Tuesday, October 6, 2009

GLOBAL OUTLOOK OCT 6: Stocks Rise on Optimism , AUD Rate Increase


- Stocks: Monday: Asia down, Europe, US up, Tuesday 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 most riskier majors, JPY, this trend continuing in Tuesday trade.

- Main events today: AUD: Trade Balance, Cash Rate, RBA Statement, GBP: Halifax HPI m/m, Mfg Production m/m, NIESR GDP Estimate CAD: Building Permits m/m, Ivey PMI

- Big Theme: AUD rate rise, stocks rising on optimism as earnings season begins, bias to risk assets short term



A strong advance by the financial sector after Goldman Sachs got an analyst upgrade and hopes for exporter earnings gains from a weaker USD give the stock market its first gain in five sessions.

The high profile earnings season officially begins today and will often dominate daily news for the coming weeks.

Informally the season is already underway as of Monday after crop nutrient and animal feed producer Mosaic (MOS) issued a quarterly report that fell well shy of expectations. The company recorded earnings of 23 cents a share on revenue that tumbled 66.3% from a year earlier. Despite the news, MOS shares rose with the overall market.

Mosaic's results could be a warning sign that cost-cutting alone will not be enough to drive earnings growth through the recovery and with many companies facing steeper hurdles to impress investors that have been convincing themselves that a rebound is in full swing, things may get rocky.

The desire for sustainability in earnings growth may lead investors to take a more negative view on companies that continue to report weaker revenues. Mosaic appeared unharmed late Monday though, adding more than 1% in after-hours trading following a slight decline during the day.

Fast food restaurant operator Yum! Brands (YUM) is on the docket Tuesday, followed by Alcoa (AA) and Costco (COST) Wednesday, before PepsiCo (PEP) and Marriott post their latest figures Thursday.

The major indices started the session with modest gains, but shares of diversified banks wasted little time putting together their best percentage gain in two months. The group was helped along by news that analysts at Goldman Sachs raised their rating on the U.S. large-cap bank sector. Diversified banks finished the session 5.6% higher, which lifted the broader financial sector to a 3.3% gain and helped it outperform every other major sector.

The U.S. dollar declined 0.5% against a basket of major foreign currencies despite concerns that its weakness could disrupt the global economy. However, the weaker dollar proved beneficial to both stocks and commodities once again.

Oil's rebound helped the energy sector climb to a 2.2% gain. The materials sector finished 2.0% higher.

Though broad-based buying helped all 10 major sectors finish in higher ground, stocks did have to overcome a fit of midmorning selling pressure. Sellers had stepped in just minutes after the September ISM Services Index showed a better-than-expected reading of 50.9, but stocks rebounded when the Dow and Nasdaq Composite came in contact with the neutral line. Stocks spent the rest of the session working higher and closed a few points off of session highs.

Advancing Sectors: Financials (+3.3%), Energy (+2.2%), Materials (+2.0%), Industrials (+1.9%), Consumer Discretionary (+1.8%), Utilities (+1.2%), Telecom (+0.8%), Tech (+0.8%), Health Care (+0.5%), Consumer Staples (+0.2%)

Declining Sectors: (None)DJ30 +112.08 NASDAQ +20.04 NQ100 +0.8% R2K +1.9% SP400 +2.1% SP500 +15.25 NASDAQ Adv/Vol/Dec 1964/2.17 bln/730 NYSE Adv/Vol/Dec 2539/1.11 bln/521


Asian stocks up Tuesday led by exporters after optimism about upcoming US earnings and strong US services sector PMI data lifted US stocks.


Stock futures point to higher opening following US and Asian markets



ASIA- DOWN N225I -0.59% HS +0.26 % SSEC +0.90% FTSTI -0.20% AORD -0.58 %

EUROPE - UP FTSE -+0.71 % DAX +0.75% CAC +0.69 %

US- UP S&P +1.49% DOW +1.18% NASDAQ +0.98%



N225I +0.18% HS +1.28 % SSEC +0.90% FTSTI +1.19% AORD +0.39 %


FTSE +0.57 % DAX +0.37 CAC +0.41%


Amid the dollar's drop the CRB Commodity Index gained 1.3%. The advance reflected a sharp a sharp 1.3% gain in gold prices, which settled at $1017.80 per ounce. A rebound in oil prices also helped. Crude futures had been as low as $68.05 per barrel, but rallied to finish with a 0.7% gain at $70.41 per barrel.


Up above $70 in NYC trade as stocks rise, USD falls


Up in NYC on rising stocks, falling USD, rumors of AUD rate increase and report that OPEC will end USD use for oil trade.


General: Rising stocks and AUD rate hike give strong bias to risk currencies

USD: The U.S. dollar declined 0.5% against a basket of major foreign currencies as rising stocks, rumors of an AUD rate increase, and a report that Gulf states were seeking to replace the USD for oil trade within 9 years drove demand for higher yielding currencies. With no major US news announcements until Friday, the USD will move with stocks (especially the tone of earnings announcements) and foreign news. The rumor was correct and is feeding further USD declines against riskier currencies in early Tuesday trade.

The price action in the financial markets indicate that despite red flags like Friday's weak non-farm payrolls report, investors still want to be long risk. This sentiment was reinforced by the stronger than expected service sector ISM index which rose from 48.4 to 50.9 in September. For the first time in 12 months, activity in the service sector expanded which shows the long way that the U.S. economy has come over the past few months. Improvements were seen in all of the underlying components of the report except for prices paid, inventory sentiment and new export orders. The drop in new export orders is a bit concerning, but this subcomponent can be highly volatile. Interestingly enough, the employment component of the service sector ISM report increased which conflicts with the sharp acceleration in job losses. However, investors with the glass half full type of sentiment may look at it as a sign that job losses will improve significantly in October. In the meantime, there is no major U.S. data on the calendar for the next 24 hours.

