- Stocks: Friday: Asia up, Europe, US down Monday morning Asia down, Europe opened down, mixed on no-news reaction bounce
- 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 all majors except for JPY, GBP, small reversal early Monday
- Main events today: GBP: Mfg PMI, USD: ISM Mfg PMI, Pending Home Sales, NZD: Labor Cost Index q/q
- Big Theme: Falling risk appetite indicating tired rally? In addition to earnings, Friday's retreat after Thursday's rally on US GDP data shows markets not convinced the GDP growth is sustainable but rather a product of temporary US Government stimulus, see Conclusions below for trading opportunities as many assets approach or breaching key levels.
STOCKS
The S&P 500 fell about 4% this week, a fairly representative figure for the major indexes. Thursday's better than expected US GDP brought a temporary knee jerk reaction bounce. However, the markets concluded that the GDP result was mostly from unsustainable government stimulus programs rather than genuine private sector growth. Friday's 2.8% drop wiped out that gain and then some, marking the steepest one-day selloff since July 2. It also meant that the index fell 2 per cent in October, marking the first monthly decline since the stock market began to rebound in early March.
Wrote Peter Schiff of EuroPac Capital: Upside GDP Surprise: Misleading
Even the giddiest commentators admit that the upside GDP surprise resulted almost entirely from government interventions. But, by pushing up public and private debt, expanding government, deepening trade deficits, and pushing down savings rates, these interventions have succeeded only in putting our economy back on an unsustainable path of borrowing and spending.
Third quarter 'growth' was largely driven by a 23% increase in residential construction (the largest quarterly increase since 1986) and a 3.1% increase in consumer spending, which included a 22% jump in durable goods purchases – mostly automobiles – and 2.3% gain in government spending. Since the increase in consumption outpaced the increase in production, the trade deficit expanded, reversing the positive trend for most of 2008 and 2009. Because the increase in spending outpaced the increase in incomes, the savings rate plunged from 4.9% in the prior quarter to 3.3%.
Stocks have also reached a number of milestones: The Dow has fallen the most since April, gains in the month of October have been completely reversed, and the S&P has seen its first monthly decline since April. Things have definitely taken a different tone, but the ultimate direction that the market decides to pursue heavily depends on some key events for next week.
Noted Kathy Lien of fx360.com
Thursday's surprising GDP report may have indicated that a more substantial recovery is underway, but a series of economic indicators from today showed that consumers will not be leading the rise. The idea that a consumer led recovery may not be the case this time around is very troubling because it is unclear if there is any another sector that would be able to recharge growth like the consumers have in the past.
• Personal Spending was today’s first sign of concern, dropping for the first time in five months by 0.5%.
• To add insult to injury, wages and salaries declined and the savings rate rose, adding to the indication that consumers have their wallets sealed tight.
• Likewise, spending on durable goods took a nosedive by 7.2%, giving added evidence to the theory that government assistance has been the main driver that turned up spending in the third quarter.
• Ironically, another sign that trouble is ahead was produced by a report that blew away expectations. Chicago Purchasing Managers’ reported a significant rise to the highest level in more than a year. However, the optimism that the headline number exuded was quickly forgotten because the employment component actually fell last month. As a harbinger for next week’s employment report, the PMI wound up reinforcing the idea that continued job losses will substantially curtail expenditures now that some forms of government support have been eliminated.
The preceding factors, accompanied by substantial market swings and volatility, have already started to weight down confidence. The University of Michigan’s Consumer Sentiment Index fell off of yearly highs to reach 70.6. It seems that the market has a right to be worried that growth is composed of artificial factors rather than a dynamic rebirth of activity. That is not to say that we are not on the road to recovery, it’s just that there may be a few extra bumps along the way than many expected.
Actually, the bigger question is how big those bumps will be and have risk asset prices discounted these?
Investors will also be paying attention to third quarter corporate earnings results this week. Ford Motor Co., Cisco Systems Inc., Kraft Foods Inc., Marathon Oil Corp., Starbucks Corp. and Time Warner Inc. are scheduled to report.
Asia: Asian stock markets fell Monday after grim news about American consumers sowed more doubts about the U.S. economic recovery and sent Wall Street tumbling last week.
Europe: European shares hit a four-week low on Monday, extending the previous session's sharp declines on fears that the stocks had rallied ahead of the recovery, with banks featuring among top losers. In early morning trade stocks are attempting to rally with many making small gains on no news, thus this feels more like a reaction bounce at the time of this writing.
