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FOREX, COMMODITIES, STOCKS Outlook 1/14: Inter-market Analysis Key Events, Trends, Trades


 

NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL ANALYSIS AND CHART ILLUSTRATIONS OF RECOMMENDED TRADES  SELECT "DAILY OUTLOOK" FOR TODAY

- Stocks: Prior Day: Asia down, Europe mixed, USA up, Today: Asia, Europe up,

- FX: bias against safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], US Dollar down as jobs data defers stimulus exit, interest rate increases

- Events THURS:JPY Core Machinery Orders m/m-, AUD: Employment Change & Rate ++, EUR: Min. Bid Rate, ECP Press Confr, USD: Core Retail, Retail sales, Intel earnings, FRI: USD Core CPI, CPI m/m, Prelim UoM Sentiment, JP Morgan-Chase earnings

- Big Theme: ECB statement, US retail sales and Intel earnings dominate news Thursday. Many at Good Entry Pts SEE – SEE RECOMMENDATIONS BELOW FOR THE COMING DAYS

STOCKS

US: Despite Fed warnings that credit quality is worsening and a lack of any genuinely positive data, stock again showed resilience, with broad-based buying that brought back stocks from sizable prior session losses to near their 52-week highs.

Asia: Share markets in Asia rebounded on Thursday as rebounding shares in the US helped ease worries that China's policy tightening would slow its demand, while strong Australian jobs data raised expectations of a February interest rate hike and boosted the Aussie dollar.

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European Stock Outlook: European shares advanced for a second straight session on Thursday, led higher by banks and miners, ahead of the European Central Bank's rate decision and more earnings results this week from U.S. companies.

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ASIA- DOWN N225I -1.32% HS -2.59% SSEC -3.09% FTSTI -0.24% AORD -0.64%
EUROPE Mixed FTSE -0.46% DAX +0.34% CAC +0.02%  
US- UP S&P +0.83% DJIA +0.50% NASDAQ +1.12%    
THIS MORNING UP N225I +1.61% HS -0.15% SSEC +1.35% FTSTI -0.24% AORD +0.60%
UP FTSE +0.65% DAX +0.66% CAC +0.56%  

Commodities Outlook: Steady Wednesday and unchanged in early Thursday trade.

Crude Oil Outlook: Steady Wednesday and unchanged in early Thursday trade, as oil may have found support near $80 despite much larger than forecasted US inventories.

Gold Outlook: After range trading in Asia and Europe, markets turned upbeat in US stock trading hours as gold followed stocks modestly higher. Gold was helped by a Fed Beige book that did not show enough improvement to raise expectations for stimulus exit or interest rate increases, increasing the chances for inflation and thus boosting gold demand.

FOREX Daily Outlook: Declining stocks betray falling risk appetite, boosting safe haven currencies, especially the Yen, as well as the US dollar and Swiss Franc.

US Dollar Daily Outlook: Weakened further Wednesday, losing ground to all majors except the Yen in as rising stocks reflected a bias to risk assets and thus higher yield currencies. Today's Core Retail and Retail sales data are the most important releases of the week for the USD. After last Friday's disappointing jobs reports, the dollar's best hope is for better consumer spending, which would also raise expectations for the timing and extent of stimulus exit and rate increases.

Euro Daily Outlook: Although the euro rose against the U.S. dollar, it gave back much of its earlier gains. The profit taking can be can be partially attributed to concerns about how Greece’s problems will affect tomorrow’s European Central Bank monetary policy decision.

The ECB is not expected to alter interest rates but any hints that fiscal problems influence monetary policy could hurt the euro. The ECB's perceived hawkishness relative to the Fed and BoE has been one of the underlying strengths of the euro.

Yen Daily Outlook: The USD/JPY remains in a clear uptrend with risk appetite. Data this week has been mixed. Wednesday data indicated business activity and capital spending may be improving.However, Thursday's data has been distinctly negative, No more data from Japan this week, so Yen movements will depend on news from elsewhere, particularly US Thursday's retail sales and Intel (NASDAQ:INTL) earnings results, and Friday's results from Core CPI, Prelim University of Michigan Sentiment data, and most importantly, JP Morgan-Chase (NYSE:JPM)

British Pound Daily Outlook: rose the most in two weeks, extending gains for the fourth straight day vs. the USD, and also advancing against the euro. Wednesday's economic data was mixed. The BoE officials have not been upbeat. In sum, the GBP may simply have the least downside threats for now. There are no U.K. economic releases for Thursday, meaning it should move with the EUR in response to the ECB reports today, and the GBP/USD with US retail sales results.

Australian Dollar Daily Outlook: Rising against everything in yesterday as rising stocks showed risk appetite was on an thus the Australian dollar, the highest yielding major currency, was bound to be the prime beneficiary. In early trade Thursday the Aussie got another huge boost from blow out jobs figures, which raise expectations for yet another rate hike from the RBA at its next meeting in February.

