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GLOBAL OUTLOOK THURSDAY SEPT 24: USD Rally on G20 Regulation Threat?

SUMMARY

-           Stocks: Wednesday: Asia, Europe, US down, Thursday morning Asia, Europe down

-           FX: Falling equities, safety currencies [JPY, USD, CHF in order of safety appeal] generally Up Wednesday and Thursday morning vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], with exceptions, see below

-           Main events today: JPY: Trade Balance, EUR:German Ifo Business Climate USD: Unemployment, Existing Home Sales, NZD: Trade Balance ALL: G20 Meeting focus on banking regulation, not fx: HOWEVER, THREATENED REGULATION OF CAPITAL MKTS COULD HURT RISK APPETITE, & CAUSE SHARP RALLY IN THE VERY SHORTED USD

-       Big Theme: STOCKS
US

US
stocks drop on Fed stimulus withdrawal fears: Action was muted ahead of the latest FOMC policy statement, which spurred buying and sent stocks to their best levels of the year. However, the new highs proved unsustainable as stocks rolled over and closed at session lows with their worst loss since the first of the month.  

The tone to premarket trading had been mildly positive, but stocks lost their way after the opening bell and spent most of the morning drifting in mixed fashion. As such, gains and losses in the broader market were relatively contained.  

However, telecom steadily outperformed for the entire session. It finished 1.6% higher as the only major sector to post a gain. However, its lack of relative size limited its leadership.  

Energy stocks traded with considerable weakness for the entire session. It finished 1.9% lower, hampered by bearish oil inventory data, which showed a build of 2.86 million barrels when a draw of 1.40 million had been expected. Crude prices to finish 3.9% lower at $68.99 per barrel.  

Despite the drop in oil prices, airline stocks slumped. In turn, the Amex Airline Index shed 4.3%. US Airways (LCC 4.52, -0.71) disappointed by announcing the sale of 26 million shares of common stock. Meanwhile, AMR Corp (AMR 7.78, -0.66) priced its 48 million common share offering at $8.25 per share, which is slightly below the previous session's closing price.  

Financials were the worst performing major sector in the S&P 500, despite trading quietly in the early going. Late pressure sent the sector 2.1% lower.  Materials stocks finished not far behind financials, however. The sector dropped 2.0% amid weakness in commodities stocks and commodities prices. Softer commodities prices sent the CRB Commodity Index down 1.0%. 

Weakness among commodities was exacerbated by a stronger dollar, which fell to new 2009 lows immediately after the release of the latest Fed policy statement. However, it was able to rebound to a 0.3% gain. Despite its strong finish, many currency traders continue to bet against the greenback.  

The latest FOMC policy statement indicated that economic activity has picked up since its severe downturn. Neither that, nor the Fed's belief that economic conditions are likely to warrant exceptionally low levels of the fed funds rate (left unchanged at 0.00% to 0.25%, as expected) for an extended period came as much of a surprise. The FOMC went on to say that it will purchase $1.25 trillion of agency mortgage backed securities and $200 billion agency debt, but it will gradually slow the pace of purchases to promote a smooth transition in markets.  Stocks in the broader market attracted support with the statement's mid-afternoon release. That drove the S&P 500 to session highs and a gain of 0.8%.Ford (F 7.36, +0.35) and General Mills (GIS 63.80, +2.83) were primary gainers. Ford benefited from its view that the U.S. auto market is looking good and vehicle sales are expected to increase, while General Mills posted better-than-expected earnings for its latest quarter and issued upside guidance.  Still, their strength wasn't enough to stop some late-session selling, which culminated in a 1.0% loss for the S&P 500. This is only the second time this month that the S&P 500 lost at least 1%, though.  

Treasuries responded favorably to the Fed's announcement, but were able to hold their gains. The benchmark 10-year Note finished roughly 10 ticks higher, which put its yield back near 3.40%. Prior to the announcement they had been showing weakness, uninspired by news that a $40 billion auction of 5-year Treasuries produced a high yield of 2.47% and a bid-to-cover ratio of 2.4.

