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GLOBAL OUTLOOK 11/03: Rally in US, But Asia, Europe Unconvinced

SUMMARY


 


 

- Stocks: Monday: Asia down, Europe, US up, Tuesday morning Asia down, Europe opening down


 

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors except for JPY,


 

- Main events today: AUD: Cash Rate, RBA St., Wed: AUD: Building Approvals, Retail Sales, GBP: Halifax HPI, Services PMI, USD: ADP NFP, ISM Non-Mfg PMI, FOMC St., Fed Funds Rate, NZD: Employment Change q/q, Unemployment Rate


 

- Big Theme: Falling risk appetite – normal retest or the next leg down back to November or March support? See Conclusions below for trading opportunities as many assets approach or breaching key levels. Light news Tuesday could produce cautious tight ranges or more profit taking ahead of key news-packed Wednesday. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, MARKET REACTION TO NEWS WEDNESDAY-FRIDAY TO DECIDE


 


 


 

STOCKS


 


 


 

Better-than-expected economic data helped the S&P 500 ascend to a 1.5% gain. U.S. reports showed sharp improvements in manufacturing, construction and housing, encouraging investors to buy riskier assets with higher yields. As a result, U.S. stock indexes rose, though stocks later trimmed gains on concerns about banks' soured loans after a warning by the Fed about banks' loan losses and worries about whether the seven-month rally has run out of steam


 


 


 

News that the ISM Manufacturing Index for October came in at 55.7, construction spending in September spiked 0.8%, and pending home sales for September made a 6.1% monthly increase helped bring about some early, broad-based buying, which sent all 10 major S&P 500 sectors into the green.


 


 


 

Financials were a standout as the sector climbed to a 2.5% gain. Investors in the sector paid little attention to news that regional lender CIT Group will enter bankruptcy after weeks of struggling to secure financing and put together a plan for sustainability.


 


 


 

However, financial stocks soon saw their gains reverse as weakness among insurers spread to the rest of the sector. That took the financial sector to a 1.7% loss before buyers stepped back in and helped it finish with a 0.8% gain.


 


 


 

Midsession weakness among financials undercut the broader S&P 500, which was having trouble extending its gains past its 50-day moving average of 1052. Such technical resistance combined with weakness in one of the stock market's leading sectors eventually caused the broader market to roll over and surrender all of its gains.


 


 


 

Stocks were able to garner some support as an underlying bid limited the stock market's move to the downside. That support inevitably helped it settle the session with a gain.


 


 


 

Materials stocks finished the session with some of the strongest gains. The sector closed 1.0% higher, partly helped by a weaker dollar, which oscillated for the entire session before settling roughly 0.1% lower. The greenback's move lower helped the CRB Commodity Index climb 1.2%.


 


 


 

Other solid gains were made by consumer staples stocks (+1.0%) and consumer discretionary stocks (+0.9%), which were helped by strength in shares of Ford (F 7.58, +0.58). The automaker posted this morning better-than-expected earnings and also announced an increase in market share.


 


 


 

In other earnings news, Humana (HUM 37.01, -0.57) posted better-than-expected earnings of its own, but offered a mixed forecast that weighed on the stock. Managed care providers still advanced 1.5% as a group, though.


 


 


 

Advancing Sectors: Consumer Staples (+1.0%), Materials (+1.0%), Industrials (+1.0%), Consumer Discretionary (+0.9%), Financials (+0.8%), Health Care (+0.6%), Energy (+0.5%), Tech (+0.4%)


 

Declining Sectors: Telecom (-0.4%), Utilities (-0.3%)DJ30 +76.71 NASDAQ +4.09 SP500 +6.69 NASDAQ Adv/Vol/Dec 1277/2.43 bln/1414 NYSE Adv/Vol/Dec 1627/1.55 bln/1411


 


 


 

Asia: Asian stock markets fell Monday after grim news about American consumers sowed more doubts about the U.S. economic recovery and sent Wall Street tumbling last week.


 


 


 

Europe: European stock index futures fell on Tuesday, pointing to a weaker start for equities after Swiss lender UBS posted poor quarterly results and UK's Lloyds Banking Group expected pretax loss for 2009.


 


 


 

GLOBAL


 

MARKETS FRIDAY


 

ASIA- DOWN N225I -2.31% HS -0.61 % SSEC +2.71 FTSTI -0.22% AORD -2.16 %


 

EUROPE UP FTSE +1.18% DAX +0.29% CAC +0.88 %


 

US- UP S&P +0.65% DJIA +0.79% NASDAQ +0.20%


 

THIS MORNING


 

ASIA CLOSING DOWN


 

N225I -2.31% HS +1.71 % SSEC -0.61 FTSTI -0.45% AORD -2.16 %


 

EUROPE: OPEN DOWN


 

FTSE -1.02% DAX -1.04% CAC -1.10%


 


 


 

COMMODITIES: Down Friday with stocks as the dollar gained.


 


 


 

Oil: (NYSE:AP) -3.61% Friday SINGAPORE (AP) -- Oil prices hovered near $78 a barrel Tuesday in Asia as investors welcomed new U.S. manufacturing and construction figures as positive signs of an economic recovery. The Institute for Supply Management said Monday that U.S. manufacturing activity grew in October at the fastest pace in more than three years, while the Commerce Department reported that September construction spending posted a better-than-expected performance.


 


 


 

And the National Association of Realtors said the volume of signed contracts to buy previously occupied homes rose for the eighth straight month in September. The question is, however, how much of that was a result of government stimulus in the form of $8K tax credits to first time homebuyers and very low mortgage rates.


