Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Global Stocks, Forex, Commodities Weekly Outlook 1/25 – 1/29: Key Events &; Implications

Note: The below is a quick one-stop-shop overview of what happened last week and key events and their possible ramification for the coming week in global stock, commodity, and forex markets. For full details visit http://fxmarketanalysis.wordpress.com/  for detailed articles on each  of these.


STOCKS

Participants to US Equities: Earnings Fail to Justify My Love

Stocks and other risk assets fell hard and had their worst week since the current rally began in March, prompted by:

  • Politics: Democrats’ “ electile disfunction” in the key Massachusetts Senate seat race (after 2 lost elections for governor in New Jersey and Virginia) , prompted President Obama to announce initiatives  to limit bank involvement in risky businesses  like hedge funds and proprietary trading, which, good or bad, were seen as limiting financial sector profits, and brought uncertainty over Fed Chairman Bernanke’s confirmation.

 

  • Chinese stimulus withdrawal: causing fears of reduced Chinese growth and demand, which is seen as the primary global growth driver while most of the world’s economies, including those of the US and Europe, still struggle to recover.

 

  • Earnings Fail to Justify Higher Valuations: Relatively strong reports from many Dow components, tech leaders (like Intel (NASDAQ:INTC) and IBM (NYSE:IBM)), and regional banks, were not enough to overcome political uncertainty, weak quarterly results from the critical bellwether banks (like Bank of America (NYSE:BAC), Morgan Stanley (NYSE:MS), and Citigroup), and a widespread belief that even the solid reports did not justify rising prices.

 

  • More EU Sovereign Debt Threat-Greek Debt Tragedy Act II: EZ officials find Greek financial data unreliable and its debt as a percentage of GDP much worse than previously thought, which is saying something. Highlights include 2009’s debt as percentage of GDP up from 4.33% to a whopping 12.7%. Understandably miffed EZ officials will issue “recommendations” in February, with which Greece will have 4 months to comply or face sanctions. Greece becomes a test case for how well the EU can deal with fiscal slackers, thus putting not just Greece but the very credibility of the euro on the line, as the other fiscal bad boys will be watching carefully to see how much they can get away with. This will be an ongoing major story for much of 2010. This week Greece will attempt to sell government bonds. See Beware Greek (Debt) Tragedy Act II, Could Rock 2010 Markets Worldwide for details.

 

The result: Traders fled to the US dollar, dumped commodities, and US indices plunged: the DJIA - 4.1%, the Nasdaq -3.6% and the S&P 500 -3.9%. Thursday and Friday both showed huge volume spikes, showing conviction behind the selloff. Further proof of sated risk appetite, the VIX volatility index jumped nearly 60% to just below the 28 handle by the close on Friday, its highest level since last November.

 

S&P 500 DAILY CHART Jan 22 as of the close of US trading 4:30 pm EST 10 (image: 03Jan 24 home)

As the below chart shows, the closing 1091 sits just above the 23.8% Fib level.

 

S&P 500 DAILY AVA FX CHART Jan 22 as of 8:00 am EST 12 Jan 22

S&P 500 ends Friday  at 1091 (about where the pointer ends), again on volume that’s about 50% higher than average for the second day in a row after a month of rising on below average or average volume, suggesting more conviction on the downside, which in turn suggests more to come. Bad for risk assets like stocks, commodities, risk forex, good for the US dollar, Yen, and Swiss Franc.

 

Should the 1080 level fail, a test of support is likely around 1040, where both the 38.2% Fib retracement and 200 day SMA converge.

Asia and Europe: Both regions followed the US lead and sold off, pressured by concerns over China’s monetary tightening cooling demand, Euro-zone sovereign credit troubles from Greece, and US stock valuations.

Coming Week Events & Ramifications

 

With most of the big name earnings already out, focus will shift back to economic data.

  • New US Debt Issue Looking ahead a fresh round of $118B in short term Treasury notes coupon supply is set to be auctioned this coming week. Though the sale is no larger overall size from the December auctions, the results will certainly be watched closely in light of recent reports of declining Chinese US Treasury holdings. Also there are questions about whether the proposed restrictions on proprietary trading could have the unintended effect of hampering banks ability to participate in US debt auctions. Banks often fill client orders with their own capital and then decide whether to simply trade out of it or through or take the other side of it themselves, which would be proprietary trading. 

 

  •  
    • Ramifications: If demand is good, lower rates, good for US economy, risk assets like stocks. If not, higher short term rates, bad for stocks and other risk assets, good for the US dollar because it puts upward pressure on US interest rates and demand for dollars. Other safe-haven currencies also benefit with risk aversion.