Asia     
Asian stocks were lower both Wednesday and Thursday morning as Japan reported that exports fell 36% in August (cars falling by 50%), showing the world's #2 economy stuck in a deep slump. investors look to this week's Federal Reserve meeting for more clues about the strength of the U.S. recovery. Declines in automobile and steel exports were especially pronounced, the Ministry of Finance said. Exports fell for the 11th straight month to 4.5 trillion yen ($49 billion).

 "We are not seeing an improvement in exports due to a continued slump in global demand," said Hiroshi Watanabe, an economist at Daiwa Institute of Research. "Japan's exports were particularly hit hard by stagnant demand in Asia and China." 

Imports, meanwhile, dropped 41.3 percent from a year earlier to 4.3 trillion yen, reflecting weak consumption within Japan, where the jobless rate is at a record high as companies shed workers. Consumer finance company Aiful Corp. said Thursday it will cut 2,000 jobs, or about 44 percent of its work force. 

Europe

Most markets in tight, flat trading ranges this week reflecting lack of news. Long term USD weakness remains, but so does very overbought stock market that could pullback anytime and, given extreme level of USD shorts, cause a wild USD bounce.








 

Opening doollowing Asia as traders cautious ahead of G20.

 

 

 

WED. GLOBAL

MARKETS RESULTS

NB: Japan closed

MON-WED

 

 

 

 

ASIA- DOWN

NIKKEI -0.0%

HS -0.49%

SSEC-1.89 %

FTSTI +0.01%

AORD +0.0%

EUROPE - DOWN

FTSE -0.06 %

DAX -0.13%

CAC-0.05 %

 

US- DOWN

S&P -1.01

DOW -0.83%

NASDAQ -0.69%

 

 

THURSDAY

 

 

 

 

ASIA MID DAY

DOWN

 

 

 

 

NIKKEI +1.67

HS -2.34 %

SSEC -0.81%

FTSTI -0.55%

AORD -0.76 %

EUROPE: AT OPEN

DOWN

 

 

 

 

FTSE -0.82 %

DAX -1.24%

CAC-1.04 %

 

 

                 

 

COMMODITIESWeakness among commodities was exacerbated by a stronger dollar, which fell to new 2009 lows immediately after the release of the latest Fed policy statement. However, it was able to rebound to a 0.3% gain. Despite its strong finish, many currency traders continue to bet against the greenbackOil

 

PERTH, Sept 24 (Reuters) - Oil prices extended losses and fell closer toward $68 a barrel on Thursday, as data showing an unexpectedly high build up in U.S. oil and products stockpiles reminded traders that oil prices may have run ahead of the demand fundamentals. The U.S. Energy Information Administration reported commercial stockpiles of crude rose 2.8 million barrels in the week to Sept. 18, against analysts' expectations of 1.5 million barrels fall.

 

   Crude oil prices fell nearly 4 percent in the previous session and are on track to shed about 5 percent this week, as demand concerns resurface.

 

Benchmark crude for November delivery was down 71 cents at $68.26 a barrel by midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract tumbled $2.79 to settle at $68.97 on Wednesday.

 

The $70 a barrel level has been a magnet for months, with growing optimism that the global economy is recovering from recession offset by signs that crude demand isn't picking up. Most analysts believe further evidence of recovery is needed to push oil over it's $75 2009 high.

 

A weaker U.S. dollar has helped bolster oil prices in recent weeks. Crude is priced in dollars so it becomes cheaper when the dollar falls. The dollar is at a nearly one-year low against the euro, and fell Wednesday after the Federal Reserve said it would keep interest rates at a record low -- near zero.

 

BNP Paribas also cautioned that a recent string of positive economic data could potentially overstate actual growth as it was hard to distinguish if the rebound in indicators, such as factory output, was merely reinstatement of previously cancelled orders or a genuine return to growth.

