Tuesday, October 13, 2009

GLOBAL OUTLOOK OCT 13: Risk Assets, Bank Call Options Up, USD Down


Stocks: Monday: Asia down, Europe, US up, Tuesday morning Asia up, Europe down

- FX: Higher equities, AUD rate rise brings 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 up/steady against most riskier majors

- Main events today:GBP: CPI y/y, EUR German ZEW Econ. Sentiment, Wed: BoJ Press Confr., CNY Trade Bal., GBP Claimant Count, USD Core Retail Sales, FOMC Minutes, NZD: CPI q/q

- Big Theme: Rising risk appetite, USD weakening w/ no reason to stop except for extreme oversold position. Bank Call Options Suggest Optimism on Bank Earnings


A breakdown in technical support caused stocks to rollover midsession, but the S&P 500 successfully fended off sellers to log its sixth straight gain, which is the best streak this year for the stock market.

Strong gains by European markets and renewed weakness in the U.S. dollar helped stocks start the session on strong footing and the S&P 500 climb above its 2009 closing high, which had represented significant resistance late last week.

Early gains were broad-based, but energy stocks were easily the best performers for the entire session. The sector settled with a 1.2% gain as oil and gas drillers (+2.5%) and oil and gas equipment stocks (+1.9%) responded to a 1.9% gain in crude oil prices, which closed pit trade at $73.15 per barrel.

Financial stocks lagged for most of the session and even dipped into negative territory in the early going. However, the sector was able to regroup and finish at a session high with a 0.9% gain, second only to the energy sector.

Within the financial sector, diversified banks (+2.8%) showed particular strength. Their gains came amid comments from widely followed analyst Dick Bove during a CNBC interview that Wells Fargo (WFC 30.28, +1.07) will most likely provide a positive surprise for the latest earnings reporting season. Bove also said that Morgan Stanley (MS 31.76, -0.33) and Goldman Sachs (GS 190.15, +0.85) should do pretty well, but 60% of regional banks will probably post losses this quarter and next quarter.

Despite strength in the broader market, the S&P 500 could not push through its 2009 intraday high, which stands near the 1080 level. Stocks traded sideways just below that technical hurdle, but a sudden fit of selling pressure soon snowballed and dropped the S&P 500 way back to neutral line, where it garnered support and reclaimed gains into the close.

Meanwhile, the Dow finished with a modest gain, but the Nasdaq settled with a fractional loss.

Trading volume was paltry this session. Not even 950 million shares exchanged hands on the NYSE this session. That's the lowest level two months.

Treasury markets reopen Tuesday. They were closed this session for Columbus Day.

Rise in Demand for Call Options on Financial ETF Suggests Optimism on Bank Q3 Earnings

** Reuters: 12 Oct, 9:33 PM If call options on the XLF banking-sector ETF are anything to go by, there are expectations for big earnings from the financial companies reporting this week, including JPMorgan Chase (JPM), Citigroup (C), Goldman Sachs (GS) and BofA (BAC).

Advancing Sectors: Energy (+1.2%), Financials (+0.9%), Utilities (+0.5%), Health Care (+0.4%), Tech (+0.3%), Materials (+0.3%), Consumer Staples (+0.2%), Consumer Discretionary (+0.1%)

Declining Sectors: Telecom (-0.1%), Industrials (-0.1%)DJ30 +20.86 NASDAQ -0.14 NQ100 +0.1% R2K -0.2% SP400 +0.1% SP500 +4.70 NASDAQ Adv/Vol/Dec 1221/1.79 bln/1438 NYSE Adv/Vol/Dec 1640/946 mln/1352

Asia: TOKYO, Oct 13 (Reuters) - Japan's Nikkei average rose 0.4 percent on Tuesday, helped higher by exporters such as Advantest Corp after the S&P 500 managed a sixth consecutive day of gains, while steelmakers climbed on a brokerage ratings hike. Hong Kong shares picked up pace across the board towards midday Tuesday, gaining 1.8 percent as gains in Europe and the US, along with positive news from big name firms fed risk appetite.

Europe: Q3 earnings hopes lift shares higher, futures point to higher opening. FTSE rising on dovish GBP statements.



ASIA- DOWN N225I -- HS -0.93 % SSEC -0.59% FTSTI +1.05% AORD -0.19 %

EUROPE - UP FTSE +0.94 % DAX +1.25% CAC +1.22 %

US- UP S&P +0.44% DJIA +0.21% NASDAQ -0.01%



N225I +0.39% HS +0.79 % SSEC +1.44%% FTSTI -0.45% AORD +0.93 %


FTSE -0.24% DAX -0.55 CAC -0.48%

COMMODITIES: Today in Asia, commodity prices change little as the market awaits more data both from the macro and industry side.

