by Bryan Rich on June 25, 2009
in General
Key News
* Britain facing biggest deficit in Western world, warns OECD (Telegraph)
*Roth Signals New Swiss ‘Aggressiveness’ in Franc Intervention (Bloomberg)
*BOE King: Pound Weakness To Help Mitigate Poor Global Outlook (Bloomberg)
*Ship orders set to add to capacity glut (FT)
The Event Agenda
The Morning Run-Down
The 2-day Fed meeting resulted in a fairly lackluster event with one exception. The Fed’s statement on inflation was a bit different. And the bond market interpreted the message as slightly more hawkish on inflation. I would not be surprised, however, to see the move in interest rates yesterday reversed. Below are the excerpts on the reference to price pressures in yesterday’s statement compared to the statement made after the last Fed meeting…far from a clear move beyond deflation worries.
Currency markets have been very choppy over the course of the last week. Critical trend breaks in stocks, commodities and currencies took place last week implying an aversion to risk is coming back into play—and these key breaks still hold. Though, particularly in the pound, sharp sell-offs in currencies have been met with equally strong buying over the past several days, creating a whipsaw back and forth. Approaching the Fed announcement, however, the dollar started its move higher and continued its move higher following the announcement. Bolstering this trajectory, yesterday the Swiss National Bank intervened selling Swiss francs against the euro. This boosted the dollar nearly 4% higher against the Swissie.
Key Charts
The pound has lagged the trend break that has taken place in stocks, commodities and other major currencies and is now testing this trendline as well. The challenge of this trendline will be key to watch.
And USDJPY looks to have made a false break of this wedge formation gaining with general dollar strength and helped along earlier today from dollar supportive comments from the Japanese Finance Minister. This formation implies that USDJPY is preparing for a breakout or breakdown.
by Bryan Rich on June 17, 2009
in General
Key News
* Bank of England Voted 9-0 to Continue Money-Printing Program (Bloomberg)
*UK Unemployment Rises Less Than Economists Forecast (Bloomberg)
*U.S. Consumer Prices Rose Less Than Forecast in May (Bloomberg)
The Event Agenda
The Morning Run-Down
After some whipsaw action in currencies yesterday, the currency markets, stocks, commodities and interest rates are back on path, showing more confirmation this morning that a deterioration of risk appetite is underway. The pound made a strong move higher yesterday on some slightly hotter inflationary data. But today’s Bank of England minutes disclosed the unanimous vote to stay the course with zero-like rates (50bps) and additional stimulus measures, indicating the BOE is very concerned about the downside risks and not overly optimistic about the sustainability of the small improvements that have made in the economy. That brought the pound back down to earth quickly.
But news is not really driving markets right now—it’s more a matter of risk, giving way to risk aversion. There have been key technical breaches in currencies, commodities and stocks that support the argument that risk aversion is returning. And volatility is suggesting the same. The VIX, the gauge of what stock market participants are paying for protection, is breaking higher. And Credit default swaps on sovereign debt have been rising briskly. See the charts below of more details…
Key Charts
The clean break of the trendline that represents the entire move from the March lows in the S&P 500 has resulted in 30 S&P points– thus far.
And volatility is picking up across markets and that’s a sign that risk appetite is waning and protection is being sought.
Credit default swaps on soveriegn debt are starting to move aggressively higher. This chart shows the recent bounce in the UK CDS market (in white) implying increased perception of risk. And it shows the relationship credit default swaps have had with the pound (which is shown inverse in this chart in green). This spike in UK CDS market could be a precursor for a steep fall in the pound (rise in this inverse chart).
by Bryan Rich on June 12, 2009
in General
Key News
*Big increases in Fed bond purchases unlikely (Reuters)
* Bank Rescue Costs EU States $5.3 Trillion, More Than German GDP (Bloomberg)
*Treasuries Gain After Japan Says It’s Confident About U.S. Debt (Bloomberg)
*Setback for eurozone recovery hopes (FT.com)
The Event Agenda
The Morning Run-Down
There has been a lot of noise driving currencies back and forth over the past four days. In fact, the dollar is trading this morning very near the levels from the opening of the week. It’s important to filter out the noise and conflicting day to day news, and focus on the bigger picture and themes driving markets– and vulnerabilities within these themes.
For now, the key theme driving markets is expectations of recovery. And the key focus in this environment is “beware of negative surprises.” Negative surprises can turn a fragile recovery argument very quickly. A reverse in stock prices can do the same.
In our last Currency Comments I showed the double dip taking place in some critical German data. Today that is translating to the rest of the Eurozone. Industrial production reported this morning was down printed new lows, down 21.6% from the same period a year ago. That’s the steepest fall since records began dating back to 1991. The euro was already moving lower this morning, this news has given it a little punch.
The dollar index tested and held key support last week—the 61.8% retracement of the move from the all-time lows last July to the high made in March. The chart shows the beginning of an impulsive C-wave that should take the dollar higher. And this is all in the face of an onslaught of negative sentiment—an historically good contra indicator.
Adding support to the stronger dollar scenario, longer term Treasuries have also received relentless negative sentiment. And this outside range, a key bullish reversal signal could mean the near term sell-off in longer term Treasuries is over. In a typical economic environment this would mean bad news for the dollar—i.e. lower yields, lower dollar demand. But in a broad reaching global recession the risk aversion trade still ties the dollar and US Treasuries tightly together.
And stocks, though less active in recent weeks, are looking vulnerable to a break down. The trendline below represents the entire move up from the 666 lows in March. Rest assured, a break of this line will summon strong selling pressure. This is bad news for risky assets and good news for the risk aversion trade.
by Bryan Rich on June 9, 2009
in General
Key News
*Stress-Tested banks raise $75 billion in capital (Washington Post)
* UK Housing Market Shows Signs of ‘Stabilizing,’ RICS Says (Bloomberg)
*Euro-Zone Banks Need Recovery Plan, IMF Says (WSJ)
*Blanchflower Says BOE May Expand U.K. Money-Printing (Bloomberg)
The Event Agenda
The Morning Run-Down
After four days of strength, the dollar is giving back a little ground this morning. There are a few perceived bright spots in the data today and some gloom. Japan’s leading index has now had two consecutive months of upticks, albeit very minor and still hovering around the lows of a massive plunge. Nonetheless, the yen is a bit stronger today as a result, finding some relief after a 5% decline (vs. the dollar) in the last six days.
UK house prices also showed continued signs of improvement. But the political situation in the UK is still fragile after a weekend election to showed a collapse in support for the ruling Labour Party.
And data in Germany looks like a good proxy for what lies ahead. Glimpses of improvement can quickly be reversed. See the below charts.
Key Charts
Export numbers have been abysmal for Germany, the largest exporter in the world. Today those numbers disappointed again. For the first four months of the year compared with the same period last year, exports have fallen 28.7%.
Industrial production disappointed as well. After a small blip up, activity has plunged to a new low, down 21.6%. This chart goes back to 1992.
The factory order plunge printed worse numbers for six consecutive months until a slight improvement in March. The April number suggests the continued deterioration is still intact.
by Bryan Rich on June 3, 2009
in General
Key News
*Australia Shares End Up 1.6% On Strong GDP Data (WSJ)
* European Spending, Exports Decline Most in 14 Years (Bloomberg)
*Euro zone Q1 GDP shrinks on inventories, investment (Reuters)
The Event Agenda
The Morning Run-Down
This morning the dollar is stronger, stocks lower, Treasuries higher and commodities slightly lower. The dollar is getting relief on weaker than expected data out of Europe. Consumer spending and exports contracted the most in “at least 14 years” according to Bloomberg. This combines with the bigger than expected rise in unemployment to 9.2% released yesterday and softer GDP this morning. Also yesterday, we had a look at Switzerland’s Q1 GDP. The economy is shrinking by the most in 15 years.
Paul Volcker said yesterday that a full US recovery is years away. Considering sentiment has been THE driver of this retracement in asset prices, be aware of negative sentiment creeping back in.
Employment data is a big focus going into the end of the week. Today we get somewhat of a gauge with ADP, which came in a bit worse than expected. Tomorrow jobless claims and then payrolls and the unemployment rate on Friday.
We also have interest rate decisions out of the BOE and ECB tomorrow. Both should be unchanged, but the focus will be on the Trichet press conference again for indications on quantitative easing plans.
Yesterday’s tighter range in the S&P 500 makes an outside range today (a potential reversal signal assuming a weak close) likely. Global stocks are leading the way lower this morning, as analysts are beginning to chatter about over valuation.
Key Charts
The dollar index tested and held key support of the entire move off of the March highs. Today the sharp move of the last four trading days in currencies is breaking down.
by Bryan Rich on May 19, 2009
in General
Key News
*U.S. Housing Starts Drop on Apartments, Condominiums (Bloomberg)
* IMF’s Lipsky Warns Against Complacency on Economy (Bloomberg)
*Despite Oil Reserves, Norway Slips Into Recession (NY Times)
*Goldman, Morgan Stanley ask to repay TARP funding (MarketWatch)
The Event Agenda
The Morning Run-Down
After Friday’s break down in stocks and in the risk trade, this week, it’s more optimism. Goldman, JP Morgan and Morgan Stanley are applying to pay back the TARP. The market is taking that as a sign that the banking system is recovering. Alternatively, more likely, these banks just want the government out of their business. When the TARP was a no strings attached free-for-all cash injection everyone was lining up to get in. When the restrictions were later threatened, the entities on the margin wanted their privacy back (read pay packages and business trips). Of course only after the government stepped in a effectively made good on their counterparty hedges with AIG.
Nonetheless, today stocks have been higher, Treasuries lower, commodities higher and the dollar lower. The risk relationships continue to hold across financial markets. It’s a directional trade either for risk or for risk aversion. And right now, the risk taking camp is continuing the climb.
However, as long as stocks remain contained by significant technical resistance, the relative day to day strength in the risk-currencies like the Aussie should be less important unless confirmed by stocks.
The data in focus for the remainder of the weak should be negative—which should not bode well for the risk taking environment. Tonight, Japan reports preliminary GDP for the first quarter. The economy is expected to be contracting at an annualized rate of 16.1%, more than the 12.1% intial estimate. Bank of England and the FOMC both report minutes from their last meetings tomorrow. Then, thursday we get US leading economic indicators which remain negative and in decline the last three months. And Friday, we get another reading on UK GDP for the first quarter, expected to confirm the worst quarterly decline in output since 1979.
by Bryan Rich on May 11, 2009
in General
Key News
*Dollar and yen rise on move toward safety (MarketWatch)
* Trichet Says Global Economy Is Near Turning Point (Bloomberg)
*HSBC Says 2009 Will Be ‘Tough’ as U.S. Bad Debts Rise (Bloomberg)
*Latvian GDP Shrank 18% in First Quarter, EU’s Biggest Fall (Bloomberg)
The Event Agenda
The Morning Run-Down
The markets this morning are giving back some of the exuberant moves from Friday. The dollar index breached its 200-day moving average on Friday and stops that triggered on longer term passive positions exacerbated the move lower. The move in the dollar, along with the strength in stocks have stepped up the volatility in currency markets this morning.
The currencies have technically outpaced the stock market, in cases, breaching important levels, however the stock market acitivity is leading the way for currencies right now. And the stock market remains contained by major resistance. A petering out of this stock market rally will likely make these technical breaches in currencies immaterial….as the entire “risk” trade will reverse. That means lower stocks, higher treasuries, a higher dollar and a bounce in credit spreads.
This week we get more substantial data—more demand related as opposed to confidence related. We will likely see price pressures to continue to yield toward deflation, manufacturing to show major weakness and global trade to continue a rebalancing act. The timing should work nicely for an exhausted risk rally scenario.
Dollar Index
by Bryan Rich on May 6, 2009
in General
Key News
*Bank of America May Need About $34 Billion of Capital (Bloomberg)
* Europe Retail Sales Drop by Record as Recession Bites (Bloomberg)
*China Says Global Easing Policies Risk Devaluation (Bloomberg)
*Almost One-Quarter of U.S. Homeowners Underwater as Values Sink (Bloomberg)
The Event Agenda
The Morning Run-Down
If (when) we see another down turn, or shock in the economy, the Treasury estimates Bank of America would need another $34 billion in capital survive. The stress tests look ugly. This is a problem for the blind optimists that had already forecasted a rosy scenario and filed it away as the next testament of recovery. But going into the NY open this morning, a better ADP jobs number is trumping the stress test news. With that, the dollar is moving lower, global stocks are moving higher, commodities are higher, treasuries are lower…and financial market participants are happy to be wearing risk. As a result of this pervasive sentiment, the ted spread (a key proxy for credit risk) has narrowed to levels not seen since May of last year—revisiting the lows since the commencement of the economic crisis.
