Thursday, October 15, 2009

GLOBAL OUTLOOK OCT 15 - Full Length Version: Good US Earnings News Lifts Global Markets


- Stocks: Wednesday: Asia, Europe, US up, Thursday morning Asia, Europe up on Good Earnings news fr. JPM, INTL

- FX: Higher equities, 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: Thursday: AUD: RBA Gov. Speaks, USD: Core CPI m/m, Unemployment Claims, Earnings: C,GS, IBM, GOOG 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


Strong earnings from a couple of industry bellwethers and a weaker U.S. dollar brought about a concerted buying effort that sent all three major indices to new 2009 highs. Stocks lost a bit of their upward momentum as they headed into the close, but the Dow was still able to settle above 10,000 for the first time in one year.

Stocks traded solidly higher in broad-based fashion for the entire session. Their advance came on the heels of better-than-expected third quarter earnings from chipmaker Intel (INTC 20.83, +0.34) and diversified financial services outfit JPMorgan Chase (JPM 47.16, +1.50). For its part, Intel brought in $0.33 per share and also issued upside revenue guidance. JPMorgan brought in $0.82 per share for its latest quarter, even though it added $2.0 billion to consumer credit reserves, and said during its conference call that it hopes to raise its dividend back to $0.75 per share in the first half of 2010.

JPMorgan's report sent the broader financial sector to a 3.4% gain, which was better than any other sector this session. However, the bank's report set a high bar for peers like Bank of America (BAC 18.59, +0.78), which reports Friday.

Pharmaceuticals company Abbott Labs (ABT 51.20, +1.55) announced better-than-expected third quarter adjusted earnings of its own by bringing in $0.92 per share and went on to raise its fiscal 2009 guidance. That helped pharmaceutical stocks overcome continued weakness in shares of Johnson & Johnson (JNJ 60.55, -0.46) and drive the health care sector 1.5% higher.

Rail company CSX (CSX 47.06, +2.78) was one of this session's best performers following its upside earnings surprise of $0.74 per share. Fellow rail stocks shared in its strength and sent the industrial sector to a 2.6% gain, second only to financials.

Telecom was the only sector that failed to post a gain. Though its loss was fractional, this session marked the fifth time in the past six sessions that telecom underperformed.

Still, broad-based buying sent stocks to fresh highs for 2009. Since registering March lows, the Dow has climbed roughly 55%, the S&P 500 has jumped approximately 64%, and the Nasdaq has surged almost 72%.

Continued weakness in the U.S. dollar sent the Dollar Index down 0.7%. It registered new 52-week lows in afternoon trade. Though the dollar wasn't in focus this session, its doldrums continue to provide a boon for the stock market.

The positive mood among participants this session was reinforced by pleasing September retail sales data, which showed a softer-than-expected decline of 1.5%. Excluding autos, retail sales increased a better-than-expected 0.5%.

Import prices for September were up 0.1% month-over-month, which is largely in-line with what had been expected, while business inventories for August fell a sharper-than-expected 1.5%. Those reports were overshadowed, though.

In other economic news, minutes from the September 23 FOMC meeting indicated that policymakers feel that the economic outlook has improved and that job losses are slowing. In turn, most members have upwardly revised economic projections, though overall activity is still quite weak.

The minutes supported the stock market's bullish trend, but Treasuries didn't respond so well to them. Comments that increasing the scale of asset purchases could aid in the economy's recovery caused the benchmark 10-year Note to drop roughly 20 ticks and the 30-year Bond to surrender more than one full point.

Advancing Sectors: Financials (+3.4%), Industrials (+2.6%), Materials (+2.0%), Energy (+1.2%), Consumer Discretionary (+1.5%), Tech (+1.5%), Health Care (+1.5%), Consumer Staples (+0.5%), Utilities (+0.4%)

Declining Sectors: (None)

Neutral: Telecom DJ30 +144.80 NASDAQ +32.34 NQ100 +1.4% R2K +2.0% SP400 +1.8% SP500 +18.83 NASDAQ Adv/Vol/Dec 2048/2.39 bln/698 NYSE Adv/Vol/Dec 2278/1.35 bln/769

Asia: Up on positive stock news from the US and Europe Wednesday

Europe: European shares extended gains on Thursday to hit a one-year high for a second straight session, with impressive earnings results from companies such as JPMorgan and a surge in U.S. stocks boosting market sentiment.