New Zealand Dollar Daily Outlook: Rising very modestly vs. the US dollar over the past 2 days and continuing to do so given rising stocks and risk appetite, its status as the second highest yielding major currency, and its tendency to move with the AUD.

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Canadian Dollar Daily Outlook: Gaining on the US dollar despite oil's weakness, suggesting more gains to come. Perhaps Wednesday's gains were due to MoF Flaherty's upbeat outlook, that the countries deficit is shrinking and will turn to surplus.

Compared with the US, UK, and a large swath of the Euro-zone, all of which are dealing with ballooning deficits, Canada looks far healthier, and its banking system avoided exposure to the subprime debt market, leaving its housing sector healthier as well.

Swiss Franc Daily Outlook: The USD/CHF is up slightly in early Thursday trade and remains in an extremely tight trading range in the past three sessions.

CONCLUSIONS: S&P 500 and other major global stock indexes beginning to test support levels and pull back in the wake of poor Alcoa earnings and China monetary tightening. Still near new highs. Near term direction likely to be driven this week by regularly scheduled releases and the beginnings of Q4 US earnings,. See below for specifics on the S&P 500, CRUDE, GOLD, EURUSD, NZDUSD, USDCAD, USDCHF, and GBPUSD

BIG PICTURE: Bias to Risk Appetite:The S&P 500 and other major stock indexes remain in up trends, thus our longer term ambivalent bias is long on risk assets like stock indexes, commodities, and higher yielding currencies, though as stimulus programs end in mid 2010 and mortgages reset higher we are skeptical about the rally's long term health. Meanwhile, play the uptrend. Because we suspect that the Euro-zone's debt travails are far from over, and that some key commodities are still overpriced, our longer term bias is to believe the USD trend up still has room to run. Friday's NFP deferred that for now, and the current trends are anti-USD, pro risk assets (stocks, commodities and high-yield currencies). Beware that the USD trend could resume upon news of any of the 4 "dollar driver" types: fear event, positive US jobs or spending data, anti-EUR data, or falling Treasury bond prices (increases US bond yields, interest rates. Big name earnings reports (see Top-Summary-Main Events are also likely to influence sentiment.

For any trades we try to select only those trades with resistance/ profit targets that are 2-3 times farther from the entry point than the stop loss, for a 2:1 or 3:1 reward/risk ratio.

SPECIFIC TRADE RECOMMENDATIONS:

S&P 500, Other Major Global Stock Indexes:

Advice: Earlier we recommended avoiding long plays until it hits stronger support or breaks decisively above 1120. It did that and continues its steady rise. Stocks still managed to rise despite disappointing US jobs reports, suggesting that risk appetite is both resilient and that the belief in growth and higher valuations is alive and well for now. Currently back around 1142, and again in its Bollinger Band buy zone (the upper 2 bands).

The safer move is to wait for a pullback, like we saw on the 12 preferably to some kind of support level, and then jump in when that reverses, as happened yesterday. However, we urge those long on any risk assets to keep tight stop losses in place, given:

· The potential time bombs that continue ticking under the US banking and housing sectors, as well as in

· The Euro-zone sovereign debt default threat area –Update: Portugal received a warning about another downgrade from its current A+ rating following a downgrade January 21 2009.

· The Fed has now warned banks to get ready for rising rates and the certain increase in mortgage defaults. Stocks do not tend to do well in an environment of rising rates

· The very real falling demand for US Treasury bonds, which the US must keep issuing, and thus the very real incentive for Washington to allow stocks to crash a bit and drive up US T-bond demand (hat tip to Graham Summers for that observation).

Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", always take a look at the daily chart (or other relevant timeframe to the style you trade) for a picture of overall risk appetite or aversion. The current picture is bullish/long but the move may be losing momentum and flattening out.

S&P 500 Daily AVA FX Chart (02 Jan 14 )

** GOLD: Commentary: Recovering about half its losses from Tuesday Wednesday, steady thus far Thursday. Will continue to move with sentiment, which in turn is moving with US earnings reports and major news items. Yesterday's drop shows the amount of short term speculative anti USD hedges involved that will run if trouble. Conservative traders will be cautious about new positions until the theme of US earnings season (and market reaction to it) clarifies.

Trade Suggestion: Long: Conservative traders should avoid longs for now until it either retests and holds near the the 50% Fib level at $1125.41, or breaches price resistance at 1154 for a target exit around the 23.6% Fib level at 1175.75

We do not recommend opening new shorts until gold breaches the 50% Fib support level with a stop just above your entry point (with then a target exit near 1103, the 61.8% Fib level, OR after gold tests and fails to break over the 38.2% level around 1148.

