Monday, October 26, 2009



- Stocks: Friday: Asia up, Europe, US down Monday morning Asia up, Europe up

- 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 gains against all majors

- Main events today: AUD:PPI m/m, EUR: Gfk Consumer Climate, USD earnings: Monday 10/26: Corning (GLW), Electrolux AB (ELUXY.PK), Lorillard (LO), Plum Creek Timber (PCL), RIOCAN REIT, (SOHU), Sunoco Logistics Partners LP (SXL), Verizon (VZ), Winn-Dixie Stores (WINN)

- Big Theme: Falling risk appetite indicate tired rally? In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine.


US: ( Weekly Recap - Week ending 23-Oct-09 Following a volatile week of trade, U.S. equity markets closed with modest declines. Small cap stocks notably underperformed, though, as evidenced by a 2.5% decline in the Russell 2000. The S&P 500 lost a more modest 0.7%.

The declines were broad-based as nine of the ten sectors that make up the index ended lower, led by Materials (-1.8%). Only IT finished in positive territory (+1%), benefitting from blowout results from the likes of Apple (AAPL) and (AMZN).

Third quarter earnings results remained in focus, and the list of companies that surprised to the upside this week goes on and on, including names such as, American Express (AXP), Apple, AT&T (T), Capital One (COF), Caterpillar (CAT), McDonald's (MCD), Texas Instruments (TXN), UPS (UPS) and Yahoo! (YHOO). Overall, however, there was not enough top line revenue growth or sufficiently upbeat Q4 guidance to convince markets that stocks merited higher prices.

Thus, the better-than-expected results did not translate to market gains. Once again corporate America demonstrated a unique ability to wring out operating costs. In the process it also revealed just how chubby operating budgets had gotten in the credit-driven bacchanal of recent years.

Basically, it appears as if we're seeing a tired market. That was never more evident than on Wednesday afternoon when the market plunged in the final 45 minutes of trade, with the move attributed to a late-session downgrade of Wells Fargo (WFC).

The ease with which the market broke, however, suggested to us that investors knew they was operating on borrowed time, trying to climb a wall of worry while staring at $81 a barrel oil, digesting word of government mandated pay cuts for select companies receiving bailout funds and realizing that the 1,100 mark for the S&P 500 proved to be another tough nut to crack earlier that day.

There were also disappointing pieces of economic data this week, particularly Initial Jobless Claims, which after falling the prior two weeks climbed in the week ended Oct. 16 (531,000 vs. 515,000 consensus). Housing data was mixed, as a jump in Existing Home Sales in September (5.57 million vs. 5.35 million consensus) offset weaker-than-expected Housing Starts and Building Permits.

Looking ahead to next week, third quarter earnings results and economic data, particularly the Advance reading for third quarter GDP on Thursday (10/29), will be in focus. There is also another potential catalyst as the calendar is full of Treasury auctions -- 5-year TIPS reopening Monday (10/26), $44 billion in 2-year Notes Tuesday (10/27), $41 billion in 5-year Notes Wednesday (10/28) and $31 billion in 7-year Notes Thursday.

Stock bulls may hit the pause button again this week if a wave of earnings due from marquee names such as Exxon Mobil and a slew of economic data offer no new incentives to extend Wall Street's seven-month rally.

Even though the profits that have come in so far have proven to be surprisingly strong, U.S. stocks have made very little headway, as investors search for more definitive signs the economic recovery is gaining strength.

In a sign of growing uncertainty about the pace of the U.S. recovery, the market volatility index <.VIX> was up 7.64 percent on Monday.

Asia: Asian markets mostly rose Monday, shrugging off a fall on Wall Street as South Korea's fastest growth in seven years underscored the region's strengthening economic recovery.

Europe: Opening higher following Asia.



ASIA- UP N225I +0.15% HS +1.71 % SSEC +1.85 FTSTI -0.10% AORD +0.85 %

EUROPE DOWN FTSE +0.68% DAX -0.39% CAC -0.33 %

US- DOWN S&P -1.22% DJIA -1.08% NASDAQ -0.50%



N225I +0.15% HS +1.71 % SSEC +1.85 FTSTI -0.10% AORD +0.85 %


FTSE +0.23% DAX +0.73% CAC +0.40%

COMMODITIES: Down Friday with stocks as the dollar gained. See weekly analysis for more on all of these.

Oil: Down 1.91% in Friday US trade, but up on the week. Oil fell for the third day, to below $80 a barrel on Monday, extending the previous session's decline, as investors took profit amid renewed concerns about the strength of the global economic recovery.

Buoyed by a rise in global stock indices and a weak dollar, oil prices rallied to a one-year high of $82 earlier last week.

But they wobbled and fell late in the week as weak earnings results from the U.S. and a rise in U.S. jobless claims drove investors to reconsider the pace of the economic recovery and its impact on energy demand.

"Asian speculators are cutting their positions after the fall on Wall Street last week. But a rebound in the Dow Jones futures this morning has helped limit the drop in oil prices," said Ryuichi Sato, an analyst at Mizuho Corporate Bank.