GLOBAL
MARKETS FRIDAY
ASIA- UP N225I +1.4% HS +2.29 % SSEC +1.20 FTSTI -0.10% AORD +1.57 %
EUROPE DOWN FTSE -1.81% DAX -3.09% CAC -2.86 %
US- DOWN S&P -2.81% DJIA --2.51% NASDAQ -2.50%
THIS MORNING
ASIA DOWN
N225I -2.31% HS +1.71 % SSEC -0.61 FTSTI -0.45% AORD -2.16 %
EUROPE: MIXED
FTSE +0.16% DAX -0.41% CAC +0.24%
COMMODITIES: Down Friday with stocks as the dollar gained.
Oil: (AP) -3.61% Friday on the swing back to negative sentiment. Prices rose above $77 a barrel Monday in Asia, recovering some ground after a big fall, as investors eyed upcoming figures on the U.S. economy and a volatile dollar. The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy.
Gold: Down 0.64% in Friday US trade,
CURRENCIES: Bias to safety currencies with falling stocks. See Weekly Outlook Full Version for details on all for the coming week.
USD: Volatile Week Ahead: Rose last week against virtually all majors except the JPY and, strangely, the GBP. Losing ground in early Monday trade in a minor retracement. Its fate this week will depend on the packed calendar of potentially market moving events. The main ones are Monday's ISM manufacturing (expected to progress further into the 50+ expansionary levels), Wednesday's FOMC statement, ISM Non-Manufacturing index (its employment component is significant for Friday's reports), the ADP Non Farms Payrolls report, and Friday's climactic US Non Farms Labor and employment rate reports.
Now that the market has reached an inflection point where uncertainty has replaced confidence, the employment report will be key in providing markets direction for the coming month. That is just the schedule for the US. When accounting for the fact that the RBA, BoE, and ECB will all be announcing rates, it becomes clear how pivotal next week will be in ironing out some loose ends of the current economic landscape.
EUR: - RETAIL SALES AND UNEMPLOYMENT ADD TO EURO’S PLIGHT-The EUR/USD fell Friday, negating most of Thursday's gains. The world-wide stock market selloff, including the sharpest decline in European stocks in four months, has led to renewed interest in the safety of the dollar at the expense of the euro. Disappointing German retail sales for the second straight month and rising unemployment data, declining CPI and hints of ECB intervention this past week also weighed on the EUR. Holding just above strong support level of $4.4720 (50 day MA + 23.6% Fiboncci retracement from its June rally, also lower BB band around 1.4657)
Details: For the most part, several high profile economic indicators foreshadowed troubles ahead for the sixteen country region. The first disappointment was that German Retail Sales fell for the second time in a row, adding to the realization that the recovery will not be assisted by the consumer. Even though German government initiatives have focused on keeping people at work, employers were forced to cut working hours in order to prevent such layoffs. The result is obviously a cut in income, and likewise reduced spending. To add on to consumer difficulties across the Euro-zone, the unemployment rate rose to 9.7% which is the highest rate on record. Since last September, the report indicated that a total of 3.2 million jobs have been lost in spite of government support. An estimate on Consumer Prices showed a slight uptick to -0.1% from -0.3%, hardly the rise that would signal increased interest by the ECB. Speaking of the ECB, the central bank has become a lot more vocal about their distaste over the euro’s persistent strength. Comments from the ECB’s Christian Noyer have surfaced and indicated that “problems are stemming from the weakening of the dollar and the pound.” However, it is still unclear what the central bank will be willing to do to prevent a continued rise. This week’s big event will be the ECB’s rate decision which is scheduled for Thursday.
JPY - USD/JPY: BOJ BEGINS GRADUAL PULLOUT FROM CREDIT MARKETS The Bank of Japan initiated a gradual retreat from unconventional measures, triggering a massive rally in the Yen against all other major counterparts. The central bank plans to let its temporary program to acquire corporate bonds and commercial paper to expire at the end of December as initially planned. The overnight interest rates remained intact at 10 basis points. Economic signs have started to point toward stabilization as the economy emerges from its deepest recession in more than half a century.
The Jobless Rate unexpectedly fell to 5.3% from 5.6% in September and job-to-application ratio rose for the first time in more than two years. Meanwhile, Household Spending continued its positive trajectory rising for second consecutive month. An increase in domestic demand has been a welcome sign for Japan’s newly elected government which continues its push for a more consumer driven economy. However it’s not all sunshine and butterflies for current stage of economic recovery. The Bank of Japan forecasted deflation to persist into 2011 in its half-year economic outlook report. Core CPI dropped to -2.3% in September, remaining in a negative territory for seventh month in a row. On another note, Annualized Housing Starts came in line with predictions as construction sector is bottoming out.