Oil: Crude oil price rallied 2.2% to a 7-week high at 73.84 Monday as driven by strong equity market and weak USD. While market sentiment once again pushed oil closer to the key resistance of 75, stagnant fundamentals in energy market refrained price from an upside break. The benchmark contract eventually settled at 73.27, gaining +0.7% from last Friday's close. Rising in Tuesday morning trade to around $73.50.

Saudi Arabia and other members of the Organization for Petroleum Exporting Countries have said they were content with current crude prices, which, at around $71 per barrel, are over double their levels that December when OPEC cut 4.2 million barrels per day production.

Kuwait is one the top five producers in OPEC -- a cartel of 12 nations, whose output accounts for two-thirds of the world's oil reserves, and, as of April 2009, 33.3 percent of the world's oil production.

Gold: Gold price pared Friday's loss and rebounded +0.8% to 1057.5 yesterday with the decline in USD remaining the major driving force. Silver surged to almost a 3-month high at 17.955 before closing the day +0.7% higher at 17.82 while platinum added +0.6% to close at 1347.3.

Investor Jim Rogers said that will not buy gold at current price as fundamentals do not support. However, he reiterated his long-term bullishness on bullion and anticipated it would reach 2000 in the next decade.

CURRENCIES: Rising stocks, risk appetite keeps bias strongly to risk currencies

USD: Trading with risk sentiment, thus with rising stocks and commodities theUSD weakened against major currencies except for Japanese yen and British pound. The dollar index(.DXY) fell to 76.12. Against higher-yield currencies such as the euro, Australian dollar and New Zealand dollar, USD dropped to 1.48, 0.908 and 0.736 respectively after a brief recovery last Friday, as rising stocks encourage investors to buy higher yielding currencies. While there is yet no reason for the USD to reverse, its increasingly oversold position makes that reversal more likely on even mildly positive news.

Later in the week will be busier with the minutes from September's FOMC meeting due on Wednesday as well as September retail sales. In addition, the Q3 earnings season continues this week, and is likely to affect risk sentiment.FOMC minutes will be closely watched as markets seek clarity on the Fed's current position on exit strategies. Two separate Fed reps try to talk up the USD, though it's just talk for now, markets still see it as an improvement.

Can the Recent Gains in the Dollar be Sustained?

However if you look beyond the price of USD/JPY and the GBP/USD, the greenback is still struggling to recover. For example, the EUR/USD sold off by less than 100 pips while the Canadian dollar extended its gains against the greenback. The Australian and New Zealand dollars are still holding near their highs. The trade deficit narrowed in the month of August, but the mild improvement is hardly enough to trigger a bottom in the dollar. Yet we are walking into a very busy data week that will allow investors to compare the current state of the U.S. economy with that of its peers. We already know that Australia, New Zealand and Canada are outperforming the U.S. economy (data-wise) but there is a good chance that the U.S. could play catch-up in the coming week which may actually be dollar positive. The releases to watch on the U.S. calendar include retail sales, the minutes from the most recent FOMC meeting, consumer prices and the Treasury International Capital flow report. Although economists expect a sharp drop in consumer spending following the expiration of the cash for clunkers program, the rise in the ICSC and Redbook retail sales reports suggests that the contraction in spending may not be as bad as expected. Given the latest comments from Bernanke and the recent trend of U.S. data, we anticipate optimism from the members of the monetary policy committee. As for inflation, the rise in commodity prices should bolster price pressure. The TIC report which measures foreign demand for U.S. Treasuries on the other hand is a bit of a wildcard. Talk of reserve diversification and the weakness of the dollar have traders fearing that foreigners have become less willing to buy dollars. However demand by foreign central banks is not that volatile and could therefore surprise to the upside. So overall, we believe that the odds are skewed towards stronger reports next week and we may finally see the dollar rally on good data. On top of that, White House Economist Romer repeated the Obama Administration’s support for the strong dollar.

