Wednesday, October 7, 2009

GLOBAL OUTLOOK OCT 7: Risk Assets Continue Rise on Optimism as US Earnings Season Begins


- Stocks: Tuesday: Asia, 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 today.

- Main events today: AUD: Home Loans m/m, All: IMF meetings, EUR: Final GDP q/q, German Factory Orders m/m

- Big Theme: Rising risk appetite, continued USD weakness, first high profile US earnings report from Alcoa


Despite a downward drift in afternoon action, stocks were able to march considerably higher in broad-based fashion for the second straight session as overseas gains and a weaker U.S. dollar kept buyers in the marke

The major indices started markedly higher as the previous session's gains were extended amid news that by Australia's Reserve Bank hiked its key lending rate by 25 basis points to 3.25%. Though the rate hike may strike some as an unlikely impetus for higher stock prices, global participants were encouraged by the symbolism of the act, since it suggests that the global economy has strengthened. That consideration helped drive the Dow Jones World Index to a 1.9% gain, which is its best percentage gain in two months.

Implications of a Weak US

Many believe that weakness in the U.S. dollar continues to bode well for stocks, especially for shares of multinationals. In fact the weak dollar is good only to the extent that a firm pays expenses in dollars, and gets paid in a stronger currency. That's true for some multinationals, but not others, and to different degrees. For example, a US manufacturer with most of its expenses in USD that is selling in Europe or Australia will benefit from a weak USD. However US based airlines could suffer badly because rising fuel and foreign labor and airport fees are a large part of their expenses, while their US markets pay in USD. The Dollar Index dropped 0.5% this session, but it is still trading above its 2009 lows.

A weak dollar does make US assets cheaper for foreign buyers, so the overall US stock and real estate markets could benefit, as US businesses and real estate become cheaper in other currencies. The dollar's drop and gold's gains helped materials stocks show leadership in the early going, but as the greenback pared its losses midsession and pulled the materials sector back from its near 3% gain, the broader market drifted off of its midday highs. A pullback by financials, which were leaders in the previous session, also undercut the broader market. Goldman Sachs (GS 186.98, +0.51) weighed considerably on the sector as participants pressured the stock in high volume.

However, the stock market was able to recover from the afternoon drift as materials stocks and financial stocks rebounded. Materials stocks settled with a 1.9% gain, while financials finished 1.2% higher. That helped the stock market finish on a relatively positive note and book a two-session gain of 2.9%, its best back-to-back performance in more than one month. There weren't any economic releases this session and only a handful of companies made announcements ahead of earnings season's start tomorrow night. Participants had little reaction to results from an auction 3-year Treasuries. Key tests of interest will come later this week with the auctions of 10-year Notes and 30-year Bonds.

Advancing Sectors: Energy (+2.1%), Materials (+1.9%), Tech (+1.9%), Consumer Discretionary (+1.5%), Telecom (+1.2%), Financials (+1.2%), Industrials (+1.1%), Consumer Staples (+0.9%), Health Care (+0.8%), Utilities (+0.7%). Declining Sectors: (None)DJ30 +131.50 NASDAQ +35.42 NQ100 +1.8% R2K +1.8% SP400 +1.4% SP500 +14.26 NASDAQ Adv/Vol/Dec 2007/2.42 bln/675 NYSE Adv/Vol/Dec 2414/1.23 bln/621

Asia: Up on optimism from US markets, commodity stocks lead.

Europe: Stock futures point to a lower opening after the prior session's sharp gains on further recovery hopes.



ASIA- UP N225I +0.18% HS +1.87 % SSEC +0.90% FTSTI +1.09% AORD +0.39 %

EUROPE - UP FTSE +2.26 % DAX +2.70% CAC +2.59 %

US- UP S&P +1.37% DJIA +1.37% NASDAQ +1.37%



N225I +1.11% HS +2.07 % SSEC +0.90% FTSTI +0.85% AORD +2.15 %


FTSE +0.57 % DAX +0.37 CAC +0.41%

COMMODITIES: Commodities were helped considerably by the dollar's decline. In turn, the CRB Commodity Index tacked on 1.3%. Gold was one of the best performing assets this session. It spiked to a record intraday high of $1045 per ounce, before it settled with a 2.2% gain at a record closing high of $1039.70 per ounce.

Oil: Oil prices rose above $71 a barrel Wednesday in Asia as increased optimism about a global economic recovery boosted expectations that crude demand will grow.

