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GLOBAL OUTLOOK 11/09: Resilient Risk Appetite Steady After US Jobs Disappointment

GLOBAL OUTLOOK 11/09: Resilient Risk Appetite Steady After US Jobs Disappointment9 11 2009

- Stocks: Prior Day: Asia up, Europe up, US Up/flat, this morning Asia, Europe up

- FX: Higher equities Friday, bias against 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: Home Loans m/m, CAD: Housing Starts

- Big Theme: Rising risk appetite? or range trading until next major news? Rising thus far this week-See Conclusions below for trading opportunities. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, still unclear if markets have fully digested the US jobs data, and news this week is light, suggesting trading with ranges


US: (Market Diary – Week ending 06-Nov-09 (With Excerpts from

The S&P 500 gained every session this week, with the bulk of the gain coming on Thursday following solid results from Cisco (NASDAQ:CSCO) and a surge in nonfarm productivity. The much talked about stock market correction continues to fail to materialize with the S&P 500 just 2.9% from its 2009 highs and up 60% from it’s march low.

Amazingly, US stocks somehow managed to close higher despite much worse than expected US employment data which seriously undermines the current US recovery picture. Some viewed the weak report as evidence that interest rates will remain low, which is generally good for stocks, and ignored the problems the report poses for consumer spending, as well as the housing and banking sectors. Given the light news week ahead, it will be interesting to see how markets open next week after having had a weekend to digest all the news of last week.

Friday was all about the monthly jobs report. They came in a bit worse than expected (-190K versus -175K expected) but investors could handle that. The problem was that the unemployment aspect of the household survey came in at 10.2%, leapfrogging expectations of 9.9% and topping that 10% level that everyone feared could get here. That is the worst showing since 1983.

There was good and there was bad in the report for the market. The good, on top of the decent non-farm payrolls, were their revisions from August and September that made up for the October miss. There were some other bad areas that I will discuss later. Markets chopped around and in the end the bigger cap stock indexes finished with modest gains, the smaller cap indexes with minor losses.

All ten sectors advanced during the volatile week of trade, though cyclical stocks saw the most buying interest. Industrials surged 6.1%, consumer discretionary advanced 4.7% and materials gained 5.0%. Defensive areas underperformed on a relative basis, with telecom and consumer staples both gaining just 1.0%.

In economic news, third quarter nonfarm productivity surged 9.5% in its preliminary report. That is considerably better than the consensus which called for an increase of 6.5% increase. The surge marked the largest gain in productivity since 2003. It was fueled by the sharp increase in third quarter output and the considerable drop in hours worked. With job conditions still weak, unit labor costs dropped 5.2% in the third quarter. They were expected to fall 4.2%.

October nonfarm payrolls fell 190,000 in October, which was worse than the expected decline of 175,000. Meanwhile, the unemployment rate rose to 10.2% from 9.8%, which was worse than the 9.9% consensus. The rise in unemployment was not due to more workers entering the workforce — the labor force declined by 31,000 people as 259,000 workers left the workforce over the last month. The jump in unemployment was solely due to an increase in the number of unemployed. and reflects the continued challenges in the labor market

In other economic news, ISM Manufacturing Index for October came in at 55.7 (53.0 consensus), the ISM Services Index for October came in at 50.6 (51.5 consensus), construction spending in September spiked 0.8% (-0.2% consensus), and pending home sales for September made a 6.1% monthly increase (consensus unchanged).

In monetary policy news, the Federal Reserve didn’t provide much a surprise in its statement, keeping its language unchanged that low interest rates are warranted for an extended period of time. The Bank of England and European Central Bank also opted to keep their rates unchanged, as expected.

There were a fewer big names among the 94 S&P 500 companies that reported earnings this week as Q3 earnings season starts to wind down, there was . The trend of better than expected earnings continued (75 beat), with revenue failing to match the EPS performance (45 beat).

