Cliff Wachtel's  Instablog

Risk Assets Up on Positive FOMC Statement, Surprising GDP Growth in France, Germany

STOCKS: All major Global stock indexes up, recover Tuesday losses. Showing very tight trading range over the past week within about 2%. The big question: Will the mood stay positive enough to keep stocks around current overbought levels?

FOREX:  Despite stocks rise, FX pairs don't show the usual pro-risk bias. Very Unusual. Note the table:

USD traded up after upbeat FOMC statement, again showing it can move with US economic fundamentals for the second time in a week. EUR likely to gain early Thursday on surprise GDP growth in France and Germany.

COMMODITIES:

Crude up nearing $71 from $70 as it follows stocks in recovery prior day's losses. Gold showed a similar reaction, recovery most of Tuesday's loss to get back over $950, helped by Fed decision to leave interest rates low, boosting bullion's inflation hedge value.

MEANING: Markets recover Tuesday losses, short term tight range trading as markets seek direction given no major surprises from news. Major Thursday news: EUR: GDP data from Germany, France, (both expand 0.3% vs.-0.2% forecast!) Eurozone. US: Retail sales, initial jobless claims, US business inventories.

WHY:  Risk assets recover Tuesday losses due to overall tone of Fed was definitely +, signaling a stabilizing US economy and a likely QE exit date this autumn. Tight trading range over past week (2% in S&P) due to lack of market moving news.

TRADING OPPORTUNITY: Stocks, other risk assets remain at multi-month highs, dollar deeply shorted, be ready when key calendar events (see below) hit or if stocks moves down to short risk assets, go long USD. See prior analyses for info on why markets remain overbought, overpriced, vulnerable to pullback. However, if no major negative news, markets could stay in flat trading range.

WEDNESDAY:

Asia towards close:  up (N225 -1.25%, HS -1.91%, ST -0.27%)

Europe: Down (FTSE: +0.97%, DAX +1.22%, CAC 40 +1.48%)

US: Down (S&P +1.15%   NSDQ +1.47 % Dow +1.30% ),

THURSDAY: Asia near close up (N225 +0.98%, HS +1.96%, ST +1.57%)

US:  Neither the FOMC's latest policy directive nor a key Treasury auction delivered any negative surprises, so this session's buying effort generally went without being thwarted. Though the major indices did fall from session highs in the final minutes of the session, stocks still finished broadly higher.

EUR:  Gains on surprising GDP growth in Germany, France, which together = 50% EZ GDP

USD: The dollar had a rocky session as the buck almost immediately gave back a good part of its post-FOMC gains. Prior to the FOMC meeting, the dollar had largely been weakening versus most of the major currencies as US and European equities had positive sessions, closing over 1% higher. EURUSD traded 1.4087-1.4247 and USDJPY 96.76-95.13. The dollar appears to have passed the FOMC test as the statement was largely as expected and there was no increase to the asset purchases. But we are still waiting to see if recent events play out differently than in early June.

GBP: The BoE released its Quarterly Inflation Report and acknowledged some "encouraging signs" of a gradual recovery over the next few years and below-target CPI inflation over the forecast horizon. But they also predicted tight credit conditions would hinder recovery, as would high levels of public and private debt. BoE Governor King noted sterling is still some 20% below where it was when the crisis started and should help rebalance the economy. But he also said the best he could hope for is to be able to respond to exchange rate changes, since he cannot control them. Unemployment data was mixed showing another increase in jobless claims to 24,900, though less than the consensus 28,000, and the unemployment rate ticked up to 7.8% versus consensus 7.7% and 7.6% previously.    

Of the central banks that held major events yesterday, the Bank of England proved to be the most despondent. While the BOE did not announce any downgrades to its UK growth forecasts, as many had anticipated, and acknowledged the improvement in shorter-term indicators, BOE governor Mervyn King was at his most dovish on rates, almost explicitly saying that current market expectations were wildly overdone. In addition, he said that the pace of growth and recovery would be highly uncertain. He was particularly scathing about the level of bank lending and, while not engaging in an outright call for banks lend more to customers, he warned that growth could be curbed if banks continued to limit lending to businesses and consumers in an attempt to repair their balance sheets. He even threatened to slash the interest the BOE pays on cash held in banks’ reserve accounts to encourage them to lend more.

JPY: no news

CAD: Economic data was mixed as the trade deficit was not as large as expected at C$0.1bn versus consensus C$0.7bn while the new housing price index dropped 0.2% m/m versus consensus of no change. Data aside, the CAD largely benefited from a drop in crude and a positive day in equities as USDCAD is around 1.09 at the time of writing.

AUD, NZD:   Down on risk aversion ahead of FOMC statement.