Gold: Gold eased from record highs on Wednesday as investors took profits, but sentiment remained bullish and a fresh record was within sight as the dollar's weakness and inflation concerns reinforced bullion's appeal as a hedge. As discussed in our notes below on the USD, the US is likely to let the dollar weaken further, and rising gold demand reflects this belief.

Both spot gold and U.S. gold futures have benefited from factors including technical buying, growing talk of countries diversifying foreign reserves or settlement currencies away from the dollar, and inflation concerns fueled by current massive fiscal stimulus measures and aggressive monetary easing.

"The driving force for gold's rally is the declining confidence in the dollar, which helped elevate gold's stature, along with the explosive growth in gold-backed exchange-traded funds which broadened the investor base for bullion," said Shuji Sugata, a manager at Mitsubishi Corp Futures & Securities.

"Technically the market is very much in favor of the bulls as nobody can complain about gold prices rising, so barring profit taking that may cap prices for a short time, the market looks set to test fresh highs," he said.

The near-term target is likely $1,050 per ounce, but the $1,040 level offers good profit taking opportunities and may prove to offer resistance that market players need to clear first, he said.

"We're seeing a period of consolidation below $1,040 an ounce. Importantly, gold does not appear to be finding support from Tokyo, which is the key region in our time zone," said Nigel Moffatt, head of treasury for the Perth Mint.

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

USD: The U.S. dollar was under pressure on Wednesday as investors added to long positions in commodity-linked currencies like the Australian and New Zealand dollars on renewed optimism about a global recovery. Expectations that U.S. interest rates will remain low as the economy tries to pull out of recession means U.S. dollar could be the funding currency of choice for carry trades.

Near zero rates have increased the U.S. dollar's appeal in carry trades, where investors borrow in a cheaper currency to buy higher-yielding ones. Many doubt the Fed will raise rates anytime soon, since low interest rates keep bank loan defaults down, make US assets more attractive to overseas buyers, and should eventually help businesses expand with cheap credit and thus reduce unemployment.

5 Reasons the USD Could Fall Further

Last week, we talked about the 5 Reasons Why the Dollar Could Fall and here is a quick update on our points:

1. Don’t Expect a Fed Exit Anytime Soon – The decision by the Reserve Bank of Australia to hike interest rates last night highlights the sharp divergence between the growth and monetary policy of countries like Australia with that of the Federal Reserve. Recent comments from the Fed suggest that they intend to keep Quantitative Easing in place for as long as they can. Over the past few decades, the Fed has never raise interest rates before the unemployment rate has peaked. With the recent uptick in unemployment, there is a good chance that the Federal Reserve could be one of the slowest central banks to tighten monetary policy and the slower they are, the fewer reasons for investors to own dollars.

2. Reserve Diversification – Although not directly related to reserve diversification, speculation that the Gulf States, China, Russia and Brazil are holding secret meetings to establish non-dollar denominated oil contracts contributed to the weakness of the dollar. Qatar and Saudi Arabia denied the speculation but this should remind traders that many non Anglo-Saxon nations have a long standing desire to reduce their dependence on the dollar.

3. Strong Q3 Earnings – To get a sense of how currencies could impact earnings, just listen to the complaints coming from Japan. Toyota warned that for each one yen appreciation against the dollar, operating profit is cut by 35 billion yen or $390 million. For Canon, each one yen appreciation hurts their bottom-line by more than 4 billion yen or $45 million. No U.S. corporation will be that specific, but from these statistics, we can gage the positive impact that a weak dollar may have for U.S. exporters. Alcoa reports on Thursday so watch for more discussion about currencies and their impact on earnings

4. Twin Deficits – The U.S. trade deficit is due for release on Friday. The twin deficits have long been a drag on the dollar.

5. Price Patterns – So far, price patterns are holding. 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.

There are no major U.S. economic reports until Friday.

EUR: ECB Risk: For the third trading day in a row, the euro appreciated against the U.S. dollar. There was no economic data from the Eurozone which means that the strength of the currency stemmed entirely from dollar weakness. As the greenback continues to lose value, traders will start to wonder about what could turn the dollar around.

Last week, the dollar appreciated significantly on the heels of currency related comments from European officials. This is why the European Central Bank meeting on Thursday is such a major event risk. ECB President Trichet will undoubtedly be asked about his take on the dollar or euro. If he simply reiterates his previous support for a strong dollar or expresses concern about excess volatility in foreign exchange it may be enough to turn the EUR/USD around.

