by Bryan Rich on September 18, 2009
in General
Key News
* Lloyds’ Capital-Raising Plan Fails FSA Test, Telegraph Reports (Bloomberg)
* Gain in US Household Wealth Will Help Ease Strain on Spending (Bloomberg)
* US Treasury’s money market guarantee closing down (Reuters)
*Public sector borrowing hits August record (FT)
The Event Agenda
The Afternoon Run Down
Gold has sustained the $1,000 level. Although pulling back a bit today, it’s now had five closes above $1,000 and should challenge the all-time high of $1,032.
Protectionism is heating up, going into next week’s G-20 meeting. G-20 member countries pledged to avoid protectionist policies, yet since their last meeting in April the WTO has a record of 91 protectionist initiatives filed against G-20 countries. The U.S./China dispute weighed on Chinese stocks over night sending the Shanghai index down 3%. When stocks in China fall, risk appetite takes a hit.
The dollar is doing better today across the board on the weaker risk bid, following an eight day slide in the dollar index. The big mover of the day is the British pound.
The UK Lloyds Bank failed to raise enough capital to satisfy an FSA (Financial Services Authority) stress test. The pressure on the pound picked up earlier in the week when the BOE announced that it is considering cutting the interest it pays on bank reserves- a move to get banks lending, and also an indication that the BOE is not nearing the exit doors for QE and easy money policies.
The pound had the biggest weekly drop against the euro since January of this year. With all of the dollar pressure this week, the pound remained the relative loser. And with all of the dollar bears calling the play-by-play of a perceived dollar rout, the dollar index is going into the close of the week barely changed.
Most of the noise in currencies has been relative to gold. For the month of September, gold is up 6.3% against the pound, up 5.9% against the dollar and up 4.1% against the yen.
On Wednesday, Bernanke said that the U.S. recession is “likely over.” It’s not news, but merely a statement of what’s likely a fact. The third quarter ends in less than two weeks and the U.S. economy is expected to print a positive GDP number, technical end to recession. Nonetheless, stocks rallied and interest rates moved higher. And keeping with the tone of the week, the dollar was sold.
We also had the DPJ party take office in Japan. After the finance minister surprised the markets by taking a strong yen stance, he has now moderated his tone saying the government shouldn’t comment on yen rates. Strong currencies remain a serious problem for countries trying to achieve and sustain recovery. And intervention speculation will continue to accelerate.
Key Charts
This technical break in EUR/GBP opens up more weakness for the pound.
Gold sits above the $1,000 mark with a record speculative long position. That makes long positions very vulnerable, as any sharp move lower will have speculators running for the exits…
Prices across several countries this week indicated some slight upward price pressure—still well below target inflation rates.
Chicago Tribune article reported the first half of 2009 was the worst decline of retail sales tax receipts in 20 yrs in the Chicago area. Not estimates, but actual tax receipts…
by Bryan Rich on September 14, 2009
in General
Key News
* Yen Hurts Japan’s Exporters (WSJ)
* Obama to hit China with tough tariff on tires (MarketWatch)
* Russia Cuts Benchmark Rate to 10.5% to Buoy Recovery (Bloomberg)
*U.K. Banks to Post $215 Billion Losses, Moody’s Says (Bloomberg)
*Economist warns of double-dip recession (FT.com)
The Event Agenda
The Morning Run-Down
Gold is dictating where the dollar is going in the near term. With the aggressive ascent to the $1,000 mark, the perception of reserve diversification from global central banks has the dollar on weaker footing. This move higher in gold, lower in the dollar has sent some key currencies rallying to new 2009 highs and has sent the dollar index through its key support level to new 2009 lows. The next key level in the dollar index is the all time low reached last year of 70.6—still 8% away.
Today the dollar is mixed. Gold traded below 1000 going into the NY session which gave the dollar a boost this morning. Also, the news of protectionist activity between the U.S. and China has the dollar a bit better bid as risk aversion creeps higher.
All that said intervention talk is heating up too. I wrote a piece in moneyandmarkets.com on Saturday (“Strong Currencies — Not Welcome”) pointing out the threat that the rapid rise in currencies are presenting to fragile recoveries.
The WSJ ran a couple of articles in a similar vein this morning on the growing problems that euro strength and yen strength are causing for the Eurozone and Japanese economies. And the South Korean won and Indonesian rupiah are falling today on speculation the central banks will intervene.
The Canadian dollar is one currency that has been in the crosshairs of intervention talk. The loonie is outpacing most currencies to the downside this morning. The Canadian Finance Minister said he wants all stimulus money spent, pushing the growing budget further into deficit territory—CAD negative.