RBA Governor Glen Stevens delivers his semi-annual testimony to parliament on Friday, but it is unlikely that he would have changed his tone so soon after last week's RBA rate decision and quarterly Statement. The Baltic Dry Index fell to a over a 2-month low last week. It was its worst week since Oct'08 (falling 17%) due to slowing Chinese demand for shipments of coal and iron ore slowed. The RBA's monetary policy report sounded a cautiously optimistic note, observing that the global economy is stabilizing and "extreme risk aversion seen earlier in the year has retreated somewhat". The bank judged that the domestic economy has shown "considerable resilience", helped by a strong recovery in China that has boosted demand for Australian exports. The statement forecasts that the domestic GDP growth will average 0.5% over 2009. On the subject of interest rates, stronger-than-expected economic data and a general improvement in sentiment both domestically and overseas, have "reduced the likelihood" that further cuts to the policy rate will be needed.

• CRUDE: Followed stocks to recovers prior day's losses . Paris based IEA lowered their global oil demand growth forecast for next year. It sees mixed evidence for recovery. Technical action suggests oil set a near term high last week below $72, the close under $70 suggests oil is vulnerable to pullback. Oil tends to track stocks, which are likely to set oil's direction. With stocks extended after a rally of questionable justification, more positive news will be needed to prevent profit taking from stocks and other risk assets like oil. A current oil supply glut and strengthening dollar are also pressuring oil prices.

• GOLD: Followed stocks higher to recover some of Tuesday's loss, FOMC's leaving interest rates low also helped, as did weakening dollar in Asia trade early Wednesday.

Longer Term is more positive, global gold price hedging by producers is nearing a multi-year low, suggesting that miners DO NOT want to be bound by current prices and want more exposure to anticipated higher spot prices.

The FOMC and the Markets II: The Morning After

The optimistic comments from the Federal Reserve and the not so subtle hints that the central bank is thinking about an exit strategy drove the dollar higher across all board. The U.S. central bank recognized the improvements in the economy by saying that “economic activity is leveling out” and also put a time stamp on when they plan on ending Treasury purchases.   With bond yields rising across the board, money is flowing into the U.S. dollar. The Fed has satisfied the market by recognizing the improvements in the U.S. economy and the financial markets. The central bank’s decision to leave their $300 billion Treasury purchase program intact and to complete it in October suggests that they do not feel that the U.S. economy needs additional stimulus at this time. We actually believe that their decision to extend their purchase program to the end of October from September is a positive move because it suggests that the U.S. economy is stable enough for them to spread out their stimulus instead of delivering it quickly and aggressively.

Going into this report we were looking for answers to 3 central questions and the Fed has provided them:

1) Will the Asset Purchase Program be Increased? - Instead of increasing their asset purchase program, the Federal Reserve is winding it down, which we expected to be a positive move for the greenback.

2) Has the Economy Improved Enough to Warrant an Upgraded Assessment? – They upgraded their economic assessment by replacing “the pace of economic contraction is slowing” with “economic activity is leveling out.”

3) Is it Time to Talk about Exit Strategies? – By saying that the full amount of Treasury Purchases will be completed in October, the central bank is suggesting that it may be time to think about exit strategies in the fourth quarter.

Yet the statement still contained some cautiousness as the central bank says that that spending is being constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. They also expect the economy to remain weak for a time and because of that, interest rates should remain exceptionally low for an extended period of time.

After Friday’s non-farm payrolls report, currency traders openly wondered whether the dollar is finally trading off fundamentals and not risk appetite. As we have seen today’s reaction to the FOMC announcement, when it comes to key events, the dollar is responding to fundamentals. The main reason for this is yield. If bond yields are rising, investors are plowing into dollars. If Treasury yields give up their gains, so should the dollar.

The next FOMC meeting is on September 23rd.

Thursday key trading events: EUR: GDP data for Germany, France +, see Summary above), Eurozone.  US: Retail Sales, business inventories

Why Markets May Be Ready to Pull Back:  Links to articles worth seeing.

·         Preview from Europe: Non-Farm Payrolls Add to Bullish Tone

Very good graphs on Bob Farrell's Rule # 8: bear markets have 3 stages 1. Sharp downturn 2. Reflexive rebound 3. Drawn our fundamental downtrend   & shows we're in reflexive rebound stage, prelude to a further downturn in stocks and other risk assets.

·         Preview from Europe: Stocks Consolidate at Lofty Levels

seekingalpha.com/article/153851-preview-...

Key points include:

• A record 13.9% of companies beat their EPS estimates, prior record was 7.9% in Q1 of 2004. Does this suggest the game of lowball estimates have become far more exaggerated?

• Year over year profit growth still at -29.5%. Yes, that's better than the -31.7% consensus estimate before Q1, but at the start of the year estimated growth rate for Q2 was -11.3%, So actually, earnings are coming in below expected by more than 18 percentage points on this basis, but believe me, there is nary a newspaper or a bubblevision TV program that is going to make mention of that particular statistic.

• What about guidance? Again, not a broadly reported statistic but there have been 39 negative EPS pre-announcements versus 15 positive pre-announcements thus far for 3Q. That yields a negative/positive ratio of 2.6x, which is actually well above the 1.8x at this same juncture during the Q1 reporting season three months ago and the long-run average of 2.1x.

