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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • GLOBAL OUTLOOK 11/06: NFP DAY AND HOW TO PLAY IT -FULL VERSION 0 comments
    Nov 6, 2009 4:25 AM
    GLOBAL OUTLOOK 11/06: NFP DAY AND HOW TO PLAY IT -FULL VERSION6 11 2009

    GLOBAL OUTLOOK 11/06: NFP DAY AND HOW TO PLAY IT

    SUMMARY

    - Stocks: Wednesday: Asia up, Europe up, US flat, Thursday morning Asia, Europe down

    - FX: Lower/flat equities Thursday, 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,

    - Main events today: NZD: RBNZ Gov Bollard Speaks, AUD: Trade Balance, Gov. Stevens speaks, GBP: Mfg Production m/m, Asset Purchase Facility, MPC Rate St., Official Bank Rate, EUR: Minimum Bid Rate, ECB Press Confr. CAD: Building Permits, Ivey PMI, USD: Unemployment Claims w/s

    - Big Theme: Falling risk appetite – normal retest or the next leg down back to November or March support? Rising thus far this week-See Conclusions below for trading opportunities as many assets approach or breaching key levels. Light news Tuesday produced small moves except for gold and oil arising from special events (SEE BELOW) News-packed Wednesday. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, MARKET REACTION TO NEWS WEDNESDAY-FRIDAY TO DECIDE

    STOCKS

    US: (NYSE:AP) A bright forecast from Cisco Systems and upbeat economic news sent stocks soaring Thursday and propelled the Dow Jones industrials back above 10,000. The rally, coming a day before the government’s October employment report, showed that investors are regaining their optimism about an economic recovery. The bellwether S&P 500 regained the 1060 level it had lost on last Friday’s profit taking. Up ahead today, the month’s climactic economic event, US monthly employment data, which will provide the next key insight into the recovery’s progress and the health of the all important US consumer’s ability to spend.

    (Briefing.com) Broad-based buying on the back of a strong quarterly report from Cisco and a couple of pleasing economic reports helped stocks net robust gains ahead of tomorrow’s potentially pivotal nonfarm payrolls report.

    Cisco (CSCO 23.93, +0.64) won support for itself and other large-cap tech issues by posting better-than-expected top and bottom line results for its latest quarter and announcing that it has authorized an additional $10 billion to add to its share repurchase plan, which now stands at roughly $13 billion. Cisco went one step further and issued a solid outlook during its conference call.

    Strength among large-cap tech issues helped hand the Nasdaq its best single-session percentage advance since July. Meanwhile, all 30 Dow components advanced and helped the blue chip index close above 10,000 for the first time in two weeks.

    The positive tone among this session’s participants was also helped by news that third quarter nonfarm productivity surged 9.5% in its preliminary report. That is considerably better than the 6.5% increase that had been widely expected. The surge marked the largest gain in productivity since 2003. It was fueled by the sharp increase in third quarter output and the considerable drop in hours worked. With job conditions still weak, unit labor costs dropped 5.2% in the third quarter. They were expected to fall 4.2%.

    The latest initial jobless claims total came in 512,000, down 20,000 from the previous week and not as bad as the 522,000 initial claims that had been widely expected. Continuing claims came in at 5.75 million, which is in stride with what had been forecast and down from 5.82 million in the previous week. That decline, though, is primarily rooted in the trend that unemployed workers are losing their benefits, not finding jobs.

    That trend has many market watchers looking ahead to the government’s official nonfarm jobs report, which will be released before the opening bell Friday morning. The consensus forecast is that the October unemployment will hit 9.9%, which would be the highest level since 1982.

    Despite concerns for that matter, all 10 major sectors finished the session with a gain. Only consumer staples failed to gain more than 1%. Disappointment over the pharmacy benefit management business at CVS Caremark (CVS 28.87, -7.28) overshadowed the company’s better-than-expected earnings and additional share repurchase authorization, and caused the stock to drag on the consumer staples sector. Consumer staples, as a group, settled with a relatively modest gain of 0.6%.

    Insurers also lagged as participants shunned Allstate (ALL 29.05, -0.57) and Prudential Financial (PRU 44.64, -1.92). Allstate missed the consensus earnings estimate, but Prudential actually posted a positive earnings surprise. Despite their weakness, financials still advanced 2.5%.

    Only the consumer discretionary sector had a better gain. It advanced 2.6% in the face of mixed monthly same-store sales results from retailers.

