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Global Market 1/11-1/15 Short Version: Key Market Movers For Stocks, Currencies, Commodities

NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL ANALYSIS AND CHART ILLUSTRATIONS GO TO http://fxmarketanalysis.wordpress.com/   AND SELECT "WEEKLY OUTLOOK"  SEE THE DAILY OUTLOOK FOR UPDATED TRADE RECOMMENDATIONS

WEEKLY STOCKS OUTLOOK: What’s Pushing Them Higher, And What Could Stop Them

 

Stocks are the best single barometer of asset markets, so here’s what anyone needs to keep in mind for the week ahead, and beyond.

Summary

 

  • US jobs reports disappoint, but show enough positives to keep stocks moving higher:
    • Revised November figures show first job growth in nearly 2 years
    • Jobs weakness in December suggests continued low rates for a longer time, which is good for stocks
  • While stocks priced in USD continue to rise, stocks priced in a better store of value, gold, are now down trending, suggesting declining real wealth, coming stock decline when easy money props are removed from stocks.
  • One of the prime movers in the rise of stocks has been abundant cheap money seeking yield, with little competition from fixed income given low prevailing rates, however…
  • Weakening Demand For Treasuries plus Fed warning to banks to prepare for higher rates, suggests possible liquidity drain and rate increases sooner than expected, as rising rates may be needed to keep up demand for Treasuries. Rising rates could pound stocks. Timing for this is unclear.

 

WEEKLY COMMODITIES OUTLOOK

 

Summary

 

  • Key Events This Past Week For Commodities

 

  • Friday’s disappointing US jobs figures weakened expectations for US interest rate increases and thus the US dollar, which boosted commodity prices.

 

  • The Peoples Bank of China reiterated that the monetary policy will continue to be 'appropriately loose' so that the market should not be overly worried about tightening.

 

  • Recent US Dollar weakness has bolstered commodities, but evidence suggests US rates may be going sooner than many expect despite the Feds wishes, as  an ever growing supply of Treasury bonds from the US (also the UK) is reducing foreign demand, which can usually be revived only via rising rates (or a stock market collapse – separate discussion). Timing of such increases is unclear. Rate increases would boost the dollar, pressuring commodities.

 

  • The current supply/demand picture suggests much of the gains in commodities remains speculative anti-dollar hedging. Thus continued increases in commodity prices will depend on continued dollar weakness.

 

WEEKLY CURRENCY OUTLOOK

 

US Dollar Weekly Outlook: 4 Key Drivers, Ramifications For All Markets

 

As the past month has dramatically demonstrated, movements in the US Dollar ripple through virtually all major asset markets. Here’s what any investor or trader needs to know about it for the coming week and beyond.

Summary

US Dollar Weekly Forecast: Bearish in the short term, as long as risk appetite remains. Bullish over the coming weeks as risk factors favor the Dollar’s safe haven role and improving job trends boost dollar fundamentals. Any dollar trend changes in the near term depends on news concerning  the 3 dollar drivers listed in the beginning of the below analysis

-    Events: Sun-FOMC Member Bullard Speaks, Trade Balance, IBD/TIPP Economic Optimism, Wed- Fed Beige Book, Thurs-Core Retail/Retail Sales m/m, Unemployment Claims, Import Prices, Business Inventories, Fri- Core CPI, CPI m/m, Prelim UoM Consumer Sentiment

-    Jobs data disappoints, but has enough positives to keep risk appetite alive: job loss trend continuing to improve, November revision shows jobs first gain in almost 2 years, rates to remain low, good for risk assets like stocks, commodities

-    Dollar weakens as jobs data cools rate expectations, thus USD resumes role of shunned safe haven in a yield seeking market

-    The Dollar’s technical picture could change quickly

Analysis

As we’ve repeatedly reminded readers, the drivers of US dollar movements are:

  1. Fear inducing events that play to the USD’s role as a safe haven currency
  2. Data that suggest improvements in US jobs and spending, the key metrics the Fed is using to determine the pace and size of stimulus reduction and eventual interest rate increases
  3. Anything that undermines the Euro and thus almost forces a move up in the USD
  4. Here’s a new one: Sudden spikes in US Treasury Bond Yields or US inflation, which will pressure US interest rates higher regardless of what the Fed wants. We already saw hints of this last week, as the Fed warned banks to prepare for higher default rates arising from higher interest rates. NB: Demand for US Debt has been waning among the usual foreign buyers, making the Fed itself among the largest purchasers. That can’t continue without raising rates in order to draw buyers. Hard to time when that will happen, but when it does, that should up expectations for US short term rate increases and propel the dollar higher. So watch T-bond prices and TIC (Treasury International Capital) data, which shows whether foreigners are net sellers or buyers of long term US debt. As of October data, they were sellers. That means bond prices must drop in order for yields to rise enough to bring back buyers.