Of the larger market cap companies reporting this week — Cisco, CVS, Kraft (KFT), Qualcomm (NASDAQ:QCOM) and Time Warner (NYSE:TWX) — all reported better-than-expected results. Kraft, however, came up came up short on revenue, and as a result fell 2.7% for the week. With regard to Cisco, the tech bellwether authorized $10 billion more in share buybacks issued a solid outlook during its conference call, helping its shares rise 4.3% on the week.

In other corporate news, Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A) announced a cash and stock offer for Burlington Northern (BNI) at $100 per share. The news sent BNI up 29% for the week, with peers Union Pacific (NYSE:UNP) and CSX (NYSE:CSX) also posting healthy gains of 13%.

In commodity trading, gold gained nearly 6% to hit an all-time nominal intraday high of just over $1100 per ounce. Oil prices also gained in a volatile week of gain, up about 1% as the dollar dropped about 0.8%.

Index Started Week Ended Week Change % Change YTD %
DJIA 9712.73 10023.42 310.69 3.2 14.2
Nasdaq 2045.11 2112.44 67.33 3.3 34.0
S&P 500 1036.19 1069.30 33.11 3.2 18.4
Russell 2000 562.77 580.35 17.58 3.1 16.2

Special Section-Friday’s Jobs Reports: Non Farms Payrolls and Unemployment

This was one of the most important jobs reports in quite some time because the non-farm payrolls have been trending lower and everyone is looking to when they actually get to zero. It is the same with the weekly claims – right now, we just want it to get below 500K. Neither is working out for now. In addition, the slow recovery picture is priced into risk assets. For continued gains, markets need evidence to set expectations higher.US job recovery a key part of that.

Jobs were down more than expected (-190K. Revised -154K from -201K in August; -219K from -263K in September). The revisions more than made up for the miss on the non-farm payrolls number, so that is a positive.

The non-farm payrolls are interesting because it is mostly the large companies that they survey. They try to factor in the smaller companies and small businesses, but it is very difficult for the government to get that information accurately and quickly enough. It was worse than expected, but not drastically so, and the markets absorbed it well.

On the other hand, there is a 10.2% unemployment rate, and that is the highest since 1983. There is an argument about whether the non-farm payrolls or the household survey is more important. Greenspan always said the non-farms payroll was more important, but as we saw coming out of the recession in 2001, the household survey was more accurate. We saw that it was improving, and it was showing the right kind of improvement because there were many small businesses that were created thanks to tax incentives. We saw S corporations proliferate. The filings for those proliferated and small partnerships also surged.

We are not seeing that this time, however. There is not a surge of any kind of small businesses as the non-farm payrolls number improved, and the household number is getting worse and worse. It is my view, and the view of many smart economists, that household is more important when you come out of recession because many of the jobs are gone. JNJ and GE and those places are not going to be hiring people because they are still laying people off. The jobs are going to come from the smaller businesses, and if the smaller ones are still saying things are bad, then things are bad.

There was a 10.2 unemployment rate, but there were interesting figures with respect to the headlines below the headlines. 17.5% of the work force is either unemployed or underemployed. Underemployed means they would like to work more but cannot get the jobs. That is why we are seeing the temporary jobs growing. That is a key factor, and it has been up for two months in a row. People want to work but they cannot.

The job pool actually decreased by 500K workers. At the same time, the new unemployed increased by 1M. It was not just a factor of more people entering into the jobs market and thus pumping up the number of people out there unemployed. The number of new unemployed rose, so we have a serious problem. The headlines under the headlines are showing that things are not improving in employment, but they are worsening. Some of the anecdotal data from Challenger says that the layoffs are fewer, but those are only the big companies. They do not cover the small ones as closely and cannot cover them as accurately.

More than that, the average workweek is critical. It has to increase before there will be new hires. It stayed flat at 33.0, and that is after declining from 33.3 to 33.2, to 33.1 and now holding at 33.0 for two months in a row. We have a serious problem because it has to get up to 3.5 – 3.6 before they get to the point of thinking about adding even temporary workers.

