Thursday, October 1, 2009

GLOBAL OUTLOOK OCT 1: Markets Mixed, Initial Indicators Suggest Disappointing NFP Friday


- Stocks: Wednesday: Asia mixed, Europe, US down, Thursday morning Asia near close down, Europe opening higher

- FX: Equities lower but no clear bias to safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD down against all majors Wednesday, overall down Thursday

- Main events today: JPY: Tankan Indexes, CNY: Mfg PMI, EUR: German retail sales, EUR unemployment rate, GBP:Mfg PMI, USD: Challenger job cuts, Unemployment claims, personal spending, Bernanke testifies, ISM Mfg PMI, Pending home sales

- Big Theme: Despite potential for a volatile week, tight trading ranges thus far in most markets. News will be climaxing in Friday's US jobs data, Leading indicators thus far suggest result below expectations. Stocks, Gold, Oil still in extended rallies. Gold long futures at 12 mo. High INITIAL NFP INDICATORS NEGATIVE – SEE NFP SPECIAL REPORT LAST PART



An early selling effort dropped stocks from an initial gain to a loss of more than 1%, but stocks gradually made their way back to positive ground before falling under a second wave of selling pressure. Although they finished the session with a loss, stocks still logged impressive gains for the month.

Better-than-expected earnings from several companies, including Nike (NKE 64.70, +4.61) and Jabil Circuit (JBL 13.41, +1.13) helped prop up the bias in the broader market this morning. The tone of trade improved further from news that second quarter GDP was revised upward to show an annualized decline of 0.7%, which is better than the 1.2% annualized decline that had been expected.

The GDP headline overshadowed the latest ADP Employment Change Report, which indicated that 254,000 private jobs were lost during September. Since that is worse than the consensus forecast for 200,000 job losses, some wonder whether the government's official nonfarm payrolls report on Friday will be worse than expected.

Despite early signs of strength, stocks reversed direction in the first few minutes of trade. The slide was exacerbated by news that the Chicago PMI reading for September came in at 46.1, below the consensus forecast of 52.0 and down from the previous reading of 50.0.

Within the first hour of trading the S&P 500 saw a modest gain turn into a loss of 1.3%. However, buyers waded back into the action and helped stocks turn their losses into a midday gain. The rally was challenged, though, as the S&P 500 failed to push through its opening highs.

Tech had been a primary source of support for the midsession advance, but renewed selling pressure in the second half of the session left the sector to finish with a mere 0.2% gain. Semiconductor stocks were able to hold on to a near 0.9% gain, however.

Materials stocks had also provided leadership as commodities prices soared. Though the sector faltered and finished with a 0.5% loss, the CRB Commodity Index jumped 2.9% in its best single-session percentage gain in nearly two months.

The CRB's impressive performance came as bullish gasoline inventory data helped underpin a 5.7% gain by crude oil prices, which settled at $70.49 per barrel. Meanwhile, gold prices shot up a strong 1.5% to settle at $1009.50 per ounce.

The strong performance by commodities helped give the CRB Commodity Index a 0.6% gain for September and a 3.8% gain for the third quarter.

Though stocks finished September on a rather dour note, the S&P 500 was still able to book a monthly gain of 2.7% and a quarterly gain of 14.9%, which is the second best quarterly performance for the S&P 500 this decade. The best quarter came in the second quarter of this year, when the stock market advanced 16.7%.

With the end of the quarter at hand, investors and portfolio managers drove trading volume in the NYSE sharply higher as they juggled their portfolios. In turn, nearly 1.8 million shares traded hands on the NYSE. That's the second highest single-session tally this month


Asian stocks fell Thursday after a weak economic reading in the U.S. weighed on Wall Street and as a Japanese survey showed manufacturers still think they have too many workers


Down on weak US jobs data, but close Q3 17.3% higher, best gains in a decade, vs. 11.5% decline in Q3 of '08.



