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GLOBAL OUTLOOK 11/05: Asset Covering Ahead of Major Events

GLOBAL OUTLOOK 11/05: Asset Covering Ahead of Major Events5 11 2009

GLOBAL OUTLOOK 11/05: Asset Covering Ahead of Major Events


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

- FX: Lower/flat equities Thursday, 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: NZD: RBNZ Gov Bollard Speaks, AUD: Trade Balance, Gov. Stevens speaks, GBP: Mfg Production m/m, Asset Purchase Facility, MPC Rate St., Official Bank Rate, EUR: Minimum Bid Rate, ECB Press Confr. CAD: Building Permits, Ivey PMI, USD: Unemployment Claims w/s

- Big Theme: Falling risk appetite – normal retest or the next leg down back to November or March support? Rising thus far this week-See Conclusions below for trading opportunities as many assets approach or breaching key levels. Light news Tuesday produced small moves except for gold and oil arising from special events (SEE BELOW) News-packed Wednesday. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, MARKET REACTION TO NEWS WEDNESDAY-FRIDAY TO DECIDE


US: While the US employment data didn’t move markets, the latest FOMC policy statement and a weaker dollar helped bolster buying in stocks, but some late selling caused stocks to rollover in the final hour and close near the neutral line.

The major indices started the session in higher ground as participants responded to strong overseas gains and a downturn in the U.S. dollar. Gains among the major indices were both broad and strong.

Participants also digested in the early going the ADP Employment Change Report for October. The report indicated that last month private payrolls fell by 203,000, which is a bit worse than the 198,000 job losses that were widely expected. The ADP Report is a precursor to the official nonfarm payrolls report on Friday.

In other economic news, the ISM Services Index for October came in at 50.6. Though any reading above 50 denotes expansion, the October reading fell short of the 51.5 that had been forecast. The employment component of the report pointed to a lower non farms payroll report ahead, though the ADP report seemed to agree with the current consensus of -175K.

Reaction to the data was relatively muted as participants were largely focused on the latest FOMC policy statement, which was released mid-afternoon. The directive indicated that the FOMC will maintain the target range for the federal funds rate at 0.00% to 0.25% and it continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The statement was met with a volatile response by stocks, while the Dollar Index extended its losses. It settled with a 0.7% decline, its worst single-session percentage drop in two weeks.

As the dollar slid, both stocks and commodities showed strength. Gold futures prices had hit a new intraday record high around $1096.50 per ounce, but settled at $1087.30 per ounce with a fractional gain. However, in electronic trade, gold prices have ticked higher toward $1098 per ounce.

Meanwhile, oil futures prices settled 1.0% higher at $80.36 per barrel, helped along by the weaker greenback and an unexpected draw in weekly inventories. The gains by gold and oil helped drive the materials sector and energy sector more than 1% higher, respectively. Those gains vanished late in the session, though. The two sectors settled with losses of 0.1% each.

Late weakness came about as a broad-based selling effort took hold of stocks. Financials were at the center of the downturn, however. Financials were up as much as 1.6% in the early going, but steadily saw their gains erode before dropping sharply to a 1.5% loss late in trading. Multiline insurers (-3.8%) were among the worst performers in the sector.

However, managed care providers (+3.8%) fared well and helped the health care sector to a 1.3% gain, which was the best of any major sector. Strength in the sector came amid news from the Associated Press that the Senate’s top Democrat signaled that Congress may fail to meet a year-end deadline for passing health care legislation. That could make for an uncertain outcome in 2010.

Earnings played somewhat of a supportive role in the early going, but had little lasting impact on this session’s trade. Kraft (KFT 26.67, -0.87) was the only Dow component to report. It struggled as light revenue results overshadowed its better-than-expected earnings.

In other earnings news, broadcasters Time Warner (TWX 30.10, -0.06) and Comcast (CMCSA 14.06, -0.45) topped earnings expectations, but oil drillers and services outfits Baker Hughes (BHI 40.89, -2.54) and Transocean (RIG 84.41, -1.50) missed earnings estimates.

