Friday, October 16, 2009

GLOBAL OUTLOOK 10/16: Profit Taking vs. Buying On Dips

SUMMARY


- Stocks: Thursday: Asia up, Europe down, US up, Friday morning Asia down, Europe up.

- FX: 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 makes some gains

- Main events today: CHF: Retail Sales y/y, CAD: CPI m/m, USD: TIC Long Term Purchases, Earnings from BAC, GE

- Big Theme: Rising risk appetite? So far, buying on dips overcoming "sell on news". USD weakening w/ no reason to stop except for extreme oversold position.



STOCKS

US: (Briefing.com) The major stock indices extended their 2009 highs late this session by overcoming losses that stemmed from a sell-the-news reaction to quarterly reports from Goldman Sachs and Citigroup.



The broader market spent most of the session with modest losses, which came amid considerable weakness in the financial sector. Financials were down as much as 1.7% following better-than-expected earnings from Goldman Sachs (GS 188.63, -3.65) and Citigroup (C 4.75, -0.25), both of which benefited in the previous session from an upbeat report from JPMorgan Chase (JPM 47.16, +0.00). However, the gains during the previous session effectively priced in this morning's positive surprise, prompting participants to sell the shares and take profits as the news hit.



Weakness in the financial sector weighed on the broader market for the entire session, but a late lift helped the sector pare its losses so that it finished with a loss of 0.7%.



The late lift was led by the energy sector, which settled with a 2.0% gain. That is more than twice the gain of the next best performing sector (utilities, +0.9%). Energy's advance came as refiners (+8.0%) surged and oil and gas equipment stocks (+3.4%) and oil and gas driller stocks (+3.2%) spiked with a sharp rise by oil prices. News that weekly oil inventories increased by a smaller-than-expected 334,000 barrels helped send oil futures prices to new 2009 highs of $77.97 per barrel. Oil prices settled at $77.58 per barrel with a 3.2% gain.



Energy's strength helped the broader market finish at session highs, which extended the gains made in the previous session. The broader market is now up more than 21% year-to-date. Despite that accomplishment, the S&P 500 is just now at levels first seen in 1998.



Market participants were generally unfazed by the latest batch of economic data, which featured a 0.2% increase in consumer prices and core consumer prices for September. The consensus called for a 0.2% increase in CPI and a 0.1% increase in core CPI. Initial jobless claims for the week ending October 10 totaled 514,000, which was a bit below the consensus forecast of 520,000 initial claims and down 10,000 from the previous week. Continuing claims slipped below 6.0 million for the first time since March by coming in at 5.99 million. The consensus called for an even 6.00 million continuing claims.



The Empire State Manufacturing Index for October came in at 34.57, which topped the 17.25 that was widely expected, while the Philadelphia Fed Index for October came in at 11.5, which is fractionally below the 12.0 reading that was expected. Still, the Philly Fed Index has showed three straight positive readings, which hasn't happened for roughly two years.



Advancing Sectors: Energy (+2.0%), Utilities (+0.9%), Consumer Staples (+0.8%), Telecom (+0.7%), Health Care (+0.6%), Materials (+0.4%), Industrials (+0.3%), Consumer Discretionary (+0.1%)

Declining Sectors: Financials (-0.7%)





Asia: Down on profit taking

Europe: Opening higher on follow through from US gains



GLOBAL

MARKETS YESTERDAY

ASIA- UP N225I +2.11% HS +1.04 % SSEC +0.31 FTSTI +0.39% AORD +0.59 %

EUROPE - DOWN FTSE -0.63 % DAX -0.40% CAC %

US- UP S&P +0.42% DJIA +0.47% NASDAQ +0.05%

THIS MORNING

ASIA CLOSING DOWN

N225I +0.19% HS -0.25 % SSEC -0.11 FTSTI -0.30% AORD -0.41 %

EUROPE: OPENING UP

FTSE + 0.71% DAX +0.67% CAC +0.45%



COMMODITIES: Oil jumping to new yearly highs, gold testing near term support.



Oil: Oil prices continued a weeklong rally Friday in Asia, jumping above $78 a barrel, after U.S. gasoline inventories unexpectedly fell and the dollar weakness prompted new 12 month highs for oil.

The Energy Information Administration said Thursday that U.S. gasoline supplies fell 5.2 million barrels while analysts had expected a jump of 1.6 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Crude supplies rose 400,000 barrels, the EIA said, while analysts had anticipated an 2.2 million barrel gain.

Until this week, oil had bounced between $65 and $75 since May.

"The transition to a $70 to $80 range is now in full cry," Barclays Capital said in a report. "We expect further transitions upward to occur in line with improvements in the underlying market data."

A falling U.S. dollar has also helped boost oil this week.

Gold: Down Thursday as it continued to retest earlier gains as the USD strengthened and global equities up trends begin to flatten out. Thursday Steady at around $1048/ ounce early Friday.

Bullion retreated in spite of a rally in oil, which has risen for the past six straight days, outperforming gold. Gold is used as a hedge against inflation.

Per a Reuters report:

Analysts said that a combination of technical weakness, renewed credit worries and record speculative long positions in the futures market prompted selling in gold.

"We've seen the dollar bounce back today, which is why we've seen this consolidation," said Andrey Kryuchenkov, an analyst at VTB Capital.

"I don't see at this point in time that the gains in gold are justified. You have massive speculative exposure ... and this money can't keep coming forever."

December gold futures settled down $14.10, or 1.3 percent, at $1,050.60 an ounce in COMEX trade. Spot gold was at $1,049.70 an ounce at 2:26 p.m. EDT, against $1,061.90 late in New York on Wednesday. The dollar index <.DXY> clawed back from the 14-month lows it hit in early trade.

A firmer dollar tends to pressure gold, as it curbs the metal's appeal as an alternative asset and makes it more expensive for holders of other currencies.

Gold failed to receive a boost even after oil rose more than $2 to just below $78 a barrel.

A closely watched gold-to-oil ratio has dropped to below 14. Technical traders often switch positions between gold and oil when one is perceived to be cheaper relative to the other.

Appreciating oil prices, often seen as a trigger for rising inflation, usually lift gold.

Frank McGhee, head precious metals trader at Integrated Brokerage Services, said that gold was pressured by stop-loss orders and the dollar strength, but its long-term fundamentals remained positive.

"Gold at the moment is on its own," McGhee said Traders said U.S. bank Citigroup's quarterly per-share loss due to $8 billion of credit losses stirred worries about the financial sector, triggering weakness in gold.

CURRENCIES: Rising stocks, risk appetite keeps bias strongly to risk currencies, USD still near new lows against all commodity currencies. Both the Australian and New Zealand central banks appear ready for more interest rate increases.



USD: The dollar rose against the euro, yen and Canadian dollar on Thursday after encouraging U.S. data prompted some profit-taking on the greenback's recent slide.



Minutes from the Fed's last meeting showed officials don't see inflation as an imminent risk, suggesting interest rates may stay low for some time. In that case, investors should continue to favor higher-yield currencies over the greenback.

This outlook has helped push the dollar down about 2 percent against a basket of major currencies over the past two

weeks <.DXY>. It has lost about 7 percent so far this year.

A report showing U.S. consumer prices rose a modest 0.2 percent last month bolstered the Fed's case, though other data muddied the outlook a bit. New applications for jobless benefits fell to a nine-month low, and New York state manufacturing reached a five-year high.