ASIA- MIXED N225I +0.33% HS -0.28 % SSEC +0.90% FTSTI -0.39% AORD -0.17 %

EUROPE - DOWN FTSE -0.50 % DAX -0.67% CAC -0..49 % MIBTEL -1.09%

US- DOWN S&P -0.33% DOW -0.31% NASDAQ -0.08%



N225I -1.53% HS -0.28 % SSEC +0.90% FTSTI -0.47% AORD -0.79 %


FTSE -0.06 % DAX +0.58% CAC -0.17 %


Up despite falling stocks on falling USD and sentiment, no special news Temporary technical bounce?


Oil prices fell below $70 a barrel Thursday in Asia after surging overnight on signs U.S. gasoline demand may be improving, dropping USD.

Where Is Oil Headed? Two Views

Oil Going Down

Oil Options Hit Highs as Verleger Predicts 44% Plunge: If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.”

Right to Sell

Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.

The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.

Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said. “There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”

Oil Going Up

Al-Naimi’s View

Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound, and said demand for crude was rising.

“Economic growth is the name of the game,” Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. “Oil today is a commodity. As long as economic growth is there, the price is going to go up.”

Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.

OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production.


Once again, despite falling stocks, gold futures gained on a slumping USD, though precious metals remain under pressure as stagnating stocks, strengthening USD and the weight of the largest # of long speculative positions in a year. These longs will need to take profits at some point, adding downward pressure to gold. The noncommercial net long position -- buying to profit from further gains -- in gold futures on the COMEX division of the New York Mercantile Exchange stood at an all-time high of 236,749 lots for the week ended Sept. 22.

"These (long positions) make the metal vulnerable to the downside, if upside momentum slows down further and weak longs start liquidating," said Alexander Zumpfe, senior precious metals trader at Heraeus in Germany.


General: overall market was rangebound as major economic events lined up this week, dealers said. "Market participants refrained from taking positions on one direction before key U.S. jobs data, the G7 meeting and also as the new quarter has just started," said Yuji Saito, head of the FX sales department at Societe Generale. "The broad market trend is for dollar selling but some dollar short-covering is being seen before those economic events," he said.

USD: The dollar finished the US session lower against all major currencies and to a fresh 13 mo. low against the AUD. was on the defensive on Thursday, having resumed its downtrend in the previous session as investors shifted funds out of the greenback and chased growth-linked currencies. Quarter end repatriation by U.S. corporations to recognize profits and window dress balance sheets helped create demand for U.S. dollars. Now that the quarter has come to an end, the dollar is falling once again.

European exporters have been able to overcome the barriers of high exchange rates to supply Middle East and Asia with capital goods for those region’s massive infrastructure build outs. On the other hand, US manufacturers have had only limited success in pressing their weak currency advantage on the global stage. If yesterday’s surprisingly weak Chicago PMI data foreshadows today’s ISM Manufacturing report the divergence between EZ and US economic condition will become even more pronounced.

5 Reasons the USD Could Fall

There are many reasons why we believe that the dollar will continue to fall but they center around 5 key factors.

1. Don’t Expect a Fed Exit Anytime Soon – Based upon 3 month LIBOR rates, the U.S. dollar is the lowest yielding G10 currency. Comments from Fed officials suggest that they are in no rush to exit from their unconventional monetary policy and will therefore leave the dollar as a cheap funding currency. Atlanta Fed President Lockhart said this morning that it will be some time before a comprehensive exit is needed while Kohn said that low inflation and slack demand will allow the Fed to keep interest rates around zero for an extended period of time. There is a good chance that the Federal Reserve could be one of the slowest central banks to tighten monetary policy because of the extreme slack in the U.S. economy. Last week, we talked about how the difference between the current unemployment rate in the U.S. and that of its 17 year average is the highest amongst the G10 nations. The countries with the least slack should be the first to hike rates while the ones with the most could be the last.