    Advancing Sectors: Consumer Discretionary (+2.6%), Financials (+2.5%), Industrials (+2.5%), Materials (+2.4%), Tech (+2.2%), Utilities (+1.7%), Health Care (+1.6%), Energy (+1.6%), Telecom (+1.2%), Consumer Staples (+0.6%)

    Declining Sectors: (None)DJ30 +203.82 NASDAQ +49.80 NQ100 +2.4% R2K +3.2% SP400 +2.4% SP500 +20.13 NASDAQ Adv/Vol/Dec 2125/2.23 bln/579 NYSE Adv/Vol/Dec 2495/1.30 bln/542

    Outlook For Friday’s Non Farms Payrolls Report

    Today’s NFP report due at 13:30 GMT is the climactic event risk of the week, arguably the month, because it provides some of the most important information for assessing the sustainability of the global recovery trade. The remains by far the world largest economy, and that economy is mostly comprised of consumer spending, which in turn depends on labor conditions.

    The US economy remains a laggard amoung the G-3 as job losses have continued rising, whereas Germany and Japan have slowed job losses.

    As we’ve noted frequently, consumer spending is about 70% of US GDP. The US economy cannot generate sustainable consumer demand and thus GDP growth going forward until labor conditions stabilize and improve, thus providing increased disposable income for consumers that will ultimately restore the key financial and housing sectors. Improving incomes allow consumers to repay residential and other debt and spend, thus allowing businesses to improve and repay commercial debt. To that end despite a slight tilt to the positive, this month’s pre-NFP labor reports offer a decidedly mixed picture. Here is how the leading indicators for NFP look:

    Evidence Supporting a Better than Expected Payrolls Report

    1. Average Jobless Claims Dip to 512k Compared to 552k a Month Prior

    2. Challenger Reports Drops to a Lowest Pace of Layoffs Since March 2008

    3. Continuing Claims at 5.79M Compared to 6.09M from a Month Before

    4. ADP Reports Private Sector Job Losses at -254K, Lowest Since July 2008

    5. Employment Component of Manufacturing ISM Rose to 53.1 Compared to 46.2 Last Month

    6. Monster.com Employment Index edges up to 120 from 119

    Evidence Supporting a Weaker Payrolls Report

    1. Employment Component of Non-Manufacturing ISM dropped to 41.1 from 44.3

    2. Conference Board Consumer Confidence Unexpectedly Dips to 47.7 from 53.4

    3. Strike Activity slightly rises

    4. University of Michigan Confidence decreased to 70.6 from 73.5

    Perhaps the strongest argument for a better NFP print is the sharp decline in the weekly jobless claims which is always the first step towards and improvement in labor markets. That data point however is offset by the disappointing reading in the employment subcomponent of the ISM Non Manufacturing report which has an 85% correlation with the NFP numberTraders should note that the initial reaction to the report is more often than not reversed within the first 4-6 hours after the announcement. See the AVA FX special report on how to trade Non-Farms Payroll news: [ http://www.avafx.com/11719.html
    ]

    Asia: Japan’s Nikkei stock average rose 0.9 percent on Friday as exporters such as Canon Inc climbed after good U.S. job news renewed hopes about the pace of economic recovery, with tech shares up after gains by their U.S. peers. Hong Kong shares climbed on Friday, spurred by gains on Wall Street and encouraging U.S. data, while China rose to a fresh three-month high as steel and metal shares firmed.

    Europe: LONDON, Nov 5 (Reuters) – European shares set a one-week closing high on Thursday after data showed new claims for U.S. jobless aid fell to a 10-month low and business productivity in the third quarter grew at the fastest pace in six years.

    GLOBAL

     

    MARKETS FRIDAY

         
    ASIA- UPN225I -1.29%HS -0.63 %SSEC +0.85FTSTI -0.73%AORD -0.62 %
    EUROPE UPFTSE +0.35%DAX +0.67%CAC +0.63% 
    US- FLATS&P +1.92%DJIA +2.08%NASDAQ +2.42%  
    THIS MORNING    
    ASIA CLOSING DOWN    
    N225I -1.29%HS -0.63 %SSEC +0.85FTSTI -0.73%AORD -0.62 %
    EUROPE: OPEN DOWN    
    FTSE -0.95%DAX -1.28%CAC -1.12%  

    Oil: Continuing to hover around $80/bbl in Thursday and early Friday morning trade.

    However, analysts said most of the economic optimism has already been priced in and persistently sluggish energy demand in the United States, the world’s largest energy consumer, could limit oil’s gains.

    Weekly inventory data on Wednesday showed that U.S. distillate stocks — often taken as a more faithful snapshot of demand than crude oil — fell 400,000 barrels compared to analyst expectations for a 1 million-barrel decline. They remain near 26-year highs and analysts said this would cap price rises in the event of a cold winter.