 


 


 

The positive news help push stocks higher, with the Dow Jones industrial index up 0.8 percent on Monday. Asian stock indexes were mixed on Tuesday.


 


 


 

"Oil was just really following the equities markets and overall opinion on the future of the U.S. economy," Seattle-based Sander Capital Advisors said in a report.


 


 


 

Gold: Following stocks, up 1.00% in Monday US trade to 1064, Gold rose to its strongest in nearly two weeks on Tuesday, hovering within sight of last month's record, as the U.S. dollar dropped on data showing further evidence of an economic recovery. But trading was expected to be light, with Japanese speculators away for a holiday.


 

CURRENCIES: Bias to risk currencies with rising stocks


 


 


 

USD: Down against higher yielding currencies, but continuing recent gains against GBP, JPY


 


 


 

EUR: - Euro zone PMIs as expected Final German and Euro zone PMI manufacturing readings for October came in at 51.0 and 50.7 respectively, broadly in line with consensus expectations. The good PMI readings support our economists' recent upgrade of Euro zone growth forecasts.


 

JPY - Against the yen, the dollar gained 0.2 percent to 90.29 yen after falling as low as 89.18 yen per dollar on electronic trading platform EBS. The euro rallied 0.5 percent to 133.35 yen


 

GBP – Strong manufacturing PMI Manufacturing PMI was 53.7 for October, stronger than expectations of a 50.0 print. Expansion in manufacturing expanding again which raises hopes for the economy to finally recover from its longest ever post-war recession. While manufacturing headline PMI is at a 2-yr high, the services PMI, which is due on Nov 4, will be of more interest to the BoE's MPC. But nevertheless, more positive data could potentially signal a less than consensus expansion of the QE program. Consensus estimate is currently for an additional 50bn. Construction PMI is due next. We are more constructive on sterling in the longer-term but still think policy uncertainty could still weigh on sterling in the near-term..


 


 


 

AUD: Dropping against the USD despite the 25 bp rate rise on a buy the rumor sell the news move. Our economists now look for the RBA to complete a move away from the current 'emergency' 3.25% cash rate to a more 'normal' 4.25% by Q1 next year. The key catalysts are the improved business investment outlook and an improved global economy, reducing the significant downside risks to growth. We see the RBA hiking a further 50bp before Christmas to 3.75%. Later in 2010, as Q3 GDP shows a recovering consumer, renewed investment vigor and enough growth to see the unemployment rate falling, & inflation troughs, our economists expect the RBA will start the next phase of its tightening cycle, from 'normal' to 'neutral'. We look for the cash rate to end 2010 at 4.75%, rising to 5.5% in 2011.


 


 


 

NZD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of $0.7170 support Sunday and early Monday.


 


 


 

CAD: As expected, gaining ground against the USD as oil and stocks rise.


 

CHF: Jordan points to inflation Swiss PMI was 54.0 for October, weaker than estimates for a 54.8 print and also a decline from last month's figure. The SNB's Jordan suggested that this is not the time to exit from loose monetary policy. Jordan said the main indicator for exiting current policies is inflation. He also said their intervention policy has helped lower volatility and has kept the franc from rising versus the euro.


 


 


 

CONCLUSIONS: Proceed w/ caution waiting until trend clarifies before entering new positions as S&P 500 sits at near term support. Bias still towards seeking risk aversion plays, but JPY and USD vs. riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD,CRUDE, and NZDUSD


 


 


 

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. Thus: 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. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.


 


 


 


 


 

Crude Oil: Recovered support at its first Fibonacci retracement level at $77.83 yesterday, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.


 


 


 


 


 


 


 


 


 

WTI Crude Oil Daily Chart


 


 


 

01 Nov 03


 


 


 


 


 


 


 

EURUSD: Continues holding just above strong support level of $1.4700 (50 day MA + 23.6% Fibonacci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 .


 


 


 


 


 


 


 


 


 


 


 

EURUSD DAILY CHART


 


 


 


 


 


 


 

02 Nov 03


 


 


 


 


 

NZDUSD: THE TRADE FOR THE NEXT 2 DAYS


 


 


 

Background: Arguably one of the most overbought pairs because it moved up with the AUDUSD even though New Zealand's economic fundamentals and recovery story was not nearly as compelling as Australia's. Thus when the current pullback began, it was very vulnerable and came in hard and broke strong support near the $0.7250, where both its 50 day MA AND 23.6% Fibonacci retracement converged. Currently sitting on multiday support around 0.7160, it is currently falling (despite positive Labor Cost index q/q data this morning) and testing this level as Asian stocks pull back, apparently unimpressed by Wall Street's last minute rally on below average volume.


 


 


 

Recommendation: No real support until $0.7077, at which level converges both a minor price support level from September and the 38.2% Fibonacci retracement. No major NZD or USD news Tuesday, so this will move with overall market sentiment, which is currently down in Asia. However Wednesday is packed with top events in both the US and NZ (see Summary-Key Events at the top) to virtually guarantee volatility.


 


 


 

To play the further drop, entry near current levels as shown on the chart below while sufficient profit potential remains before the $0.7077.


 

To play the upside, wait until stocks start climbing on some substantially positive news that could sustain a multi-day bounce, and the pair breaks above $0.7160. Wednesday's packed calendar should provide clarification of the trend until Friday's US NFP comes out.


 


 


 


 


 

NZDUSD DAILY CHART


 

03 Nov 03


 


 


 


 


 


 


 


 


 

OTHER HEADLINES


 


 


 

(Seekingalpha.com)


 


 


 

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Property Values Set to Fall 43% from Current Depressed Levels


 

Michael David White


 

Bear Market Rallies and Lessons of History


 


 


 

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.