Friday, October 23, 2009

GLOBAL OUTLOOK 10/23: Stocks Up Despite Valuations, Crude in New Range?


- Stocks: Wednesday: Asia, Europe, US down Thursday morning Asia down, Europe down

- 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 drops along with stocks against most fx on data, BoE remarks

- Main events today: GBP: Retail Sales m/m, CAD: Core Retail Sales m/m, BoC Policy Report, Press Confr., Leading Indicators, House Price Index USD earnings: AMZN (ecommerce), AXP (financial), BDK (consumer/construction), BGG (light gas engines), BMY (drugs), BRCM (tech), DAL (airlines), DO (oil drilling), ESV (oil drilling), MCD (consumer), MRK (drugs), PNC (financial), POT (fertilizer), HOT (hotel), DOW (chemicals), UNP (railroad), UPS (freight), GRA (chemicals)

- Big Theme: Rising risk appetite despite P/E's highest since 1999 prices? So far, buying on dips overcoming "sell on news, Oil in New Range, which in turn pushes EUR/USD higher?


US: Stocks stumbled in the early going, but strength among blue chips and financials helped the broader market to fight its way back to log an impressive gain for the session.

Note: My fellow Seeking Alpha colleague David Fry [] notes that P/E's (price earnings ratios) are now at levels not seen since the 1999 dot com bubble. For example: AMZN: Rev. Up 28%, Earnings Up 62% (implies cost cutting) Stock price up72%

Participants appeared unfazed by a large batch of better-than-expected earnings reports this morning. In turn, stocks found little support and traded lower during the first few minutes of the session. (compare earnings/rev s w/ q3 of 08)

Despite the downward drift by the broader market, blue chips showed resilience. Travelers (TRV 51.70, +3.68) and 3M (MMM 78.79, +2.46) were consistent leaders in the Dow Jones Industrial Average after posting positive earnings surprises. Fellow Dow components AT&T (T 26.10, +0.16), McDonald's (MCD 59.50, +1.17), and Merck (MRK 32.87, +0.19) also posted better-than-expected earnings for the latest quarter. Their collective strength helped the Dow outperform the other headline indices throughout the session.

Financials emerged with strength to provide the broader market with leadership. The sector settled 2.9% higher as regional banks surged 6.1%. Pleasing quarterly reports from PNC (PNC 50.65, +5.69), SunTrust (STI 21.85, +1.09), and Fifth Third (FITB 10.80, +0.69) helped garner support for the group.

Retailers also fared well. They finished the session with a 1.7% gain with help from J Crew (JCG 43.49, +5.75), which made its best single-session percentage gain in nearly five months after providing upside guidance.

Materials stocks also provided support to the broader market. They netted a 1.4% gain as the sector rallied on a pullback by the U.S. dollar. The Dollar Index had been up solidly in the early going, but it pulled back to book a 0.1% loss, just above its 52-week low. Additional support was provided by Freeport-McMoRan (FCX 82.98, +3.26), which was upgraded by analysts at Deutsche Bank, and Dow Chemical (DOW 26.46, +0.96), which posted better-than-expected adjusted earnings for the third quarter.

Steel stocks struggled to match the performance of other members in the materials sector. As a group, steel finished with a 2.8% loss, though Nucor (NUE 44.18, -1.82) and Reliance Steel (RS 42.24, -1.43) both posted positive earnings surprises.

In economic news, the latest weekly jobless claims came in at 531,000, which is worse than the 515,000 that had been widely expected. Continuing claims came in at 5.92 million, which is a tad worse than was expected. Leading indicators for September increased 1.0%, which is better than the 0.8% increase that was widely expected. Home prices for August fell 0.3% month-over-month, which missed the 0.3% month-over-month gain that was widely forecast.

Advancing Sectors: Financials (+2.9%), Consumer Discretionary (+1.7%), Materials (+1.40%), Health Care (+0.8%), Energy (+0.8%), Industrials (+0.8%), Tech (+0.6%), Telecom (+0.5%), Utilities (+0.3%), Consumer Staples (+0.2%)

Declining Sectors: (None)

Asia: Asian stock markets rose Friday, spurred by another batch of optimistic quarterly reports from major companies in the U.S. and Asia even as worries remained that this year's rally has overshot reality.

Europe: LONDON, Oct 23 (Reuters) - Stock index futures pointed to sharp gains for European shares in early trade on Friday, after a rise in financial stocks helped the Dow close back above 10,000.



ASIA- DOWN N225I -0.64% HS -0.48% SSEC -0.62 FTSTI -0.39% AORD -0.57 %

EUROPE DOWN FTSE -0.96% DAX -1.21% CAC -1.35 %

US- UP S&P +1.06% DJIA +1.33% NASDAQ +0.68%



N225I +0.15% HS +1.27 % SSEC +1.74 FTSTI +1.03% AORD +0.85 %


FTSE +1.20% DAX +1.17% CAC +1.04%

COMMODITIES: The dollar tumbled in Friday US trade to a fresh 52-week low at 75.21, giving a lift to commodities (+5.2%), lifting oil and gold.

