Key Market Drivers for Stocks, Commodities, Forex: April 19 - 23, 2010

by: Cliff Wachtel

Here’s our ranking of the market movers of the coming week:

First Place EU Debt Crisis – Markets Calling EU Bluff, To Test Greek Aid Plan: Once again the plan is unraveling as Greek borrowing costs remain too expensive to keep Greece out of default, yet German backtracking and legal challenges risk fatal delays that could put Greece in default before funds can arrive, risking a wave of sovereign defaults in the EU, CEE (Central, Eastern Europe) and financial institutions.

Second Place – The Breaking Goldman Sachs Fraud Charge Scandal: Forex and commodities were already beginning a downturn, (which often precedes that of equities, as was the case in this past January’s stock pullback). Stocks were already starting to sell off despite good earnings results even before the news hit on Friday morning EDT. The legal case against Goldman (NYSE:GS) is not strong, but that probably won’t matter in the near term. Damage to the regulatory environment, earnings, is likely to be considerable. Immediate and longer term danger is in the uncertainty surrounding the legal liability of Goldman Sachs and others, the costs of which may be relatively minor – or fatally large.

Third Place Concerns On Slowing China Growth from Tightening to Cool Housing Bubble, Yuan Revaluation: While both are probably positive in the longer term, their effects in the coming weeks could cast a pall on all major suppliers to China (think commodities, shipping, and the Australian dollar).

Fourth Place Key US Earnings Results: Still could assume their usual role of overriding scheduled economic events. Friday showed traders selling even on good earnings news. As we have warned, earnings season likely to prompt profit taking due to toppy markets, uncertainty on EU, China Growth, and now Goldman Sachs. Barring disastrous unraveling in one of these, continued low interest rates may limit the pullback given the entrenched uptrend, despite lack of news to justify higher moves (at least until mortgage resets effects felt in Q3 or 4 of 2010).


  • JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC) both reported very strong Q1 results. Provisions for credit losses continue to fall at both institutions, although investors fretted over certain credit metrics out of BoA, where allowances for loan losses were seen still growing by hefty amounts and non-performing assets remained stubbornly high.
  • However, financials led the Friday plunge, down about 3.8% on average after the potentially explosive Goldman Sachs fraud charges, which raise questions about further charges to other major names in the sector. Concern that other investment banks and brokerages may be implicated led the group to a 9.4% loss. That undercut the broader financial sector, which fell 3.8% in its worst slide since February.

Industrials: For Alcoa (NYSE:AA), GE and CSX, revenue beats but markets wanted to see top-line revenue performance, which was lacking.


  • Google (NASDAQ:GOOG) modestly exceeded expectations in its Q1 report on Thursday, growing earnings and revenue in double digits over last year’s Q1. However, shares of the search behemoth fell 5% in after-market trading as commentators focused on a small decline in average ad prices.
  • Chip rivals Intel (NASDAQ:INTC) and Advanced Micro (NASDAQ:AMD) both reported very strong results.

Key Earnings For The Week Of April 19-23

  • Monday: Citigroup Inc (NYSE:C), Eli Lilly (NYSE:LLY) Hasbro (NASDAQ:HAS), IBM (NYSE:IBM)
  • Tuesday: Apple (NASDAQ:AAPL), Bank of New York Mellon Corp (NYSE:BK), Goldman Sachs (GS), Harley Davidson (NYSE:HOG), Johnson & Johnson (NYSE:JNJ), Novartis (NYSE:NVS), TDAmeritrade Holding Corp (NASDAQ:AMTD), Coca Cola (NYSE:KO), Yahoo (YHOO)
  • Wednesday: Altria (NYSE:MO), Amgen (NASDAQ:AMGN), AMR Corp (NASDAQ:AMR), AT&T (NYSE:T), eBAY (NASDAQ:EBAY), Genzyme (GENZ), MacDonald’s Corp. (NYSE:MCD), Moody’s Corp. (NYSE:MCO), Morgan Stanley (NYSE:MS), Novellus (NVLS), QUALCOMM Inc. (NASDAQ:QCOM)
  • Thursday: Amazon (NASDAQ:AMZN), American Express Company (NYSE:AMX), Baxter International (NYSE:BAX) Credit Suisse (NYSE:CS), Continental Airlines (NYSE:CAL), Southwest Airlines (NYSE:LUV)
  • Friday: Honeywell (NYSE:HON)

Other: UK Elections: Fading In Importance – Austerity A Consensus Issue No Matter The Results

Markets still prefer a Tory victory, but deficit reduction should be a top priority regardless of outcome, reducing the concern about the elections

Stocks: Pressured by all of the above market drivers.

Commodities: Oil, gold already beginning downtrend, this negative divergence with stocks is bearish for stocks, as these also turned down just before stocks made their move lower in January.


See above for key events and overall risk sentiment movers.