Dollar Short Positions Increase

According to the latest CFTC report, forex positioning in the futures market is nearing extreme levels. For example, net short positions in the British pound rose against the dollar to the highest level ever while long positions in the euro rose to the highest since January 2008. Long positions in the Canadian dollar also doubled while long Australian dollar positions remained near 1 year highs. The only currency that traders trimmed their positions in was USD/JPY, but even then short USD/JPY positions remained near 1 year highs. This confirms our belief that the short dollar trade has become very overcrowded and because of that, the dollar is setting up for a rally. Next week’s economic reports could provide the necessary catalyst. In the meantime, Canadian and Japanese markets are closed on Monday for holidays. It will also be a Bank Holiday in the U.S. but the equity and currency markets will be open for trading.

Watching for the Ultimate Contrarian Indicator

Bloomberg and CNBC have been talking about the U.S. dollar throughout the trading day while the Financial Times carried a prominent story in today’s paper about The Case for a Weaker Dollar. Time Magazine also published an online story about Why Investors Should Bet against the Dollar which indicates that its sharp depreciation has already caught the attention of nonfinancial media. At this point, we are watching for the ultimate contrarian indicator, which is Magazine Covers. The curse of the Magazine Cover is something that is often utilized in the stock and commodity markets. The idea is that once a company or a commodity market makes the cover of a general business publication like the Economist or Business Week, the bull-run is nearly over. The indicator also applies to the currency market and is in fact probably one a popular method of determining a top or bottom. In the following chart, we have highlighted that last 4 times that the dollar was featured on the cover of a major magazine. On March 21, 2005, the cover of Newsweek was “The Incredible Shrinking Dollar.” Days after the magazine was published, the dollar soared more than 500 pips against the euro. On December 4, 2004, the cover of the Economist was a story on the “Disappearing Dollar.” Two months later, the EUR/USD fell more than 400 pips and about 11 months later, the currency pair was trading down more than 1500 pips. The same situation happened in December 2006 and December 2007 when the dollar once again graced the covers of the Economist. Although the rally in the dollar paled in comparison to the 2004 move, the knee jerk reaction still amounted to approximately 500 pips. The dollar is currently trading at much weaker levels which mean that if the greenback continues to weaken, there is a good chance that we will once again see a cover story about the shrinking or disappearing dollar and when that happens, it will be the “Ultimate Contrarian Indicator.” For our forex newbies, this means a signal that the dollar could stage a strong rally.

Source: DealBook 360

05 oct 13

EUR- EURUSD rose Monday despite weaker economic data, as the USD weakened against most currencies. It is likely to stay driven by investor risk appetite globally, and any perceived shifts in the relative timing of policy tightening between the ECB and the Fed. We continue to expect that both central banks will be among the last to begin the process of policy rate normalization.

The German ZEW survey of investor confidence is due for release on Tuesday. Despite the strength of the currency and the rise in the stock markets, we believe that the expiration of the cash for clunkers program and the recent slowdown in Germany’s recovery could weigh on sentiment. The latest retail sales report was also very weak while factory orders grew at a slower pace. The Eurozone economy is continuing to expand but we are now seeing the expansion being led by France and not Germany. A smaller than expected rise in confidence or a surprising drop could drive the EUR/USD back into its 1.4545-1.4845 trading range. However as long as the currency pair holds above 1.4450, the uptrend remains intact.

JPY - Awaiting policy statement due Wednesday, attention will focus instead on comments regarding the yen's relative strength, and whether guidance is given on the future of the BoJ's scheme for the outright purchase of CP(commercial paper) and corporate bonds. We continue to forecast USDJPY at 85 in 1m.

GBP – British pound weakened against the dollar and the euro on further dovish sentiment: the Center for Economic and Business Research said the nation's interest rate should stay at a record low of 0.5% at least until 2011. They see a strong possibility of the BoE adding an additional £75B to their quantitative easing programs, a move similar to what BoE head Mervyn King favored back in August. Putting a definitive time-line on such programs was a shocking realization to some traders that the BoE is the most dovish central bank out of all industrialized nations. Prime Minister Gordon Brown confirmed this title by indicating that now is not the right time to withdraw stimulus as it would derail recovery. These comments are coming as a result of a heated debate between Brown and Conservative party leaders who believe the stimulus should be withdrawn

At the same time, the British Chambers of Commerce said that the BOE should extend its bond purchase program by 25B pound to 200B pound next month so as to support economic recovery. Currently trading at 5-month low against the dollar and 6-month low against the euro, the pound will stay under pressure for some time.

Stock markets loved the news and headed toward a new yearly high. There were no economic releases today, but we have RICS House Price Balance, CPI, and the DCLG House Prices Index on tap for tomorrow.