Regarding the prospective global economic recovery, here’s some interesting commentary from the former Bank of International Settlements Chief Economist at a conference in Hong Kong…
Ø “Are we going into a W shaped recession? Almost certainly”
Ø “Are we going into an L? I would not be in the slightest bit surprised”
Ø “The only thing that would really surprise me is a rapid and sustainable recovery from the position we’re in”
The markets are pricing in his last scenario… the least likely scenario.
We have the FOMC and G-20 next week. The cautious tone should continue for a low interest rate environment for some time.
Here’s a look at some key charts…
Key Charts
Gold has challenged the $1,000 level twice before. In March of 2008 gold had two closes just marginally above $1,000 and then proceeded to down to the 900 area in just three days. In February of this year, gold made an intraday surge above $1,000 only to close below and subsequently fall to $900 in eight days.
So the $1,000 mark is critical to watch in gold. If it can sustain this level, the dollar will likely get punished. If it can’t, the propensity for a sharp fall is high, considering the history. And that would likely result in a sharp snap back in the dollar.
The Aussie dollar has broken to new 2009 highs but runs into a line of resistance here… the break-comeback of the trend break that took place last year this time.
After rising 27% from its lows last year, the dollar index has now fallen 14% from its “crisis highs”…
by Bryan Rich on August 31, 2009
in General
Key News
* India’s Growth Accelerates for First Time Since 2007 (Bloomberg)
* German First-Half Rail Cargo Traffic Declines Most on Record (Bloomberg)
* Japan DPJ Election Win Brings ‘Bloodless Revolution’ (Bloomberg)
* Canada to Sell Debt as Spreads Fall to Lowest in Year (Bloomberg)
*China’s Stocks Slump Most Since June 2008, Cap Monthly Loss (Bloomberg)
The Event Agenda
The Morning Run-Down
Chinese stocks took another dive overnight. The 6.7% decline puts global risk appetite on unstable footing. As a result, crude is down 3%, U.S. stocks are down over 1%, U.S. Treasuries are up and the dollar is doing better against commodity currencies, weaker against the yen. Stock market and currency market implied volatilities are jumping this morning—a sign of fear creeping back in.
Canada announced on Friday that it would be issuing U.S. dollar denominated bonds. That’s the first foreign currency denominated bond issuance in Canada in over a decade. That puts upward pressure on USD/CAD. The USD/CAD pair is getting further support this morning from the disappointing Canadian GDP numbers and the pressure on risk appetite from lower global stocks (especially China).
Japan’s elections over the weekend did not surprise. The power shift from the incumbent Liberal Democratic Party (LDP) to the Democratic Party of Japan was expected. USD/JPY traded lower initially, but fully retraced the move and is now trading lower on the generally weaker risk appetite environment.
The Reserve Bank of Australia meets tomorrow to set interest rates. While many expect Australia to move first on rates, there should be no change tomorrow. The commentary surrounding the interest rate decision should be watched carefully. The RBA has been optimistic throughout much of the global economic downturn and has made clear indications that they will be moving rates higher sooner rather than later. The Aussie dollar is down about ½% this morning on the sell-off in Chinese stocks.
Key Charts
I showed you this chart on Tuesday last week. With the slide overnight in China, here is an updated look. Look for this divergence between the S&P 500 and the Shanghai Composite to converge. Vulnerability= lower.
by Bryan Rich on August 25, 2009
in General
Key News
* Bernanke Is Nominated for Second Term as Fed Chief (Bloomberg)
* Government Spending Lifted Germany Out of Recession (Bloomberg)
* Home Prices in 20 U.S. Cities Fall Less Than Forecast (Bloomberg)
* Swine-Flu Report Details Number of Potential Cases (WSJ)
The Event Agenda
The Morning Run-Down
The general consensus following the Kansas City Fed symposium in Jackson Hole was that key global economies are emerging from recession.
The currency markets have reacted by rewarding those currencies with better growth prospects and better yield prospects and penalizing those that are projected to underperform.
As a result, the U.S. dollar, the euro, the Canadian dollar and the Aussie dollar have all done better relative to the pound and the yen.
The crisis-oriented trend of what’s good for the U.S. economy is bad for the dollar is showing signs of waning. As more upbeat assessments of recovery continue, a transition back toward normal value drivers in currencies will inevitably take place. That means economies with better growth prospects and yield prospects will attract capital. And the U.S. is expected among the top performers.
