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Cliff Wachtel
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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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  • FOREX, COMMODITIES, STOCKS OUTLOOK May 5th: SPECIAL EU CRISIS MARKET CORRECTION -ABRIDGED 4 comments
    May 5, 2010 6:49 AM

    NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR A FAST OVERVIEW OF ALL MAJOR GLOBAL STOCK, FOREX, AND COMMODITY MARKETS -- FULL ANALYSIS AND CHART ILLUSTRATIONS OF RECOMMENDED TRADES GO TO http://fxmarketanalysis.wordpress.com/ AND SELECT "DAILY OUTLOOK{date}: FOR TODAY

    Stocks: Prior day: Asia, Europe, US down. Today: Asia, Europe Down on continued concerns as Greek contagion fears dominate, pushes aside ongoing still grave concerns over BP oil spill, latest China moves to cool housing bubble, US Jobs reports Friday

    - US Bonds: Up in reaction to plunging risk appetite, 10 year benchmark rates down from 3.7050% to 3.6130%.

    - FX: Overall bias to safety currencies [JPY, USD, CHF in order of safety
    appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GB in order of risk appetite
    appeal], few exceptions, most fairing as per their position on risk spectrum, but EUR worst.

    - Main events: MON:USD ISM Mfg PMI, NZD Labor Cost Index, TUES: AUD RBA Rate St., GBP Mfg PMI, USD Pending Home Sales, WED: AUD Building Approvals, USD:ADP Non-Farms Payrolls, ISM Non-Mfg PMI, NZD: Employment Change, Rate, THUR: AUD Retail Sales, Trade Balance, GBP Election, Services PMI, EUR German Factory Orders, Min Bid Rate, ECB Press Confr. CAD Building Permits, Unemployment Claims USD Unemployment Claims, Bernanke Speaks, FRI: AUD RBA Policy St. CAD: Unemployment Change, Rate, USD Non-Farms Payrolls, Unemployment Rate

    Big Theme: Risk Appetite off again: Correction has begun per most technical measures. The underlying fundamental problems have been present for a while and will not go away soon, and stock indices remain near 52 week highs and strong resistance of their 200 week moving average. The key question is how deep a test of support is coming for risk assets. Little chance of more upside from recent highs SEE FUL VERSION FOR DETAILS

    STOCKS:

    US: Down- Rising fear of a wave of EU sovereign defaults and banking crisis gave the bellwether S&P 500 index its worst 1 day loss since February has put it at a one month low and just above its 50-day moving average. For the second time in a week, the bellwether index fell around 2.5% on much higher volume, similar to other major global indices.

    A rumor that Spain was seeking EU aid also added to the fear level. The Volatility Index (VIX) spiked to more than a two-month high as a result, up more than 20% at its session high. The VIX index, used as a gauge of fear, also spiked.

    This kind of increasingly frequent high volatility is a classic sign of a market top. As noted in The Coming Crash: Four Reasons Pro and Con – Short Version the bearish forces (threatened EU sovereign default contagion, China cooling, oil spill, lingering US economic weaknesses and coming wave of mortgage resets) in addition to strong technical resistance for stocks at the 200 week moving average resistance, all have made stocks ready for a retest of support.

    US Bonds: As expected in a plunging US stock market, demand for safe haven assets like the USD and US TBonds was higher, sending the benchmark 10-year TBond yield falling from 3.7050% to 3.6130%.

    European Bonds: PIIGS bonds yields and costs to insure them continued to spike on fears that both Greece and the other PIIGS block nations remain at risk of default. Specifically, there is growing concern that:

    · The latest Greek rescue plan will again hit political snags – ALREADY HAPPENING SEE FULL VERSION FOR DETAILS

    · An even graver danger is that rising borrowing costs for other PIIGS nations make them more likely to need aid and that the EU will be unable to prevent them from defaulting–SEE FULL VERSION FOR DETAILS OF RISING RISKS

    Asia Stock Outlook: Down at the close in early Wednesday trade GMT as EU debt crisis moves noticeably closer to becoming a wave of sovereign defaults and financial collapse as Slovakia and Austria balk at Greek rescue, PIIGS bond costs continue higher, threatening Italian and Spanish bond sale failures and defaults in the coming months.

    European Stock Outlook: Down – At the open in early Wednesday trading GMT European shares fell after modest early gains on continued concerns that the latest bailout package for Greece will not be approved by all needed parties, that Greece may not be able to sustain the needed spending cuts over the coming years (a prerequisite for receiving aid), rising PIIGS bonds yields threatening additional EU sovereign defaults.

    Commodities Outlook: Down In Tuesday and early Wednesday trade GMT: Strength in the dollar and a sour tone in the stock market conspired to drop the CRB Commodity Index for a 2.3% loss -- its worst loss in three months.

    Crude Oil Daily Outlook: Down – Oil was one of the weakest commodities as it recorded its largest single-session loss in nearly three months; crude oil contracts for June closed 4.0% lower at $82.74 per barrel, and continues to fall as Asian markets wind down and Europe opens.

    Gold Daily Outlook: Down- Gold also finished lower after it gave up an early gain. The yellow metal ended Tuesday with a 1.2% loss at $1169.20 per ounce, and has held steady in early Wednesday trading as Asian markets close and European trading begins.

    FOREX Daily Outlook: In Tuesday and early Wednesday trade GMT: Bias to safety fx as most currencies perform according to their place on the risk spectrum: JPY best, commodity dollars mostly down, but EUR worst due to EU crisis.

    US Dollar Daily Outlook: Down but recovering Wednesday vs. the JPY, up strongly vs. the EUR,AUD, NZD,CHF,CAD, GBP. In other words, behaving exactly like the #2 safe haven currency it is, losing ground only to the JPY.