AUD: We increase our 3m forecast on AUDUSD from 0.75 to 0.80 to reflect the increased risk of accelerated RBA rate hikes. Our economists now predict a further 50bp of tightening this year, expected to come in two 25bp installments.

The Australian dollar was easily the strongest performer last week, gaining over 4 percent against both the greenback and Japanese yen, after the Reserve Bank of Australia surprised everyone and became the first major central bank to raise interest rates after the global financial meltdown. Indeed, the RBA raised rates by 25 basis points to 3.25 percent, as the central bank determined that “growth [is] likely to be close to trend over the year ahead [and] inflation close to target,” adding that “the risk of serious economic contraction in Australia [has] passed.” Meanwhile, RBA Governor Stevens said that “it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” suggesting more rate hikes may follow, with Credit Suisse overnight index swaps now pricing in another 175 basis points worth of increases over the next 12 months.

In being the first to take this bold step, the RBA has upped the ante for other central banks, but more specifically, the Reserve Bank of New Zealand, the European Central Bank, and the Bank of Canada, as the markets are speculating that they may be the next to follow suit. That said, with increased speculation comes increased disappointment when the central bank strikes a neutral tone, as we saw with the euro’s response to the ECB’s statement last week.

Event risk will be comparatively low for the Australian dollar this coming week, and as a result, price action may simply constitute a consolidation period for the currency following its massive rally. The releases of NAB business confidence and Westpac consumer confidence are likely to reflect robust optimism, as the sharp increase in employment suggests firms are doing well enough to hire and more households are earning income. Likewise, consumer inflation expectations could continue to creep higher, adding to evidence that the RBA will increase rates further.

NZD: Retail sales in New Zealand surprisingly increased +1.1% mom in August, compared with consensus of a +0.6%gain, from a drop of -0.5% in the prior month. Excluding auto, the reading surged +1.2% during the month. The better-than-expected data should increase speculations that the RBNZ will increase its policy rate earlier than previous estimated. Currently, the market is pricing in a move in January 2010. We also lift our 3m NZDUSD forecast from 0.60 to 0.65.

The New Zealand dollar is not the Australian dollar. This may seem like an obvious observation; but you wouldn’t think so when comparing the price action between the two currencies. The reason for the Aussie’s strength is clear: the RBA has already initiated a hawkish policy stance and economic data is fully supporting a progressive economic recovery. Yet, the kiwi doesn’t share these fundamental benefits. The New Zealand recession is still quite prominent, there is now a more appealing investment currency among the majors and RBNZ Governor Bollard has explicitly expressed his intentions to keep his nation’s benchmark lending rate unchanged at 2.50 percent until “late” next year. These are glaring discrepancies and they will not hold out forever.

Looking out over the coming week, the currency’s relationship to its Australian counterpart (and more importantly risk appetite) will be tested with a notable round of economic data. A critical step towards putting interest rates back on that much-sought-after hawkish policy is establishing a true economic recovery. Data has so far shown a tepid recovery; and we will look for heat with the economic indicators on the docket. Retail sales, business activity and housing sales will offer a relatively complete picture of economic activity. Of the three, the retail spending figure holds the greatest potential for volatility. However, the sales data is the most promising indicator for the week. The third quarter Consumer Prices data will provide Governor Bollard a clear gauge for establishing the need for restrictive monetary policy. Still trying to support an economic recovery; the central banker will have to see a threat of inflation before his is prompted to rate hikes (and most likely preemptive ones at that). It is true that he has said he would hold the benchmark well into next year; but he could easily renege on that vow; and his propensity for aggressive policy shifts is renowned. However, the issue here too is that he does not want to further encourage his currency to appreciate.

In the meantime though, the direction and momentum of any genuine trend for the kiwi will lie with risk appetite. It has been said that a rising tide floats all boats; and the New Zealand currency is certainly riding the surf. In fact, all commodity dollars have enjoyed the advance in risk appetite (even the Canadian dollar which has neither no real return to speak of nor a particularly hawkish future ahead of it). For the kiwi, demand for yield finds a significant return with the nation’s high benchmark; but there is also the sentiment factor. For those currencies considered fundamentally depressed (like the British pound), a bullish outlook for the global economy and markets offers a far greater reward. Taking stock of direction in sentiment, the proxy for sentiment (equities) is on the cusp of new yearly highs. A breakout or reversal can develop; but there are no clear catalysts offering to resolve the standoff. This in itself is an important observation; because without an engine to keep risk appetite on a rise, the currently high levels of optimism will eventually appear extreme and will encourage a retracement. -