Oil: SINGAPORE (AP) -- Oil prices rose to near $82 a barrel Friday in Asia, just below a one-year high, as signs the global economic recovery is gathering pace fueled investor optimism. Investors have taken heart from evidence that recovery from the global recession is gathering pace. China said Thursday that its economy grew 8.9 percent in the third quarter, building on recent improvements in industrial production, retail sales and commodity imports. Crude traders are also eyeing gains on global stock markets, which tend to reflect overall investor sentiment. The Dow Jones industrial average jumped 1.3 percent on Thursday and most Asian indexes rose in early trading Friday.Prices soared to $82 a barrel earlier this week, the highest since October 2008, from $32 in December. "We think the market is transitioning to a higher range But we don't think an explosive move will be sustained," Barclays Capital analyst Yingxi Yu said.

"We have broken the $65-$75 range seen in most of the third quarter and we now see prices consolidating."

Oil's Break Over $75 – Another Nail in the USD's Coffin? (see ) for full details. Currency and intermarket analaysis guru Ashraf Liadi wirites that oil's break over $75, in addition to repeated Fed PR blunders, is the main reason for the EUR/USD's break over $1.50. Concise and insightful, though we continue to believe that the likely near term salvation for the USD is a multiweek pullback in stocks, given the numerous reasons stocks are due for a pullback, including: high valuations relative to likely performance, intractable employment/consumer spending/banking/default risk and ultimately rising interest rates from other major central banks (which will hit their own stock markets and likely ultimately Wall Street too).

Gold: TOKYO, Oct 22 (Reuters) - Spot gold was steady near $1,060 an ounce on Thursday as it continued to draw investors seeking a hedge to a weak dollar and to inflation concerns stemming from a rally in oil prices.

CURRENCIES: Bias to safety currencies with falling stocks, but USD falling on BoE minutes which restate the obvious that GBP rates will rise at some pt – no deadline, of course. Pure short seller reaction, unlikely to sustain – suggests go short GBPUSD for short term traders.

USD: The AUD, NZD, and CAD vs. USD finished a bit weaker than their previous day's closes

SYDNEY, Oct 23 (Reuters) - The U.S. dollar surrendered slim gains on Friday, resuming its fall towards 14-month lows against a basket of currencies on expectations interest rates will remain low in the U.S.

Traders expect some position-squaring to continue, with the dollar vulnerable on expectations of low rates, a view reinforced after Chicago Federal Reserve President Charles Evans said on Thursday the Fed's focus remained on an accommodative rate policy.

Evans, who is a voting member, added that a recovery is going to be unsatisfactory in 2010 and the Fed will be monitoring dollar movements.

"The U.S. dollar looks vulnerable to a short, brutal move to the spring 2008 lows," said David Watt, senior currency strategist at RBC Capital. The dollar index had hit of a low of 70.7 in March 2008.

Watt added a pullback in demand for riskier assets and higher-yielding currencies was likely to be temporary and the dollar index would struggle to stay above the 75 level.

The index was down 75.046, just above a 14-month low of 74.94 struck earlier in the week.

Since April, the dollar index has lost around 12 percent with selling picking up in recent weeks as Asian central banks diversified into other currencies, and on growing talk that the U.S. dollar was fast emerging as the funding currency for leveraged carry trades.

In recent days, U.S. officials have stepped up rhetoric about a strong dollar while European officials have fretted over the euro's appreciation.

But with U.S. unemployment near 10 percent, investors expect rates to remain anchored at record lows while signs of stronger growth prompt central banks elsewhere in the world to raise rates.

Low rates make the U.S. dollar less attractive than higher-yield currencies more closely correlated with economic recovery.

US Job Losses Reduce Risk Appetite (from

After declining for two consecutive weeks US jobless claims rose an unexpected 11,000 to 531K from 515k projected. The less volatile four week average of initial claims continued to decline albeit at a glacial pace as it moved from 533K to 532.5K.

The jobless numbers have become a key data point of concern for the currency market as they represent the main impediment to any Fed action on the monetary front. The Fed has never raised rates until the unemployment rate has peaked and given the fact that this week is the sample for the monthly Non Farm payrolls report due November 6 th it suggests that US may lose another -150K jobs in October.

The data was a mild blow to the recovery trade as euro sold off modestly on the news, dropping below the 1.5000 level after rallying back to that point in early morning New York session. However, overall the market showed little reaction to the numbers given the week to week volatility of the data.

Nevertheless, the currency traders are unlikely to change their anti-dollar bias until the weekly jobless numbers drop below the key 500K level suggesting that the contraction in the US labor market is over. Only then will the Fed be able to adopt a more assertive monetary posture providing a modicum of support for the greenback.