 

   "Industrial output is recovering after undershooting final demand but the improving surveys could potentially overstate actual growth as the economy comes back from the lows of Q1 and Q2," BNP's senior analyst, Harry Tchilinguirian, said in a report.

 

   Analysts said investors would keep a keen watch on some key economic data due to be released later on Thursday, including weekly U.S. jobless claims number and August home sales data, to get more clues on the pace of recovery in the world's largest energy consumer.

.

 

Near Term Prospects for Oil: All agree prices will move—but which way?

 

 

Oil Going Down

 

Oil Options Hit Highs as Verleger Predicts 44% Plunge: If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a telephone interview. “It was a very weak summer. We came out with more gasoline than we started.”

 

Right to Sell

 

Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.

 

The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.

 

Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said. “There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”

 

 

Oil Going Up

 

Al-Naimi’s View

 

Saudi Arabia’s oil minister said stockpiles have become irrelevant to crude prices because of the rebound, and said demand for crude was rising.

 

“Economic growth is the name of the game,” Ali al-Naimi told reporters in Vienna on Sept. 9 before a meeting of the Organization of Petroleum Exporting Countries. “Oil today is a commodity. As long as economic growth is there, the price is going to go up.”

 

Traders are betting with al-Naimi. Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures 38 percent in the week ended Sept. 15 to 45,557 contracts, according to U.S. Commodity Futures Trading Commission data.

 

OPEC, whose members supply about a 40 percent of the world’s oil, agreed at the meeting in Vienna to maintain current production quotas and eliminate surplus production.

 

 

Gold

 

TOKYO, Sept 24 (Reuters) - Spot gold rallied to trade around $1,010 on Thursday as the precious metal continued to look to the dollar for direction, though a sense of caution prevailed due to the threat of heavy liquidation of futures positions.

    "The trend of a strong euro and weak dollar is what's keeping the price of gold above $1,000," said Shuji Sugata, a manager at

the Mitsubishi Corp Futures & Securities research team. Sugata added, however, that investors needed to watch the long positions in the New York market.

    Noncommercial net long positions in gold futures in New York are at an all-time high, raising concerns that this together with the sharp rally, which has prompted the precious metal to rise as much as 16 percent this year, could lead to a bout of selling.

    "Concerns about long liquidation are likely to increase towards the end of the month, and this is something we'll have to keep an eye out for," he said.

 CURRENCIES

 

General: Generally following falling stocks. Bias to safety currencies Wednesday, thus the safest, JPY, up against USD, the second safest, USD, up against the third safest CHF and also the EUR, AUD, CAD, and NZD. The dollar softened against higher-yielding currencies on Thursday as investors shifted their funds away from the greenback on expectations the Federal Reserve will keep interest rate very low for a long time. NB Overall picture this week: currencies have followed stocks this week in a tight flat trading range.

 

 

USD : In NYC trading steady vs. the EUR at $1.4722, down against the JPY to 91 yen. Up Wednesday against most currencies. the Overall upbeat Fed minutes( that showed the US economy recovering enough to permit stretching out the same stimulus amount over a longer period) hurt the USD in early morning Thursday trade in Asia ,since this information fed risk appetite and stocks, which usually hurts the USD. Also, the confirmation that USD rates would remain low further weakens USD demand in times of optimism. "The Fed didn't make much of a change to factors surrounding the dollar. That means the overall dollar trend stays downwards," said Jun Kato, senior chief analyst at Shinkin Central Bank Research Institute. The key point from the FOMC meeting: rates will remain low, which is good for stocks and bad for the USD.  NB: SHORT USD POSITIONS AT RECORD 12 MO HIGH>>USD OVERSOLD DUE F/ BOUNCE IN THE SHORT TERM. The G20 meeting could provide the catalyst with its move to regulate capital markets which could well hurt risk appetite and boost the USD.