CAD: USD/CAD: No support for the pair until parity, as a combination of rising risk appetite and positive Canadian economic data simultaneously lift the CAD and hurt the USD Better job numbers continue to lift the CAD The CAD continued to strengthen vs. USD due to some anticipation that the BoC could hike rates prior to its conditional commitment to keep its policy rate on hold through Q2 2010 as a result of Friday's strong employment data. However, the currency strength is doing some tightening for the BoC already, and the BoC continues to remained concerned about weak CPI readings. We decrease our 3m USDCAD from 1.18 to 1.12 on the grounds that Canadian economic data has shown some resilience of late, culminating in the recent strong employment report.

However not all news was good news for Canada this morning. The trade deficit in Canada hit a record low in August as exports plunged 5 percent. Imports also fell but not as aggressively as exports. Weaker demand was seen in most products but agriculture and machinery took the biggest hit. Although we are worried about the trade numbers, we do not believe that it will erase the upside momentum in the Canadian, but we will become very worried if trade fails to recover in September. That could renew intervention concerns.

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 Swiss Franc Forecasts Neutral Given Major SNB Headwinds

Fundamental Forecast for Swiss Franc: Neutral

- One-sided sentiment points to further USD/CHF declines

- Swiss Franc falls as Consumer Price Index loses more than expected

The Swiss Franc was one of the worst-performing currencies to end the week’s trade, as a broad rally in key risky asset classes decreased flight-to-safety demand for the European currency. Recent Swiss National Bank forex market intervention likewise stayed fresh in many traders’ minds, and markets are understandably reluctant to force major CHF appreciation. The week’s Consumer Price Index inflation figures only reinforced fears of further SNB FX intervention; prices fell more than expected in the 12 months ending in September. Central bank officials have made it relatively clear that they will continue to fight Swiss Franc appreciation in the face of broader deflationary pressures in the domestic economy. Absent a material shift in CPI, we can reasonably expect the SNB to continue defending the key SFr 1.5000 mark against the Euro. Broader US Dollar weakness has left the USD/CHF lower in recent weeks, but our overall forecast for the CHF remains neutral on the persistently looming threat of SNB intervention.

Another relatively lackluster week of economic event risk leaves the Swiss central bank as the primary attraction for Swiss Franc in the days ahead. A Swiss Retail Sales report is the only real exception, but this report seldom forces major moves across CHF pairs. Traders should instead keep an eye out for important shifts in global financial market risk sentiment. Equity market bulls continued to rule the roost through last week’s trade and forced fairly universal gains across global indices. A continuation of such strength would almost certainly prove bearish for the Swiss Franc, but continued risk sentiment gains are hardly guaranteed. Despite strong year-to-date performance across key risky assets, it remains relatively clear that fortunes can and do improve at a moment’s notice. Swiss Franc traders should accordingly be on the lookout for any such deterioration in financial market risk sentiment and its effects on the safe-haven Swiss currency.

CONCLUSIONS: Bias to risk currencies as stocks rise on questionable earnings data and AUD keeps rallying on good news. These favor short USD trades near term, long term, until stocks pull back or there is other major pro USD news. Earnings season begins to dominate news. A key point for encouraging clients to open accounts, deposit more – to be ready for next week, when we get a number of high profile announcements that should set the initial tone for earnings season. As stated in the DAILY analysis for stocks:

In the end, next week's major earnings announcements will decide the fate of stocks for the near term. We'll get a clearer picture next week, when the likes of Johnson & Johnson (JNJ), Intel (INTC), JP Morgan Chase (JPM), Citigroup (C), Goldman Sachs (GS), Nokia (NOK), Google (GOOG), IBM (IBM), Bank of America (BAC) and General Electric (GE) all provide results. There are enough big names here to set the tone. Increased revenues in addition to beating estimates could mean stocks rise even higher. Disappointing revenues could bring huge trading profits to the downside in stocks, commodities, AUD/USD, NZD/USD, EUR/USD, given the extended nature of the rally and oversold USD.

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, no trend continues forever.

Crude oil

Reaching the upper edge of its multi-month $67-$74 range at 72.97. $74 would also mean crude would recapture its rising trend line from mid July that it lost in late September, so $74 is a convergence of both price and trend line resistance that, if broken, could signal more gains for crude. Thus around $74 is a good entry point to either play a up or down move, depending on how stocks are doing.

Crude Oil Futures Daily Chart as of Oct 13 09

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