A Bleak Beige Book (from

Wednesday’s release of the Federal Reserve’s Beige Book, which analyzes economic conditions across the Fed’s 12 districts, left little to get excited about. Stock market rallies did not fare well in light of an economy that does not look as upbeat as everyone had hoped. The Fed notes that even when they saw improvement, it was “either small or scattered.” They did give credit to residential real estate and manufacturing for its improvement over the summer, but there was far too much cause for concern to signal any change in monetary policy would be required. The Fed indicated that the worst performing sector by far was commercial real estate, which weakened across all regions. The report also brought the weakness in the labor market back into market consciousness. Consumer spending as a result was mixed as job uncertainties continue to curtail expenditures. The list of problem spots goes on with continued softness in the financial services industry followed by little to no increase in prices. Even though the Fed indicated that all districts reported “stabilization or modest improvement,” the question is whether or not we can expect a sustainable return to growth in the third quarter with these weak spots. It is possible, that as fiscal stimulus starts to unwind the economy could hit a wall like what the Beige Book seemed to demonstrate. In any event, today’s release was a real wakeup call that indicated that we are not as far along the road of recovery as expected.

EUR- EURUSD finished Thursday up at 1.5036, many traders believe there is strong support around $1.50

Can the EUR Keep Rising? ( Now that the euro is at the highest level since August of 2008, the obvious question that is circulating through the markets is whether it will be able to maintain its performance. The answer seems to depend on two factors: whether the improvement in data will be sustained and the threat of an ECB reaction. It is undeniable that with Germany returning to growth, economic data has picked up lately. However, not all things look too impressive, especially in light of the growing ranks of the unemployed. Furthermore, the ECB may be the next impediment for the pair to face. The sheer velocity in which the euro has appreciated would pose a great threat to any central bank, especially to one that is highly concerned with the health of the region’s exports. Such a strong currency could eventually serve to cut off growth and send the unemployment rate skyrocketing further. It would be hard to believe the ECB would let this happen, leaving the possibility of intermittent verbal interventions a real threat to continued rallies. Data was at a minimum today and will be for tomorrow as well except for the Euro-zone Current Account. We will be able to better assess the euro’s sustainability after some critical data expected Friday.

JPY - The yen weakening for the 4th day in a row in Friday morning GMT trade. The yen could come under a bit of pressure on expectations Japanese investors will step up overseas bond purchases. Traders are eyeing support at 91.75 and then at around 92.30 per dollar.

GBP – weak data overnight and an unexpected dovish shift by MPC member Paul Tucker. Having previously voted against an expansion in QE, Tucker said overnight that it would be possible to increase quantitative easing if necessary. In addition to Governing King, David Miles and Adam Posen who have either voted for or are in favour of a QE extension, a fourth vote would mean Governor King, who remains intrinsically bearish on the UK economy, would need one final vote to secure a GBP25bn expansion.

On the data front, retail sales were much softer than expected at 0.0% (vs. 0.6%) on the month and 2.4% annualized (0.5%m/m, 2.8%y/y expected), but last month's print was revised slightly higher.

DMO Chief Executive Stheeman, speaking before a parliamentary committee, said that when the time comes for the BoE to shrink its balance sheet by disposing of assets, the BoE will "co-ordinate" with the DMO so as not to "upset" the market.

On balance we still expect a ?25 bn increase in November as part of a phased easing in the QE programme. In our view the committee is divided with some such as the governor likely looking for at least another ?25 bn of QE and others holding the view that the current total of ?175 bn is adequate for now at leas

AUD: The Australian dollar inched up to $0.9284, recovering from lows after stock markets bounced <.SPX> on strong U.S. corporate results, with the undertone bullish on expectations of steep Australian rate rises in coming months.

NZD: Continuing to rise against the USD to around 0.7560

Hawkish Central Bank Comments Boost NZD: ( Much of the rallies seen in the commodity currencies dried up by the end of trading thanks to the sharp reversal in US stocks. Nevertheless, the New Zealand dollar was a particular outperformer, surging about 80 pips to retake 15-month highs. Oil prices definitely did not hurt, rising to a fresh one-year high. Recent comments from RBNZ Governor Alan Bollard were received with excitement by kiwi traders. Bollard said that the strong rallies in the currency do not particularly prevent them from raising rates. Since many expected that this was perhaps the one major reason keeping rates low, the outlook for future decisions changes dramatically. The hawkish comments confirm a similar move earlier this month when the RBNZ ended certain relief programs like the Term Auction Facility. Even though Bollard said rates would be on hold until late 2010 as recently as September, the latest course of action may have signaled a shift in the banks outlook. Unfortunately, today’s surprise was met with one piece of bad news in that Credit Card Spending declined for ten out of the last eleven months

CAD: The U.S. dollar held on to gains at C$1.0467 . It had risen to C$1.0545 on Thursday but eased back after the Bank of Canada's quarterly monetary policy report suggested officials think the economy can cope with a stronger currency.

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.

CONCLUSIONS: New Trading Ideas: Watch USD/CAD, GBP/USD for pullbacks from recent news driven moves, crude oil still in strong rising channel on daily charts, look to trade at either extreme long or short depending on stocks. EURUSD but at new1.500 support

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.

for Wednesday.

Crude Oil

Breaches new highs at $82, 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).



•China's Economy Expands 8.9%, Increasing Pressure for an End to Stimulus

•Credit Suisse Posts Third Straight Quarterly Profit on Gains From Trading

•Stocks Decline Around World on China's Growth, Ericsson as Dollar Rallies


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