Here’s a look at expectations for full year 2009 and 2010 growth…
Still, central bankers and government officials have continued to warn against complacency. The IMF said, post Jackson Hole, warned that sustainable global expansion would have to include development of domestic demand in Asian countries…i.e. they can’t rely on exports. That’s unlikely.
China’s stock market continues to show signs of vulnerability. The Shanghai was down over 5% before recovery near the close to finish down 2.6%. Yesterday, Chinese Premier Wen warned about being “blindly optimistic” about China’s economic recovery. The Chinese stock market is important to watch. China has recently been pealing back the flood of liquidity that drove the first half performance of the Chinese economy. A further slide in Chinese stocks could shake global confidence and reignite the risk aversion trade.
If this happens, it’s a dollar positive on the flight to safety trade. If it doesn’t happen, the dollar should do better anyway as the relative growth trade continues to re-emerge.
Key Charts
While Chinese stocks have sold off…U.S. stocks have continues higher. Look for this divergence between the S&P 500 and the Shanghai Composite to converge. Vulnerability= lower.
Bearish head and shoulders in the pound + relative fundamental weakness in the UK points to a lower pound…
by Bryan Rich on August 21, 2009
in General
Key News
* Existing Home Sales in U.S. Jump to Two-Year High (Bloomberg)
* Trichet Says Global Recovery Talk Makes Him ‘Uneasy’ (Bloomberg)
* China Said to Plan Rules Tightening Capital of Banks (Bloomberg)
* Bernanke Says Global Economy Emerging From Recession (Bloomberg)
The Event Agenda
The Afternoon Run-Down
The currency markets had plenty of news to digest today and, in the end, the dollar for the second time in two weeks earned demand from a relative growth perspective. You might recall the short-lived breakdown of the risk trade two Friday’s ago, when the dollar was favored after a surprisingly better employment report. Yields rallied, stocks rallied and so did the dollar for a change. Since last year, within the risk-on/risk-off environment the dollar has only benefited when fear and uncertainty creeps in. Otherwise good news has been bad for the dollar.
But today was another sign that the sentiment toward the dollar may be shifting. Bernanke’s speech at the Kansas City Fed conference was growth positive. And the reaction in markets was lower yields, higher stocks and a reversal in the dollar toward higher ground. After a decline in the London session, the dollar made the strongest move against the pound and the yen where the U.S. holds a stronger position in the recovery theme.
The euro fared a bit better against the dollar after recent data has suggested the Eurozone will emerge from recession sooner than thought.
Here’s a look at the activity from Friday…
Key Charts
The move in the pound following Bernanke’s speech…
S&P’s broke to new 2009 highs on the growth theme…
Crude did as well…
The market turned focus to Chinese stocks as the proxy for the sustainability of global economic recovery and the Shanghai Composite slid sharply this week and held at the 38.2% retracement.
by Bryan Rich on August 17, 2009
in General
Key News
* Pound Drops as Home Sellers Lower Asking Prices Most This Year
(Bloomberg)
* Nikkei 225 Declines Most Since March on GDP, U.S. Confidence (Bloomberg)
* China Buys Treasuries, Proving Dollar Demise Overdone (Bloomberg)
* New York Factories Expand for First Times Since 2008 (Bloomberg)
The Event Agenda
The Morning Run-Down
Today the VIX (stock market implied volatility) has spiked 16% higher and currency volatility has jumped across the board. Risk is being taken off.
The dollar is higher this morning, except against the yen. Friday’s sharp reversal in risk appetite took stocks lower, commodities lower, yields lower and the dollar higher. The move is continuing today.
First, here’s a look at the activity from Friday…
Including today’s 5.7% drop in the Shanghai Composite, the Chinese stock market has now fallen 17% in nine trading days. China reported foreign direct investment in July down 35.7% from the same period a year ago. Because China is the outperformer thus far in the global recession, though underperforming its growth of the past decade, it’s critical to watch the sustainability of the stimulus led growth of the second quarter. And the markets are starting to indicate that the recovery theme could be over-rated.
Japan’s GDP report overnight came in positive territory as expected, but below estimates. The yen is benefiting in a general unwind of risk in the yen crosses. USD/JPY is down 0.40%, EUR/JPY is down 1.3% and AUD/JPY is down 1.9%.
Comments made by BOE Governor King about the strength of the pound in last week are headlines today. But the pound is dropping on general risk appetite and the relative weakness in the UK economy. The housing data overnight showed house prices dropped in August by the most in eight months.