Advancing Sectors: Health Care (+1.3%), Tech (+0.7%), Utilities (+0.7%), Consumer Staples (+0.5%), Telecom (+0.4%)

Declining Sectors: Financials (-1.5%), Industrials (-0.2%), Consumer Discretionary (-0.1%), Energy (-0.1%), Materials (-0.1%)DJ30 +30.23 NASDAQ -1.80 NQ100 +0.1% R2K -1.3% SP400 -0.5% SP500 +1.09 NASDAQ Adv/Vol/Dec 1048/2.23 bln/1631 NYSE Adv/Vol/Dec 1623/1.35 bln/1398

Outlook For Friday’s Non Farms Payrolls Report

Wednesday brought three key reports that are usually indicative of the US Non-Farm Payrolls report results. The first, and most important of which, was the Service sector ISM report. Surprisingly, the report showed further declines in jobs despite expectations that the industries would expand further. Even though it was still above the 50 expansion level for the second consecutive month, the key employment component dropped 3.2 points to 41.1. This figure is the most reliable leading indicator for jobs and its decline makes it hard to support expectations for employment to improve this month. The Institute for Supply Management noted that respondents are in ‘wait and see’ mode, which explains the weak hiring.

ADP also released its report today which showed a decline of 203,000 private sector jobs. While better than last month’s 254K decline, it was still below estimates, further cutting optimism about the US Dept of Labor NFP. Finally, we had the Challenger Layoffs data which was the most upbeat, indicating that firings have dropped by 50.7 percent. We weigh these against a very upbeat Manufacturing ISM that was reported on Monday and showed that its employment index actually improved. In total our indicators are mixed, which supports a growing conclusion that the unexpected expansion in third quarter growth was driven by productivity enhancement, not new hiring efforts. Thus many, including’s Kathy Lien, believe that the NFP is doomed to jettison at least 100K jobs for October.

Asia: Asian stocks markets dropped Thursday as the U.S. Federal Reserve failed to reassure investors that a lasting recovery in the global economy was taking hold, and investors booked profits on caution ahead of US jobs data.

The U.S. central bank decided Wednesday to keep a key interest rate at a record low and said cheap credit would continue for an "extended period" as the world’s largest economy struggles to regain its footing after its worst downturn in decades.

For many investors, the news raised doubts about whether the turnaround under way in many economies was strong enough to extend a powerful eight-month rally in global markets. A key U.S. unemployment report due Friday, which could yield clues about the ailing U.S. consumer and demand for Asian exports, also kept traders on edge.

"Around these levels, it’s hard to have conviction positions," said Jan Lambregts, head of research of Rabobank in Hong Kong. "There’s a big question on investor confidence given issues about the sustainability of the global recovery once stimulus policies fade

Europe: European shares were lower on Thursday ahead of interest rate decisions by the Bank of England and the European Central Bank, with banks and commodity stocks the biggest losers.




ASIA- UP N225I +0.42% HS +1.76 % SSEC +0.46 FTSTI +1.03% AORD +1.24 %
EUROPE UP FTSE +1.40% DAX +1.70% CAC +2.40%  
US- FLAT S&P +0.10% DJIA +0.31% NASDAQ -0.09%    
N225I -1.29% HS -0.63 % SSEC +0.85 FTSTI -0.61% AORD -0.62 %
FTSE -0.95% DAX -1.28% CAC -1.12%    

COMMODITIES: Up Wednesday & Thursday morning despite mixed stocks as India’s central bank’s gold purchase from the IMF

Oil: prices hovering around $80 a barrel Thursday in Asia & Europe. Although crude normally follows equities, yesterday it decoupled from stocks and followed gold higher

"Very slowly, the imbalances in the U.S. oil market have been sorting themselves out," Barclays Capital said in a report. "A key part of that adjustment has been the winnowing away of the overhang of inventories."

Barclays expects oil prices to average $76 a barrel in the fourth quarter and $85 next year.