"But overall, the market is cautious about pushing oil prices higher because the demand fundamentals are still weak and the world economy is still fragile."

Comments from producer group OPEC last week that it would raise output targets at a December meeting has also cast a pall on the oil market, analysts said.

Gold: Down 0.38% in Friday US trade, Gold inched up towards $1,060 on Monday as the dollar fell to a 14-month low against the euro, but weak physical demand capped the upside for bullion. NB: Nuriel Roubini was quoted this weekend that he believes gold prices are at "bubble levels" since it is only in demand when markets collapse or there is extreme inflation.

After hitting record highs above $1,070 per ounce on Oct. 14, gold prices have traded in a narrow range, centering around $1,060, with support near $1,040.

Gold has gained on the dollar's decline because a weaker dollar boosts investor interest in gold as a hedge and makes bullion cheaper for non-dollar holders, but buying momentum has lost some of its steam given weak jewellery demand and high prices spurring scrap sales.

"Gold remains in an uptrend as long as the dollar is in a downtrend, but with physical demand weak, bullion lacks incentives to test new highs," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute.

"The market is moving in tandem with the euro/dollar moves."

Expectations for U.S. interest rates to stay low well into next year will likely push the euro higher, with some forecasting the single currency to reach $1.52 in the coming three months.

The euro may hit $1.52 and even higher in the coming three months and euro zone officials may not express serious concerns, as the single currency is not extremely strong on the basis of a trade-weighted average, said Masafumi Yamamoto, chief foreign exchange strategist for Japan at Barclays Capital

CURRENCIES: Bias to safety currencies with falling stocks, … START W CURRENCIES

USD: Risk aversion, coupled with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.

Against a basket of currencies, the dollar <.DXY> was at 75.078, having hit a fresh 14-month low of 74.94. The next key level is seen at 74.50, the intra-day low hit on Aug 8 last year. Despite the greenback's battering over the past few months, U.S. officials have stepped up rhetoric about a strong dollar. But they also want to see a correction in imbalances between exporter and importer nations, a move analysts felt would require the greenback to fall even further.

Yields on Treasuries spiked late last week ahead of record issuances this week and on speculation the Federal Reserve may change its tenor to a slightly more hawkish bias.

That view got a boost from a Financial Times article highlighting discomfort among some Fed officials with language that U.S. interest rates would remain low for an extended period.

EUR- Edging lower in Monday morning trade, after recovering Friday's small pullback after a Chinese report saying China should raise holdings of EUR and JPY in its foreign currency reserves prompted dollar selling, currently hovering around $1.5030. The report noted, however, that the USD should remain the principal currency in Chinas fx reserves.

JPY - The U.S. dollar rose to 92.14 yen from 92.08 yen late on Friday in New York, with traders expecting the Japanese currency to stay on the defensive as U.S. Treasuries yields rose.

GBP – The pound extended losses on Monday after data showed the UK economy was still struggling, disappointing investors who had been paring short positions betting for an early return to growth. Traders say investors are set to aggressively sell the pound on expectations that a sluggish road to recovery would prompt the Bank of England to keep rates near zero for a long period of time.

The drop in the pound, along with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.

Data this week could show the U.S. economy grew more quickly than forecast in the third quarter, which could raise speculation that the Federal Reserve may tighten monetary policy sooner than previously thought.

"Maybe the advance GDP will help bolster the dollar, where nothing else could," RBC currency strategist David Watt said.

"But, after the UK GDP surprise last week one has to be wary of undershooting the consensus."

The data which is out on Thursday, is expected to show U.S. gross domestic product (GDP) grew 3.3 percent in the third quarter.

The pound broke past support at $1.6300 to fall to $1.6272 from $1.6313 late on Friday when it lost nearly 1.9 percent.

Last week, sterling enjoyed a reprieve after minutes from the Bank of England's latest meeting stirred hopes that policy rates could be pushed up from record lows in coming months amid worries about inflation.

AUD: The Australian dollar edged lower to $0.9211 amid growing speculation on whether rates will move up by 25 or 50 basis points next month. Third-quarter producer price index (PPI) numbers were lower than expected, reducing the threat of inflation and pressure to raise rates. These figures come ahead of consumer price numbers on Wednesday.

NZD: Continuing to pull back against the USD in early Monday GMT trade, bank holiday leaves NZD to move with broad market sentiment. Given the very light news day, US earnings are likely to provide the main events to move markets Moday

CAD: Continues to lose ground to the USD after dovish BoC comments, lower oil and stock prices.

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. As of early Monday GMT the CHF is recovering most of its losses against the USD from Friday.

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch USD/CAD for more rally, GBP/USD for more pullbacks if break below 1.6300 from recent news driven moves, crude oil has begun to pull back, no strong support level until about $74, look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order).

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 may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and and a 1 standard deviation Bollinger Band. See chart.

Daily Chart Crude Oil

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