Specific FX market movers

Risk aversion from EU debt crisis, Goldman Sachs scandal favors safety currencies, Fed remains most hawkish of the ECB, BoJ, BoE. EUR weakness on Greece, risk aversion especially good for USD.

US Dollar Weekly Outlook: Likely to Rally On Further S&P 500 Declines

USD Bias: Bullish

  • US dollar rallies sharply on S&P 500 tumbles on Goldman Sachs SEC charges, more short term gains likely on risk aversion, though long term damage to banking could hurt the USD’s fundamentals.
  • USD to gain sharply on further unwind in leveraged futures positioning.
  • Fear from Greek fiscal crisis likely to erode EUR, thus feed US dollar strength.
  • EU crisis has silver lining for USD – raises fear, demand for USD and US bonds, undermines confidence in EUR as reserve currency alternative.

Euro Weekly Outlook: Facing Additional Pressures On Lingering Greek Uncertainties, Sinking EU Credibility

Euro Bias: Bearish

  • Critical German participation in aid remains uncertain, ditto IMF as US is primary benefactor, and euro not a US priority but an unwanted competitor for reserve currency status.
  • Yet IMF may need to provide first funds if EU funds held up in legal challenges--will US taxpayers object to subsidizing the EUR?
  • European Central Bank reiterates dovish tone.
  • Industrial outputs jump higher in February
  • euro-zone CPI disappoints.
  • Morgan Stanley speculates that Germany, other hard currency nations may ultimately form own currency group.

Japanese Yen Weekly Outlook: Top Safe Haven Status Bullish For Yen Despite Weak LT Fundamentals

Japanese Yen Bias: Bullish

  • Speculative sentiment hints Japanese yen rally to continue.
  • However, BoJ arguably the most dovish, longer term this policy to weigh on the JPY

British Pound Weekly Outlook: Relative Improvement In Economy May Top Low Expectations

British Pound Bias: Neutral

  • Political uncertainty less of a factor now that all major parties favor some kind of austerity; Tories gain.
  • Trade deficit narrowed more than expected to 3.329B against forecasts of 3.900B.
  • Consumer confidence dropped in March by the most since July, 2008.

Swiss Franc Weekly Outlook: Moving With EUR on SNB Intervention Concerns – Bearish for CHF

Swiss Franc Bias: Bearish/Neutral

  • Traders fear SNB intervention to prevent strong CHF hurting exports to EU, which will weigh on CHF as EUR struggles, boost USD/CHF
  • Swiss producer & import prices stopped falling in March for the first time since 2008.

Canadian Dollar Weekly Outlook: Pullbacks In Oil, Stocks, Also BoC Decision, Threaten CAD Slide

Canadian Dollar Bias: Bearish

  • Futures traders remain extremely net-long the Canadian dollar.
  • Canadian dollar nonetheless tumbles on risk aversion via US S&P 500, Crude Oil declines.
  • USD/CAD more exposed to EU troubles, doesn’t benefit from EUR weakness like the USD – which pleases BoC, as Canada views too much CAD strength as hindrance to US exports.

Australian Dollar Weekly Outlook: Moving With Chief Risk Drivers: Greece, Goldman, China Growth, US Earnings

Australian Dollar Bias: Bearish

  • But high rates make it first fx beneficiary when risk appetite bounces.
  • Australian business confidence edges lower in March.
  • Home loans drop for fifth month on rates, grants.
  • AUD/USD’s 82% correlation to MSCI World Stock Index could likely weigh on it near term.

New Zealand Dollar Weekly Outlook: Suffering From IMF Downgrade, Risk Aversion

New Zealand Dollar Bias: Bearish

  • IMF Declaration: NZD 25% overvalued to weigh on NZD.
  • Retail spending unexpectedly contracts in February.
  • New Zealand manufacturing expands at faster pace.
  • House sales fall the most in 13-months.

Conclusion: Risk Asset Rally Over- Pullback Or Range Trading?

Beyond the fundamental forces cited above – the usual inter-market correlations between stocks, commodities, and currencies suggest some kind of near term test of support, the degree of which will depend on how bearish the above market drivers become. Chief concern for the coming weeks remains the EU, which is struggling to provide even short term solutions – though that focus may indeed be the heart of the problem.

These include:

  • Stocks
    • Selling even on good earnings news, despite extreme bullish sentiment, lowest CBOE put volume (high volume is a sign of pessimism) since start of the March 2009 rally
    • The 61.8% retracement of the 2007-2009 decline in the S&P 500, which comes in at the 1225/1230 area, a natural point to trigger a correction, and which was effectively seen with a high around 1214
  • Commodities: Gold and oil in overall retreat for over a week--they also pulled back ahead of the January stock drop
  • Forex: The JPY gaining on all counterparts over the past weeks despite lack of significant positive economic news. Safe haven USD and CHF also improving relative to riskier fx.

Disclosure: No Positions