Gold: Despite falling stocks, gold settled higher up 0.89% around $1087 in late Wednesday trade as the USD weakened. TOKYO, Nov 5 (Reuters) – Spot gold inched lower on Thursday but remained within striking distance of the $1,100 level after

hitting an all-time high for the second straight session on a weak dollar the previous day.

News this week of India’s purchase of 200 tonnes of gold from the International Monetary Fund has also provided gold with upward momentum to rise back towards $1,100.

The IMF’s transaction represents about half of a long-planned bullion sale, which now has the gold industry wondering who will

be buying the remainder that is due to be sold.

Akira Doi, a managing director at Tokyo’s Daiichi Commodities Co Ltd, said gold could fall on profit-taking this month after it

eventually hits $1,100.

"Funds close their books in November, and one should keep in mind they may decide to pocket profits and sell this month," he


Noncommercial net long positions in U.S. gold futures remained near a record. He added, however, that gold was likely to remain above $1,000 even if it is hit by profit-taking, noting that India’s purchase from the IMF was made near an average of $1,045 an ounce.

"I think that fact will have a psychological impact on the market … there is no longer any surprise in seeing a four-figure price for gold," Doi said.

CURRENCIES: Bias to safe-haven currencies due to overall downtrend in stocks. FX trade today will move with how stocks react to the major news events mentioned above. With the RBA and the FOMC out of the way, attention now turns to the BoE and ECB. No policy changes anticipated from the ECB.

USD: Dropped against all majors except the JPY, under the combined pressure of rising stocks and commodities as well as a dovish FOMC statement. The dollar also suffered its biggest day loss in about 8 weeks. Thursday’s action likely to be dominated by the EUR on hopes the ECB will be a bit more hawkish.

Investors initially appeared unsure how to interpret the FOMC statement, as price action was very frenetic. The source of the confusion appeared to have stemmed from the decision to reduce target agency debt purchases from $200 bn to about $175 bn. EURUSD initially gyrated for a period before finally heading higher, hitting an intraday high of 1.4909. The Fed also reiterated the key phrases that the policy rate would remain "excessively low" and "for an extended period", which weighed on the dollar.

The decision to reduce agency debt purchases was driven by the "limited availability of agency debt," rather than a move towards tightening. Once investors reached this conclusion, it was taken as a risk positive move, as the Fed appeared to signal that that market was functioning well and could therefore reduce its footprint there. But even if markets thought the statement was indicative of tightening, which it was not, a look at the Fed’s balance sheet shows that mortgage-backed securities, rather than agency debt, has by far the more dominant presence on the balance sheet.

It was interesting to note that the FOMC laid out the conditions that would warrant "exceptionally low levels of the federal funds rate for an extended period." These include "low rates of resource utilization, subdued inflation trends, and stable inflation expectations."

EUR: - EURUSD initially gyrated for a period before finally heading higher Wednesday, making its biggest one day move in about 2 months, closing at 1.4829, then falling slightly in Thursday morning trade. No change expected from today’s ECB policy statement, given that even the policy Hawks such as Governing Council Member Weber, have emphasized that it is still premature to implement an exit strategy.

Eurozone services PMI was in line at 52.6 (cons. 52.3), while composite PMI came in at 53.0. PPI was in line with expectations coming in at -7.7%y/y. German services PMI was weakened to 50.7 (cons. 50.9). The data mostly confirmed the picture of general improvement shown by Monday’s Manufacturing PMI. Wednesdays’ Fitch’s double-notch downgrade of Ireland’s debt yesterday follows their recent downgrade of Greek debt two weeks ago. Moody’s has also changed the outlook on Portugal’s debt to negative. The moves will refocus attention on the consequences bond spreads and diverging fiscal deficits within the Eurozone, but talk of a break-up of the EUR, which was fashionable earlier this year, is likely to be much quieter now given the passage of the Lisbon Treaty.

