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Daily AVAFX Traders' Global Markets Review/Preview August 14, 2009


Most Risk Assets Continue Up on FOMC Optimism, Good News on Euro zone GDP, Downplay Bad US Jobs, Retail Data



STOCKS: All major Global stock indexes up on positive news on recovery from FOMC and Euro zone GDP data, show strength in overcoming bad US jobs and retail news.


FOREX:  Despite stocks rise, FX pairs show bias to safety. Very Unusual. Note the table:

·  EUR: Steady Friday in Asia against USD after rising Thursday on unexpected German, French GDP growth.

·  USD:  Up against most due to risk aversion after bad US jobs, retail data Thursday, down against Yen

·  CAD:  No major change See General. See below for details

·  JPY: The yen climbed across the board on Tuesday, gaining strongly against the Australian and New Zealand dollars as investors trimmed long positions in those currencies after Chinese data showed below-forecast factory expansion See General. See below for details. NB suffering most as a safe haven

·  CHF: See below for details

·  GBP: up vs. USD, down against EUR, JPY as UK looks weaker compared to others. GBPUSD will move w/ USD

NZD, AUD: The central bank Governor of Australia gives optimistic view of economy, indicates interest rates should be rising soon, sending the AUD higher as most traders are pricing in a half percentage point increase in overnight rates before year end. Fueling the New Zealand dollar rally was a stronger than expected business PMI report.  The index has risen from 46.5 to 49.7 and could very well move back into expansionary territory next month.  However retail sales are due for release this evening and if consumer spending misses, we could see a sharp reversal in the NZD/USD. 




Crude up above $71 from $70 as it follows stocks. Gold showed a similar reaction, up to around$955 from $950, helped by Fed decision to leave interest rates low, Euro zone GDP news, boosting bullion's inflation hedge value.



Markets continue up on Euro zone GDP data, show strength in overcoming bad US retail, jobs data to close higher. Asia markets continue up on Friday morning.


Risk assets up overall on upbeat Fed, Euro zone GDP outweighing bad US retail, jobs data, as markets believe recovery is coming, even if slower in key US, UK, Euro zone areas..

TRADING OPPORTUNITIES: Each of the three are real possibilities:

·        Play the Pullback: Stocks at highs, dollar deeply shorted, be ready when key calendar events (see below) hit this week or if stocks moves down to short risk assets, go long USD. See prior analyses for info on why markets remain overbought, overpriced, vulnerable to pullback.

·        Play the Up Trend: However, markets continue to focus on the positive and could continue up as long as no major news contradicts ongoing recovery story or questions current risk asset prices.

·        Play the Trading Range: If no major news, markets could stay in flat trading range. Continuing low interest rates and upward stock momentum a plus for risk assets.




  • Asia near close up (N225 +0.98%, HS +1.96%, ST +1.57%)
  • Europe: up (FTSE: +0.82%, DAX +0.95%, CAC 40 +0.49%)
  • US: up (S&P +0.69%   NSDQ +0.53 % Dow +0.39% )


  • Asia near close up (N225 +0.59%, HS -0.84%, ST +-0.00%)  


US:  Unexpected economic growth out of Germany and France helped set a positive tone Thursday, but a generally disappointing batch of U.S. economic data undermined the bias, leaving stocks to trade with modest gains for most of the session.


News that the German and French economies both exceeded expectations by posting second quarter growth of 0.3% brought about broad-based buying overseas and propped up U.S. stocks ahead of the opening bell. However, the positive bias was dialed down following news that the latest round of initial jobless claims were greater than expected at 558,000. That hiked the 4-week moving average up to 565,000 from 556,500. Meanwhile, continuing claims made a larger-than-expected retreat to 6.20 million, but the drop is most likely from unemployed workers losing their benefits.


Total retail sales for July made an unexpected 0.1% decline and sales less autos fell a sharper-than-expected 0.6%. That, combined with elevated jobless claims totals, pressured shares of retailers. However, Wal-Mart's (WMT 51.88, +1.37) better-than-expected earnings and solid outlook provided support to the group and helped it finish 0.3% higher.


With consumers still hesitant to open purse strings, demand for imports remains soft. With that, July import prices fell for their first time since January by declining a steeper-than-expected 0.7% month-over-month. Despite the persistently weak state of things, stocks were able to close near their best levels of the session. This kind of resilience is encouraging.


Stocks In Asia Friday morning: Optimism infected all markets, with Japan's Nikkei average <.N225> hitting its highest in 10 months to end the morning session up 1.05 percent, as investor confidence was further reinforced after Europe's biggest economies, Germany and France, ended their recessions in April-June, earlier than expected.