 

Official ECB warnings that it would not bail out Greece gave us a small dose of #1 and #3. Greece’s recent moves to reduce its debt did not satisfy the ECB, thus the warning. There is still a year to go before the ECB raises lending standards to a level that would make Greek government bonds unacceptable as collateral, so markets recognized that this was just an opening gambit in the coming Greek drama that will play out over the current year.

As we noted last week, the latest NFP and employment rate reports were a potent form of #2, and set the tone for the USD for the near term. The key facts:

  • In December the US lost 85K jobs vs. a forecasted loss of about 10K or less – disappointing
  • However, revised November figures showed the US actually gained 4K jobs, breaking an almost 2 year string of job losses
  • The unemployment rate remained unchanged at 10 percent but the 590k decline in household employment suggests that it would have been higher if not for workers dropping out of the labor force.
  • In addition to the weak employment report, consumer credit also fell by a record $17.5B in November as banks reduce lending and consumers cut borrowing.

 

What It Means:

The key point: The resulting sell-off in the U.S. dollar, drop in bond yields and rally in U.S. stocks tell us the Federal Reserve won’t be raising interest rates anytime soon. For now, that removes the US dollar’s improving fundamentals appeal, and leaves it to trade in the near term mostly as a low yield safe haven currency, sold when markets feel good, bought when they’re scared. Until there is more good short term news about US jobs or spending, we can expect the US dollar’s outlook to move opposite that of risk assets like stocks and commodities.

Though disappointing, the job loss was still the second best in 2009. Combined with the positive revision for November, the past months do confirm that the trend in US job losses is improving, as illustrated in the following chart from the Bespoke Group in their article: NFP: Beggars Can't Be Choosy.

 

US Employment Trends    03 jan 10 home

This means interest rate increases and tightening can’t be ruled out. That provides both:

  • A degree of restraint on US dollar shorting, as does lurking threats of further sovereign debt troubles

 

  • A background against which the dollar could rally quickly, when the next positive jobs and spending data hits the markets, because the bottoming is already happening.

 

However, the theme is still “fewer job losses” rather than the hoped for beginning of sustained jobs growth, which in turn dampens expectations for the rate and extent of stimulus exit and rate increases.

Thus the most likely source of news prompting  a reversal in the dollar’s decline remains events #1,3, and 4 above.

 Events & Positioning For the Week Ahead

 

Expect more volatility in the U.S. dollar in the week ahead with the trade balance, Federal Reserve Beige Book report, retail sales consumer prices, Empire State Manufacturing Survey, industrial production and consumer confidence numbers due. All but the first could influence sentiment about dollar fundamentals.

The fact that consumer spending is expected to be strong following the solid ICSC and Redbook chain store sales reports may be part of the reason why the dollar did not see a larger decline Friday. Higher oil  prices could also prop up inflationary pressures while the improvements in the labor market could bolster consumer confidence. Meanwhile the most recent COT report of this past Tuesday showed futures traders going for risk, as they increased their short EUR/USD, GBP/USD and long USD/JPY positions. It is likely that they have reduced those positions following today’s NFP report. However, despite the resilience of the dollar earlier this week, futures traders increased their long AUD/USD and short USD/CAD  positions. This suggests that if the dollar continues to sell off in the coming week, the EUR/USD could see steeper gains than the AUD/USD.

 

 

 

 

Euro Weekly Outlook: Range Trading For Now vs. the US Dollar,  Risk Ahead of European Central Bank, EUR/USD Breakout Coming?

 

Summary

Fundamental Forecast for Euro: Bullish

-    Events: Mon- French Industrial Prod., Thurs- Industrial Production m/m, ECB Press Confr., Minimum Bid Rate, Fri-CPI y/y, Core CPI y/y

-    Euro Zone Unemployment hits 11-year high, Euro falters

-    Retail Sales also disappoint, raising concerns ahead of ECB

-    Top event risk will be European Central Bank in the week ahead

-    Ongoing Greek Tragedy: Markets shrug off ECB warning of no bailout help as part of ongoing bargaining

-    Euro prevails over USD this week as the lesser of evils. EUR/USD trend Changing with news events, risk appetite

Analysis: EUR/USD Breakout Coming?