Euro-zone services purchasing manager index indicated that the sectors activity has expanded at the fastest rate in two years. However, even though Germany’s and France’s indicators remained above the 50-line, neither beat economic estimates. Nevertheless, the picture that has been painted over the last week is indicative of the improvement that might justify the large gains in the euro over the past few months. However, Producer Prices, despite being largely ignored by euro bulls, declined for the ninth consecutive month on a yearly basis. From last month, producer prices fell to -0.4% from 0.5%. The threat of consistently low prices is just one of the issues that the ECB will be considering at tomorrow’s meeting.

Even though much of the emphasis for tomorrow’s schedule has shifted to the BoE’s decision, it is important not to count the ECB out. There is a growing possibility that the bank may formally discuss their plans to make an exit from some extraordinary measures like the 12-month loans that provide an unlimited amount of cash to the regions banks. The ECB’s Weber himself pointed out last week that there was the possibility of such a move. However, even though the announcement is expected soon, it is hard to pinpoint when the ECB will actually publicize its conclusions

We closed our short EURUSD trade recommendation as our stop was triggered post-FOMC.

Asset markets are likely to remain choppy as more investors look to lock in profits heading into year-end, which would benefit the dollar and as such, we maintain our 1m short bias for the EURUSD, and forecast a level around $1.45.

JPY – Losing ground against most of its counterparts. We remain cautious on JPY performance and look for USDJPY to remain choppy around 90 in the near-term.

GBP – Up against the USD, yesterday, currently is pulling back a bit Thursday morning, losing ground against the EUR yesterday and today.

QE OR NOT QE? THAT IS THE QUESTION-WE’LL KNOW TODAY–UK services PMI was much stronger than expected at 56.9 (cons. 55.5) for October. The PMI survey highlights more starkly the recent disconnect between the PMI and the GDP data. If the PMI survey is an accurate reflection of UK economic performance the economy is in fact outperforming the euro area. If instead, the official data is correct, the UK is underperforming the euro area. This divergence together with a historical pattern of upward revisions to official UK data suggests that the gap between the survey and the official data will narrow when official data is revised up. Historically, the PMI’s have been important ingredient for the MPC’s near term forecasts of economic activity. More recently though the committee seems to place more weight on the less buoyant official GDP data. So even though the survey data is pointing to robust economic, the committee is likely to expand QE on November 5.

We hold on to our long-held view that the MPC will phase out QE with a 25-50 bln expansion tomorrow and if possible redirect the some of that away from gilts and directly to corporate bonds. This could well hammer the pound, though if in fact there is no expansion the surprise could well send the GBP higher back towards its pre- Q3 GDP announcement level around1.6600.

The consensus view has also recently shifted in favor of an extension but, given the pound’s recent appreciation; we believe it is not priced for this. Sterling has fallen heavily on previous QE announcements and, if the MPC votes for another QE extension, we expect it to respond as before.

AUD: While building approvals were slightly better than expected, the critical monthly Retail Sales data was much worse, -0.2% vs. a forecasted +0.5%. If employment figures are also weak, the RBA might consider deferring or decreasing rate increases until recovery looks more solidified. While retail sales and then the subsequent jobs reports will be major factors in the RBA’s next decision, it’s now less certain that we’ll see one more 25bp hike in December. AUD will likely remain closely linked to risk sentiment for the balance of the year.

RBA Governor Stevens noted that the combination of several forces, including the significant rallies in the AUD, permit him to more ‘gradually’ take rates higher. This is a departure from last month’s implied hurry to take the benchmark off of historical lows. Furthermore, it is important to note that the RBA has never raised rates in three consecutive decisions. Building Permits were also released today and showed a substantial 2.7% climb over last month. However, the cause is predominantly the result of first-time home buyer grants which have boosted housing demand.

NZD: Closed unchanged Wednesday against the USD.

