Preview For Week of July 27, 2009: Key Clues from Global Markets For This WeekSummary: A Coming Shift in Forces Driving Markets? How Long Can the Rally Continue?Introduction: Review for the Sake of PreviewEmerging divergence?Stock Indexes: Rising despite economic fundamentals? A sign of near term weakness- or strength?Merck (NYSE:MRK), United Tech. (NYSE:UTX), DuPont (DD), Coca Cola (NYSE:KO), Caterpillar (NYSE:CAT), Boeing (NYSE:BA), Pfizer (NYSE:PFE), 3M (NYSE:MMM), AT&T (NYSE:T), McDonald's (NYSE:MCD), American Express (NYSE:AXP) -- all of which topped EPS expectations. Yet the revenue results reflect the difficult corporate environment -- only two companies posted positive (nearly flat) y/y revenue, and seven missed the consensus revenue estimate. The market's reaction to the earnings reports were mostly positive, led by a 23.6% surge in shares of CAT.Conclusions for Equities· While stocks are already near highs and there is plenty of bad news for short sellers to latch onto, stocks have nonetheless managed to keep going up, so short term traders should be taking what gains the market can give on the long side, but must ready to play the short side when, if, the market turns.· Longer term investors should be preparing their lists of buy targets if / when stocks tumbleForex and CommoditiesUSD
Forex Preview: Key Trading Info for the Coming WeekUSD Are US economic fundamentals beginning to counteract risk appetite?
Summary· Fundamentals support an eventual recovery in US and global growth, at least relatively sooner and stronger than other parts of the developed world. Is this sentiment beginning to supporting the dollar?· Or will the ensuing rise in risk appetite hurt the dollar, as it's done in the recent past? · Bernanke sees signs of stabilization, calls for focus on the deficit.· The most likely catalyst for further risk going forward will be Friday's US GDP announcement. Given that it will be taken as a gauge of global economic health, we again wonder whether risk appetite or US fundamentals will exert the bigger influence on the USD. Global markets' reaction should be instructive.
Major Economic News for the USDWatch stock indexesIf stocks pull backEURO Deflation and US bond auction pose threat
Summary- German Producer Prices Fall Most in Over Two Decades
- Euro Zone, German PMI Results Top Expectations, Stay in Below 50
- Sentiment Points to Continued Euro Gains Against the US Dollar
The Euro looks vulnerable in the week ahead as headline inflation figures point to the increasing likelihood of deflation while the US Treasury holds a record-setting bond auction that stands to boost the Dollar at the expense of the single currency.Deflation
For their part, the European Central Bank has seemingly struggled to formulate an effective policy response to the deflationary threat thus far. Jean-Claude Trichet and company have focused on banks as the vehicle through which to make money cheaper and put a floor under falling prices, promising unlimited lending to the region’s financial institutions including an unprecedented 442 billion euro in 12-month bank loans. The ECB will also implement a 60 billion bond-buying scheme. To the central bank’s credit, borrowing costs have indeed moved lower: although the ECB publicly maintains target interest rates at 1%, it has allowed the average cost of overnight lending (referred to as EONIA) to drift far below that. Indeed, borrowing in Euros has been consistently cheaper than doing so in British Pounds since late June, even though the Bank of England’s stated interest rates are substantially lower at 0.5%.
US Bond AuctionAn unprecedented bond auction in the United States may also weigh on the Euro. The US Treasury’s announced last week that it will sell a record $115 billion in bonds next week in a bid to help finance the rapidly growing public deficit, pushing 10-year notes to register the largest daily loss in nearly seven weeks and sending yields to the highest level in a month.
Other Euro Considerations: Coming News to NoteJPY Japanese Yen seeks the next driver of risk appetite, USD/JPY may be the most volatile currency on Monday
Summary- Earnings season draws to a close; but where does that leave risk appetite?
- Japan’s trade balance improves as both imports and exports plunge
- Yen crosses don’t offer a clear cut technical outlook
Direction from the Japanese yen is often the product of risk appetite. However, the primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.
Through the end of this past week, we have seen upside surprises decrease, and the notoriety levels of the reporting companies recede. Looking back on the week four Fed ‘Stress Tested’ banks report losses and many more blue chips missed forecasts. Looking ahead, there are very few major reports due; but more importantly, there are far fewer days when a group of notable earnings releases will be reported at the same time (and therefore can generate enough influence to catalyze risk appetite. One of the last opportunities for an earnings related swell is on Thursday when ExxonMobil, MetLife, Walt Disney, Dow Chemical, Travelers and Colgate are scheduled to release.
If earnings don’t drive markets, what will?
USD/JPY could be the most volatile pair for MondayGBP: QE or Not QE, that is the questionSummary-U.K. GDP contracted by 5.6% annually, which was the most since records began in 1955
-U.K. Retail Sales rose more than expected by 1.2%, Led by a 4.7% increase in textiles
-BoE voted 9-0 to keep rates and QE measures unchanged
The British pound ended a week of choppy price action heading lower as the 2Q GDP preliminary reading showed a deeper than expected contraction of 0.8% against expectations of 0.3%. Economic growth on the year dropped by a 5.6% which was the most since record keeping began in 1955.
Although the drop in growth is alarming, the improving outlook for the global economy which was evident in the massive rally in equities during the week could keep the MPC on hold. Bank of England Deputy Governor Charles Bean said this week that the economy may have stopped shrinking which could signal the potential for an improvement in the central bank’s growth estimates when they release their latest report on August 12. The growth numbers and the corresponding inflation outlook will determine the future course of action.
GBP News to NoteThe economic calendar this week will give us further insight into the U.K. housing market and prevailing credit conditions.· The Nationwide Building Society is expected to show that house prices rose 0.2% in July as thawing credit markets are underlining demand. Indeed, mortgage approvals are forecasted to rise to 47,000 from 43,400 in June which would be the highest since April, 2008 but still far below the ten year average of 97,000. · The BoE lending report mortgage lending was showing sign of improving but that credit for consumers and businesses remains a challenge.
GBP/USD: Topping Out?· Growth in the UK slid by more than double expectations by -0.8 percent marking the fifth straight quarter of contraction, a streak trumped only by the recession in the seventies.· Furthermore, annualized figures showed the largest drop since records began in 1955. USD/CADAUD & NZDCommoditiesOther News to WatchChina – US Economic & Strategic Dialogue · more Chinese consumer spending · openness to foreign investment· a more active Chinese role in moderating North Korea’s push for nuclear weapons and general bellicosity