Asian markets closed mixed, Europe down, but the US closed up as an unexpected drop in crude inventories sends energy stocks and ultimately the broader market higher, but again on low volume, suggesting the move lacks staying power, and is just part of a longer term flat range trading. NB Here's a case of CRUDE leading the stock market up- unusual! In the long term, could rising commodity-based equities (fed by devaluing currencies) become the new stock market driver?
- Asia mixed (N225 -0.70%, HS +0.08%, ST -0.26%, SSEC +0.48%, BSESN -1.25%),)
- Europe down (FTSE: +0.08%, DAX -0.36%, CAC 40 -0.01%)
- US: up (S&P +0.69% NSDQ +0.68 % Dow +0..66% )
- Asia near close up (N225 +0.71%, HS +1.59%, ST +0.72%, SSEC +2.10%, BSESN -1.50%)
Mixed signals, as table below shows. In the absence of fresh economic data, currencies were mostly following stock prices for direction. The 4% stock recovery has brought EUR/USD TO BIGGEST RISE IN 2 WEEKS UP TO $4.42 With trading desks thinned out by summer holidays, analysts said moves were exaggerated. Noted one trader:
"These are some of the most illiquid market conditions you will see all year, with probably about 25 percent of normal market volume, So these moves must be put into that context."
- EUR: EUR/USD tumbled below 1.4100 in the aftermath of the release pushed lower by the surprisingly cool PPI data and a resurgence of risk aversion in Asia as Shanghai fell once again. The unit looks pressured and could see a run on the 1.4000 level later in the day if equity flows turn negative.
- USD: Down as stocks rise Tuesday, recovering Wednesday morning as Asia stocks looking negative
- AUD, CAD, NZD: no major news, continue to move with stocks
- JPY: BoJ member doubts recovery, suggests low rates remain, thus JPY to remain preferred funding source for carry trade, & likely to move opposite of stocks.
- CHF: Intervention policy unchanged, Thursday's Swiss monthly trade balance 2.35B beats forecast 1.79B & prior -1.5B
- GBP: QE vote divided, leaves open chance for more on the way. The MPC meeting minutes ominously noted that, "The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously."
Hot Oil Party! Crude at 10 month high near $74 (from low of about $67 3 days ago, over 10% rise!!) on rising US stocks, sinking inventories as API and EIA confirm oil demand up. Gold up to 945 from $933 (over 1%) 2 days ago, could see delayed-reaction rise soon if stocks and crude continue up, since these feed inflation concerns (silver a better play?)
Markets are moving up, but overall still in tight flat trading range, awaiting direction from significant news, which may not come for another few weeks. Barring very good news, may well to imitate the degree of mid-June-July pullback. NB Crude hits 10 month high on US inventories news. That US markets were able to close up despite lack of other news and down markets in Asia, Europe, suggests sensitivity to any decisive news.
Profit taking sparked by extended markets that have a slow recovery already priced in, lacking much market moving news to support them in coming weeks. Awaiting next big news, which could be from: Central banks, IMF/OECD/World bank/? US NFP?
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.
Note: Always use stop loss orders.Main Events:
THURSDAY: CHF TRADE BALANCE, GBP RETAIL SALES, USD WEEKLY UNEMPLOYMENT
FRIDAY: LOTS EUR MFG AND SERVICES PMI DATA, USD EXISTING HOME SALESSTOCKS
US: Stocks started the session in the red as participants reacted negatively to further selling pressure overseas, but a jump in oil prices helped the energy sector lead a turnaround that took the broader market to a solid gain above near-term resistance levels. Participation remains unimpressive, though. Trading volume was exceptionally low again, however. For the second straight session fewer than 1 billion shares exchanged hands on the NYSE, suggesting that there hasn't been much conviction behind the recent moves
Comments from renowned investor Warren Buffett in a New York Times article offered a reminder that the U.S. economy is on a slow path to recovery. With that in mind, the mood on trading floors started to change as chatter began to circulate that a second fiscal stimulus plan could be possible, but that was downplayed when a White House spokesman said in a Bloomberg.com article that there is no imminent economic announcement.
However, market participants jumped into the energy sector following news that weekly oil inventories showed a draw of roughly 8.40 million barrels in the face of calls for an inventory build. Oil prices had been down in early pit trade, but settled 4.7% higher at $72.42 per barrel. Energy stocks were able to recover from a loss of roughly 1% to finish with a 1.9% gain, better than any other major sector.