ASIA- UP N225I -0.16 HS +1.95 % SSEC +1.17% FTSTI -0.45% AORD +0.93 %

EUROPE - UP FTSE +1.98 % DAX +2.45% CAC +2.14 %

US- UP S&P +1.75% DJIA +1.47% NASDAQ +1.51%



N225I +2.11% HS +1.04 % SSEC +0.31 FTSTI +0.39% AORD +0.59 %


FTSE +0.11% DAX +1.86 CAC +1.76%

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

Oil: Oil prices reached a fresh one-year high near $76 a barrel Thursday in Asia on a weaker U.S. dollar and growing investor optimism about an economic recovery. While weakness in USD was certainly a major driving force, better-than-expected inventory report from the industry-sponsored API further boosted speculations on improvement in energy demand.

Gold: Down slightly Wednesday as it consolidated. Steady at around $1060/ ounce early ThursdayPrice expected to be steady or higher until stock pullback as sheer momentum, inflation fears, dollar weakness and overall risk appetite feed the up trend.

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 Thursday, and fell against all others as well, as after

strong quarterly earnings from JPMorgan Chase, bullish forecasts and results from Intel, the DJIA's rise above 10,000 for the first time in a year, and dovish FOMC minutes boosted investor appetite for riskier assets and foretell continued USD pressure.

The dollar index, a gauge of the greenback's performance against six other major currencies, fell to a 14-month low of 75.317.

The greenback was also under pressure after the minutes of the latest Federal Open Market Committee meeting indicated that

US interest rates are likely to remain low for some time.

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 - No changes indicated from yesterday's BoJ statement. MoF Fujii blames JPY strength on USD weakness, says current rise in yen doesn't warrant intervention, but did not say what level would provoke intervention. Overall a yen bullish statement. We continue to forecast USDJPY at 85 in 1m.

GBP – The UK unemployment rate was steady at 7.9% (cons. 8.0%). The UK's claimant count rate was steady at 5.0%, better than expectations of a jump to 5.1%. The claimant count increased by 20.8k, much better than 24.5k expected and also a drop from last month. We continue to see a ?25bln expansion in the asset purchase program. While this may pressure sterling, we would avoid chasing EURGBP aggressively at current levels due to excessive valuations.

AUD: The dollar fell to a 14-month low against the Australian dollar on Thursday as comments from the head of the Reserve Bank of Australia encouraged investors to buy the higher-yielding currency, which helped other growth-linked currencies gain. Australia's central bank chief said local interest rates would need to move towards a more normal setting as economic recovery took hold, reinforcing the view that the country is heading for a second straight rate hike in November.

NZD: The New Zealand dollar jumped to a 15-month high versus the U.S. dollar after stronger-than-expected inflation numbers raised

expectations of a near-term interest rate hike. 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: The Canadian dollar, another currency seen as linked to commodities, rose to a 15-month high against the dollar of C$1.0217

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.

Risk Rally Stretches-USD Decline To Slow

Reserve growth and diversification is in the spotlight once again as China's Q3 reserve growth figures were released overnight, coming in at $141bln, one of the largest quarterly gains on record. September inflows alone were $61.8bln. Adjusted for valuation, it is conceivable that capital inflows have accounted for a significant portion of FX reserve growth in China. Before the financial crisis, these flows - likely seeking to capture significant asset price gains domestically.

The surge in reserve growth also calls in into question how diversification by the world's major reserve holders is proceeding at this stage. China may have stepped up its purchases of non-US assets over the past few months but will not be doing so in a destabilizing fashion. According to Treasury data, China's purchases of Treasuries is now a bit more volatile compared to previous quarters and the pace of buying is clearly declining. However, this does not suggest any rapid move away from the US as a reserve currency in the foreseeable future due to the lack of alternative assets available amongst other potential reserve currencies.

Nevertheless, the main concern of the dollar's creditors remains one currency debasing due to the Fed's asset purchases. Treasury purchases will end soon and it remains to be seen how it would affect net holdings amongst sovereign names. China may have been able to offload some of its current holdings at preferable prices due to the surge in demand during the financial crisis, while the Fed has been a willing buyer on the other side of the trade. However, compared to cumulative holdings these changes are still miniscule and China may be resigned to the fact that it cannot engage in significant diversification of existing assets without causing major disruption.

At present, USDCNY stability and strong reserve growth suggest China is no closer to moving back towards a floating regime anytime soon. Recently released trade numbers are welcome news for the domestic economy, but the result may be further reluctance on the part of authorities to move away from an export-oriented growth model. This is good news for the dollar as it means CNY gains will be closely managed in the future, while other economies with managed regimes will be reluctant to allow appreciation of their own currencies for fear of losing competitiveness. In the long run, the dollar will face secular downside pressures but the pace is likely to be much more measured than what the market is expecting.

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. Thursday earnings-most before the market opens: Citigroup (C), Goldman Sachs (GS), Nokia (NOK), Google (GOOG), Harley Davidson (HOG), IBM (IBM). Friday: 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 new 12 mo high around $76 Thursday morning, implies more gains ahead barring stock pullback.



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