Increases in productivity don’t help the employment picture. You can have a lot of productivity, but if companies do not feel things will get better, they are not going to hire anyway. They are just going to reap the benefits of having higher productivity and then stockpile the cash. That is good for earnings, but we are looking for jobs and getting the economy back on track. If companies are worried that jobs are going to be bad in 2010, so much so that they are not spending any of their cash on new employees, then that is a serious problem.

Asia: Asian stock markets were flat or rose slightly Monday. Some commentators said that investors took a surprisingly weak U.S. jobs report as a sign that interest rates in the world’s largest economy will stay low longer than expected, though this view ignores the implications of declining incomes in the US for US and global recovery which in turn allows the higher earnings that drive stock prices. Thus we would not be shocked to see markets waver or drop after digesting the US jobs reports.

Europe: LONDON, Nov 5 (Reuters) – European shares set a one-week closing high on Thursday after data showed new claims for U.S. jobless aid fell to a 10-month low and business productivity in the third quarter grew at the fastest pace in six years.




ASIA- UP N225I +0.74% HS +1.63 % SSEC +0.85 FTSTI +1.09% AORD +0.89 %
EUROPE UP FTSE +0.33% DAX +0.13% CAC -0.04%  
US- UP/FLAT S&P +0.25% DJIA +0.17% NASDAQ +0.34%    
N225I +0.20% HS +1.73 % SSEC +0.36 FTSTI +0.88% AORD +1.78 %
FTSE +1.02% DAX +1.17% CAC +1.11%    

Oil: Closed at $77.65, -2.47% Friday, pressured by the weak jobs data and belief that declining inventories reflected declining imports more than improving demand. Oil was still up about 1% over the past week. Monday morning Oil prices rose above $78 a barrel Monday in Asia as a weaker U.S. dollar offset signs of slumping consumer demand. Benchmark crude for December delivery was up 94 cents to $78.37 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange.

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

Gold: Closed +0.59% Friday, up over 6% during the past week on the big CB of India purchase from the IMF, which traders took to be indicative of demand by other central banks and sovereign funds. Will these follow suit?

Gold edged up on Monday and hovered near last week’s lifetime high above $1,100 on a falling U.S. dollar and after a weaker-than-expected U.S. unemployment rate revived worries about the health of the global economy.

Gold has gained as much as 25.2 percent in 2009, driven by persistent weakness in the U.S. currency, and recently by the failure of a meeting of the Group of 20 finance officials to talk more specifically about the dollar’s decline.

"The fundamental outlook for gold remains favorable. We expect a renewed test of the $1,100 mark for gold prices this week," Credit Suisse said in a research report.

CURRENCIES: Bias to risk currencies due to overall recent up-trend in stocks. Remarkable resilience in risk appetite as it holds on despite worrisome US jobs reports (see Weekly Outlook). Interesting to see how markets open after a weekend to digest the results.

USD: The U.S. dollar rose slightly Friday against the EUR after the weak jobs report, but fell on Monday morning trade as the report pushed Fed rate increases further into the future, extending the dollar’s role as a preferred funding currency for carry trades, while the New Zealand dollar led other commodity-linked currencies sharply higher after dairy giant Fonterra lifted its forecast payout to farmer shareholders by almost 20 percent.

Data from the Commodity Futures Trading Commission on Friday showed that speculators had slightly trimmed USD shorts but that the dollar has been heavily shorted for 26 weeks and there is little sign of that changing barring a sharp pullback in stocks and risk appetite.

Also hurting the U.S. dollar was a meeting of the Group of 20 finance officials meeting that failed to take any concrete action to rebalance global flows or talk more specifically about the dollar’s recent decline

The International Monetary Fund in a statement said while the U.S. dollar has depreciated in the recent months, it still remained on the "strong" side, sparking another bout of selling in Asia.

