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Daily Outlook Cheat Sheet 12/10: USD Rally Stalls Despite Sovereign Debt Fears Stocks, Risk Sentiment Mixed


Stocks: Prior Day: Asia, Europe down, US down/flat, Asia down, Europe flat.
-           FX: mixed/lower equities, 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], USD RALLY HALTING IN EARLY Thursday TRADE, MINOR REVERSALS AT THIS TIME in favor of risk assets/currencies.
-           Main events: Thurs: JPY: Core Machinery orders m/m, AUD MI Inflation Expectations, Employment Change & Rate+, CHF Libor Rate, SNB Monetary Policy, Press Confr., GBP: Asset Purchase Facility, Official Bank Rate, MPC St., CAD: Trade Bal, USD: Trade Bal.
US: Frequent swings by the U.S. dollar caused stocks to spend most of the session chopping along in a relatively narrow range, but some late support helped the major equity averages make modest gains. Despite a growing list of sovereign debt downgrades that now includes Spain and is likely to grow further still. The action hasn't provided any clarity to the market's near-term direction.
Asia: Japan's Nikkei average fell 1.3 % Wednesday and 1.4% Thursday as debt problems in Greece, Dubai, and now Spain, along with recent Yen strength hurt investor confidence,
Europe:  European shares briefly turned negative in morning trade on Thursday as financial stocks gave up early gains ahead of the Bank of England's interest rate decision later in the session, as worries about European bank exposure to Greece, Dubai, and Spain weigh on markets.
N225I -1.42%
HS -0.19%
SSEC +0.45%
FTSTI +0.17%
AORD -0.72 %
FTSE -0.34%
DAX -0.57%
CAC -0.54%%
S&P +0.37%
DJIA  +0.50%
NASDAQ +0.49%
N225I -1.01%
HS -1.53%
SSEC -3.35%
FTSTI -0.64%
AORD -0.64 %
FTSE -0.08%
DAX -0.01%
CAC +0.41%
Oil:   Oil prices were a primary drag on the CRB. Contracts for crude closed pit trade with oil priced 2.6% lower at $70.70 per barrel, near fresh two-month lows. The move came even though weekly inventory data showed a surprise draw of 3.82 million barrels. Recovering slightly in early Thursday trade.
Gold:    Stabilizing Wednesday into early Thursday trade around $1130, down from a high of $1220 just 6 sessions ago.
CURRENCIES: Flight to safety reversing late Wednesday into early Thursday trade as the USD, JPY, CHF lose ground against higher risk currencies, thus putting most currencies in a tight range over the past day vs. the USD.
USD:  It finished with a 0.3% loss after holding gains through the end of Asian and European trade Wednesday against all FX except for the JPY as sovereign credit fears drive demand for safe-haven currencies as carry trades unwind.
Wednesday: Though the Dollar Index looked like it got a lift from an early flight to safety, it was unable to trade with any clear direction. Each of its attempts to pare losses was met with resistance at the neutral line.
EUR: Down again at the end of European trade Wednesday trade vs. the USD and Yen, 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: Dropping back against all higher risk FX including the USD in early Thursday trade
GBP: Up slightly vs. the USD Wednesday, giving back that gain in Wednesday and early Thursday trade
AUD: Gaining ground against safe haven FX. The Australian dollar jumped about half a U.S. cent after Australian employment rose by 31,200 in November, beating forecasts for a rise of 5,000. The Australian dollar rose to $0.9163 from about $0.9105 just before the data, and was up 0.9 percent on the day. 
NZD: Continuing its move higher into early Thursday trade as the Kiwi settles around $0.7220, having hit a high of $0.7235, as the Reserve Bank of New Zealand says it could start raising rates from middle of 2010 and also brings forward its forecast for a rise in the 90 day bank bill price
CAD: Recovering much of Tuesday's losses Wednesday and Thursday despite oil's continued slide as the USD rally halts, continuing higher against the USD early Thursday. In ascending triangle pattern that suggests a break coming to one side or the other.
CHF: Overall up vs. all majors except for the JPY, USD, steady against EUR as safe-haven currencies dominate but USD rally moderates.
CONCLUSIONS: S&P 500, other remains below 1100 resistance, but coming off lows as USD rally loses steam into the Europe close and continuing early Thursday. It attempts to rally despite dropping slightly in early Wednesday 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, Spain and others. 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, yearend 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 again fallen below 1100 for the past 3 days, and is at strong support at 1094, where multiple supports converge: the 23.6% Fib retracement, lower rising channel line, and 20 day MA. Doji star candle yesterday suggests overall market indecision. 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 debt issues of Dubai, Greece, and now Spain, with even the US and UK getting a warning from Moodys. 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 around the1091 (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 (01 Dec 10) 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 Wednesday 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 38.2% Fibonacci retracement has, as we predicted yesterday, brought down to the next support around the 50% Fib retracement at $1125. Given the break in the USD rally, gold could well bounce here, given the additional support of the lower Bollinger Band; if the USD rally resumes then the next stop appears to be around $1103, where there's a convergence of 61.8% Fibonacci retracement, then the 76.4% retracement at around 1080, which is reinforced by the rising trend line.
At this point, gold is moving opposite the dollar, so watch the EURUSD and S&P 500 for indications of gold's near term moves
Gold Daily Chart (03 Dec 10) 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 continues crashing through supports despite the Wednesday-early Thursday respite in the USD rally and risk asset decline. Crashed $74-$72 support, not seen since mid-October, and which had the additional support of the rising trend line since July. As of early Thursday is just below  $71, next likely support around the 76.4% Fib retracement at just below $70. Attempting to stabilize near $71 around there in early Thursday 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 (05 Dec 10) AVAFX CHART
EURUSD: As the prime counterpart of the USD, is crashing through support levels as Spain's downgrade now adds to sovereign debt worries. Despite better than expected US oil inventory drawdown AND the USD rally losing traction late Wednesday into early Thursday trade, oil is still continuing down. However with key 1.4800 support smashed along with the next support at 1.4750 too, oil's downward momentum is not so easily stopped. As of early Thursday the 76.4% Fib retracement level is holding, though crude is still drifting down. By itself that's not so surprising, because oil often exaggerates risk appetite.  Watch the S&P for overall risk appetite, and the EURUSD for a quick gauge of the USD to judge if oil is ready to stabilize.
As noted in our Global Outlook for 11/30-12/04:
NZDUSD: As suggested yesterday, strong support around 0.7100, made a good entry point for those playing the long side, with the halt in the USD rally. As of early Thursday, it is continuing to move up as the USD consolidates, similar to virtually every other currency vs. the USD., Watch the S&P 500 and EURUSD to gauge risk appetite and USD strength. Much will depend on whether more bad sovereign debt news comes out.
NZDUSD Daily Chart (07 Dec 10)
Upper line of the declining channel resistance broke Wednesday as part of the USD rally and drop in oil and stocks, despite good economic news from Canada. Keeping roughly to its overall downtrend line as the USD rally halts.
08 Dec. 10
10 Reasons the Equity Rally Is Over
 The Destruction of the Dollar: It's Nearly Inevitable
Currencies on the Move