Based upon the latest GDP numbers from Germany and France, both countries have come out of recession. This is completely surprising as the IMF predicted just last month that the Euro zone would be contracting well into 2010.  Admittedly GDP for the Euro zone as a whole was still negative (0.1 percent), but for the two largest countries within the Euro zone, increases in private and public consumption has pulled their economies out of the sharpest recession since World War II.   French Finance Minister Christine Lagarde even went so far to say that France was one of the first countries to have pulled out of the recession and promised that growth will pick up going forward. For Germany, this was the first positive quarter since the start of 2008 breaking a string of four consecutive quarters of negative output. Naturally, the much better than expected reports has helped the EUR extend its gains against the U.S. dollar.  The GDP numbers clearly vindicates the ECB who has come under sharp criticism for their stubbornness and reluctance to implement easier monetary policy.  However it still remains to be seen whether Germany and France can sustain this growth.  There is no question that optimism has improved in the region but we need to see this supported by real activity.  Looking ahead, consumer prices are due for release tomorrow.  Weaker inflationary pressures in Germany and France should cap regional prices pressures. 




With the FOMC rate decision and retail sales now behind us, many traders may be wondering whether the rally that we saw week in the EUR/USD, GBP/USD and USD/JPY is all the action that we will see in the month of August. 


Unfortunately range trading may dominate for the rest of the month since the big event risks including the ECB, BoE and Fed rate decisions are all behind us.  We previously said that volatility picks up in August and we have already seen the breakout move that we expected in the first week of the month.  From here on forward, the calendar is dominated by Tier 2 economic data which is less market moving.  August is also the month where most Europeans go on vacation and with one third of all global forex turnover occurring in London, the absence of European traders will certainly be felt. 



For example, the reaction to the retail sales report Thursday could be indicative of the degree the declining volatility that we might expect from the currency market over the next few weeks.  There is no question that consumer spending is important because it is the backbone of the U.S. economy.  Therefore the surprising decline in retail sales should have elicited a bigger reaction in the U.S. dollar (as well as a more negative reaction in stocks).  Reasons include:


  • It is at odds with the optimistic comments from the Federal Reserve. On Wednesday, the central bank said consumer spending was constrained, but at the same time the economy is stabilizing.


  • There are also plenty of reasons to believe that consumers are simply delaying their purchases.  Back to school sales and tax free holidays are primarily being held this month and next while the cash for clunkers program is gaining traction.  Gas prices have also increased which means that gas station receipts will probably rise.  Traders expect consumer spending to rebound over the next 2 months and are therefore downplaying the latest results. 



U.S. Recovery: Neither Fast Nor Strong


We do not believe that the July retail sales figure throws off the recovery but it does undermine the strength of the recovery.  As Bernanke previously warned, the consumer will not fuel the global recovery which leaves the burden on U.S. corporations and the government.  In terms of the actual data, consumer spending fell 0.1 percent in July, the first drop in 2 months.  Without the positive impact of the cash for clunkers program, consumer spending dropped 0.6 percent, the largest decline since March.  Weekly jobless claims rose but overall the trend of claims is down with continuing claims dropping to the lowest level since April.  


Economic Data Preview


Aside from maybe the University of Michigan confidence report, CPI and IP are not particularly market moving in this type of environment.  The drop in import prices last month suggests that inflationary pressures are nonexistent but even if they did rise modestly, it would not impact the Fed’s decisions.  Manufacturing activity could pickup as global demand recovers and we expect the same for confidence.  With equities hitting a new year to date high earlier this month and job losses tempering, we expect Americans to grow more optimistic about the outlook for the U.S. economy.




Although the weaker U.S. retail sales report drove the British pound higher against the greenback, the currency lost value against the Euro and Yen.  With GDP in Germany and France turning positive, there is an even greater chance that the British pound will underperform.  Earlier this week, employment numbers from the U.K. were discouraging and the Bank of England warned that interest rates will remain low an extended period of time.  If the ECB grows more optimistic because of the latest growth numbers, it would be sharp departure from the pessimism and dovishness of the BoE.  No economic data from the U.K. was released this morning and nothing is expected over the next 24 hours.  As result, the pound may well continue to underperform the euro while the GBP/USD will be at the whim of the market’s sentiment towards U.S. dollars.






Japanese Yen crosses plummeted across the board Thursday as risk aversion dominated the markets after U.S. Retail Sales reported worst than expected.  Over the past month, Japan’s recovery was fuelled by a modest increase in foreign demand but Bank of Japan Governor Masaaki Shirikawa warned earlier this week that the demand for Japan’s exports may not be sustainable. Part of his concern may be due to speculation that Chinese growth has peaked.  This is important because the Yen crosses have been taking their cue from Shanghai stocks during the Asian trading session.  The minutes from the latest Bank of Japan Policy Meeting are due for a release later this evening and they should provide further details on the central bank’s strategy to improve the economy. The Tertiary Index is expected to drop slightly from the previous month as the weak labor situation spreads into the economy.  Pair is testing its upwards trendline







The Canadian dollar ended the U.S. session virtually unchanged against the greenback.  There was no data released from Canada but oil prices edged slightly higher.  Manufacturing and new motor vehicle sales are due for release tomorrow and given the sharp drop in the IVEY PMI report last week, manufacturing sales may be suffering. 