"Many major currencies have rallied to significant levels against the dollar, and there's not enough momentum to sustain those moves today in the face of stronger U.S. data," said Kathy Lien, director of research at GFT Forex in New York





The Data to Watch – Treasury International Capital flow report (fx360.com)



One of the pieces of economic data on the calendar tomorrow could threaten the downtrend in the dollar. The Treasury International Capital flow report which measures foreign demand for dollar denominated assets is due for release at 9am NY Time. One of the primary arguments for long term dollar weakness is the need for reserve diversification and tomorrow’s report will shed light on whether central banks have been all talk and no action. If demand for dollars remains strong, it could lend support to the currency but if foreigners become net sellers of dollars, we could see an acceleration of dollar weakness. The TIC report will be a number that we will be keeping a very close eye on for the next few months. The dollar began its latest wave of weakness in August, but it did not really go into freefall mode until September. Holding dollars for yield right now is a losing proposition and at some point, central banks could balk at the idea of holding dollars and that is when the dollar greenback could really be in trouble. Aside from the TIC report, industrial production and the preliminary release of the University of Michigan consumer confidence survey for October are also due for release on Friday.







DOLLAR UPS AND DOWNS AHEAD

Some analysts said more profit-taking may be on the cards, particularly if the euro fails to retest the $1.4967 level and

makes a further push to $1.50.

Beyond that, though, most said they expected further dollar weakness. Goldman Sachs currency strategists this week cut their dollar forecasts against most majors. They now see the euro at $1.55 in three and six months, up from $1.45 earlier,

though they predict a relapse to $1.35 over the next 12 months.

"Everyone is short (dollars), and this is a legitimate risk," said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut. But, he added, "this is one of those rare markets when extreme supply and demand imbalances are sustainable," at least

through year end and possibly into early 2010.





EUR- the EURUSDswung between gains and losses and remained near a 14-month peak above $1.49 as investors debated when the Federal Reserve will raise U.S. interest rates from current record lows near zero.



EUR Exit Strategy in December?

ECB President Trichet reiterated Thursday that it is very important for the U.S. to pursue strong dollar policies and he pointed out that the euro was not created to be a global reserve currency. These are comments that we have heard from the ECB President before but this is the first time in a while that we have also heard him say that "excess forex volatility is an enemy of stability." However Trichet stopped short of calling the move brutal which may be part of the reason why the losses in the EUR/USD were limited. Also, the central bank President himself may not be entirely convinced that the strong euro is hurting the economy. In the same speech, he also reminded the market that the ECB's primary mandate is price stability and that is most likely the "one needle" in their "compass." If inflation is his primary focus, then Trichet's comments on exchange rates may only be politically motivated because a strong euro helps prevent inflationary pressures from getting out of hand



ECB member Mersch said in an interview with Market News International that there are signs inflation expectations are inching higher and if there are upside inflation risks, the ECB may need to act. More importantly however he said the central bank could present an exit strategy in December with new staff forecasts which could be very meaningful for the euro. The Eurozone trade balance is due for release tomorrow. USD/CHF has fallen to levels where intervention risk is particularly high but the Swiss National Bank appears to be watching EUR/CHF much more closely than USD/CHF.



JPY - The dollar rose 1.5 percent to 90.66 yen , its highest in three weeks, after slipping to 89.28 overnight



GBP – The British pound staged a very strong rally today indicative of a major short squeeze. There was no economic data released from the U.K. today and no groundbreaking comments from government officials. Yet the currency managed to stage its strongest rally against the dollar in more than 2 months.



Part of the currency’s strength was attributed to rumors that a Swedish energy company may be interested in buying British nuclear power plants but it is more likely that traders are still responding to Bank of England executive director Paul Fisher’s comment that quantitative easing is working. However from a flow perspective, the price action in the pound today is definitely in line with a short squeeze. Last week’s CFTC IMM report on positioning in the futures market revealed that net short positions in the GBP/USD reached record highs. In an environment where the dollar is falling against nearly all of the major currencies, it was bound to eventually underperform the pound as well.



Sterling soared 1.8 percent to $1.6266 after Bank of England policymaker Paul Fisher told the Financial Times he

felt more confident the central bank's asset purchase program was working. Sterling jumped more than 3 percent to 147.42 yen while the euro fell 1.8 percent to 91.77 pence. The GBP was the biggest mover of the day, rising1.66 percent against the dollar, 1.64 percent against the euro and a whopping 3.1 percent against the Japanese Yen.