    "The deluge of global liquidity has contributed to lifting oil prices since February. With the end of easing approaching, we envision a harder grind ahead — one where fundamentals will matter more," Morgan Stanley said on Friday in a research note led by energy analyst Hussein Allidina.

    "We think upside in crude will be rather limited as supportive macro factors start to fade and physical markets remain weak."

    Barclays expects oil prices to average $76 a barrel in the fourth quarter and $85 next year.

    Gold: Continuing to break to new highs following the news India’s 200 tonne purchase from the IMF, currently breaching $1090. Press reports indicate that the RBI made their purchases between October 19th and 30th at an average price of $1,045 an ounce and likely to test the 1,100 level, they’re already profiting brilliantly

    The math is as follows: A gain of about $50 an ounce is about a five percent rise in the gold price and a five percent rise in the RBI’s $6.7 billion is a gain of about $335 million.

    The IMF’s transaction represents about half of a long-planned bullion sale, which now has the gold industry wondering who will

    be buying the remainder that is due to be sold.

    Akira Doi, a managing director at Tokyo’s Daiichi Commodities Co Ltd, said gold could fall on profit-taking this month after it

    eventually hits $1,100.

    "Funds close their books in November, and one should keep in mind they may decide to pocket profits and sell this month," he

    said.

    Noncommercial net long positions in U.S. gold futures remained near a record. He added, however, that gold was likely to remain above $1,000 even if it is hit by profit-taking, noting that India’s purchase from the IMF was made near an average of $1,045 an ounce.

    "I think that fact will have a psychological impact on the market … there is no longer any surprise in seeing a four-figure price for gold," Doi said.

    CURRENCIES: Bias to risk currencies due to overall recent up trend in stocks. FX trade today will move with how stocks react to the major news events mentioned above. An index that measures the dollar against six other major currencies rose 0.1 percent <.DXY>, while the euro, the biggest component of that basket, was unchanged at $1.4874

    USD: NEW YORK, Nov 5 (Reuters) – Losing ground against riskier higher yielding currencies as stocks, gold rise.

    The greenback fell in the prior session after the Federal Reserve kept interest rates at record lows and signaled they

    were likely to stay there for some time to come.

    It lost more ground earlier Thursday after European Central Bank President Jean-Claude Trichet sounded an optimistic note about a 2010 recovery and hinted at a slow-motion exit strategy for some emergency stimulus measures.

    NB: The dollar could be volatile today with US employment data coming out. A higher-than-expected jobless rate or a bigger loss of jobs than forecast could rattle investors on Wall Street and the energy complex and send them fleeing into the safe haven of U.S. government bonds and the U.S. dollar.

    EUR: - euro gains above $1.49 were short-lived, and analysts said investors were largely moving to the sidelines ahead of Friday’s jobs report, expected to show a slower pace of U.S. job losses but another rise in the unemployment rate.

    JPY – The dollar rose 0.1 percent to 90.76 yen Thursday. Losing ground against most of its counterparts. We remain cautious on JPY performance and look for USDJPY to remain choppy around 90 in the near-term.

    GBP – Up against the USD and EUR, again on Thursday to $1.6582 as the GBP gained on news of less than expected QE increase.

    AUD: Up 0.48% against the USD following stocks higher against it all this week along with other risk currencies

    NZD: Moving up with stocks Wednesday and Thursday morning against the USD

    CAD: Slowly gaining against the USD all this week into today following oil, stocks higher .

    CHF: Following overall risk sentiment, thus the CHF has been in a tight range, gaining against the USD, EUR

    CONCLUSIONS: Surprising optimism for the days so close to the US employment reports suggests most traders believe the figure will beat expectations and send markets higher. We say proceed w/ caution waiting until trend clarifies before entering new. See below for specific opportunities with CRUDE, GOLD, EURUSD, NZDUSD, AUDUSD, GBP/USD

    Trading Opportunities: Near term has favored risk currencies, shorting safe-haven assets. Today’s news is quiet until 13:30 GMT US employment data. Along with the normal tendency to profit taking on Fridays, we suspect a bias to risk averse trade until the data comes out. The picture will be clearer after markets have had 4+ hours to digest the information 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.

    GOLD: Continuing to hold near multi-year highs independent of movements in equities, purely on speculation that other central banks and other large buyers may do the same. It is difficult to predict the extent or duration of such a sentiment driven move into new territory. However, if news over the remainder of the week is strongly bearish for equities, it is difficult to see how oil and gold could continue to rise. Inflation would not be seen as a threat, thus undermining further gold advances. Crude inventories remain high, so there is no immediate problem with supplies that might drive oil higher, especially if the recovery picture does not improve. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher.