The run up in oil prices helped provide leadership to other commodities, which gave the CRB Commodity Index 1.5% gain -- its best performance in two weeks.
The improved tone among participants helped stocks build on the previous session's gain. In turn, stocks are down less than 1% week-to-date after Monday's 2.4% drop, which marked the stock market's worst single-session percentage loss in six weeks. The back-to-back gains have also taken stocks above near-term resistance levels, which stood just above 990.
Note: See Weekly Preview for Further Details and Analysis
EUR: Weber cautious on German improvement
ECB Governing Council member Weber said the surprise expansion of German Q2 GDP occurred largely because of stimulus measures already introduced and the increase may therefore not be sustainable. He warned that the German economy is likely to recover only slowly with GDP growth unlikely to reach levels seen in 2008 until 2013. Weber's comments echo ZEW president Franz who said, "There is, however, no reason for euphoria. The German economy develops parallel to the world economy and should, hence, recover only gradually." We stay long a EURUSD strangle with 6 weeks to expiry struck at 1.3162 and 1.4507.
NB: Lots of EUR PMI data for both French , German, Euro zone manufacturing and services
USD: Equities weigh on dollar
The dollar weakened as US equities managed to finish up 0.6% and higher oil. USDJPY triggered stops, pushing below 94 before settling around 94.10 at the time of writing. EURUSD traded 1.4085-1.4267, USDJPY 94.96-93.67. We expect a small decline in new claims in the week of August 15 (UBS and cons: 550k) after 558k in the previous week. Although the level is still high, new jobless claims appear to be trending downward. We believe the data are now fairly "clean" following some seasonal adjustment-related distortions in much of July. We maintain our 3m EURUSD forecast of 1.30.
NB: Thursday events: weekly unemployment, Friday: existing home sales, Bernanke speaks
GBP: QE vote divided
Sterling was pressured by the BoE minutes which showed a 6-3 vote regarding raising the amount of asset purchases, with the three dissenters, including Governor King, voting for a 75 bn increase versus the 50 bn that was agreed upon. The tone of the minutes was consistent with the conclusions of the latest Quarterly Inflation Report and officials noted that although Q2 GDP had been weaker than forecast, output seemed to have since stabilised. The minutes also revealed that, "The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously." Given that the current limit of asset purchases will likely be met in November, this is consistent with our view that a further increase of 25 bn could be in the cards. Opposition leader David Cameron warned that high borrowing levels put the UK at risk of default. While government finances remain a concern, default warnings are more politically motivated ahead of the general elections. For now, we still look for further GBP underperformance going forward with the BoE arguably at the most dovish end of the G10 central bank spectrum.
JPY: BoJ member doubts recovery, suggests low rates remain, thus JPY to remain preferred funding source for carry trade, & likely to move opposite of stocks.
This suggests BoJ will leave interest rates at ultralow levels. The yen therefore is likely to remain the preferred funding vehicle for the carry trade amongst the major currencies and the USD/JPY will continue to trade on risk appetite/risk aversion flows rather than fundamental economic data.
CHF: Intervention policy unchanged, Thursday's Swiss monthly trade balance 2.35B beats forecast 1.79B & prior -1.5B
The SNB's Jordan said the Swiss economic recovery is likely to be slow and GDP growth should be positive again by mid-2010 as Swiss banks have improved their positions, though some risks remain. He said deflationary risks cannot be ruled out yet in Switzerland and reiterated that a strong franc poses a risk to the recovery. Jordan said the SNB's measures have worked thus far and he is satisfied with the range the franc is currently trading in, though he declined to specify at what level the SNB would intervene. But the deflation risks mean it is still too early for a normalization of monetary policy from his perspective. Jordan's comments echo the themes and undertone from the SNB's mid-June assessment and so far the SNB continues to sound comparably cautious. We suspect the EURCHF could reach 1.52 in 1m and 3m.
CAD: CPI roughly as expected
Headline and Core CPI were below expectations by 0.1% at -0.9% y/y and 1.8% y/y, respectively. While Core CPI is still near the BoC's 2% operational guide, the negative headline figure will likely allow continued accommodative monetary policy. But risk sentiment more so than economic fundamentals remains a major driver behind the CAD. We maintain our 1m USDCAD forecast at 1.15.