Thursday was the second day in a row, the Australian and New Zealand dollars have recovered against the greenback.  In fact the NZD/USD even came within a whisker of its 10 month high intraday.  There was no data released from Australia but copper prices rose to a new yearly high,  fueling gains in the currency.  China’s Yanzhou Coal Mining Company also placed a $3.5 billion offer for Australian based Felix Resources. Early Friday RBA Governor Glen Stevens delivered his semi-annual testimony to parliament on today, sounding upbeat and leading many to believe that it will increase the overnight cash rate for banks before year end. Not surprisingly, AUD is moving up as of this writing.  

Fueling the New Zealand dollar rally was a stronger than expected business PMI report.  The index has risen from 46.5 to 49.7 and could very well move back into expansionary territory next month.  However retail sales are due for release this evening and if consumer spending misses, we could see a sharp reversal in the NZD/USD. 



  • CRUDE: Followed stocks to recovers prior day's losses . Paris based IEA lowered their global oil demand growth forecast for next year. It sees mixed evidence for recovery. Technical action suggests oil set a near term high last week below $72, the close under $70 suggests oil is vulnerable to pullback. Oil tends to track stocks, which are likely to set oil's direction. With stocks extended after a rally of questionable justification, more positive news will be needed to prevent profit taking from stocks and other risk assets like oil. A current oil supply glut and strengthening dollar are also pressuring oil prices.


  • GOLD: Followed stocks higher to recover some of Tuesday's loss, FOMC's leaving interest rates low also helped, as did weakening dollar in Asia trade early Wednesday. Longer Term is more positive, global gold price hedging by producers is nearing a multi-year low, suggesting that miners DO NOT want to be bound by current prices and want more exposure to anticipated higher spot prices.



  • Banks May Reach Point of No Return as Toxic Loans Exceed 5% of Holdings
  • No New Normal as JPMorgan Sees V-Shaped Recovery With Growth Accelerating
  • Pimco Says Japan Company Bond Sales to Beat Record as Borrowing Costs Fall
  • Sugar May Climb Further 80% on Shortage, Hedge Fund Manager Coleman Says
  • China Embarks on Energy, Mining Acquisition Spree After Valuations Slump
  • Australia Will Raise Rates From `Emergency' Level, Governor Stevens Says
  • Japanese Service Demand Unexpectedly Rose in June on Stimulus Measures
  • Michael Vick Gets Second Chance in NFL With Philadelphia Eagles Contract – Potentially negative for sentiment of NY traders, since he is talented. Anyone familiar with Eagles fans' behavior will appreciate the good fit with the convicted dog torturer.


The FOMC and the Markets Part III


Stocks Set to Continue Rally?


While we remain skeptical, there is growing evidence for further upside with stocks. In the interest of presenting a balanced picture, consider the following.


If economic data along with the Fed can be used as a guide, there no reason to see global stock markets retreat to any appreciable degree going forward. Therefore, expect to see markets continue to rally over the third and fourth quarters.


The Fed has basically raised its assessment of the economy, noting in the latest statement that “economic activity is leveling out.” Inflation figures to remain “subdued for some time” and the market has again been reassured that rates will not rise for an “extended period,” a sign that policymakers are in no rush to end their efforts to boost the economy.  Language slightly less optimistic helped stocks rally over 12% since the previous meeting on June 24.


German and French GDP rose 0.3% in the second quarter which helped limit the overall European contraction to just 0.1% over the period, an indication that much like the U.S. the worst recession in the post-war period has just about ended and that economic expansion will occur over the third and fourth quarters of 2009. The ECB is likely to remain cautious however, and looks to continue its program of offering banks unlimited amounts of cash while keeping borrowing costs at record lows.


The Libor-OIS spread, the premium banks charge over the expected daily Fed Funds rate, narrowed to 25 basis points overnight, a level that former Fed Chairman Allan Greenspan labeled as “normal.” And while the banks still remain reluctant to lend, cash has been and likely will remain readily available in the capital markets. High grade U.S. companies sold $898 billion of bonds this year, the busiest period since at least 1999 according to Bloomberg, while European firms have issued a record $1.2 trillion this year, more than was sold in all of 2007. Ten year investment grade spreads, the difference between corporate borrowing costs over risk-free Treasuries, narrowed from 603 basis points down to just 254. Liquidity has been just as available in the high-risk markets; non-investment grade firms have sold at least $19.8 billion of debt this week and sales this year total about $858 billion compared with $648 billion during the same period last year.