In a speech and statement posted on the RBNZ website, RBNZ Governor Bollard compared the recovery prospects for Australian and NZ economies, saying that in NZ, the "pick-up is slower and more vulnerable – a difference (that) financial markets do not appear to appreciate". He added that, "if financial markets can’t see the differences, they will eventually lose money." Predictably, AUDNZD climbed through 1.26 in response, but the gains were temporary. The New Zealand unemployment rate meanwhile registered a large increase to 6.5% (cons 6.4%, prev. 6.0%), showing no signs of leveling off. Finance Minister English yesterday forecast that the unemployment rate would peak at around 7% next year. Our economists point out that we should not read too much into this latest print given that much of the surprise weakness came from the part-time sector which is a volatile component.

CAD: Unchanged from Tuesday.

CHF: Following overall risk sentiment, thus the CHF has been in a tight range.

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 CRUDE, GOLD, EURUSD, NZDUSD, AUDUSD, GBP/USD (big today)

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.

GOLD: Continuing to hold near multi-year highs independent of movements in equities, purely on speculation that other central banks and other large buyers may do the same. It is difficult to predict the extent or duration of such a sentiment driven move into new territory. However, if news over the remainder of the week is strongly bearish for equities, it is difficult to see how oil and gold could continue to rise. Inflation would not be seen as a threat, thus undermining further gold advances. Crude inventories remain high, so there is no immediate problem with supplies that might drive oil higher, especially if the recovery picture does not improve. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher.

Crude Oil: Up slightly Wednesday near $79.50, unchanged in early Thursday trade. Still following the speculative rush into gold following India’s central bank bullion purchase despite stocks struggling. Next resistance is at $82. The combined price support around $77 has held over the past week. If the series of key news items over the next 3 days does not cause any surprises, then we might expect crude to trade within this $77-82 range. Positive surprises could cause crude to challenge the $82 level, and disappointments, especially in those related to unemployment, could pressure it towards $77 and below. If the FOMC surprises with a more dovish than expected statement, that would weaken the USD and thus help crude, whereas a more bullish FOMC wording could push the USD up and pressure oil. Watch the S&P and gold to see how news is affecting the markets and crude.


WTI Crude Oil Daily Chart

02 Nov 04

EURUSD: Broke decisively above the key $1.4700 support level (50 day MA + 23.6% Fibonacci retracement from its June rally, also lower BB band around 1.4657) on dovish Fed comments Look to play this break above this upside break 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 . If gold and oil continue to move up on speculative pressure independent of equities, that could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time. Note that like other risk assets it’s pulling back Thursday morning, not unexpected as traders turn cautious ahead of ECB, BoE statements today and US employment data Friday



02 Nov 03


Update: Virtually unchanged for the past 4 days around 0.7180, dropping slightly into Thursday

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 both a minor price support level from September and the 38.2% Fibonacci retracement converge to reinforce each other. 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.

As noted above, if gold and oil continue to move up independently of moves in equities, that could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time.

NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.


NZDUSD Daily Chart

03 Nov 04

GBPUSD: Made its big move up in Mid October because the BoE hinted at QE ending sooner than expected. If in fact Thursday’s statement reveals further QE, especially if it’s the full 50 bln that many anticipate, that might cause the pair to drop to at least the 1.6300 support level it held after the terrible Q3 GDP figures. If the US employment figures disappoint on Friday, the general retreat in risk assets could send the pair back toward the deeper support level at 1.5800 that it held before the BoE jawboned the pair higher on pure talk.


GBP/USD Daily Chart.

BoE announcement of additional QE, along with disappointing US employment data on Friday could send it back to its mid October levels around 1.500 as part of a general retreat in risk assets, and flight-to-safety driven USD demand. Any upside surprise in either event could well send the pair higher.

02 Nov 05


Fed Likely to keep key interest rate at record low

Oil falls to near $79 despite US crude supply drop- AP

Disney says China approved Shanghai theme park- AP

GM board decides to keep European Opel unit- AP

Auto sales show industry beginning to stabilize- AP

Rising commodities, deal making lift stocks- AP

Sprint laying off part of wholesale division- AP

Oil prices rise as Fed meets on interest rates- AP

Factory orders rise 0.9 percent in September- AP


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