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Overview: Safe haven assets gain over the past 24 hours though risk assets recovering some of their steep losses yesterday. Big market movers that sent risk assets falling were China’s rate increase and news that the NY Fed and PIMCO funds want Bank Of America (NYSE:BAC) to repurchase mortgages it sold them, feeding fears that the US foreclosure crisis could lead to steep losses for the major banks and drag the overall market lower. Remember that the US banking sector has led markets in and out of major trends since the global economic crisis began in 2007 began with the US subprime lending crisis and associated banking losses.
Economic calendar is light this week, but US Q3 earnings may provide plenty of volatility. The big banks are always especially important in recent years, especially with concern about their exposure to foreclosure fraud allegations and how the banks respond to them.
As seen yesterday, further bad news for banks regarding foreclosure fraud liability could be the biggest market mover. If not, expect big name earnings to lead the way.
Big name earnings releases that could move markets today include: Altria (NYSE:MO) AMR (NASDAQ:AMR), ETRADE (NASDAQ:ETFC), eBay (NASDAQ:EBAY), Fidelity National Financial (NYSE:FNF), Merck (MERK.BO), Morgan Stanley (NYSE:MS), Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB)
If the overall tone of market reaction to earnings announcements is positive, that could continue to feed risk appetite and thus pressure the safe-haven USD. Expectations for new US stimulus, which have pushed markets higher in past weeks, are believed by many to have been overdone, leaving risk asset markets vulnerable to a pullback unless earnings can provide new lift for markets.
STOCKS: US: Down Hard- US indexes fell the most in 2 months mostly on news that a group including the NY Fed and PIMCO Funds want Bank of America (BAC) to repurchase mortgages. This fed fears that the big banks will suffer large losses from the foreclosure fraud scandal as many demand banks buy back CDO (collateralized debt obligations – bundles of mortgages) sold to them.
The fear this news generated was strong enough to override a group of better than expected earnings results from Apple (NASDAQ:AAPL), IBM (NYSE:IBM), Coca-Cola (NYSE:KO), United Health (NYSE:UNH), Johnson & Johnson (NYSE:JNJ), Goldman Sachs (NYSE:GS), Capital One (NYSE:COF) and even Bank of America (BAC) itself. All saw their shares drop despite the earnings beats, as fears about the potential damage to the critical banking sector sent every market sector lower.
As we noted in Coming Week Market Movers Foreclosure Fraud Threatens New Systemic Risk, the foreclosure fraud could potentially provide another fundamental threat to the stability of the largest US banks, which were at the heart of the scandal and presents potential systemic risk. Both Citibank and BAC essentially denied that there is a significant problem and even announced they would soon resume foreclosures. However as the above actions by the NY Fed and PIMCO (which runs some of the most prominent bond funds) suggests markets may not share the banks’ lack of concern.
Given the light news calendar, expect US Q3 earnings results to continue to be the most likely market driver today, particularly if bank results are especially positive or negative. Big name earnings announcements today include: Altria (MO) AMR (AMR), ETRADE (ETFC), eBay (EBAY), Fidelity National Financial (FNF), Merck (MERK.BO), Morgan Stanley (MS), Wells Fargo (WFC), US Bancorp (USB)
US Bonds: Up- US bonds closed higher Tuesday with yields down slightly to 2.4750% from 2.4910% on Monday.
Asia Stock Outlook: Down – Most major Asian exchanges modestly lower today on follow through from Wall Street’s lower close and bearish effects of the new China rate hike, which is believed to put a new damper on Chinese growth. Some argue, however, that the real reason for the hike was to allow Chinese banks to attract new deposits in order to spur new lending, which they expect to continue despite higher rates given the still supposedly healthy growth rates. We note however, that there is building evidence that China’s growth prospects have been overstated and an asset bubble exists that threatens to derail China’s growth. See here for details. The Nikkei has hit a 2 week low.
European Stock Outlook: Mixed–European shares are mixed with various indexes modestly higher or lower, though markets are overall improving as of Midday GMT as minutes released from the latest Bank of England Monetary Policy Committee raised expectations for new UK stimulus on concerns that the UK economy could relapse under the burden of government spending cuts.
Commodities Outlook Tuesday To Midday Wednesday GMT: Gold, oil, wheat down over the past 24 hours but recovering some of yesterday’s losses thus far today as markets rebound from the shock of the China rate hike and its weakening of risk appetite and strengthening of the USD. Other soft commodities continuing higher.
FOREX Daily Outlook Tuesday To Midday Wednesday GMT: Bias to safe haven forex with few exceptions. USD, JPY, CHF strongest in that order since Friday, though some risk fx are recovering some of yesterday’s steep losses thus far today though remain down over the past 24 hours.
US Dollar Daily Outlook: Up vs. all for the third straight day over the past 24 hours, however the USD is giving back some of yesterday’s huge gains thus far today as the damage to risk appetite from the China rate hike wears off. Here’s how other currencies are faring vs. the USD as of 9:30 GMT per dailyfx.
Gains Wednesday vs. the USD
Reasons for the USD rally of recent days include:
· China rate hike: seen as hurting growth and thus benefitting the safe-haven USD
· Fed officials are voicing more ambivalence about the need for more stimulus, lowering expectations about the size, manner, and extent of the still expected coming new quantitative easing. The less QE, the stronger the USD.
· Other central banks appearing relatively more dovish, so USD looks relatively better. BoC left rates unchanged and sounded pessimistic about further hikes after lowering GDP forecasts for 2010. Bank of England is looking more pro-stimulus, and even the RBA has indicated at its last meeting that there was no urgency to raise rates. As noted recently, ECB head Trichet countered hopes for tightening, saying there were no such plans for the ECB at this time.
Euro Daily Outlook: Up vs. the GBP, and all commodity dollars, down vs. the USD, JPY, CHF as lower risk appetite boost the EUR vs. riskier currencies given the events noted above feeding risk aversion, and the GBP remains weakened in rising expectations for new UK stimulus.
Yen Daily Outlook: Up vs. all except the USD over the past 24 hours for the second straight day, though losing some of yesterday’s big gains thus far today against most other currencies. This strength comes despite the Cabinet’s downgrade of Japan’s economic prospects as export dependant growth stagnates under the weight of a strong Yen that kills profits even as sales improve, prompting many big exporters to consider moving production abroad to hedge against Yen strength. The BoC has been unable to effectively lower the Yen in the face of US stimulus bringing low US bond yields relative to Japanese bonds, feeding Yen demand.
British Pound Daily Outlook: Down vs. all over the past 24 hours for the second straight day and continuing lower thus far today on uncertainty ahead of the spending report and growing belief that more stimulus could be coming.
Australian Dollar Daily Outlook: Up vs. the GBP, down vs. all other majors for the second straight day, though recovering some of yesterday’s losses vs. most major currencies
New Zealand Dollar Daily Outlook: Up vs. the GBP, CAD, AUD, down vs. all other majors
Canadian Dollar Daily Outlook: Down vs. all except up vs. the GBP, AUD
Swiss Franc Daily Outlook: Down vs. the USD, JPY, up vs. all others,
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