Emerging-market stocks increased by the most in almost two weeks on Thursday after the Fed’s statement reassured investors there. The DJ Stoxx 600, a European index, gained 1.6% heading into the N.Y. open.


The dollar will likely continue declining against the euro, pound and A$ as those currencies resume their months-long rally against the yen. Commodities will remain strong while government debt prices decline. Expect to see the normal in and out breathing along the way, but just ignore it for the time being because more cash is likely to come into the market as investors grow even more fearful of missing the rally and give up waiting for a significant retracement.





As noted in the summary, there are three real possibilities regarding market direction, at least for the short term. The most likely, however, appears to be continued range trading unless some very potent news comes along. Next weeks' calendar is relatively light.



Economic Calendar News [actual-expected-prior, all times GMT*= Most Important]



12:50am  JPY  Core Machinery Orders m/m                            9.7%    2.8% -3.0%  

*2:30am  AUD  Home Loans m/m                                                        1.1%    1.9% 2.2%  

7:45am  EUR  French Industrial Production m/m                                   +0.3%  -0.1% 2.6%  



Aug 11  12:01am  GBP  BRC Retail Sales Monitor y/y                         1.8                   1.4%  

12:01am  GBP  RICS House Price Balance                              -8.1      -9.8% -18.1%  

*3:00am  CNY  Industrial Production y/y                                              -10.8    11.5% 10.7%  

3:00am  CNY  CPI y/y                                                                         -1.8      -1.7% -1.7%  

3:00am  CNY  NBS Press Conference      

3:00am  CNY  PPI y/y                                                                         -8.2%  -8.3% -7.8%  

Tentative  JPY  Monetary Policy Statement      

*Tentative  CNY  Trade Balance                                                          10.6     10.3B 8.3B  

*Tentative  JPY  BOJ Press Conference      

9:30am  GBP  Trade Balance                                                               -6.5B   -6.4B -6.3B  

*1:15pm  CAD  Housing Starts                                                            132K   141K 141K  



2:00am  AUD  Westpac Consumer Sentiment                                       3.7%                9.3%  

2:30am  AUD  Wage Price Index q/q                                                   0.8%    0.8% 0.8%  

6:00am  JPY  BOJ Monthly Report       

*9:30am  GBP  Claimant Count Change                                               24.9K  25.5K 23.8K  

9:30am  GBP  Average Earnings Index 3m/y                             2.5%    2.3% 2.3%  

10:00am  EUR  Industrial Production m/m                                             -0.6      0.4% 0.5%  

*10:30am  GBP  BOE Gov King Speaks      

*10:30am  GBP  BOE Inflation Report      

*1:30pm  CAD  Trade Balance                                                            -0.1B   -0.6B -1.4B  

*1:30pm  USD  Trade Balance                                                             -27.0B -28.4B -26.0B  

3:30pm  USD  Crude Oil Inventories                                                    2.5M    0.7M    1.7M  

*7:15pm  USD  FOMC Statement      

*7:15pm  USD  Federal Funds Rate                                         <0.25%<0.25% <0.25%  



*7:00am  EUR  German Prelim GDP q/q                                                                                  +0.3%  -0.2% -3.8%  

7:45am  EUR  French Prelim GDP q/q                                                                                      +0.3%  -0.3% -1.2%  

9:00am  EUR  ECB Monthly Bulletin      

10:00am  EUR  Flash GDP q/q                                                                                                 -0.1%  -0.5% -2.5%  

*1:30pm  USD  Core Retail Sales m/m                                                                                     -0.6%  0.2% 0.3%  

*1:30pm  USD  Retail Sales m/m                                                                                              -0.1%  0.5% 0.6%  

*1:30pm  USD  Unemployment Claims                                                                                     -558K  540K 550K  

1:30pm  USD  Import Prices m/m                                                                                             -0.7%  -0.2% 3.2%  

3:00pm  USD  Business Inventories m/m                                                                                   -1.1%  -0.9% -1.0%  

*11:45pm  NZD  Retail Sales m/m                                                                                            -0.4%  -0.3% 0.8%  



*Aug 14  12:30am  AUD  RBA Gov Stevens Speaks               optimistic, suggests rates rising soon     

12:50am  JPY  Monetary Policy Meeting Minutes      

12:50am  JPY  Tertiary Industry Activity m/m                                                                           +0.1%  -0.3% -0.1%  

7:45am  EUR  French Prelim Non-Farm Payrolls q/q                                                                -0.5%  -0.9% -1.2%  


DISCLOSURE & DISCLAIMER:  Opinions expressed do not necessarily represent those of AVA FX. The author may have positions in above mentioned instruments.