Wednesday, October 14, 2009

GLOBAL OUTLOOK OCT 14: JNJ Revenue & Whitney's Warning


- Stocks: Tuesday: Asia up, Europe, US down, Wednesday morning Asia, Europe up

- 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 down against all

- Main events today: CNY Trade Bal., JPY: BoJ Press Confr. GBP:Claimant Count Change, USD: Core Retail Sales FOMC Minutes JPM reports today, Thursday C,GS, IBM, GOOG report tomorrow, along with AMD, HOG, MERCK.BO, NOK. Positive news should lift risk assets, hurt the USD.

- 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, but GS downgrade could be significant if it again foretells bank earnings results


The S&P 500 saw its six-session streak of gains come to an end Tuesday despite a weaker dollar, as Dow component Johnson & Johnson reported better earnings on worse revenues, leading to concerns about future earnings, and GS was downgraded, leading to concerns about the banking sector, the health of which will be critical to any sustained recovery.

**Significantly, the downgrade came from Meredith Whitney, who is credited with calling out many of the troubles facing banks and the broader financial sector during the last couple of years, AND whose UPGRADE of GS got Q2 earnings season off to a good start as she correctly predicted a good earnings report from GS. Will she again prove to be a leading indicator? We'll know Thursday morning EDT before the market opens in NYC.

If she's right again & GS, or the banks as a group disappoint, or even fail to improve top line revenues, markets could pull in fast, because that news, along with the latest US monthly employment data, would further tarnish the US recovery story and raise questions about current stock market valuations.

A weaker greenback has been a strong underpinning of the stock market's recent gains, but its affect on stocks this session was mitigated by caution among participants ahead of a flurry of upcoming earnings announcements. The Dollar Index returned to 52-week lows early this session, but participants paid more attention to the third quarter report from Dow component Johnson & Johnson (JNJ 61.01, -1.52), which brought in better-than-expected third quarter earnings of $1.20 per share and offered an increased earnings outlook of $4.54 to $4.59 per share for fiscal 2009. Those accomplishments were tainted by a softer top line, however. Johnson & Johnson's report came as a reminder that earnings for the latest quarter could very likely be driven by cost cutting rather than resurgent demand.

Participants get a better feel for things when JPMorgan Chase (JPM 45.66, -0.42) reports Wednesday morning (EDT) and Goldman Sachs (GS 187.23, -2.92), IBM (IBM 127.02, -0.02), Citigroup Inc (C) and Google (GOOG 526.11, +2.04) report Thursday. Bank of America (BAC 17.81, -0.22) and General Electric (GE 16.39, +0.06) lead the list for Friday.

Financials weighed on trade for virtually the entire session, though the broader market did manage to finish in mixed fashion after recovering from morning lows.

This contradicts rising demand for October and November call options (rights to buy) on XLF, the banking ETF, which suggests most options traders believe bank earnings will please the markets and bring gains to these shares. It will be interesting to see who was right.

Telecom stocks finally showed some strength after underperforming in each of the previous four sessions. The sector tacked on 0.4%.

Retailers saw some of the best gains, though. As a group, retailers advanced 0.9%.

Meanwhile, materials stocks settled 0.5% higher, helped by higher commodity prices.

Advancing Sectors: Materials (+0.5%), Consumer Discretionary (+0.4%), Telecom (+0.4%)

Declining Sectors: Financials (-1.1%), Health Care (-1.0%), Utilities (-0.6%), Consumer Staples (-0.2%)

Unchanged: Energy, Industrials, TechDJ30 -14.74 NASDAQ +0.75 NQ100 unch.% R2K -0.3% SP400 -0.4% SP500 -3.00 NASDAQ Adv/Vol/Dec 1192/2.05 bln/1463 NYSE Adv/Vol/Dec 1289/1.14 bln/1706 Treasury markets reopen Tuesday. They were closed this session for Columbus Day.

Asia: N225 down on profit taking after 5 days of gains, the rest of Asia up towards close on continuing risk appetite and weak USD encouraging liquidity flows into Asian markets, and China exports and imports post better than expected results.

Europe: European shares bounced back in early Wednesday trade from the previous session's decline, with soothing earnings results from Intel (INTC.O) and ASML (ASML.AS) prompting investors to pick up riskier assets such as equities..



ASIA- UP N225I +0.60 HS +0.79 % SSEC +1.44% FTSTI -0.45% AORD +0.93 %

EUROPE - DOWN FTSE +1.34 % DAX -1.19% CAC -1.22 %

US- DOWN S&P -0.28% DJIA -0.15% NASDAQ +0.04%



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


FTSE +1.75% DAX +1.86 CAC +1.76%

COMMODITIES: Today in Asia, oil steady near $75/barrel, gold retreating slightly.

Oil: Oil futures prices in NYC opened the session with a gain of roughly 1%, but reversed into the red as the U.S. dollar worked its way up from its lows. However, oil contracts garnered support and finished with a 1.2% gain at $74.15 per barrel. Continuing to rise in early Wednesday Asia trade close to $75/barrel on USD weakness, optimism about growth.

Gold: Gold prices jumped in NYC to new record highs of $1069.70 per ounce in early trade, but saw some of those gains pared before finishing with a 0.7% gain at $1064.60 per ounce. Wednesday, slight retreat, just below record highs Gold is expected to continue to move in the opposite direction of the USD.

CURRENCIES: Rising stocks, risk appetite keeps bias strongly to risk currencies, USD, GBP weakness persists.

