Wednesday, October 28, 2009

GLOBAL OUTLOOK 10/28 Cheat Sheet -Why this Correction Could Become a Collapse


- Stocks: Tuesday: Asia down, Europe mixed, US down Wednesday morning Asia down, Europe opening down

- FX: Lower equities, bias to 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 gains against most majors(down against Yen)

- Main events today:AUD: CPI q/q NZD: NBNZ Business Conference Rate Statement, USD: Durable goods, New Home Sales earnings: Wednesday 10/28: Aflac (AFL), Coca-Cola Ent. (CCE), ConocoPhillips (CON), Eni (E), General Dynamics (GD), GlaxoSmithKline (GSK), Goodyear Tire & Rubber (GT), SAP (SAP)

- Big Theme: Risk Appetite Becomes Nausea? Excessive valuations, oversold USD, uncertainty ahead of US GDP Friday In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine. SEE FULL VERSION: WHY CORRECTION COULD BECOME A COLLAPSE


US: Two of the three major indexes finished lower as continuing concerns about already high valuations was somewhat moderated by some overall positive earnings news.Reasons Why this Correction Could Become a Collapse SEE FULL VERSION

Asia: Asian stocks were lower for a second day Wednesday amid worries U.S. consumers were continuing to struggle, undermining hopes for a quicker turnaround in an economy that's a major export market for the region.

Europe: Oct. 28 (Bloomberg) -- European stock-indexes hit 3 week low fell and Asian shares declined as SAP AG cut its software sales forecast and Canon Inc. posted a seventh straight quarterly profit drop. U.S. futures were little changed.

COMMODITIES: Down Monday with stocks as risk appetite retreated and the dollar gained. See weekly analysis for more on all of these.

Oil: TOKYO, Oct 28 (Reuters) - Oil was steady around $79.50 a barrel on Wednesday, supported by industry data showing a surprise large drawdown in U.S. crude inventories that blunted the impact of a strengthening dollar and weak Asian equities. As the dollar strengthens, crude becomes more expensive for holders of foreign currencies. Traders also await U.S. gross domestic product (GDP) data, due to be released on Thursday. Analysts expect it to show that the world's largest economy grew 3.3 percent in the third quarter, but a lower growth figure could prompt a sell-off in riskier commodities whose prices have rallied this month.

Gold: Gold prices steadied around $1,040 per ounce on Wednesday, recovering from three-week lows hit the day Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.

CURRENCIES: Bias to safety currencies with falling stocks. Heavy short positioning on the USD made traders hesitant to continue selling it, and more inclined to unwind existing USD shorts, in the face of falling stocks and risk appetite, which heighten the USD's safe-haven appeal. Most USD crosses lost ground against it.

USD: The U.S. dollar gained 0.2% against a basket of foreign currencies. The Dollar Index has now advanced for four straight sessions.Dollar performance was modestly positive versus most of the majors as US equities were relatively flat and Treasuries were in demand following a good 2y auction and some disappointing economic data.

EUR- Down vs. the USD Tuesday to around 1.4800 (-200 pips about 1% in 2 days), steady Wed. above 1.4800. The risk asset trade has run into a wall of serious resistance as key psychological points. With Dow struggling at 10,000 S&P capped at 1100 and EUR/USD battling with 1.5000 the recovery rally looks exhausted as most of the good news appears to have been priced in. With the EZ calendar quiet for Wednesday, the major news is due from the US session during which the main news release will be Consumer confidence at 14:00 GMT. Given the U of Michigan miss and stagnant unemployment data, there's a strong chance of a negative surprise, which could spark further risk aversion in stocks and further drag the EURUSD down to test 1.4800.

JPY - USDJPY fell from over 92 to around 91.24, as falling stocks and yen purchases by Japanese exporters lent support to the JPY.

GBP – Recovering against the EUR and USD in the past 2 sessions in what appears to be a reaction bounce after last week's big drop on poor Q3 GDP

AUD: Down 0.7% against the USD as it the AUD drops with stocks and other risk assets. CPI q/q today beat expectaions, bullish for AUD.With 100bp of tightening already priced for the next 3 RBA meetings, a topside surprise in CPI was needed to justify AUD at these levels.

NZD: Continuing to fall against the USD as risk aversion driven profit taking continues

CAD: stabilizing with oil after days of decline

CHF: gaining slightly against the EUR and USD in early Wednesday trade after struggling for the past 2 days

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, GBP/USD for more pullbacks on a sustained break below 1.6300, and crude oil has begun to pull back, no strong support level until about $74 (see daily chart below). We favor going short on crude if it breaks below $78 (fibonaccci 23.6% retracement which has held as support for the past week) look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order).

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 may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no strong price support before around the $74 level, though at $77.81 there is a 23.6% Fibonacci retracement level that has held for the past week, and at about $75.50 there is a convergence of a 38.2% Fibonacci retracement and a 1 standard deviation Bollinger Band. See chart.

Daily Chart Crude Oil Oct 28- No strong support until around $74, but have minor support at $77.81 & $75.50) where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.

01 oct 28


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