The API data showed a large stock build and if confirmed by the Energy Information Administration, that could be bearish in the very short term."

But pullbacks should be seen as buying opportunities as crude heads back to $100 a barrel, Richard Ross, global technical strategist at Auerbach Grayson in New York, said.

The persistent weakness in the U.S. dollar, global strength in equities, absence of overhead resistance, powerful momentum and mounting evidence of real economic recovery pointed to a bullish outlook for crude, he said in a research note.

(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 prices were able to recover in US trade Wednesday from negative territory to finish fractionally higher at $1058.60 per ounce,.

CURRENCIES: USD up slightly 0.4% as stocks pull back on mixed earnings and weak economic data.

USD: USD up slightly 0.4% Tuesday as stocks pull back on mixed earnings and weak economic data. EURUSD fell to a low of 1.4883 before recovering some ground, and spent the session in the range 1.4883-1.4994. Treasury Secretary Geithner warned that the recovery was still in its early stages and that, given that the economy has still some excess leverage to wind down, the recovery is going to be a slow one. He re-iterated his view that a strong USD is important to the US.

The U.S. dollar consolidated in Asia on Wednesday after rebounding from 14-month lows against a basket of currencies in the previous session, with investors taking a breather from high-yielding currencies.

EUR- More warnings on the EUR French presidential advisor Henri Guaino said that with EURUSD at 1.50, it is a 'disaster' for European industry and the economy. The Finnish finance minister said the Eurozone is very happy about US statements that a strong dollar is in the US' interests, but warned that a strong EUR is a worry for the Eurozone. Rhetoric from both policy- and lawmakers in the Eurozone has risen over the past few weeks but we expect the ECB to maintain its current policy of focusing on appreciation in Asia and acting on FX within the G7 framework. Spain expressed calm over a strong euro. Overnight Trichet said the Eurogroup did not discuss an alternative forum for FX discussions to the G7. On the data front, German PPI was weaker than expected at -0.5%m/m (cons. -0.1%). Eurozone construction output also fell further, by 0.4% on the month and 11.3% on the year.

Inflating Public Debt: U.S. officials have said they want a strong dollar but France's Guaino accused the United States of having a policy aimed at inflating away the public debt. Guaino said the United States was "flooding the world with liquidity" and said eventually Europe would be forced to react.

"When the Americans create dollars and the dollar falls, there is a point at which you cannot take it any more," he said. "What do you do? Either you create liquidity to bring the euro down, or you let the euro rise, rise, rise and then you are completely suffocated."

The euro zone single currency has strengthened 6.6 percent against the U.S. dollar since the start of this year.

JPY - In Japan the BoJ's facility for purchasing Japanese corporate debt may be folded away soon. Given the relatively small size of the program, its retirement would be largely symbolic, but would nonetheless help to provide another tangible sign that the world economy is returning to some form of normality, bringing a significant boost to risk appetite. Yet even though the BoJ is clearly leaning towards ending these unconventional measures, it is equally clear that officials from the newly elected DPJ have deep misgivings about such a course of action. Banking Minister Kamei last week openly accused the BoJ of "talking in its sleep" when it became known that possible exit strategies were being discussed. So although the CP and CB purchasing schemes are due to expire naturally in December, this is by no means certain 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 – Borrowing and M4 figures mixed Public finance figures were worse than expected as the net cash requirement came in at GBP19.4bn vs. cons. 19bn. Net borrowing was better than expected at GBP14.8bn. M4 growth was stronger at 0.7% on the month (cons. 0.5%). This may cool expectations of an asset purchase program expansion by the BoE but the risks are finely balanced. In his speech later, BoE Governor King said that the UK economy is likely to return to growth in H2, but that it still faces two major long-term challenges: re-balancing the economy and reforming the banking sector. He predicted that CPI would be volatile into next year, but that it would rise in the coming months. King cautioned however that it choosing the correct course for monetary policy is difficult due to supply and demand uncertainties, a weakened banking sector, and uncertainties surrounding the fiscal tightening measures likely to be introduced next year.

All eyes are now on the Bank of England's minutes of its last policy meeting, due for release later in the day. At the meeting held on Oct. 7-8, it held rates at a record low of 0.5 percent and kept its 175 billion pound ($287 billion) asset-buying programme in place, as expected.

Sterling came under pressure on Tuesday after Bank of England Governor Mervyn King said that Britain is likely to return to positive growth in the second half of this year, but output will remain below its year-ago level for for some time [ID:nLAG003851].

Sterling was at $1.6370, broadly unchanged from late on Tuesday when it lost 0.26 percent.

AUD/NZD : The Bank of Canada's move to keep rates steady at record lows led to some selling in other commodity-linked currencies, particularly the New Zealand dollar and to a lesser extent the Australian dollar. The kiwi, however, erased some of those losses after the central bank chief, Alan Bollard said a high currency was not necessarily an obstacle to raising the cash rate. Regarding the Aussie, RBA minutes continued to reflect inclinations to raise rates soon.

CAD: Boc Says strong C$ could hurt economy, C$Falls 2% on BoC Dovishness: As expected, the BoC voted to leave the overnight rate on hold at a record low of 0.25%. More significantly, the accompanying statement was surprisingly dovish in its content and tone, saying that no change in the overnight rate should be expected before the end of Q2 2010. The statement also noted that persistent CAD strength, accompanied by higher volatility, was acting to slow growth and depress inflationary pressures, adding that aggregate demand would be more heavily skewed towards domestic demand as a result. The bank repeated that it retains "considerable flexibility" in how it conducts monetary at low interest rates, a hint that unconventional policy measures could still be used if required. The October Monetary Policy Report will be released on Thursday.

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 pull in a bit but within rising channel Stay w/ trend, but be ready for pullback (still pulling back, GBP/USD breaking higher towards next resistance around 1.6700, USD/CAD continuing to bounce higher on dovish BoC comments yesterday

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.


01 OCT 21

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



Trichet, Europe Finance Ministers Urge Stronger Dollar After Euro Advances

Financial Armageddon in Alabama Proving Parable for Local U.S. Governments


Jim Rogers on the Next 10 Years

The Greatest Depression Is Coming

How to Play the Next Great Bull - Matt McCall

Readers Pick the Top 20 5-Year Horizon Stocks

Is Crude Oil Breaking Out?


No comments:

Post a Comment