 

 

USD Reserve Status and the G20:  Despite currencies not being on the main agenda, there has been a lot of talk about the dollar’s status as a reserve currency ahead of the G20 meeting. Although China also wants a greater role for the Yuan, we don't expect an aggressive attack on the dollar but as the greenback continues to fall, the threat to its role as a reserve currency increases. Whenever the dollar is very weak, central banks and foreign investors start to become very concerned about the notional value of their investments. In a more stable economic environment, the dollar's reserve status would be a greater issue at the G20 meeting, but right now, G20 leaders have bigger concerns, including possible friction over protectionism. In the meantime, foreigners continue to buy dollar denominated assets. Based upon a report from Merrill Lynch, international investors including central banks have boosted up their purchases of U.S. Treasuries because they expect inflation to remain muted. Foreigners encompassed 43.1 percent of the demand for Treasuries this year compared to 27.1 percent in 2008.

 

 

EUR-   The euro weakened against the dollar after Reuters cited a French government official as saying the country is concerned about the euro’s strength and intends to press fellow G-20 members to set a timeframe for a discussion on exchange rates.

 

“The market is becoming sensitive to comments from monetary authorities as the G-20 meeting approaches,” said Kosei Fujita, a foreign-currency dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “As comments from French government officials added to concerns, people are inclined to close long positions on the euro.” A long position is a bet that an asset will rise.

 

Except for French manufacturing data, the rest of the busy EUR news day was negative, with French consumer spending, German and EUR PMI data below expectations, further hurting the EUR against the USD.

 

 

 

EUR and the G20: Euro-zone policy makers are expected to be at the forefront of the fight for significant financial regulation at this week’s G-20 meeting. The region has already drawn up plans for the EU as a whole, which includes some rather substantial shifts in regulatory practices. According to these plans, a total of three regulatory divisions will be established with broad based powers over financial institutions. Among the new delegated power includes the ability to reverse national regulatory decisions, perform widespread investigations along with the ability to perform stress tests if needed. Their plan is a small peek into the agenda that will be discussed later this week which is why many expect the meeting to result in some of the broadest initiatives since the Great Depression.

 

Nevertheless, there is still the question of whether international policy makers will be able to coordinate their approaches. Along the same lines, the OECD announced a push for more European banking stress tests. According to the organization, the tests that were performed originally were not transparent enough and should be repeated. On a good note, Germany’s Bundesbank issued a statement that concludes that German businesses stand to benefit from rising exports. The bank claims that this should offset the now disbanded cash for clunkers program and reflects their lack of concern about the recent strength of the euro. The Eurozone Economic calendar will be light until Wednesday’s PMI reports.

 

JPY -  Sept. 24 -- The yen traded near a one-week high against the dollar, helped by speculation that Japanese companies returned from a three-day holiday to repatriate funds before the end of the fiscal first half, and fear rising from a sharp drop in Japanese exports.

 

The yen also rose versus all of its 16 major counterparts after a government report showed Japan’s exports fell for an 11th month, curbing demand for risky assets. The euro fell from a one-year high against the U.S. dollar on concern that policy makers will discuss the rapid appreciation of the 16-nation currency at this week’s meeting of Group of 20 leaders.

 

“Yen repatriation by Japanese firms will likely peak today and tomorrow,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “There are probably a lot of yen-purchase orders from exporters after three days of holidays. This may lead to buying of the yen

 

GBP – Currency traders have a turned less bearish on the pound following the release of the Bank of England’s Monetary Minutes. Everyone breathed a sigh of relief when they saw that the commission voted unanimously to leave rates and the QE target at their current levels. Markets were further enthused by the fact that there was no sign that the bank was considering a cut to the deposit rate, something that the BoE has said in the past.

 

AUD – The dollar fell against Australia’s currency amid speculation the Federal Reserve Board will stand pat on interest rates to keep borrowing costs low. said Jitsuo Tachibana, senior manager for marketing at Sumitomo Trust & Banking Co. “As interest rates in the U.S. remain low, the hyper-liquid dollar will continue to trickle down into higher-yielding currencies.