Gold is moving opposite the dollar, so watch the EURUSD and S&P 500 for indications of gold's near term moves. Also watch the S&P 500 and other major stock indexes and news to see if risk appetite gets a lift from improving spending, jobs, or other data that ALSO boosts USD stimulus exit and interest rate expectations, thus supporting the dollar and driving down gold.

Gold Daily AVA FX Chart (03 Jan 14)

Crude Oil: Virtually unchanged since yesterday, sitting right at the 38.2% level, a great entry point long or short with stop loss within about 30 pips. Crude is volatile, so best to accept being stopped out and then just jump on the trend in the other direction. Will move with risk appetite and the dollar, which for Thursday rests with:

The ECB statement: Recommendation: IF upbeat- Consider going long with target near recent highs and stop loss just below your entry point. Rational: good for the euro, growth, bad for the USD, and thus bullish for crude oil). The opposite applies if the ECB is gloomy or sounds dovish, which would likely undermine the EUR and boost the USD. The short target exit point would be just before the next Fib level down (38.2%), with stop loss just above the entry point. Again, Oil can be volatile, so keep the stop loss close, accept the higher risk of being stopped out, and then just jump in on the other side.

Retail sales: (likely to affect both crude and the USD the same way, since spending is a key metric the Fed is watching for deciding the pace and extent of QE exit, and is also pro-growth and good for oil. Thus harder to call this one, though it would benefit the dollar more because it is much more beaten down than oil, which is near 12 month highs.

Intel earnings: If positive, go long as per instructions above. Rational: good for growth and thus crude, but doesn't address the key jobs or spending issues that would boost the US dollar, so the dollar would likely react as a low yield safe-haven currency and weaken, further boosting oil.) If disappointing, go short oil, as instructed above

Watch the EUR/USD chart for USD movements, and the S&P 500 chart for overall risk sentiment.

WTI Crude Oil Daily AVA FX Chart (04 Jan 14)

EURUSD: Price and recommendation unchanged from yesterday: Like many of the anti-USD Forex plays, jumping higher in the wake of the weak US jobs report and weakening USD. Given the clear short term bias to risk assets shown in the S&P 500 chart above, current bias is long.

Recommendations unchanged.

Long: Wait until it breaks the 1.4600 resistance level or retests the 1.4428 (50%) Fibonacci retracement level, with stop loss just below the recently broken resistance turned support.

Short: At or near a break below the 50% Fib level, this has been stubborn resistance lately.

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.

EURUSD DAILY CHART (05 Jan 12) AVAFX CHART

NZDUSD: Price and recommendation essentially unchanged, currently at 0.7429. Recommendation unchanged. Gaining on the US dollar like all high yielding or risk currencies, but currently too close to the 61.8% Fibonacci resistance at 1.4785,

Long: Can enter around current levels 0.7420 and use the descending downtrend line as a support level to place a stop loss nearby, with a target of 0.7563 for a 3:1 reward/risk level

Short: not yet – wait until some major pro dollar or fear news breaks and enter just below the declining down trend line, placing a stop loss just above it, and with a target around the 76.4% Fib level for a 2:1 reward/risk at least.

Watch the S&P 500 and EURUSD to gauge risk appetite and USD strength. Much will depend on further news on US economic fundamentals and Euro zone sovereign debt issues.

NZDUSD Daily Chart (05 Jan 11) AVAFX CHART

USD/CAD: Following oil, so consider going LONG or short NOW near current price of around 1.0372. If you see the pair pulling back, wait until the 76.4% Fib support level holds before going long, with target at the next Fib level higher Just tested resistance, which held, so has support for oil as of early Tuesday. SHORT around the current 1.0322 level, stop loss around the 1.0368 level, target around 1.0200 for a 122/66 pip (almost 2:1) risk reward ratio. Not ideal, but given the momentum, not unreasonable to try. LONG: not until oil or the USD reverse momentum.

1.0364

USDCAD DAILY AVA FX CHART (image: 05 Jan 13)

USD/CHF: Essentially unchanged for the past 3 sessions as of the time of writing. Go long if the 50% Fib level is breached, short if the 61.8% level is breached, with stop loss just on the opposite side.

USD/CHF DAILY AVA FX CHART (06 Jan 13)

GBP/USD:

Sitting right at the 50% Fib level, great entry point long or short. Momentum is with the pound, despite lack of fundamental justification, so we focus on technical criteria. Clearly a price support resistance level here over the past 6 weeks. No major UK news for the rest of the week, so the pair should move with USD news as noted above for oil, with targets near the next Fib level above or below, with stop nearby in the opposite directions.

GBP/USD Daily AVAFX CHART (05 Jan 14)

OTHER HEADLINES

Bloomberg.com

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DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.