Friday, October 9, 2009

GLOBAL OUTLOOK OCT 9: Risk Assets Continue Rise


- Stocks: Thursday: Asia, Europe, US up, Friday 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: USD: Fed Chairman Speaks, Trade Balance, GBP: PPI input, EUR, ECB President Speaks, CAD: Unemployment, Trade data

- Big Theme: Rising risk appetite, continued USD weakness, first high profile US earnings report from Alcoa spurs optimism & rally despite data that suggests otherwise (see Report Below)


The broader equity market logged its fourth straight gain amid encouraging corporate headlines, continued weakness in the U.S. dollar, and a better-than-feared weekly jobless claims report. However, technical resistance capped the move by stocks.

Dow component Alcoa (AA 14.35, +0.15) kicked off earnings season last evening in positive fashion. The company brought in an adjusted $0.04 per share, which was considerably better than the loss of $0.09 per share that had been widely expected. Alcoa went on to issue a relatively upbeat outlook. Shares of AA started the session at fresh highs for 2009, but the stock drifted off of its opening levels for the rest of the session.

Still, Alcoa's report was enough to set the materials sector on a strong course. The sector finished 2.0% higher.

Materials stocks were also helped by higher commodity prices, which were bolstered by a weaker dollar. With the greenback shedding 0.6% against a basket of major foreign currencies, the CRB Commodity Index climbed 2.1%.

Once again, gold was a standout among commodities. The yellow metal finished 1.1% higher at $1056.20 per ounce, but had been as high as $1062.70 per ounce, which marks a new record high.

Oil futures also garnered strong interest. Crude contracts settled with oil priced 3.0% higher at $71.68 per barrel. Oil's enviable gain helped lift oil and gas drillers 4.3% and oil and gas explorers 3.9%, which gave the broader energy sector a 2.3% gain, better than any other major sector.

Retailers were also among the session's better performers. As a group, they finished with a 1.8% gain. The advance followed a flurry of same-store sales results for September. Though many companies continued to see softer sales results, the numbers showed an improvement from previous months and were also better than expected. JCPenney (JCP 35.16, +0.25) and Kohl's (KSS 59.97, +1.43) went so far as to raise their outlook in the wake of their monthly sales results.

The broader market was also helped by news that initial claims for the week ending October 3 fell 33,000 to 521,000, which is below the 540,000 that was widely expected. Meanwhile, continuing claims fell 72,000 to 6.04 million, which is below the consensus call of 6.11 million. Though the numbers were better than feared, there is cold comfort in knowing that initial claims remain at uncomfortable levels and continuing claims have come down as a result of expired jobless benefits.

Though the broader market traded with strength for the entire session, it did encounter some resistance as the S&P 500 attempted to push through levels in-line with its 2009 closing highs. Failure to push through that mark coincided with the dollar's move off of its session low, which was marked when the Dollar Index was down 0.8%, and left stocks to pare some of their gains in afternoon trading.

The pullback was particularly hurtful to the financial sector, which had been up as much as 1.3% before finishing with a modest 0.2% gain. Regional banks weighed on the sector after several were assigned a Sell rating by analysts at UBS. Regional banks closed with a 1.1% loss.

Health care stocks also underperformed. The sector settled with a fractional loss amid weakness in managed care stocks (-4.6%), which were pressured on comments regarding possible windfall taxes for insurers.

Telecom stocks were the worst performers for the second straight session, however. The sector surrendered 0.8%.

Treasuries encountered some of their own weakness following an auction of 30-year Bonds. The auction produced a bid-to-cover ratio of roughly 2.4 and a high yield of 4.0%. The 30-year Bond responded to the auction by surrendering more than one full point, while the benchmark 10-year Note dropped some 18 ticks, which put its yield back around 3.25%.