Stocks, EIA surprise inventory drop boost crude. Will gold catch up? It often does.
- CRUDE: The Deparment of Energy's crude oil inventory data surprised investors, showing a drawdown of 8.4 mn barrels versus forecasts for a build of 1.2 mn. "The EIA report has been pretty bullish for the market, and will support sentiment in the near term," said David Moore, commodity strategist with the Commonwealth Bank of Australia. "But we expect prices to remain volatile, as the overall demand picture remains weak, and as equity markets and the dollar continue to play major roles in influencing trading direction." U.S. crude stockpiles plunged by a whopping 8.4 million barrels in the week to Aug. 14 -- against analysts' forecasts for a 1.3 million barrel build -- as imports dropped to the lowest level since September 2008 and refiners hiked runs, data from the U.S. Energy Information Administration showed.
- GOLD: following stocks up Tuesday, following them down in Asia Wednesday morning, then up in NYC in very tight range. NB gold, silver often lag oil, could see delayed reaction move up if stocks, oil hold current levels.
OTHER HEADLINES (Bloomberg)
•Switzerland to Sell $5.6 Billion UBS Stake After U.S. Tax-Lawsuit Accord
•European, Asian Stocks Advance, Led by Shell, BHP; U.S. Index Futures Gain
•Rio Tinto Profit Tumbles 65% After Copper, Iron Ore, Aluminum Prices Drop
•Telstra Shares Valued at $1.4 Billion Offered by Australia's Pension Fund
•Samsung, Toshiba Say U.S. Ended Investigation of Flash-Memory-Chip Market
•King Changes Tune as Deeper U.K. Recession Prompts `Activist' Bond Stance
•FDIC May Add Special Fees on Banks as Mounting Failures Drain Deposit Fund
Global Market Direction?
While we remain skeptical, there is growing evidence for further upside with stocks. In the interest of presenting a balanced picture, consider the following.
Stocks Set to Continue Rally?
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.
Why Markets May Be Ready to Pull Back: Links to articles worth seeing.
Very good graphs on Bob Farrell's Rule # 8: bear markets have 3 stages 1. sharp downturn 2. reflexive rebound 3. drawn our fundamental downtrend & shows we're in reflexive rebound stage, prelude to a further downturn in stocks and other risk assets.
Key points include:
- A record 13.9% of companies beat their EPS estimates, prior record was 7.9% in Q1 of 2004. Does this suggest the game of lowball estimates have become far more exaggerated?
- Year over year profit growth still at -29.5%. Yes, that's better than the -31.7% consensus estimate before Q1, but at the start of the year estimated growth rate for Q2 was -11.3%, So actually, earnings are coming in below expected by more than 18 percentage points on this basis, but believe me, there is nary a newspaper or a bubblevision TV program that is going to make mention of that particular statistic.
- What about guidance? Again, not a broadly reported statistic but there have been 39 negative EPS pre-announcements versus 15 positive pre-announcements thus far for 3Q. That yields a negative/positive ratio of 2.6x, which is actually well above the 1.8x at this same juncture during the Q1 reporting season three months ago and the long-run average of 2.1x.
- What about valuations? The S&P 500 is trading at 16.5x calendar year 2009 earnings estimates; 14.7x four-quarter forward estimates; a 13.2x calendar year estimates. These are forward estimates, which are merely analyst projections, and they are based on operating, not reported earnings. And the best, the very best, multiple that can be drummed up is 13.2x. That doesn’t exactly sound like bargain prices from where we sit, especially when dividends are being slashed and the corporate bond market is still offering up coupons of over 7%.
- Banks are not doing enough business to earn their way out from under a still growing mountain of loan default losses
- Bank failure rate much higher than anticipated two months ago. For 2009, may have about 230 vs 125 forecasted, and amount of assets involved is much larger than in past per bank failure
- Loan defaults increasing for several more quarters, especially commercial loans
- FDIC is in trouble, probably bankrupt
- May be going to historic lows in bank credit
- Best case US GDP Growth of about 2% per year for 2010-11 will not be enough to allow many mid sized and smaller banks to survive.
CONCLUSIONSAs 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. This week's calendar is relatively light on market moving news, however with markets still near highs, there is potential for volatility.