• What about valuations? The S&P 500 is trading at 16.5x calendar year 2009 earnings estimates; 14.7x four-quarter forward estimates; a 13.2x calendar year estimates. These are forward estimates, which are merely analyst projections, and they are based on operating, not reported earnings. And the best, the very best, multiple that can be drummed up is 13.2x. That doesn’t exactly sound like bargain prices from where we sit, especially when dividends are being slashed and the corporate bond market is still offering up coupons of over 7%.

Traders should carefully monitor BoE and Fed Statements. Most markets are arguably overbought and thus may be vulnerable to pullback. Either of these statements have the potential to move markets—in either direction.

TRADING OPPORTUNITY: Stocks, other risk assets remain at multi-month highs, dollar deeply shorted, be ready when key calendar events (see below) hit or if stocks moves down to short risk assets, go long USD. See prior analyses for info on why markets remain overbought, overpriced, vulnerable to pullback. However, if no major negative news, markets could stay in flat trading range.

 [Forecasted—Prior ] All times are GMT, *= Most Important

Economic Calendar News [actual-expected-prior, all times GMT]

MONDAY AUG 10

12:50am  JPY  Core Machinery Orders m/m                            9.7%    2.8% -3.0%  

*2:30am  AUD  Home Loans m/m                                                        1.1%    1.9% 2.2%  

7:45am  EUR  French Industrial Production m/m                                   +0.3%  -0.1% 2.6%  

TUES AUG 11

Aug 11  12:01am  GBP  BRC Retail Sales Monitor y/y                         1.8                   1.4%  

12:01am  GBP  RICS House Price Balance                              -8.1      -9.8% -18.1%  

*3:00am  CNY  Industrial Production y/y                                              -10.8    11.5% 10.7%  

3:00am  CNY  CPI y/y                                                                         -1.8      -1.7% -1.7%  

3:00am  CNY  NBS Press Conference      

3:00am  CNY  PPI y/y                                                                         -8.2%  -8.3% -7.8%  

Tentative  JPY  Monetary Policy Statement      

*Tentative  CNY  Trade Balance                                                          10.6     10.3B 8.3B  

*Tentative  JPY  BOJ Press Conference      

9:30am  GBP  Trade Balance                                                               -6.5B   -6.4B -6.3B  

*1:15pm  CAD  Housing Starts                                                            132K   141K 141K  

WED AUG 12

2:00am  AUD  Westpac Consumer Sentiment                                       3.7%                9.3%  

2:30am  AUD  Wage Price Index q/q                                                   0.8%    0.8% 0.8%  

6:00am  JPY  BOJ Monthly Report      

*9:30am  GBP  Claimant Count Change                                               24.9K  25.5K 23.8K  

9:30am  GBP  Average Earnings Index 3m/y                             2.5%    2.3% 2.3%  

10:00am  EUR  Industrial Production m/m                                             -0.6      0.4% 0.5%  

*10:30am  GBP  BOE Gov King Speaks      

*10:30am  GBP  BOE Inflation Report      

*1:30pm  CAD  Trade Balance                                                            -0.1B   -0.6B -1.4B  

*1:30pm  USD  Trade Balance                                                             -27.0B -28.4B -26.0B  

3:30pm  USD  Crude Oil Inventories                                                    2.5M    0.7M    1.7M  

*7:15pm  USD  FOMC Statement      

*7:15pm  USD  Federal Funds Rate                                         <0.25%<0.25% <0.25%  

THURS AUG 13

*7:00am  EUR  German Prelim GDP q/q                                                                                  +0.3%  -0.2% -3.8%  

7:45am  EUR  French Prelim GDP q/q                                                                                      +0.3%  -0.3% -1.2%  

9:00am  EUR  ECB Monthly Bulletin      

10:00am  EUR  Flash GDP q/q                                                                                                             -0.5% -2.5%  

*1:30pm  USD  Core Retail Sales m/m                                                                                                 0.2% 0.3%  

*1:30pm  USD  Retail Sales m/m                                                                                                          0.5% 0.6%  

*1:30pm  USD  Unemployment Claims                                                                                                 540K 550K  

1:30pm  USD  Import Prices m/m                                                                                                         -0.2% 3.2%  

3:00pm  USD  Business Inventories m/m                                                                                               -0.9% -1.0%  

*11:45pm  NZD  Retail Sales m/m                                                                                                        -0.3% 0.8%  

FRI AUG 14

*Aug 14  12:30am  AUD  RBA Gov Stevens Speaks      

12:50am  JPY  Monetary Policy Meeting Minutes      

12:50am  JPY  Tertiary Industry Activity m/m                                                                                                   -0.3% -0.1%  

7:45am  EUR  French Prelim Non-Farm Payrolls q/q                                                                                        -0.9% -1.2%  

10:00am  EUR  CPI y/y                                                                                                                        -0.6% -0.6%  

10:00am  EUR  Core CPI y/y                                                                                                                           1.4% 1.4%  

1:30pm  CAD  Manufacturing Sales m/m                                                                                              -0.2% -6.0%  

*1:30pm  USD  Core CPI m/m                                                                                                            0.1% 0.2%  

1:30pm  USD  CPI m/m                                                                                                                       0.0% 0.7%  

DISCLOSURE & DISCLAIMER:  Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments.