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GLOBAL OUTLOOK Cheat Sheet 12/09: Renewed Sovereign Debt Fears Ignite Risk Aversion, JPY, USD Rally


Stocks: Prior Day: Asia, Europe down, US down,   this morning Asia down Europe down
-           FX: lower equities, strong bias to safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], as debt fears spur flight to safety,  unwinding of carry trades, falling oil, gold hits commodity currencies and stocks USD RALLY HALTING IN EARLY WED. TRADE, MINOR REVERSALS AT THIS TIME
-           Main events: Tues: GBP: Halifax HPI m/m+, Mfg. Production-, AUD: RBA Gov Stevens Speaks, CAD: Housing Starts= BoC Rate St., Wed. AUD: Home Loans+ m/m, Trade Balance-, GBP annual Pre Budget Release, NZD: RBNZ Press Conference, Cash Rate & Rate Statement
-     Big Theme: Renewed Sovereign Debt Concerns Spark Risk Asset Pullback, JPY, USD Rallies, continuing reversals across the Forex spectrum TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, NUMEROUS GOOD REASONS TO TRADE SEE RECOMMENDED TRADES BELOW
US: US stocks fell about 1% following Asia and Europe down, as further Greek credit downgrades from Fitch and renewed concerns about European bank exposure to Dubai debt sparked a Global market wide retreat of risk assets and rally of safe haven assets. Cautionary comments about the U.S. & UK debt rating and strength in the U.S. dollar weighed on the minds of participants. Broader sentiment remains mixed, though, as participants continue to assess the market's near-term direction.
Asia: TOKYO, Dec 8 (Reuters) - Japan's Nikkei average slipped 0.3 percent on Tuesday to snap a six-day winning streak, with profit-taking and an increase in the yen against the dollar eating away at gains made by exporters such as Canon Inc .
Europe: LONDON, Dec 9 (Reuters) - European stock index futures fell on Wednesday, pointing to a weaker start for equities as renewed concerns over banks' exposure to Dubai's debt weighed on sentiment, as did and a downgrade on Greece's credit rating from Fitch. Nor did Wall Street Journal reports of Moody's concern over UK and US government debt levels help.
N225I -0.27%
HS -1.18%
SSEC -1.06%
FTSTI +0.17%
AORD -0.19 %
FTSE -1.51%
DAX -1.58%
CAC -1.43%%
S&P -1.03%
DJIA -1.00%
NASDAQ -0.76%
N225I -1.34%
HS -1.44%
SSEC -1.73%
FTSTI +0.17%
AORD -0.19 %
FTSE -0.19%
DAX -0.59%
CAC -0.25%
Oil:  Futures fell $72.74 per barrel as they fell 1.6% in their fifth straight loss. In early Wednesday trade, crude rose slightly above $73.
Gold:    Fell 1.32% Tuesday, erasing Monday's gains and more, continuing to fall in early Wednesday trade to around $1130, from a high of $1220 just 6 sessions ago.
CURRENCIES: As of the end of trade Tuesday, the Yen, then USD lead currencies on flight to safety after Greek debt downgrade and on renewed fears of European bank exposure to Dubai credit woes, and other sovereign credit troubles after Greek debt downgrade. Early Wednesday trade shows the trend continuing with the Yen gaining on all majors, and the USD gaining or holding gains against all except the Yen.
USD:  Gaining through the end of Asian and European trade Tuesday against all FX except for the JPY as sovereign credit fears drive demand for safe-haven currencies as carry trades unwind. Holding gains in early Wednesday trade.
EUR: Down again in Tuesday trade vs. the USD and other lower risk currencies (JPY, CHF) in the overall flight to safety and USD, JPY strength. Recent negative data on German production adds to the EUR's continuing plunge. Gaining vs. the GBP, steady vs. AUD
JPY: Up again against all majors in the overall flight to safety, with the EURJPY and USDJPY hitting multi-month support.
GBP: Still falling against the USD to multi-month support, steady against the EUR on EUR weakness from Trichet remarks, Greece debt downgrade and renewed Dubai concerns.
AUD: Continuing down vs USD and other safe haven lower yielders Tuesday as a market wide flight to safety and unwinding of risk carry trades hits commodity and high yield currencies.
NZD: Continuing down vs USD and other safe haven lower yielders Tuesday as a market wide flight to safety and unwinding of risk carry trades hits commodity and high yield currencies.
CAD: Continuing down vs USD and other safe haven lower yielders Tuesday as a market wide flight to safety and unwinding of risk carry trades hits commodity and high yield currencies
CHF: Overall up vs. all majors except for the JPY, USD as safe-haven currencies dominate. 
CONCLUSIONS: S&P 500 holding for 6th day above 1100, dropping slightly in early Monday trade. Liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming. Dubai again reminds markets of real risk of sovereign debt default from Greece and others. However, good NFP suggests valuations may not be so overdone, upping the chance that the S&P may be able to avoid a major pullback for now. See Trading Opportunities section below. Traders should consider going with the current trend but be ready for pullbacks. See below for specific opportunities with the S&P 500, CRUDE, GOLD, EURUSD, NZDUSD, and AUDUSD, & GBPUSD.
Trading Opportunities:  Near term has favored safe-haven assets. Friday's NFP supports USD, as does its safe-haven status. Stocks may still be vulnerable to a pullback at this 1100 resistance level for the S&P 500 due to valuation concerns, year end selling, and to the extent that traders believe a stronger USD drives stocks down (usually wrong. Always use sell stop orders. See recommended trades below.
Specific Trades:
S&P 500 & Risk Assets In General: The big question this week is how world risk asset markets (of which the S&P 500 is the best single picture) digest Friday's US jobs reports, the renewed sovereign debt concerns and the concomitant rise in the USD. The S&P 500
Has stayed above key resistance at 1110 for 7 sessions, yet declined slightly yesterday on no specific news. The price level is currently in the middle of its rising channel, and the current $1100 level is itself a price resistance level. Thus we believe traders should be wary of opening new positions on this index and on all other assets until we get a decisive move above or below 1100. We may have gotten that on Friday Dec 4, but awaiting confirmation. As noted above, it’s a struggle between liquidity pushing stocks up vs. concerns over the underlying fundamentals and high valuations that suggest selling. Add to that brew the unresolved Dubai crisis, a disappointing Black Friday, Fed preparations to reduce liquidity, and the added uncertainty of US Non Farms Payrolls and unemployment this Friday makes for a potentially volatile week. Unclear how it will play out. Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", this indecisive picture suggest traders should make long or short moves when the S&P hits support levels at 1091 (23.6% Fib retracement +20 day MA + some price support from mid-October + rising trend line) and at 1080 (38.2% Fib retracement + rising channel line + lower Bollinger Band + 50 day MA) or a decisive break over 1100. Given the fear reflected in the S&P, traders should be very cautious opening long positions in ANY risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions. They should also have some short positions planned, complete with initial and confirming indicators, and planned entry/ exit points.
S&P 500 Daily Chart as of Dec 1 08:47 GMT (03 Dec 09) AVAFX CHART
GOLD: After recovering from the low $1130s to $1160s in just a day after Bernanke remarks Monday dampened US recovery hopes (and thus inflation prospects) fell hard again Tuesday as its anti-dollar role cuts against it in the overall flight to safety into the USD. The decisive crash through support at $1148 (tested 3 times in the past 3 sessions at the 61.8% Fibonacci retracement suggests gold's has not yet stabilized and continues to have shorting opportunity given its lack of established support, as long as the USD rally continues which would leave the next support around the 50% Fib retracement at $1125, then around $1103, where there's a convergence of 61.8% Fibonacci retracement, Bollinger Band and rising trend line.
When the USD rally halts (watch EURUSD), these could be the near term resistance levels at which to try long plays.
Gold Daily Chart (05 Dec 09) AVAFX CHART
As we noted last week, gold's meteoric rise meant it had no time to build up any nearby support levels, which made it ripe for shorting should anything interfere with the forces pushing it up. Friday's NFP did that by suggesting a bottoming in the USD, and gold was very much an anti-USD play that many believed could be overbought in the near term despite its long term bullish potential. Predictably, the fall was hard and fast, allowing only alert traders to catch it thus far. 1150 (also the 38.2% Fibonacci retracement level) has proven to be some support 3 times in the past 2 weeks. Continuing down as of this writing. No real support besides the above Fibonacci retracements, (which thus far tend to provide at least some temporary pause in down moves) until about 1080, where both a Fib and upward trend line converge, though we suspect the $1000 level (also has a 61.8% Fib retracement level) should provide some support.
Gold is likely to move this week opposite the USD. If the USD moves higher, gold could test the above support levels, though we repeat the below argument that gold's rally has long term legs. The trick will be to identify the next good entry point.
The Long Term Bullish Gold Argument: Makes sense as long as the USD Doesn't Make a Sustained Move Higher.
As noted in our Global Markets Outlook 11/23-11/27, the belief that there are large buyers like central banks seeking to buy gold may have caused a new fundamental upward shift in price based on this perceived demand. While gold was not immune from the Dubai induced panic late last week, it has recovered those losses already, and is close to recovering its steep upward trend line. This relative strength suggest that if markets truly calm down, gold could resume its climb, even if global equity markets remain pressured by the weight of the extended rally, valuation concerns, and year-end tax selling.
There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.
Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long.
•           In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.
•           Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. The long-term uptrend is not likely to end soon.
•           Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5th largest bullion owner just below France and above China.
In short, it's not just increasing gold demand, but demand from big buyers.
In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year. 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. As long as the central bank/sovereign wealth/momentum story holds up, Rogers looks correct.
Crude Oil: As another anti-dollar play crashed $74 support, not seen since mid-October, is just above support of the 50% Fibonacci retracement at $73.70. A break below leaves no support until near the 61.8% Fib retracement at $71.74, stabilizing around there in early Wednesday trade.
NB: Crude has been among the weaker risk assets over the past month despite the USD's weakness. A crude peaked week before stocks did, and has been behaving relatively weaker than stocks. For example, yesterday's action showed that stocks were still able to retain some of their gains when momentum reversed, but crude could not, and closed lower. Not surprising, since crude tends to exaggerate the S&P 500's trends for better and for worse. Range bound for the near term, will likely follow stocks higher to its upper range near $82 if stocks can rally, but poor fundamentals and an extended rally for both oil and the S&P 500 that it tracks suggest more downside risk at this time. USD strength has clearly exacerbated this trend, as has the stalling out of the S&P 500 and other risk assets at current resistance levels.
Certainly seems unwise to consider new longs until oil stabilizes, likely around the $73-$60 range, if not lower. An additional outcome of the Dubai crisis may be increased production as the UAE may need to produce more oil in order if it decides to fund a bailout or related assistance to stabilize the Dubai situation.  Watch the S&P 500 to lead oil.
WTI Crude Oil Daily Chart (06 Dec 09) AVAFX CHART
EURUSD: As the prime counterpart of the USD, is crashing through support levels as sovereign debt worries and Friday's NFP revive USD longs and unwind USD shorts, key 1.4800 support that has held since September is gone Currently around 1.4700 and stabilizing there in early Wednesday trade. Support levels are somewhat meaningless as long as the USD rallies, though established priced levels are providing at least temporary testing points, so next stop is likely to be around 1.4550 if the risk aversion continues to boost the USD.
As noted in our Global Outlook for 11/30-12/04:
NZDUSD: Down again vs. the USD Tuesday, stabilizing early Wednesday Near strong support around 0.7100, which would make a good entry point for those playing the long or short side, depending on one's' read on the direction of global stocks and risk appetite. As of early Monday, it is continuing to move down as the USD gains, similar to every other currency, but as we've noted, the NZD was especially vulnerable to pullback given its rise with the AUD without the AUD's fundamentals. As clear a downtrend as one would want, likely to continue as long as the dollar continues up (watch the    EUR/USD as the best indicator of that)
NZDUSD Daily Chart (08 Dec 09)
Upper line of the declining channel resistance broke Tuesday as part of the USD rally and drop in oil and stocks, despite good economic news from Canada. Stabilizing early Wednesday as shown, going with the fortunes of the USD.
09 Dec. 09
10 Reasons the Equity Rally Is Over
 The Destruction of the Dollar: It's Nearly Inevitable
Currencies on the Move