 

The cost of three-month loans in dollars between banks dropped yesterday to a record low of 0.285 percent, according to the British Bankers’ Association. The London interbank offered rate, or Libor, for dollar loans slid below that of the Swiss franc on Sept. 8 for the first time since November, making the greenback the cheapest among the major currencies to borrow

  

NZD – New Zealand’s GDP. The country just managed to pull into positive territory, technically marking the end of its long and painful recession. In fact, the past year has resulted in the worst recession experienced in the country for about three decades, which saw the longest string of quarterly GDP contraction on record. Consensus pointed to a 0.2% contraction in growth, which would have marked the sixth straight quarter of weakness. New Zealand’s Trade Balance came out this morning better than expected, and the NZD is rising recovering yesterday's losses against the USD.

 

CAD – Tracking oil first, stocks and risk appetite second. No major Canadian news out Wednesday or for the rest of the week, so the CAD is likely to move with oil and stocks.

 

CHF Despite falling stocks Wednesday, fell against the riskier EUR and gained against the slightly safer, lower yielding USD.

 

CONCLUSIONS      

 

Virtually all markets in tight horizontal trading ranges reflecting the light news week and lack of direction. More of the same expected unless some major surprise from the Fed (none so far) or G20 (none expected). Next week, however, is NFP week, followed in Mid October by Q3 earnings.

 

Trading Opportunities: 1. Be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts.  Always use sell stop orders.

 

Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back.

 

Currency Pair in Play for today 

 

The EUR/USD  will be the currency pair in play over the next 24 hours. Germany will be releasing its IFO report at 4:00 am ET or 8:00 GMT. The US will be releasing Existing Home Sales at 10:00 am ET or 14:00 GMT. Keep in mind that the G-20 Meeting will also be in session throughout tomorrow’s trading day.

 

Even after today’s declines, EUR/USD  was able to remain in the Bollinger band buy zone. However, if prices should continue to drop, there is the September 21st low at 1.4611 to provide some support. Even though EUR/USD  will have today’s highs to contend with as resistance, there is a far more important level lying only slightly above. Price action failed to reach the critical 1.4866 resistance level, which is a high from September 22nd 2008, in today’s trading. This should be the most significant impediment to rallies in the short-term going forward.


Crude Oil: Two Ways to Play, But Beware G20 Regulation Threats to Risk Assets Near Term

 

If the G20's policy to increase regulation on financial institutions looks likely to succeed, that could threaten financial sector profits and hurt risk appetite – oil could well be one of the short term casualties.

 

From a technical perspective: As shown in the below chart, Crude is in a multi-month up trend and forming a bullish rising wedge.

 

From a fundamental perspective: Oil has tended to rise with stocks and risk sentiment, both of which are moving up for now. There are excellent arguments for a coming pullback in stocks, which would likely mean a drop for oil too. Moreover, there is near term oversupply, which could pressure prices near term. However, markets are look to the future, and sentiment has generally overridden near term inventory data.

 

Trading Ideas

Play the momentum: buy on breaks above $74, or sell on breaks below the rising trend line of the bullish wedge

 

Play the range. Simply try to buy near $68, sell near $74, with stop losses not far from these levels to minimize losses if the reversal doesn't occur. If that's the case, use this as a signal to jump in and play the other direction.

 

NB BEW

 

Always use stop loss orders


OTHER HEADLINES

 

(Bloomberg)

 

Age of Austerity Awaits G-20 as $9 Trillion Debt Haunts Rogoff, Greenspan

•European Stocks, U.S. Futures Drop; BHP Billiton, Hennes & Mauritz Decline

•King Says Two British Banks Got Within Hours of Collapse on Oct. 6, 2008

•Fed Signals Return of U.S. Growth Insufficient to Withdraw Record Stimulus

 

(seekingalpha.com) Just one but really worth the read:

 

https://seekingalpha.com/article/163093-yield-curves-fx-and-libor-trends

 

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.