2. Reserve Diversification – According to the latest IMF report, foreign exchange reserves around the world rose 4.8 percent to $6.8 trillion. The dollar’s share of global reserves however has fallen from 65 to 62.8 percent as central banks around the world boosted their holdings of euros, yen and sterling. This report follows Russia’s announcement yesterday that they plan on adding Canadian and Australian dollars to their reserves. Reserve diversification threats slowed during the global financial crisis but if the recovery continues the talk will return. If there is one lesson that investors around the world should have learned from the crisis, is the need for diversification.

3. Strong Q3 Earnings – The weakness of the U.S. dollar should be very positive for third quarter earnings which could help to drive stocks to new highs. Not only does a weak dollar help U.S. exporters but it also increases the foreign earnings of U.S. multinational corporations. Since the EUR/USD has had a more than 85 percent positive correlation with the S&P 500 since the beginning of the year, a rise in the stock market should translate into gains in the euro and weakness in the U.S. dollar.

4. Twin Deficits – Don’t forget the trade and budget deficits that have plagued the dollar for years. The U.S. government has spent a lot of money propping up the economy and this will only burden the budget deficit. At the same time, a recovery in the U.S. economy could boost imports which could increase the trade deficit.

5. Price Patterns – Finally, price patterns also suggest that the dollar should continue to fall. At the beginning of September we talked about how the price action of the EUR/USD and USD/JPY this month could set the tone for the rest of the year. At that time, we showed two tables illustrating how in 7 out of the last 10 years, the EUR/USD moved in the same direction between October and December as it did in September. For USD/JPY, the odds were even higher with the currency seeing follow through 8 out of the past 10 years. Therefore based upon past price patterns, we have more reasons to believe that the dollar will fall against the euro and Japanese Yen over the next 3 months.

EUR- Comments from European Union’s Commissioner for Economic and Monetary Affairs Joaquin Almunia, that the Euro group will discuss euro’s appreciation at the upcoming G-7 meeting this Saturday in Istanbul, sent the single currency tumbling for more than 50 points in a matter of minutes at the start of European FX trade.

The latest statement from Mr. Almunia following on the heels of similar sentiment expressed by French President Nicholas Sarkozy at the G-20 summit earlier this month indicates that European fiscal authorities are becoming increasingly concerned about the relentless rise of the euro against the dollar. The currency has appreciated more than 16% since reaching a low of 1.2455 against the greenback in early March.

Despite the relative economic strength of the region, EZ officials are worried about the ascent of the euro, and today’s not so subtle warning from Mr. Almunia suggests that officials have decided to preempt any attempts at a runaway market. The EZ authorities are clearly concerned that a move past the psychologically important 1.50 mark could trigger a wholesale liquidation of long dollar positions and open the way for a test of all time highs of 1.6036 set in July of last year. Therefore today’s comments may be the start of a verbal intervention campaign to slow down the units rise, especially in light of possibly another weak US NFP number on Friday which would put further downward pressure on US rates and make the dollar even more vulnerable to carry trade flows.

In New York trade, stronger economic data and a correction in the U.S. dollar helped to lift the euro. German unemployment fell by 12k in September, the third consecutive month of lower unemployment. Although 10k people lost their jobs this month on a seasonally adjusted basis, the unemployment rate declined for the first time in 12 months from 8.3 to 8.2 percent. This is a sign of improvement in the German economy and should bode well for tomorrow’s retail sales report.

JPY - The dollar edged up 0.3 percent from late U.S. trade to 89.94 yen, staying above an eight-month trough of 88.23 yen hit

earlier this week. But offers from some Japanese exporters limited gains in the dollar, traders said. The U.S. currency lost nearly 7 percent against the yen in the previous quarter just ended on Wednesday as investors dumped the dollar on a fall in U.S. Treasury yields. But against the closing level at the end of 2008, dollar/yen was down only 1 percent.