    Crude Oil: Up slightly Wednesday near $79.50, unchanged in early Thursday trade. Still following the speculative rush into gold following India’s central bank bullion purchase despite stocks struggling. Next resistance is at $82. The combined price support around $77 has held over the past week. If the series of key news items over the next 3 days does not cause any surprises, then we might expect crude to trade within this $77-82 range. Positive surprises could cause crude to challenge the $82 level, and disappointments, especially in those related to unemployment, could pressure it towards $77 and below. If the FOMC surprises with a more dovish than expected statement, that would weaken the USD and thus help crude, whereas a more bullish FOMC wording could push the USD up and pressure oil. Watch the S&P and gold to see how news is affecting the markets and crude.

    image0012

    WTI Crude Oil Daily Chart

    02 Nov 04

    EURUSD: Broke decisively above the key $1.4700 support level (50 day MA + 23.6% Fibonacci retracement from its June rally, also lower BB band around 1.4657) on dovish Fed comments Look to play this break above this upside break 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 . If gold and oil continue to move up on speculative pressure independent of equities, that could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time. Note that like other risk assets it’s pulling back Thursday morning, not unexpected as traders turn cautious ahead of ECB, BoE statements today and US employment data Friday

    image0023

    EURUSD DAILY CHART

    02 Nov 03

    NZDUSD: THE TRADE FOR THE NEXT 2 DAYS

    Update: Virtually unchanged for the past 4 days around 0.7180, dropping slightly into Thursday

    Background: Arguably one of the most overbought pairs because it moved up with the AUDUSD even though New Zealand’s economic fundamentals and recovery story was not nearly as compelling as Australia’s. Thus when the current pullback began, it was very vulnerable and came in hard and broke strong support near the $0.7250, where both its 50 day MA AND 23.6% Fibonacci retracement converged. Currently sitting on multiday support around 0.7160, it is currently falling (despite positive Labor Cost index q/q data this morning) and testing this level as Asian stocks pull back, apparently unimpressed by Wall Street’s last minute rally on below average volume.

    Recommendation: No real support until $0.7077, at which level both a minor price support level from September and the 38.2% Fibonacci retracement converge to reinforce each other. No major NZD or USD news Tuesday, so this will move with overall market sentiment, which is currently down in Asia. However Wednesday is packed with top events in both the US and NZ (see Summary-Key Events at the top) to virtually guarantee volatility.

    To play the further drop, entry near current levels as shown on the chart below while sufficient profit potential remains before the $0.7077.

    To play the upside, wait until stocks start climbing on some substantially positive news that could sustain a multi-day bounce, and the pair breaks above $0.7160. Wednesday’s packed calendar should provide clarification of the trend until Friday’s US NFP comes out.

    As noted above, if gold and oil continue to move up independently of moves in equities, that could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time.

    NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.

    image0033

    NZDUSD Daily Chart

    03 Nov 04

    GBPUSD: Made its big move up in Mid October because the BoE hinted at QE ending sooner than expected. If in fact Thursday’s statement reveals further QE, especially if it’s the full 50 bln that many anticipate, that might cause the pair to drop to at least the 1.6300 support level it held after the terrible Q3 GDP figures. If the US employment figures disappoint on Friday, the general retreat in risk assets could send the pair back toward the deeper support level at 1.5800 that it held before the BoE jawboned the pair higher on pure talk.

    image0042

    GBP/USD Daily Chart.

    BoE announcement of additional QE, along with disappointing US employment data on Friday could send it back to its mid October levels around 1.500 as part of a general retreat in risk assets, and flight-to-safety driven USD demand. Any upside surprise in either event could well send the pair higher.

    02 Nov 05

    OTHER HEADLINES

    South Korea OK’s India free trade agreement- AP

    Unemployment nears 10 pct. as rebound remains slow- AP

    World unemployment up despite economic recovery- AP

    Taxpayers risked trillions at height of crisis- AP

    Stocks surge on jobs data, Cisco forecast- AP

    Banks borrow more from emergency Fed program- AP

    (Seekingalpha.com)

    Gold Is Not in a Bull Market

    Corrupted by the Treasury

    The Significance of the IMF-RBI Gold Sale

    What If World Governments Had Washed Their Hands of the Financial Crisis?

    Today’s FOMC Meeting: Extended Life Support for Markets?

    DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

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