Tuesday, October 27, 2009

GLOBAL OUTLOOK 10/27 Full Version: Has the Pullback Begun?


- Stocks: Monday: Asia up, Europe, US down Tuesday morning Asia down, Europe opening slightly higher

- 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: GBP: CBI Realized Sales, USD:CB Consumer Confidence, CAD: BoC Gov Carney Speaks, USD earnings: Baidu (BIDU), Bayer (BAYRY.pk), BE Aerospace (BEAV), Boston Properties (BXP), BP plc (BP), Canon (CAJ), Celanese (CE), Daimler AG (DAI), Honda (HMC), Valero Energy (VLO), Wynn Resorts (WYNN)

- Big Theme: Risk Appetite Becomes Nausea? High risk asset prices relative to growth prospects, a series of US bank downgrades oversold USD, uncertainty ahead of US GDP Friday 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: Stocks fell under the combined weight of doubts about their valuations, disappointing earnings announcements from big names like VZ and BP, legislative threats to end house purchases, uncertainty ahead of Friday's US GDP report. Without any countervailing reason to go long, traders started taking profits, which scared others into also taking profits, etc.

The big name earnings announcement of the day came from telecom giant Verizon (VZ), which of course "beat earnings" – its Q3 profit fell only 9%--while its stock price is about the same that it was a year ago. Its price fell with the overall market. This has been a common kind of announcement, but it helped drive home the point that the stocks appear at best fully valued and probably overbought given current growth prospects. It also illustrated the waning effect of beating earnings estimates.

It's is no longer impressive to beat earnings estimates. More than ever, most companies control/manage/manipulate much of the information on which analysts base their estimates, so that, surprise, they beat these estimates. Because stock prices drop on earnings misses, companies do all they can to avoid these.

Downgrades of a number of banking stocks (from banking bull analyst Richard Bove) and BP plc's 34% earnings drop provided further though unsurprising excuses

Below is an excerpt from a popular media source that is a typical example of the non-explanations offered.

(Briefing.com) Stocks dropped in broad-based fashion after they failed to extend an early gain and the U.S. dollar made another strong move off of its yearly low.

The major indices were up solidly in the early going, but the S&P 500 struggled to break above the 1090 zone and the Nasdaq 100 ran into resistance when it approached the 2009 highs that it had set last week. As stocks stalled, sellers stepped in and undercut the early advance. That caused stocks to drop sharply and spend the rest of the afternoon trading in negative territory.

A stronger dollar also weighed on stocks. The greenback has now gained ground against a basket of foreign currencies for three straight sessions, the latest of which took it 0.7% higher in its best single-session percentage move of the past month. That made for particular trouble against multinationals and materials stocks, which dropped 2.5%.

Monsanto (MON 70.69, -4.54) created an additional drag on the materials sector. The stock was caught up in chatter that an analyst issued pessimistic comments about the chemical company's pricing efforts.

Financials were also among the worst performers this session. The sector sank 2.5% as bank stocks tumbled 4.1%, based on the KBW Banking Index. Weakness surrounding banking issues stemmed from a downgrade by Rochdale of regional lenders Fifth Third (FITB 9.52, -0.82) and SunTrust (STI 19.85, -1.14).

There weren't any real leaders for participants to follow this session. Dow component Verizon (VZ 28.64, -0.21) was one of the only widely-held companies to report its latest results this morning. The integrated telecom giant posted better-than-expected adjusted earnings of $0.60 per share for the third quarter, but they were largely dismissed, leaving telecom to fall to a 1.3% loss.

All 10 major sectors finished the session in the red. Seven of them suffered losses in excess of 1%.

Despite widespread weakness in the equity markets, Treasuries suffered. As such, the benchmark 10-year Note dropped roughly 18 ticks, which took its yield above 3.5% for the first time since August. Its weakness seemed to worsen in the wake of better-than-average results for an auction of 5-year TIPS.

Meanwhile, Rochdale Securities bank analyst Richard Bove lowered his ratings on Fifth Third Bancorp, SunTrust Banks Inc. and US Bancorp. Fifth Third fell 82 cents, or 7.9 percent, to $9.52 and SunTrust slid $1.14, or 5.4 percent, to $19.85. US Bancorp fell 80 cents, or 3.2 percent, to $24.15.

Advancing Sectors: (None)

Declining Sectors: Financials (-2.5%), Materials (-2.5%), Energy (-1.5%), Telecom (-1.3%), Utilities (-1.3%), Health Care (-1.1%), Industrials (-1.0%), Consumer Staples (-0.8%), Consumer Discretionary (-0.5%), Tech (-0.3%)DJ30 -104.22 NASDAQ -12.62 NQ100 -0.4% R2K -1.2% SP400 -1.1% SP500 -12.65 NASDAQ Adv/Vol/Dec 763/2.33 bln/1914 NYSE Adv/Vol/Dec 713/1.39 bln/2317

Asia: Asian stocks retreated Tuesday, following losses on Wall Street amid rising concerns the markets have gotten ahead of economic realities.

Europe: FTSE 100 share index ended 1% lower on Monday, with mining and energy stocks suffering as the U.S. dollar rose and commodity prices fell, while a sharp decline in ING put pressure on financials.



ASIA- UP N225I +0.77% HS +1.71 % SSEC +0.06% FTSTI +0.05% AORD +0.85 %

EUROPE DOWN FTSE -0.97% DAX -1.71% CAC -1.68 %

US- DOWN S&P -1.17% DJIA -1.05% NASDAQ -0.59%



N225I -1.45% HS -1.46 % SSEC -2.08% FTSTI -0.57% AORD -1.16 %


FTSE +0.20% DAX +0.13% CAC +0.14%

COMMODITIES: Down Monday with stocks as risk appetite retreated and the dollar gained. See weekly analysis for more on all of these.

Oil: Crude oil plummeted -2.3% to settle at 78.68 Monday (intra-day low: 77.97) as strong rebound in USD in NY session reduced appeals of commodity investments. Correction in US stock market with particularly weak financial sector diminished investors' risk appetite as strength in financial market is crucial for economic growth in the US.

Gold: Comex gold plunged to as low as 1038.1 before recovering to 1042.8. The benchmark contract slid -1.3% Monday. Although global economic environment has improved, the yellow metal needs new catalyst to excel further. Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.

CURRENCIES: Bias to safety currencies with falling stocks. Heavy short positioning on the USD made traders hesitant to continue selling it, and more inclined to unwind existing USD shorts, in the face of falling stocks and risk appetite, which heighten the USD's safe-haven appeal. Most USD crosses lost ground against it.

Data on Friday showed currency speculators increased bets against the greenback, with the dollar's net short position rising to $18.65 billion in the week ending Oct. 20 from a $17.99 billion net short the prior week.

Commodity-linked currencies declined as oil fell to below $79 a barrel on concerns over a sluggish economic recovery.

The U.S. dollar rose 1.2 percent against the Canadian dollar , while the Australian dollar fell 0.7 percent against the greenback and the New Zealand dollar was down 0.9 percent.

Canada's central bank governor Mark Carney on Monday repeated concerns about the adverse impact of a strong currency on the economy.

USD: The U.S. dollar rose broadly on Monday, rebounding from a 14-month low against the euro as falling stock and commodity prices prompted investors to lock in recent gains in other currencies. It strengthened against all majors, driving the EURUSD down 125 pips in US trade

Traders were also reluctant to push the euro higher given the huge amount of bearish trades on the dollar, which suggests a near-term rebound in the U.S. currency could be on the horizon. It was a turnaround for the dollar, which struggled earlier partly due to a report saying China should increase holdings of euros and yen in its foreign reserves.

The dollar rose against 12 of its 16 major counterparts on speculation U.S. lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will sell shares to pay back its government bailout. Both are negative for risk appetite. However, the lack of a strong fundamental catalyst for the USD (stock market crash, heightened prospect of interest rate increase, very negative EUR news, significant new geopolitical threats), SUGGESTS THIS IS PROBABLY A RELIEF RALLY, though one that could last some weeks. Much depends on how stocks respond to news and earnings, especially the major events for the coming weeks: this Friday's US GDP and next Friday's US NFP report.