There are many factors that are elevating the risk threat; however, markets for the moment are hanging onto the ADP data (an historically unreliable predictor of payroll numbers, which are due out on Friday).
Ø The euro was softer earlier this morning as retail sales in the Eurozone fell off of a cliff– the largest retreat on record.
Ø The Swiss National Bank postured again this morning for a lower Swiss franc.
Ø Nearly a quarter of US homeowners are underwater on their mortgages. This is a problem that is at the core of the crisis and is worsening– and to this point, without a solution.
Going into the critical data points of the next couple of days, there is significant risk of a negative surprise —especially with the market leaning in one direction. And many key markets are either at or approaching key longer term technical levels. Enter a catalyst… like the bank stress tests, two European central bank meetings and US employment data and this all sets the stage for a reversal in sentiment.
by Bryan Rich on May 4, 2009
in General
Key News
*EU Says Europe Economy to Shrink 4% (Bloomberg)
* Obama Seeks to End Tax-Haven Strategies (Bloomberg)
*Chinese Manufacturing Expands (Bloomberg)
*Dollar Demand Is Strong, but Lending Lags Behind (WSJ)
The Event Agenda
The Morning Run-Down
This week, among the trading catalysts surrounding the US administrations involvement in, and handling of, private industry, we have three key data points. Both the ECB and the BOE meet on interest rates. The BOE is expected to hold steady at 50 bps and the ECB is expected to cut another 25 bps down to 1%. The post meeting press conference with Trichet will be important. The ECB has been public in their division on the future extent of interest rate cuts and on any plans to engage in quantitative easing, though it is expected that the ECB will reveal plans for QE measures.
Also, we get employment data in the US. Non-farm payrolls are expected to have stabilized around the 600k level. But unemployment is expected to tick up to the 8.9% level– still 2.3 percentage points lower than the peak in unemployment in the 81-82 recession. With the recent surge in risk appetite and the run in the stock market, the market is most vulnerable to a negative surprise.
The peak in unemployment in the 74-75 recession was 9%. In the 81-82 recession, unemployment reached 10.8%. Now, sixteen months into this recession, unemployment stands at 8.5%.
by Bryan Rich on April 30, 2009
in General
Key News
*Stocks Rise Worldwide, Pushing S&P 500 to Best Month Since 1991 (Bloomberg)
* Trichet Calls for Silence as ECB Council Bickers Over New Tools (Bloomberg)
*Chrysler Will File for Bankruptcy, Official Says (Update2) (Bloomberg)
*Bank of Japan slashes forecasts (Financial Times)
The Event Agenda
The Morning Run-Down
Yesterday’s joy-ride in risk assets continued the paradox of data versus optimism. GDP numbers were the worst cumulative annual rate since 1957, yet the market looked past poor components and found a reduction in inventories to grasp onto. With strong rallies in stocks, commodities and currencies (against the dollar and the yen) some key technical levels were challenged going into the Fed announcement. The risk bulls were looking for some indication out of the Fed that it was seeing signs of hope and an inference that the worse was behind us. The Fed did not deliver. Instead, its pragmatic assessment of the economy was one with no surprises. Stocks however made a run at stops above the highs before settling off the highs of the day.
And the currency market’s response following the Fed was a knee-jerk spike in the dollar. Now, with yesterday’s activity behind us there are some interest chart points to watch.
Charts and Data of Interest
Yesterday’s aggressive rally in risk assets pushed the AUD/USD through its 200-day moving average. If the rally in risk assets continues further, next significant resistance comes in at 0.7561, the 61.8% retracement of the September highs to the October lows. Currency participants will continue to look to stocks as the gauge for risk appetite.
In the next chart, the S&P 500 traded into the highs yesterday from the post Obama inauguration rally (circled in yellow)…the six day spurt that took the S&Ps up to 877 before subsequently staging a decline to new lows at 666. This level held going into the Fed announcement, but broke above as stops were run later in the day. Today’s activity should be interesting for the near future in this bear market rally. A strong close today would mean major resistance in the 940-960 area is the next target. A weak close would mean a potential blow-off top for stocks and risk assets alike.