5 Reasons the USD Could Fall Further

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. The horrific non farm payroll data reinforces this sentiment. 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. New reports that Gulf states are actively planning to replace the USD for oil trade reinforces this sentiment. 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- For the second trading day in a row, the euro strengthened against the U.S. dollar and the British pound. Stronger economic data and dollar negative comments from ECB member Weber helped to drive the single currency higher. Weber foresees further dollar weakness in the near term. Eurozone service sector PMI was revised modestly higher due to improvements in France and Italy; Germany is beginning to lag the pack. At the start of the recovery in the Eurozone, Germany’s cash for clunkers program helped to spur aggressive growth but now that the program has passed, the pace of recovery in Germany is beginning to slow. Eurozone retail sales also fell less than the market had anticipated. Originally economists were looking for a 0.5 percent drop in consumer spending, but instead, retail sales fell only 0.2 percent, matching last month’s decline. This still marked the 15th consecutive month of weaker spending as rising unemployment crimps demand. Looking ahead, there are no major economic reports from the Eurozone but Switzerland has consumer prices due for release

JPY - Continues to gain on USD despite rising risk appetite and MoF Fuji 's intervention threats. These threats to weaken the yen are a complete reversal of his previously stated stronger yen policy and reflect political pressure from exporters. For example for each 1 yen rise against the USD, Toyota losses 250 bln yen, and Canon loses 4 bln yen. That Fuji's threats have not slowed the USD/JPY fall suggest markets don't believe he will act.

GBP – The British pound failed to gain momentum even after better than expected economic indicators helped to boost the outlook for the U.K. economy. The service sector PMI index continued to outperform its peers, coming in at a healthy 55.3 in September versus the 54.1 the previous month. The industry is now performing at levels not seen since 2007 as the index continues to rise above the 50 level. The strong improvement in the services sector cannot be truly appreciated unless it is compared to other countries. The U.S., for instance, has just seen its services index reach into expansionary grounds, a feat that the U.K. accomplished five months ago. In addition to the PMI, we also got an interesting look into the health of the financial industry, which is a dominant portion of the non-manufacturing sector. The Confederation of British Industry conducted a survey that showed that banks grew “more confident”. Thanks to fiscal and monetary stimulus along with a general boost in growth, banks saw a surprising expansion in business volumes, particularly among trading and investment firms. However, the report went on to show that many businesses are planning to continue layoffs and remain skeptical as to whether future demand could support similar improvement. They are dealing with many uncertainties at this point, especially promises of regulatory overhaul. Nevertheless, the day showed improvement in what accounts for nearly 75 percent of British industry. Stock markets responded with decent gains after a disappointing two weeks. We will gain more insight into the rest of the economy tomorrow with Industrial and Manufacturing Production, along with NIESR GDP.

AUD: The Reserve Bank of Australia's (RBA) raised its key cash rate by 25 basis points to 3.25 percent on Tuesday, saying it was prudent to gradually take back policy accommodation now that the worst danger for the economy had passed.

The Australian dollar jumped as investors rushed to price in at least one more hike by Christmas, and rates above 4 percent within a year. The RBA decision to lift rates made it the first of the Group of 20 central banks to hike as the global financial crisis eases and came as a surprise to many analysts. Markets, however, had been abuzz with speculation about a move given the strength of recent economic data.

The move by the RBA puts it far ahead of most major developed nations which show little if any inclination to tighten. Rates in the United States, the euro zone, Britain, Canada and Japan are all at or under 1.0 percent.

Such pre-emptive policy largely reflects the strengths of the Australian economy, which boasts a sound banking system and strong demand from China for its commodity exports. Australia was the only developed nation to grow in the first half of this year.

NZD – Nearing 14 month high on positive business sentiment data, risk sentiment

CAD – Generally tracking oil first, stocks and risk appetite second, yet gained on the USD despite both falling oil and stocks.

CHF – Although EUR/CHF has rebounded off its recent lows, USD/CHF ended the U.S. trading session in negative territory. Inflationary pressures in Switzerland are muted and not likely to impact the Swiss National Bank’s monetary policy decisions.

Currency Trade of the Day: AUD/USD

With the RBA rate increase the pair has already broken through resistance, looking to make further gains on momentum.


Bias to risk currencies as stocks rise and RBA raises rates. 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.

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.



Australia Raises Interest Rates in First G-20 Increase Since Crisis Began

•European, Asian Stocks Advance

•Saudi Central Bank Governor Denies Talks to Replace Dollar as Oil Currency

•Singapore Air, Cathay Pacific `Magically' Fill Planes, Mask Yield Decline

Merrill Bringing Down Lewis Gives Bank of America 30% Profits as `a Steal'

•Unemployment Rising to 9.8% Means More Economic Pain as Consumption Falls

•Stuttgart Banker Divining Currencies Proves Best as World's Top Forecaster

Griebling predicts that the dollar will trade at about $1.42 per euro until mid-2010 compared with $1.4625 today, as investor concerns over rising U.S. deficits and debt offset optimism about the prospects for an economic recovery.


The Economic Recovery That Isn't

How to Reform the Credit Rating Agencies

Ugly Jobs Report Puts a Dent in V-Shaped Recovery Scenario

Ten Reasons for an Imminent Stock Market Crash

The Next Major Crisis Brewing

CIT's Failure Could Threaten Financial Sector's Overall Recovery


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