The dollar index was 0.23 percent lower.

EUR: - the euro higher at $1.4870, from $1.4846 late in New York on Friday, rising over $1.4950

JPY – The yen gained against the U.S. dollar to 89.75 yen, from around 89.92 late on Friday, while it held steady on the euro at ¥133.50 yen. Data from the Commodity Futures Trading Commission on Friday showed that speculators had increased their long positions on the yen while trimming those in the euro. The USDJPY is rising slightly in early Monday trade.

GBP Up vs. the USD and EUR, again on Friday and Monday morning as the GBP gained on news of less than expected QE increase.

AUD: The Australian dollar climbed to above $0.9200, mirroring the sharp gains in the New Zealand dollar.

NZD: Moving up with stocks all last week against the USD. The New Zealand dollar surged to around $0.7350, its highest since Oct 29, from about $0.7243 in late Friday trade. Dairy is New Zealand’s biggest export and the increase in Fonterra’s payout mirrored an increase in international dairy prices.

CAD: Steadily gaining against the USD all last week into Monday morning following stocks higher, despite oil’s choppy action.

CHF: Gaining against the USD, in a tight range against the EUR, tracking risk appetite with SNB pressuring it against the EUR.

CONCLUSIONS: Surprisingly resilient optimism despite high valuations and a negative US employment report. For now, risk assets steady or rising. Traders should consider going with the current trend but be ready for pullbacks. See below for specific opportunities with CRUDE, GOLD, EURUSD, NZDUSD, AUDUSD, GBP/USD

Trading Opportunities: Near term has favored risk currencies, shorting safe-haven assets. Today’s news is quiet, indeed, the week is fairly quiet, suggesting range trading. Given that markets remain very high despite mixed earnings and negative US jobs reports, still awaiting a pullback. 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. Inflation is not be seen as a threat, but continuing USD declines encourage large USD holders to diversify into gold, especially as long as interest rates remain low and thus reduce the opportunity cost of holding gold. 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: For over 2 weeks trading in the $82-$76.50 range, dropped on Friday despite steady stocks, rising gold and a falling USD, suggesting that oil may be showing more sensitivity to underlying fundamentals than gold. The historical range of the oil/gold price ratio is between 12:1, which would suggest oil should be at $91, and 15:1, which would imply oil should be at $73. Thus while crude remains range bound, if gold can hold its 1100 level, as many expect it to do, then crude could follow it sharply higher over time, especially if other risk assets can avoid a sharp correction or there is evidence of continued strong demand from China and other developing economies


WTI Crude Oil Daily Chart

01 Nov 09

EURUSD: Continuing higher after it broke decisively above the key $1.4700 support level (50 day MA + 23.6% Fibonacci retracement from its June rally) on 11/4. Approaching the upper end of its range since late September.



02 Nov 09


Breaking sharply higher in early Monday trade above strong resistance (BB + 50 day SMA) on rising dairy price data and weakening USD as the poor US jobs report pushes USD rate increases further into the future. STILL AT THE LOWER END OF ITS TRADING RANGE FROM MID SEPTEMBER

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

04 Nov 09

GBPUSD: One of the strongest currencies last week against the USD and EUR as it gained on less than expected expansion of QE, but nearing the top of its trading range since mid July and at the top of its Bollinger Band Range and recent high of $1.700. Could be a good short trade if markets pull back.


GBP/USD Daily Chart.

05 Nov 09


Investors look to consumer for clues to recoveryAP – Sun 4:11 pm ET
Investors will get some guidance about the economy this week from data issued not by the government, but by big retailers in the form of third-quarter earnings reports.

One last hurrah-Reuters

Risky assets such as equities and emerging markets may have scope for another rally before the year is out as policymakers renew pledges to keep economic boosters in place. Full Article


Is the Risk Trade Back On?

The Good, the Bad and the Ugly: Australian, U.S. and U.K. Economies

U.S. Employment Picture Remains Unattractive


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