The combination of positive Euro-zone economic data and weak U.S. data has helped to the EUR/USD  erase Thursday’s  losses. Over the past few weeks, the EUR/USD  has been trading in a very tight range and we believe that it may be primed for a breakout. The monetary policy announcement from the European Central Bank could be the catalyst.

Overall, recent data s suggests that the European Central Bank may be a tad more hawkish next week which would be positive for the euro.

Though there is always the looming threat of more bad news about Euro-zone credit ratings. Past statements, including the most recent one by ECB member Stark about no bailouts for Greece, suggest the ECB remains more worried about inflation and keeping the core economies healthy than in propping up basket-case economies that may be beyond help.

Meanwhile the Swiss Franc continued to rise against the euro despite an increase in the Swiss unemployment to 12 year highs. Although the Swiss National Bank’s pain threshold may have increased, we won’t pass judgment on this until they fail to come into the market when EUR/CHF  breaks their intervention level of 1.46.

See our  Daily Outlook for updates on EUR/USD trading opportunities.

Japanese Yen Weekly Outlook: Conflicting Yield Trends

 

Summary

Japanese Yen Outlook: Neutral

-    Events: Wed- Core Machine Orders

-    Threat of BoJ Intervention Weighs on Yen

-    Yen Technical Positioning Ambivalent vs. US Dollar After US Jobs Reports Clouds Relative Yield Expectations

-    Speculative Sentiment Suggests to Yen Weakness

-    USD/JPY to move with the yield difference between US and Japanese government bonds – but the direction of those movements is not clear: US jobs data suggests low rates, but so does the new Japanese MoF ‘s bias

Analysis

It is unclear which one of these relationships will prove dominant in the near term. If the initial reaction seen in the 10-year bond spread sees follow-through in the week ahead, USDJPY is set to decline. Alternatively, if short-term rates take center stage that should encourage a repositioning of carry trade portfolios away from a short-USD to a short-JPY bias, leading USDJPY higher.

British Pound Weekly Outlook: Limited Event Risk, 200 SMA Resistance

 

Summary

Fundamental Forecast for British Pound: Bullish

-    Events: Mon- BRC Retail Sales Monitor y/y, RICS House Price Balance, Tues- Trade Balance Wed- Mfg. Production, NIESR GDP Estimate

-    Bank of England’s rate decision yields no surprises: rates and QE program unchanged

-    UK Nationwide consumer confidence fell by most in over a year

-    UK mortgage approvals, manufacturing PMI suggest economy still recovering

Swiss Franc Outlook: Still Bullish Despite Economic Disappointments

 

Summary

Swiss Franc Outlook: Bullish/Neutral

- Events: Mon- Retail Sales y/y, Fri- PPI m/m

- Swiss Unemployment rate hits fresh highs

- Swiss Consumer Price Index rises less than expected

Canadian Dollar’s Tight Link To Oil Still The Key

 

Summary

Canadian Dollar Outlook: Bearish, given oil’s chances for a pullback

-    Events: Mon- Housing Starts, Building Permits m/m, BoC Business Outlook Survey, Tues- Int’l Merchandise Trade m/m, NHIP m/m

-     Canadian Dollar, along with Australian and Canadian Dollar gains vs. US dollar

-    Canadian job data disappoints, shows drop of 2,600 jobs vs. a forecasted 20K gain, led by manufacturing sector

-    Ivey PMI showed an unexpected pullback in the manufacturing sector to 48.4 from 55.9

-    Watch Crude Prices (60% of USD/CAD volatility), S&P 500 to gauge direction

-    BoC Intervention unlikely in the near term

Australian Dollar Weekly Outlook: Testing 2009 Highs on Rate Expectations

 

Summary

Australian Dollar Outlook: Bullish

- Events: Sun ANZ Job Ad m/m, Mon-Home Loans m/m, Wed- Employment Change/Rate,

- Manufacturing Falls Unexpectedly

- New Home Sales Improves in November

- Building Approvals Beat Forecasts

- Retail Spending Surges Higher

- Solid Fundamentals Spur “Rate Expectations” pushing the AUD/USD to new highs, as long as risk appetite holds up

New Zealand Dollar Outlook: Tracking the Aussie, Risk Appetite

 

Fundamental Forecast for New Zealand Dollar: Bullish

 

-   Events: Mon-NZIER Business Confidence, Wed-  Building Consents m/m, Thus- NZ Card Spending m/m

-    Risk trends quiet for yet another week. Pressure continues to build for an eventual breakout

-    Is the NZDUSD recent rally a true reversal or a temporary correction?

DISCLOSURE: NO POSITIONS