Key Charts
Stock markets have been the proxy for risk appetite. And China’s stock market has lately become the reference point for gauging the sustainability of the risk trade—and it’s pointing lower.
Thanks to abating risk appetite, the dollar index is in an impulsive C-wave that looks likely to break the downtrend from March.
And the Australian dollar is outpacing currencies on the downside after failing at a significant technical level of resistance…the 61.8% retracement from entire crisis driven decline last year.
by Bryan Rich on August 11, 2009
in General
Key News
* Ruble Falls in Longest Slump Since February on Record GDP Drop
(Bloomberg)
* Brazil’s Real Drops to Lowest in August as China’s Loans Fall
(Bloomberg)
* BOJ’s Shirakawa Says Japan Recovery Likely to Be Weak
(Bloomberg)
* U.K. Trade Gap Unexpectedly Widens as Global Recession Persists
(Bloomberg)
The Event Agenda
The Morning Run-Down
The dollar continues to move higher today, except against the yen. Yesterday it was the European currencies that took the brunt of the selling. Today it’s the commodity currencies (Australian dollar, Canadian dollar, New Zealand dollar). And the yen is being dragged higher on selling of the commodity currency/yen cross rates. With stocks are down more than 1%, crude down more than 2% and treasuries higher, risk is being taken off of the table.
The data overnight in China is a drag on the global recovery story. Consumer prices in China continued to decline, industrial production was shy of expectations and exports in China ticked back down, to -23% year over year. Exports have fallen for nine straight months. But perhaps most interesting, new loans in China dropped from 1.5 trillion yuan in June to just 355 billion yuan in July—the lowest level since October of 2008.
This puts pressure on the economies that have benefited from the liquidity-driven demand from China. The commodity currencies and emerging market currencies are lower as a result.
The risk barometer is being dialed up. In Russia, the value of the ruble is under pressure again. Earlier this year, the central bank spent over $200 billion of its foreign exchange reserves to defend the value of the ruble after its economy came under pressure from the global financial crisis and recession. Investors fled Russia, global demand for its oil collapsed, and speculators sold the ruble.
The economy is now contracting at 10.9% annualized rate last quarter, the worst on record. And the ruble is in its longest decline since February, when the central bank was defending against a collapse of the currency.
Also, the Latvian economy was downgraded today by Standard and Poors after reporting a 19.6% annual rate of contraction in GDP. S&P expects government debt to swell to 80% of GDP by 2011 (from 19% last year).
The Bank of Japan kept rates at 0.10% and did not announce any new alternative monetary policy initiatives (i.e. quantitative easing). These comments from BOJ Governor Shirakawa…
*BOJ can’t expect clear, strong recovery
*BOJ doesn’t see risk of deflation spiral now
*Can’t be confident about final demand
*Japan economic outlook depends on final demand
*Prices are declining worldwide
*Global economy pointing upward
*Downside risk remain high for Japan economy
The Fed rate-setting meeting concludes tomorrow afternoon. The Fed will not change rates, but there will be considerable attention to the language on plans for its asset purchase program (i.e. quantitative easing). Considering the Bank of England has just announced an increase in its quantitative easing program, a cautious stance by the Fed is likely.
The dollar benefited on the relative growth/prospective relative yield trade on Friday, a distinct shift away from the “risk sensitive” inter-market correlations we’ve seen since the middle of 2008. And today the markets are back in the risk taking vs. risk aversion mold. As a result, the dollar is benefiting on risk aversion/threats to global economic recovery.
by Bryan Rich on August 10, 2009
in General
Key News
* Ruble Slumps on Devaluation Fears (WSJ)
* U.S. Economy: Payroll Losses, Sllow, Unemployment Rate Declines
(Bloomberg)
* Treasuries Fall Most in Week Since 2003 as U.S. Job Cuts Slow
(Bloomberg)
* Baltic Dry Index Has Worst Week Since October as Demand Slows
(Bloomberg)
The Event Agenda
The Afternoon Run-Down
The jobs data on Friday beat expectations. And the recovery theme received a super charge. Stocks finished up 1.3% and 10-yr notes fell to lowest levels since June, but the dollar was the story of the day. In an environment where the risk trade has dominated since March, any news deemed good has meant bad news for the dollar.
The gears shifted on Friday.
The dollar traded with the recovery theme and with yield. Perhaps this is a sign of a breakdown of this risk appetite inter-market correlation that has held so tightly.