Once again, the currency pair has broken below the 90 level and appears poised for more losses. Among a string of economic data released in the last 24 hours, Industrial Production increased 1.8 percent. Production advanced for its sixth straight month, marking the longest streak of growth in more than a decade. However, when considering that output dropped from last month and fell 18.7 percent from a year earlier, we are not left with the feeling that manufacturing is flourishing. Nevertheless, Manufacturing PMI still managed to advance, reaching 54.5 versus the 53.6 recorded last month. Construction orders also showed an extremely strong performance, jumping from -42.8 percent to -25.2 percent. However, at the same time Vehicle Production is down 25.9 percent, with Toyota output dropping by 25 percent, and Housing Starts did not impress at -38.3 percent. Obviously, conditions are in a grey zone between full on recovery and mere stabilization.

The Tankan index came out this morning showing worse than expected sentiment among manufacturing and service sectors.

GBP – Even though the British pound ended the U.S. trading session higher against the greenback, the price action today reflects more weakness than strength. Having hit a high of 1.6126 intraday, the GBP/USD sank back below 1.60 despite strong economic data. GFK Consumer Confidence rose to -16 from -25, its biggest one-month gain since 1995. The figure also showed that sentiment returned to early 2008 levels with economic expectations for the coming year reaching the highest level in more than a decade

AUD The Australian dollar, seen as a proxy to global growth in the currency market, remained the star performer. The Aussie hit a 14-month high against the U.S. currency above $0.8850, although dealers said it later erased those gains on investor profit-taking. The Aussie benefitted from positive retail sales data, and continues to benefit from optimism on China growth and demand for Aussie goods.

NZD – Business confidence came in higher, helping it rise against the USD.

CAD – Tracking oil first, stocks and risk appetite second, so the CAD is likely to move with oil and stocks. GDP was flat for July, but the CAD still moved higher against the USD on higher oil and USD weakness.

CHF – the market's suspicions were right. On the day of the second ever ECB 1 year tender, the Swiss National Bank intervened to sell Francs against euros. The last time they intervened was during the first auction in June. By our count, this is the fourth time that the SNB has intervened in the market to buy EUR/CHF this year, but since the SNB doesn't always verify their intervention, the count is based upon price action. Intervention is usually not very effective but in the case of the SNB, their efforts have made 1.50 a floor in the currency. For the foreseeable future, we expect EUR/CHF to range trade between 1.50 and 1.54.

Currency Trade of the Day: EUR/USD

The EUR/USD will be the currency pair in play for the next 24 hours. For the Euro-zone, we expect German Retail Sales at 2:00 am ET or 6:00 GMT along with EZ Manufacturing PMI for 4:00 am ET or 8:00 GMT. On the way for the US will be Personal Income and Spending at 8:30 am ET or 12:30 GMT and ISM Manufacturing and Pending Home Sales at 10:00 am ET or 14:00 GMT.

The EUR/USD manages to pull ahead today but still remains within the Bollinger band range trading zone. If the pair should climb further, resistance stands at the September 23rd high at 1.4843. Luckily for euro bulls, there is a lot of support lying below. First of all, prices from today and yesterday are practically sitting on the 20-day moving average which should keep things lifted. However, if it does not hold, the first stop is yesterday’s low at 1.4526. If we get another break, the next area of support lies at the August 5th high of 1.4445. These levels increase the odds that EUR/USD is experiencing a small correction rather than a new leg downward.


Potentially an unusually volatile week full of news and climaxing in US Non Farms Payrolls and Unemployment Rate Reports. With so many trends extended, safest bet appears to be range trading at strong multi-month support or resistance once a bounce begins. See Crude oil for Tuesday as an example as it begins to bounce. Keep close watch on stocks, especially the S&P 500 for direction of other risk assets. Long gold futures are at 12 month highs among traders small and large, short gold futures are at a 12 month high for commercial traders. This implies extreme risk appetite/bullish sentiment, which is considered bearish. See report: What Pro Traders Think of Gold: COT Report of Sept. 22, also, How to Trade The World's Biggest Trading Day of the Month

Trading Opportunities: 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. Always use sell stop orders.

Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back.



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