USD: The U.S. dollar struck a 14-month low against the euro on Wednesday, and fell against all others as well, as Fed Vice Chairman Donald Kohn's downbeat views on recovery and chances of raising US interest rates sabotaged recent attempts by Bernanke and St. Louis Fed President James Bullard to talk up the USD.

Today FOMC minutes may provide hints on exit strategies, retail sales and CPI news might influence, but likely to be overshadowed by JPM's earnings announcement before the open, because it is the first major bank to report, and recovery in banking is critical to the broader US recovery.

Outside of a sharp fall in the U.S. equity markets, there is not much in the way of further dollar weakness. Investors expect another round of positive earnings reports, which should sustain the momentum in stocks.

Ahead today, September's FOMC meeting minutes are due 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. The Fed affirmed its Agency asset purchase targets at the last meeting and this decision implies ongoing concerns over the housing market, which should be elaborated on in the minutes.

On retail sales less autos, the market is looking for a softer print of 0.2% on the month vs. 1.1% previously.

CPI is expected to rise slightly higher to -1.4% y/y vs. -1.5% y/y previously, while core CPI is expected to stay flat.

Fed's Dudley and Bullard will also speak. Some top-tier international banks report earnings on Wednesday and Thursday. Any repeat of the broadly positive earnings surprises seen in Q2 is likely to lead to further gains for commodity currencies at the expensive of the USD. We recently increased our 3m EURUSD forecast on the grounds that the risk correction we had anticipated may not occur until later than we had originally expected.

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 Tuesday despite disappointing ZEW sentiment data, as the USD weakened against most currencies. The pair 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.

In related comments the ZEW economists blamed the fall on the impact of a stronger EUR on German exporters. Later in the week, Eurozone IP for August is released as well as Eurozone CPI for September. Last week, Trichet mentioned, on the subject of inflation, that offering Eurozone banks unlimited liquidity would not result in inflation, provided the liquidity was being sought for "precautionary motives.

Given the fact that the highest yielding currencies in the industrialized world are the smallest economies within the G-10 universe, there is a limitation to how much capital reserve managers can commit to those units. Therefore, although the European short term rates are only slightly higher at 1.00%, the EUR/USD has been the primary beneficiary of this trend away from the dollar. Nevertheless, in the world of low yields the euro provides relative value both on the interest rate and liquidity basis and continues to attract investment and speculative flows.

The recent strength of the euro has most likely contributed to the drop in optimism but at the same time, the stronger euro offsets some of the inflationary pressures created by higher commodity prices. This puts the European Central Bank in an interesting place and may help to explain why they are not actively talking down the euro. The latest comments from ECB officials including Noyer indicate that the central bank is comfortable with the current policy and will only exit when the time comes. They are optimistic about the recovery and credit the expansion in Asia for contributing to global growth. Noyer also talked about how replacing the dollar as a reserve currency is “not obvious” but the euro would be an “obvious candidate” for reserve currency along with the Chinese Renminbi if it became fully convertible.

JPY - Bank of Japan keeps its overnight call loan rate unchanged at 0.1%, and contrary to expectations, makes no mention of whether it will end measures to supply funds to the market by buying bank-owned corporate debt, suggesting it's still concerned that its termination could choke off an economic recovery. We continue to forecast USDJPY at 85 in 1m.

GBP – The British pound staged a strong recovery against the U.S. dollar and Euro on the heels of optimistic comments from Bank of England Deputy Governor Bean. According to Bean, there is evidence that Quantitative Easing is finally having satisfactory effects on the U.K. economy.

There has been significant asset price increases and improvement in consumer confidence since QE began and because of that activity in the U.K. has probably bottomed. These are the most optimistic comments that we have heard from BoE officials in a long time and explain why the pound has responded so positively. However, this does not mean that further Quantitative Easing is out of the question. Recovering against the USD, but low CPI implies deflationary pressure and need for more QE

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: Moving with risk appetite, which will move with stock market reaction to big name announcements starting today with JPM. REINZ house prices for September will be released. Our economists expect the RBNZ to drop its easing bias at its Oct 28 monetary policy meeting.

CAD: USD/CAD: Unchanged from Monday, gaining on the USD Wednesday. No support for the pair until parity, as the CAD gets support from a combination of rising risk appetite, better job numbers and resulting anticipation that the BoC could hike rates prior to its conditional commitment to keep its policy rate on hold through Q2 2010. While no talk yet of raising rates, 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: The Swiss Franc traded higher against the dollar but lower against the euro despite an uptick in producer prices. Unlike the Eurozone which has a strong currency to mitigate inflationary pressures, fears of intervention have capped the gains in the Swissie which in turn limited its impact on inflation.

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: 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.

Crude oil

Breaches resistance at $74 as it hits $75 and holds it into Wednesday, implies more gains ahead barring stock pullback.

Yesterday we wrote that oil was "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." Now that resistance is broken, that suggests more upside barring a reversal in stocks.

Crude Oil Futures Daily Chart as of Oct 13 09

01 oct .13




China Export Decline Slows, Aiding Government Efforts to Sustain Recovery

U.K. Unemployment Rises by 88,000, the Least in a Year, as Recession Eases


Option Investors Bullish on Financial ETF as Earnings Loom: Higher demand for October and November XLF.P calls implies that traders expect big banks earnings to be good


10 Most Important Earnings Reports for This Upcoming Week

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

Crude Oil and Gasoline Prices: Like Déjà Vu All Over Again

Oil Prices, Natural Gas Futures and Speculators

Is Crude Oil Breaking Out?


No comments:

Post a Comment