The immediate reaction in the Treasury market and in dollar/yen told the story. Treasuries dropped like a rock and dollar/yen spiked and never looked back—a market expression of the relative economic outperformance and prospective yield advantage. For the other majors, there was an immediate sell off in the dollar…and then the dollar came back strong.
Here’s a screenshot at Friday’s close…
Notice the good news for stocks, yields and the dollar didn’t translate to oil (line 4) and other commodities (CRB Index, line 7). Another divergence from the risk trade correlation.
And here’s the biggest performer on the screen…
by Bryan Rich on August 3, 2009
in General
Key News
* Euro gains on positive manufacturing data (AFP)
* Greenspan Says US Growth of 2.5% Is Possible in Third Quarter (Bloomberg)
* Tight credit could limit eurozone growth: analysts (AFP)
* Russian manufacturing industry shrank at slowest pace since September
(Bloomberg)
The Event Agenda
The Morning Run-Down
Better than expected manufacturing data in the Eurozone, China and the U.S. this morning set off a bid in nearly all currencies against the dollar. Add to that, positive commentary over the weekend about prospects for recovery from Greenspan, Geithner and Summers …and you get another risk-loving jolt higher in financial markets.
The activity this morning continues the sharp move in currencies from Friday. After better U.S. GDP on Friday morning, market participants put a square focus on currencies and ran the pound and the Aussie dollar through critical resistance (the 2009 highs).
Here’s a screenshot at Friday’s close…
While stocks have been leading the move in this highly correlated risk trade, on Friday stocks took a breather, and market focus turned squarely to currencies and commodities. But one market clouded the picture. Treasuries (10-yr notes) moved higher (see row 5).
The safety correlation between gold and the dollar broke down in May and has returned to its traditional inverse relationship. Thus the dollar moved lower, so gold moved higher. Considering the confluence of market performance, a move lower in Treasuries on Friday might have given the clue that the market was going after the dollar. But that wasn’t the case.
However, 10-year notes (Treasuries) have fully reversed the move now, and today, across all markets, it’s clear that it’s a risk appetite thing. And all things are pointing toward a higher risk trade. The close today will be important for currencies. The dollar index is trading into December lows. And the Australian dollar (the outperformer among currencies on this ride up) is trading into the 61.8% retracement of the move down from the July 2008 highs to the October lows…a 39% collapse, now met with a 40% climb.
With the docket set with rate decisions this week from Australia, Europe and the UK, the market is obviously positioning for positive language on the economy from central banks, hawkish sentiment from the RBA and clues on exit plans from the ECB and BOE.
And then we get employment data in the U.S. on Friday.
by Bryan Rich on July 15, 2009
in General
Key News
* BOJ Holds Rates Steady, Extends Liquidity Measures (WSJ)
* European Consumer Prices Record First Annual Drop in June (Bloomberg)
* Bean Says Darling Can Lift BOE Bond-Buying Limit (Bloomberg)
* China’s Foreign-Exchange Reserves Surge Above $2 Trillion (WSJ)
The Event Agenda
The Morning Run-Down
The strong outlook for Goldman Sachs ignited a rally in stocks on Monday, and the risk climate has swung back in favor of risk taking. The Goldman numbers however didn’t indicate strength in the economy or strength in the financial sector. Conversely, nearly 80% of Goldman’s revenues were from “Trading and Principal Investments.” With $10 billion of government money in the coffers, Goldman stepped up its daily Value at Risk by 33% from the same period last year. More high risk bets with risks transferred to the taxpayer—not a recipe for a recovery in financial “services.”
Nonetheless, some better than expected corporate earnings in the US and some slightly hotter inflation data this morning and better manufacturing and industrial production numbers are bolstering the recovery theme. Stocks are up 2%, 10-year Treasury yields are back to 4% (up 25 bps since last Wednesday) and the dollar is lower against just about every currency.
Each strong move lower in the risk trade continues to be met with an equally strong reversal. And ranges continue to hold putting implied volatilities (in stocks and currencies) in retreat. This whipsaw trading environment has proven difficult for the trading community. Out of 178 top CTAs and Hedge Funds, only 27% made money in June and only 31% are positive for the year.
Key Charts
Out of the 132 companies that have reported thus far, two companies are contracting for every one that is growing.
China’s foreign exchange reserves topped $2 trillion for the first time in the second quarter. Though this headline is making the rounds, it’s not news. China’s monthly reporting of FX reserves showed the $2 trillion mark breached in April. Money continues to flow into China, boosting fx reserves as the Chinese central bank exchanges yuan for foreign currency denominated revenues and investments. But the pace on a year-over-year basis has slowed materially.