Advancing Sectors: Energy (+2.3%), Materials (+2.0%), Consumer Discretionary (+1.5%), Industrials (+1.2%), Consumer Staples (+0.6%), Tech (+0.4%), Utilities (+0.2%), Financials (+0.2%)

Declining Sectors: Telecom (-0.8%), Health Care (-0.1%)DJ30 +61.29 NASDAQ +13.60 NQ100 +0.4% R2K +0.9% SP400 +1.4% SP500 +7.90 NASDAQ Adv/Vol/Dec 1535/2.42 bln/1131 NYSE Adv/Vol/Dec 2203/1.28 bln/817

FYI: Think the good times will continue? Consider the following article, which essentially claims that once US QE ends in October, demand for US bonds could collapse and force an interest rate rise that could potentially threaten the US banking system. See:

Asia: Nikkei ends above 10,000 as yen helps exporters 2:17am EDT TOKYO, Oct 9 (Reuters) - Japan's Nikkei average closed above 10,000 on Friday for the first time in a week, with exporters climbing on a slightly weaker yen, while Fast Retailing gained after forecasting a record profit for this business year

Europe: European equities edged lower on Friday, with the key index hovering around 1,000 points, as weaker miners offset telecom shares that rose after Telefonica (TEF.MC) offered bigger-than-expected dividends



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

EUROPE - DOWN FTSE -0.08 % DAX -0.21% CAC -0.18 %

US- UP S&P +0.75% DJIA +0.63% NASDAQ +0.64%



N225I +1.87% HS +0.03 % SSEC +4.76% FTSTI +0.06% AORD -0.18 %


FTSE -0.11 % DAX -0.26 CAC -0.24%


Oil: Oil futures also garnered strong interest. Crude contracts settled with oil priced 3.0% higher at $71.68 per barrel.

Gold: Once again, gold was a standout among commodities. The yellow metal finished 1.1% higher at $1056.20 per ounce, but had been as high as $1062.70 per ounce, which marks a new record high.

"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, boost commodities

USD: The U.S. dollar was again on the defensive on Thursday, after Alcoa Inc. posted a surprise profit and supported overall bullishness about a global recovery. USD expected to weaken as long as risk appetite improves. Protectionist tensions with China could hurt the USD if markets see a threat of China cutting back on US bond purchases. Remains in downtrend as markets believe various factors will keep the Fed from raising rates for a long time, including the poor jobs, banking, and credit picture, and the need to help US multinationals' exports.

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- Earnings Season Starts off with a Bang

Earnings season has also begun and we expect a lot of positive surprises. Alcoa, PepsiCo and Marriott all reported stronger results. If equities continue to rally, the EUR/USD should as well. The following chart illustrates the correlation between the EUR/USD and the S&P 500.

Source: Bloomberg

See for image:

Aside from the better than expected earnings reports, the risk appetite in the market has also improved because of stronger economic data. Jobless and continuing claims have fallen while chain store sales increased 0.1 percent. In other words, the latest reports indicate that the labor market is improving and consumer spending is holding steady.

Regarding ECB President Trichet’s post monetary policy meeting press conference. In general, Trichet's tone was relatively upbeat which suggests that the central bank may be much closer to implementing an exit strategy than the Federal Reserve. There are signs of stabilization in the Eurozone economy and the recovery in exports should fuel growth going forward. As we expected, the second question asked by reporters was the ECB’s stance on the currency. Trichet repeated his previous comments that excess volatility and disorderly movements in exchange rates are adverse for the global economy and with that in mind, the U.S.' strong dollar policy is extremely important in present circumstances. Although no new comments were made, it was still enough to turn the EUR/USD around. Also, traders were disappointed by the fact that the ECB failed to add a spread to the one year tender in December, but with another meeting between now and then, the central bank can afford to wait. There is no urgency within the ECB to step up their degree of verbal intervention or to implement an exit strategy. In the words of Trichet "If we have anything to say on intervention, we will." He also said that monetary stimulus is providing strong support for the economy and unconventional measures will be unwound in a timely fashion when the economy improves. Overall, Trichet’s comments should be more positive than negative for the euro. Unlike the Fed, speculation that the ECB could add a spread to the one year tender in December puts the central bank closer to tightening monetary policy which is what traders should remember when they are considering the outlook for the EUR/USD. Meanwhile German industrial production rose slightly less than expected in August. The German trade and current account balance along with the final consumer price report for the month of September are due for release tomorrow