The final release for Q2 GDP and German factory orders are due for release tomorrow. There is a good chance that orders may have suffered from the expiration of the cash for clunkers program. Meanwhile the Swiss Franc traded higher against the euro and U.S. dollar despite news that prices declined for the seventh month in a row. Labor market numbers are due for release tomorrow and like the rest of the world, unemployment is expected to grow in Switzerland.

JPY - The yen held steady at 88.70 per dollar, having gained 0.8 percent in the previous session. Traders said the yen's latest rise was partly due to Nomura's share sale, which is expected to raise up to $5.6 billion, a part of which is likely to be bought by overseas investors.

Other Japanese banks may join Nomura in raising fresh capital in the coming months to meet new capital adequacy requirements.

Still, the latest rise in U.S. yields and rebounding risk appetite should see the yen run into some resistance around 88 levels, say traders

The USD/JPY currency pair fell victim to broad yen strength despite the sharp rise in U.S. equities. The only piece of economic data released from Japan last night was loans and discounts which increased by 1.8 percent in August, compared to 2.4 percent the previous month. The market continues to shrug off comments from Finance Minister Fujii who warned that the Japanese government will take action if the movements in the yen become extremely abnormal. With the Yen strengthening and Japanese corporations screaming, government officials said it is too early for the central bank to withdraw stimulus. Deputy Prime Minister Naoto Kan even went so far as to suggest that the government may need to compile an additional program to support the labor market. USD/JPY& #8217;s break with equities indicates that the dollar is driving the currency market and not risk appetite. The economic calendar heats up this evening with leading indicators, the trade and current account balance and Eco Watchers survey due for release.

GBP: Suffering from sharp drop in industrial activity: Of all the major currencies, the British pound was the only one that failed to benefit from dollar weakness. Reason being that U.K. economic data has disappointed once again. On Monday, the market was elated by the improvement in service sector activity, but the manufacturing sector continues to suffer. Industrial production dropped 2.5 percent in August, driving annualized IP down 11.2 percent. Manufacturing production also fell 1.9 percent, to the lowest level in nearly 17 years. Although the sharp contraction in activity is partially due to the expiration of the car scrappage program, the report was still very bad. Numbers such as these validate the dovishness of the Bank of England and explain the currency’s underperformance. However there are pockets of strength, most notably in the housing market as price growth doubles in the month of September. Unfortunately this will not prevent the U.K. economy from standing still according to the National Institute of Economic and Social research who calculated that GDP remained unchanged from July to September. Consumer confidence is due for release this evening along with shop prices.

AUD: The Aussie hit a new 12 month high vs. the USD following the Reserve Bank of Australia’s surprisingly early decision to raise interest rates by 25bp. The RBA has set the bar and it is now up to other central banks to follow. According to the statement, this will not be a one off hike. Instead, the central bank intends to gradually lift interest rates from emergency levels. Their decision to raise rates now rather than later may be a bit strategic since they could have a tough time justifying a rate hike after the third quarter consumer price report. Australia’s decision is also a vote of confidence for the global recovery. The RBA’s decision could help lift the Aussie to 90 cents and higher.

NZD : Rising with the AUD because the two share many similarities, thus rate increases expected, hitting new annual high vs. the USD.

CAD : Generally tracking oil first, stocks and risk appetite second, thus rising against the USD. The Canadian, Australian and New Zealand dollars all hit12 month highs against the USD. The loonie benefited from solid economic data Meanwhile the Canadian dollar rose to a 1 year high following strong economic reports. Building permits rose by 7.2 percent in August while manufacturing conditions accelerated by the strongest level since July 2008. The IVEY PMI index which measures activity in the manufacturing sector rose from 55.7 to 61.7 in September, reducing some of the Bank of Canada’s fear that the strength of the Canadian dollar is crimping the country’s recovery. Every single one of the subcomponents of the IVEY PMI report exhibited strength with employment expanding for the first time since August 2008. This suggests that job growth continued in the month of September which will be important ahead of Friday’s Canadian employment report. The next level of support in the USD/CAD is not until 1.05. Aside from some secondary housing market reports from Australia, no major economic data are expected from the 3 commodity producing countries.

CHF: Moving up against USD more as reflection of USD weakness. SNB intervention is more of a threat for the EUR than the USD.

CONCLUSIONS: 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, no trend continues forever.



•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.

Multi-FX Gold View and Shanghai Reminder

A Global Cabal Plotting to Dump the Dollar?

Brown Brothers on Dollar Weakness, Alternative Currency Basket Reports and RBA Rate Hike

Dollar Hegemony Is Ending

Declining Dollar: The Markets' Take

The Economic Recovery That Isn't

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


No comments:

Post a Comment