EUR- In late New York trading, the euro traded 0.9 percent lower at $1.4863 , on track for its worst day since Aug. 7. The single euro zone currency earlier hit a 14-month high at $1.5064 on electronic trading platform EBS. USD is at 1 week high vs EUR

Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said the euro peaked after the Chinese reserves diversification story and that its failure to make new highs triggered selling, which accelerated after stops were hit.

"Today's price action is inflicting technical damage on the euro chart," he said. He added the next level of support for the euro is seen near the $1.4830-to-$1.4840 range and a convincing break of that area would open the way to $1.4675.

However, the EURUSD could drop to about 1.4600 and still have its uptrend intact.

JPY - Against the yen, the dollar rose 0.1 percent to 92.18 , near a high of 92.29 yen hit earlier on EBS, the highest for the pair in about a month.

The yen rose against 14 of the 16 most-active currencies on speculation Japanese companies are bringing back earnings on overseas assets before the end of the month.

Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.

“There’s talk that exporters are buying the yen,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is causing the dollar-yen to dip.”

GBP – Stabilizing after Friday's plunge, and was one of the very few currencies to gain against the USD yesterday. Per Goldman Sachs the GBP is the most undervalued since 1999 based on purchasing power parity theory. However, dovish comments from BoE officials, that the economy still needs help and that inflation is not a concern, are undermining a GBP rally.

AUD: Down 0.7% against the USD as it the AUD drops with stocks and other risk assets.

NZD: Fell 0.9% to the lowest level in almost one week against the U.S. dollar after Prime Minister Key said the very high exchange rate is “helping offset any imported inflation concerns.”

“I would personally be surprised if they raise rates in 2009,” Key said, speaking of policy makers at the nation’s central bank.

The New Zealand dollar rose to a 15-month high of 76.35 U.S. cents last week.

The Reserve Bank of New Zealand, which acts independently of the government, will announce its next rates decision on Oct. 29.

CAD: USDCAD up 1.2% in US trade yesterday, trend up continues this morning. Losing ground to the USD due to declining stocks, more dovish comments from BoC head Carney, lower oil and stock prices. According to Carney, the Canadian Dollar is resulting in a “significant drag on growth” and will continue to keep prices depressed. Perhaps even more importantly, Carney said that the current level of the Canadian dollar more than fully offsets the favorable developments since July. As a result, the BoC will most likely keep interest rates unchanged throughout the first half of 2010. Of all the major central banks, the BoC has been the most vocal about the negative impact of a strong currency. These are the words of a dovish central bank who will most likely stall any plans to tighten monetary policy. If Carney’s main purpose was to talk down the currency, he may very well have been successful. The combinations of renewed talks on excessive CAD strength and keeping rates low should offer a one-two punch for the loonie. For the most part, Carney refrained from painting a “rosy picture”, but announced that they are “on track at the start of a very long road.” Canadian data will continue to be light for the next couple of days.

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 for USD rallies against the EUR and commodity currencies, GBP/USD for more pullbacks on a sustained break below 1.6300, and crude oil has begun to pull back, no strong support level until about $74 (see daily chart below) , 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 Oct 27- No strong support until around $74, where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.

01 oct 21



India Begins Exit From Monetary Stimulus With Order to Buy Government Debt

•BP's Earnings Decline 34% on Lower Oil Prices Amid Weak Refining Margins

•Asian Stocks Fall on Commodity Price Decline, Hong Kong's Property Curbs

•Honda Triples Full-Year Profit Forecast on China, Japan Stimulus Measures

•Dollar Falls as China Output Report Sparks Demand for High-Yielding Assets


Is Obama Forcing Citigroup to Downsize?

Why Is the Market Going Up When Jobs Are Going Down?

Here's Why Asia Must Eventually Ditch the Dollar

Are Big Banks Better?

Sugar ETN Continues Its Wild Ride


Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP


No comments:

Post a Comment