JPY - The USD/JPY is having a very tough time participating in the rally experienced by the other yen crosses. This of course is a reflection of the overall weakness in the U.S. dollar. The 3 month LIBOR spread between the U.S. and Japan continues to grow in the favor of the Yen which signals further losses in the currency pair. Unless the USD/JPY manages to rise back above 90, the path of least resistance is still lower with support in the currency pair at the one year low of 87.14. If the yen is only rising against the U.S. dollar, Japanese officials may not feel as compelled to intervene in the currency. Given the flip flopping comments by Finance Minister Fujii, we do not believe that the new Finance Minister is a strong advocate of intervention. He is certainly under pressure from Japanese corporations, but a break of 85 may be needed before they will step in. Meanwhile, economic data supports the recovery story in Japan. The current surplus increased more than expected in the month of August along with the Eco Watchers Survey. Bankruptcies also plunged by 18 percent while machine tool orders fell at a slower pace. The trade balance narrowed but not by as much as the market had anticipated. As long as the dollar remains the driver of the currency market, the performance of USD/JPY could continue to diverge from the other yen crosses.

GBP – The British pound rallied against the U.S. dollar and euro after the Bank of England left the size of their asset purchase program and interest rates unchanged. The monetary policy statement was short and sweet with the central bank saying that they voted to continue with their current GBP 175 billion program of asset purchases which they expect to take another month to complete. “The scale of the program will be kept under review.” The BoE has not closed the door on further asset purchases but the market will have to wait for the minutes to see how close they are to increasing stimulus. Next month’s monetary policy announcement will be a particularly important because it comes a week before the Quarterly Inflation Report. As they prepare the report, the central bank will be thinking about the impact that the weakness in the pound and higher commodity prices will have on the economy. If economic data continues to deteriorate, the BoE may be forced to cut interest rates or ask the Chancellor for more funds. Both former Deputy Governor John Gieve and former Monetary Policy Committee member Blanchflower believe that the BoE needs to do more. The U.K. economy is clearly not out of woods and even though the BoE left monetary policy unchanged today, they have not necessarily ended their easing cycle. The central bank is still one of the most dovish on the street and for the time being, they are on hold until November. Producer prices and trade data are due for release tomorrow. On a trade weighted basis, the British pound has fallen more than 7 percent since the beginning of August which could help reduce the trade deficit. However the contribution is likely to be small since manufacturing PMI

AUD: Australian economic data continues to outperform, adding validity to the Reserve Bank of Australia’s decision to hike interest rates earlier this week. Construction sector PMI jumped from 42.4 to 50.8, putting the index into expansionary territory for the first time since February 2008. Home loans continued to fall while investment lending surged. The housing market in Australia has been fueled by not only Australian but also Chinese demand. Employment numbers released early today were all much better than expected the data is fueling further rally in the Aussie. With the employment component of service, manufacturing and construction sector PMI all rising in September, many correctly predicted that Australia experienced positive job growth last month.

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

CAD : There are a lot of economic reports due for release tomorrow but none of them are more important than Canada’s employment report. In the month of August, Canada experienced its first job gain in four months. The market expects job losses to return in September but given the sharp rise in the employment component of IVEY PMI, we believe that not only could job losses be minimal but there is a good chance that Canada experienced positive job growth for the second month in a row. A strong labor market report should add to the upside momentum in the Canadian dollar and send it a fresh 12 month high against the greenback. Although housing starts fell in September, the August data was revised sharply higher. Meanwhile the Australian and New Zealand dollars raced to fresh 14 month highs on the heels of the incredibly hot Australian employment report. A total of 40.6k Australians found new jobs last month, dropping the unemployment rate for the first time in 5 months to 5.7 from 5.8 percent. Given the rise in the employment components of the service, manufacturing and construction sector PMI reports, we were a bit surprised that economists actually expected job. In our daily report yesterday, we said there is a good chance that Australia experienced job growth but no one anticipated the strongest job growth since November 2007. The best part of the report is that most of growth occurred in full time work. The improvement in the labor market validates the Reserve Bank’s decision to hike interest rates earlier this week and confirms our belief that interest rates could be lifted again before the end of the year. The construction sector has been booming partially due to government stimulus and partially due to the recovery in the housing market. We have been looking for the AUD/USD to break 90 cents for a very long time and now expect the currency pair to rise as high as 93 cents over the next few months..

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 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. 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.




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