GBP – GBP/USD: GOOD DATA NO DEFENSE FOR POUND’S Like most other currencies, excluding the dollar and yen, the pound dropped with risk appetite. The notion that economic growth has been overstated in recent months has sent Britain’s stock markets spiraling, facing their worst week in six months.
Overwhelmed as they usually are by overall sentiment, Friday's set of economic releases pointed toward a slightly more optimistic outlook for the troubled economy. Nationwide’s House Price Index posted its first yearly advance in more than a year and a half. Furthermore, the report showed that prices have been consistently rising for the past six months. Nationwide noted that historically low interest rates have mitigated some of the effects of a disastrous employment market. However, it is doubtful that this trend is sustainable without a rebound in the job market. GFK Consumer Confidence was also reported today and showed a slight advance from -16 to -13, its highest level in ten months. Former BoE policy maker Charles Goodhart said in an interview that he believes “quantitative easing will be reduced in scale.” Plenty of comments lately, too much of which have contradicted each other to provide a reliable explanation of what the BoE plans to do. This brings us to the bank’s meeting on Thursday which may actually render a discernible change to the bank’s quantitative easing policies. Otherwise, we will have Manufacturing PMI and Industrial Production to keep things busy for next week.
AUD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of 0.9000 support Sunday and early Monday.
NZD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of $0.7170 support Sunday and early Monday.
CAD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to regain some lost ground but struggling against falling oil prices, which are the primary CAD price driver.
Details: USD/CAD: GDP DROPS UNEXPECTEDLY Yesterday’s minor rally in the commodity dollars seems like nothing more than a fluke, as the greenback continued to rally against the Australian, New Zealand, and Canadian Dollars. The Canadian economy unexpectedly shrank in August by 0.1%, suggesting that recovery remains in a “fragile” stage. Finance Minister Jim Flaherty cautioned that economic stimulus packages were crucial to the recovery’s success and need to be continued. However, Flaherty noted that “we are seeing some stability of late, which is to be desired, and so we're all comfortable.” A rapid rise in the Canadian Dollar undoubtedly dampened a drastic turnaround in growth. However, the loonies’ recent selloff does offer some solace to policy makers. Meanwhile, Australia’s Bank Lending unexpectedly dropped for the first time in nine month during September. Weaker demand for business credit enhanced declines as entrepreneurs and companies temporarily reduced their borrowing. Next week, the Reserve Bank of Australia is expected to increase their target rate by additional 25 basis points even though recent inflation reports have been disappointing. Building Permits in New Zealand rose for the fifth time in the last half-year which is pointing to a recovery in the housing market. The country has their employment report on tap for the middle of next week.
CHF: Lost ground against the USD last week, attempting a minor rebound early Monday, gained against EUR despite SNB intervention, which may not help if risk aversion over the past week develops into a full blown multi-week pullback.
CONCLUSIONS: Seeking risk aversion plays. JPY and USD vs riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD, CRUDE
Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. 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: Broke support at the first Fibonacci retracement level at $77.83 last week, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.
WTI Crude Oil Daily Chart
03 Nov 02
EURUSD: Holding just above strong support level of $4.4720 (50 day MA + 23.6% Fiboncci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 .
EURUSD DAILY CHART
01 Nov 02
OTHER HEADLINES
Yankees Move Within One Win of 27th World Series Title After Game 4 Rally Postive Sentiment
(Bloomberg)
CIT's Bankruptcy May Help Bondholders, Erase Taxpayer, Shareholder Stakes
•Asian Stocks Fall on Declines in Commodity Prices, U.S. Consumer Spending
•Aussie Dollar Channeling Yuan Shows Increased Trading in China Asset Proxy
•CapitaMalls, Longfor to Test Demand for Asian Property With Initial Offers
•Pandit's `Near Death' Cash Hoard Signals Lower Profits Ahead at U.S. Banks
•U.K. Bonus Rules Come Into Effect, Mean Less Cash, More Shares for Bankers
•Manufacturing in U.S. Probably Grew by Most Since 2006, Driving Expansion
Chinese Manufacturing Expands at Fastest Pace in 18 Months, Surveys Show
•Australia Says Economy to Grow Faster Than Expected, Keeps Deficit Outlook
(Seekingalpha.com)
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Airlines: Some Costs They Can't - And Shouldn't - Cut
Q4 Outlook: Real Life Stress Tests Begin
DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.
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