    As of the close Tuesday, rising fear sent many scurrying to the greenback for cover. That drove the Dollar Index up 1.3% in its best percentage gain of 2010. It also put the dollar just below a one-year high against competing currencies.

    Euro Daily Outlook: Down vs. all ( the JPY, AUD, CAD, GBP, NZD) except steady vs. the CHF. Along with the Euro linked CHF is the weakest today given the rising fears of spreading sovereign default risk and banking crisis because major EU banks hold most of the PIIGS bonds.

    Check out this amazing NY Times image of the Web of Debt in Europe at: http://nyti.ms/c20kkS. According to this, an Italian default probably puts France, Ireland, maybe Spain in default. A Portuguese default would likely mean default for Spain, and possibly France too. Most believe that major EU and international banks have additional hidden liabilities via off balance sheet items and direct or indirect exposure via derivatives.

    The euro remains pressured by concerns about the new EU Greek rescue. Specifically: SEE FULL VERSION FOR UPDATED DETAILS

    Yen Daily Outlook: Up vs. all as the #1 safe haven currency. Japan has the highest debt as a percentage of GDP but at current interest rates on Japanese bonds of around 1.4% (low due to high domestic demand) debt service is about 26% of its budget and can be sustained.

    British Pound Daily Outlook: Down vs. the USD, JPY up vs. the EUR, AUD, CHF, NZD, CAD

    Australian Dollar Daily Outlook: Down vs. all except steady vs. the CHF, up vs. the EUR

    New Zealand Dollar Daily Outlook: Down vs. all except the EUR and AUD, steady vs. the CAD

    Canadian Dollar Daily Outlook: Down vs. all except for it being up vs. the EUR and AUD. Steady vs. the CAD.

    Swiss Franc Daily Outlook: Down vs. the JPY, USD, GBP, steady vs. the EUR and AUD, up vs.NZD, CAD

    CONCLUSIONS & Big Picture: CORRECTION OFFICIALLY BEGUN Per Investor’s Business Daily, which per The Pragmatic Capitalist, notes that the three huge distribution days in the last week are major warning flags of very heavy institutional selling and foreshadow what is likely to be a period of risk aversion in the coming weeks. Volume has been very heavy on the sell-offs and the rally has now transformed towards the potentially early stages of correction: Given the rapidly unraveling situation in the EU, a likely slowdown in China at some point, (at least due to Chinese efforts to cool its economy, at worst from a collapse of Chinese real estate prices and construction demand that has fueled much of its growth) and damage to the US economy from both the BP oil spill (damage to US Gulf Coast economy (tourism fishing big, oil).

    The above does not even consider the longer term problems we see coming in the latter half of 2010. As we’ve noted here for weeks, we. In July, 2 major events hit: Spain needs to sell about 30 bln euros in bonds AND a massive wave of US mortgage rate resets not seen since 2007 begins. The last time we saw this magnitude of rising mortgage rates markets stalled out and ultimately crashed. With rising bond rates, Italy’s 30 bln bond sale in June looks increasingly questionable, especially after its nearly failed bond auction on April 26th. As noted above, a default by Italy would likely put France, Ireland, and possibly Spain at default risk. Italy owes France $511 bln, nearly the equivalent of about 20% of French GDP.

    NB: Near term trend is now down for risk assets, up for safe-havens like the USD and US bonds. Never fight the trend, no matter how irrational, as markets can stay irrational longer than you can stay solvent (Keynes). Therefore, as anyone who follows our trade recommendations knows, we don’t fight that trend and always wait for some breach of key support/resistance as a signal to enter a reversal position as odds appear to be in our favor, and even then only when the likely target is more than 2x as far away as out stop loss (which we ALWAYS USE, RIGHT?) so that our winning trade profits exceed out losses by at least 2:1.

    It is now time to search for opportune shorting of risk assets, long plays on safe havens at / near strong support/resistance.Near term the biggest market mover remains the latest news on the EU debt crisis.

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

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Comments (4)
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  • I am Deflated
    , contributor
    Comments (11) | Send Message
     
    Cliff,

     

    Thanks for the summary and for the warnings laid out within.

     

    One question I have in relation to currencies is the CHF is not performing as it should be. As you state, it's a safe haven currency and so over the last few days, should have been rising against the others, with the possible exception of the $US and Yen.

     

    I know the SNB is intervening, but I would have thought many Europeans - especially Germans - fed up with the Euro and looking to get out would have started buying the CHF quite substantially by now.

     

    Is the intervention of the SNB the sole reason for the relative weakness of the CHF, or is there a suspicion that Switzerland - with its substantial (bank led) investments across much of Europe - is no longer the safe haven it once was?
    6 May 2010, 07:54 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1776) | Send Message
     
    Author’s reply » as long as traders believe SNB will keep selling CHF to keep it level w/ EUR the CHF will track the EUR despite CHF's higher safety status and much better underlying economic fundamentals.

     

    I suspect SNB will back off - they ususally do not try to fight major mkt panic, and wait until low liquidity period to try and lower CHF
    7 May 2010, 09:32 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1776) | Send Message
     
    Author’s reply » indeed, just checked eurchf chart - as suspected SNB will not try to fight a panicked market, CHF will indeed move up vs EUR at least until SNB can find low liquidity period to try and knock CHF lower
    7 May 2010, 09:34 AM Reply Like
  • I am Deflated
    , contributor
    Comments (11) | Send Message
     
    Yes, I saw CHF went up shortly afterwards too.

     

    Probably, a few rich Germans saw my post and realised it wasn't a bad idea to buy SFr. :)

     

    Thanks for your comments
    9 May 2010, 09:17 PM Reply Like
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