AUD: The greenback remained near a 14-month low at $0.9197 per Australian dollar after Australia's central bank chief Glenn Stevens hinted at more interest rate rises as economic recovery takes hold. The RBA lifted rates last week.



NZD: The New Zealand dollar jumped to a 15-month high versus the U.S. dollar after stronger-than-expected inflation numbers raised

expectations of a near-term interest rate hike. Moving with risk appetite, which will move with stock market reaction to big name announcements starting today with JPM. REINZ house prices for September will be released. Our economists expect the RBNZ to drop its easing bias at its Oct 28 monetary policy meeting.



CAD: The dollar rose 1 percent against the Canadian dollar to C$1.0345 after hitting a 15-month low just above $1.02. With USD/CAD trading below the 1.05 level, there is no major support until parity. Looking ahead, the most important economic releases from the commodity currencies next week include retail sales and consumer prices from New Zealand and consumer prices from Canada.



CHF: The Swiss Franc traded higher against the dollar but lower against the euro despite an uptick in producer prices. Unlike the Eurozone which has a strong currency to mitigate inflationary pressures, fears of intervention have capped the gains in the Swissie which in turn limited its impact on inflation.





CONCLUSIONS: Bias to risk assets as stocks rise on earnings data and but beware profit taking especially on Fridays. Longer term we favor short USD trades until stocks pull back or there is other major pro USD news. Earnings season dominating news. A key point for encouraging clients to open accounts, deposit more – to be ready for next week. Initial tone of earnings looks positive, but will profit taking outweigh buying on dips? THIS IS THE BIG QUESTION FOR NOW.



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

Breaches new highs at $78, up from $74 at the start of the week. OPEC officials have said before they are comfortable with up to $80/barrel, suggesting that playing the pullback is the higher probability play ONCE IT BEGINS (NOT BEFORE).



Currency in Play for Next 24 Hours:USD/CAD: (fx360.com)

The currency in play for the next 24 hours will be USD/CAD. An eventful day will start with the release of Canadian CPI which is due out at 11:00GMT or 7:00AM EST. This will be followed by the U.S.’ Treasury International Capital flow report at 13:00GMT or 9:00AM EST and Industrial Production at 13:15GMT or 9:15AM ET. Finally the U. of Michigan Confidence is due at 14:00GMT or 10:00AM EST. USD/CAD is currently trading well within the Sell Zone, which we determine using Bollinger Bands. After falling for nearly 9 days straight, USD/CAD has finally staged a meaningful recovery. However as long as the currency pair remains below the 1.0450 level the downtrend is intact and a move down to parity is still on the table. If it breaks above 1.0450, then a larger rally towards 1.07 could ensue.









OTHER HEADLINES

US Treasury Dept Wants Higher Yuan

WASHINGTON, Oct 15 (Reuters) - China is not manipulating its currency but is piling up foreign exchange reserves at a rate that threatens progress in reducing global economic imbalances, the U.S. Treasury Department said on Thursday.

In a semiannual report to Congress on currency practices of key trade partners, the Treasury said it continues to believe China's yuan, also called the renminbi, is undervalued.

It warned that lack of flexibility in the exchange rate for the yuan, also called the renminbi, might be damaging as stimulus is withdrawn and overseas demand for Chinese-made goods returns.

An undervalued yuan makes Chinese consumer goods cheaper in foreign markets. Beijing has powered the country's growth by targeting U.S. and other consumer markets with its exports, putting many producers in those markets out of business because they cannot compete.







(Bloomberg)



Australia Can't Be `Too Timid' in Raising Key Interest Rate, Stevens Says

Consumer Prices in U.S. May Show Inflation Not a Risk as Economy Recovers



(Seekingalpha.com)

10 Most Important Earnings Reports for This Upcoming Week

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

Crude Oil and Gasoline Prices: Like Déjà Vu All Over Again

Oil Prices, Natural Gas Futures and Speculators









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

No comments:

Post a Comment