 

  • The European Sovereign Debt Threat Continues To Unfold
    • Greek 10-year paper yields some 300+ basis points above Bunds making fresh post Euro inception highs after the Greece's Debt Agency confirmed plans to issue as much as €3B in syndicated bonds over the next two months. Tuesday's preliminary look at Portugal's 2010 budget could further stoke further fears of spiraling budget deficits, more ratings agency downgrades and increased squabbles amongst member nations.

 

  •  
    • Ramifications: If debt sales go well and the euro-debt crisis looks more resolvable, good for the euro and risk assets and risk appetite as threats to the EZ economy appear to lessen. If not, the opposite as risk assets drop and safe-haven currencies jump. Very good for the US dollar, which benefits both from rising fear and a falling euro. The EUR/USD is about 30% of all forex trade, so the two currencies force each other to move in opposite directions like two children on a seesaw.

 

  • Other Events: If better than expected, these should support risk appetite and thus stocks, commodities, higher yielding and commodity currencies, and the euro. If not, more upside for safe-haven currencies like the US dollar.

 

  • GDP: Expected to Rise by 4.2% from 2.2% in Q3.
  • FOMC Meeting: No dramatics expected here, in terms of rates or wording.
  • Existing and New Home Sales
  • Conference Board Consumer Confidence: Not likely to improve until the jobs picture shows sustained improvement
  • Durable Goods Orders
  • Chicago PMI
  • Big Name US Earnings Reports:
    • Mon- AMGN, AAPL, HAL, TXN
    • Tues- GLW, DAL, JNJ, VZ, YHOO
    • Wed- CAJ,  CAT, COP GD, SAP, BA,
    • Thurs- MO, MAZN, T, F
    • Fri- CVX

 

COMMODITIES 

 

The same factors that battered risk appetite and other risk assets hit commodities too. Commodity prices dropped sharply lower across several main categories while stocks declined and the dollar rallied. Front month crude dipped below $75 for the first time in nearly a month.

Spot gold tested its 100-day moving average of $1,086 for the first time since July. The Feb contract is down nearly $50 on the week at $1,090 and traders are eyeing some key support at the $1,074 (December low, October high) and $1,050 (uptrend line from November 2008 low).

Note that gold tends to suffer in the coming months anyway, as the chart below shows.

 

FOREX

 

Overview

Given the widespread risk aversion last week for reasons discussed above, so well reflected in the S&P’s worst nosedive since the March rally began, it was a good week for low yielding currencies that benefit from unwinding risk currency positions. US Dollar, Yen, and Swiss Franc related pairs are benefiting at the expense of the euro and commodity dollars. China's stimulus withdrawal (implying other growing emerging market economies would follow), Europe’s festering credit issues,  and the US administration's latest financial industry proposals were all seen as fresh headwinds for growth.

US Dollar Weekly Outlook: Continued Rally? Watch The S&P, EUR/USD Charts, Greek Bonds, Portugal Budget

 

Summary

US Dollar Bias: Bullish

     -Key Events: Mon- Existing Home Sales, Tues-CB Consumer Confidence, Wed- New Home Sales, FOMC Statement, Rate Decision, Thurs- Davos World Econ Forum, Chicago Fed Nat Activity Index, Durable Goods, Fri GDP q/q, Personal Consumption. Also watch news on Greek bond sale, Portugal Budget for more on euro zone debt threat.

-    FOMC unlikely to change expectations on stimulus and rates until jobs, spending brighten

-    US Dollar rally on plunge in stocks, risk appetite:  Bank reforms from Democrats in response to their “electile disfunction,” inadequate stimulus from China, US earnings, S&P technical resistance, all stall the S&P 500 and risk appetite, feed the dollar rally

-    Result of the above: Dollar breaks out across the spectrum of currencies

Analysis

While the US dollar may not being showing any improvements in its fundamentals, the above mentioned events that are battering risk appetite are sending capital seeking a safe harbor fleeing to the US dollar for lack of a better alternative. As we’ve noted repeatedly for months, rising risk aversion was the most likely salvation for the USD as lackluster news worldwide suggests risk assets are at best fully priced given growth prospects, suggesting further pullbacks from which the US dollar will be a prime beneficiary.

As also noted, 2010-2011 contains plenty of time bombs ticking under risk appetite, mostly various forms of credit risk, be they sovereign, regional consumer or real estate related. We are especially concerned about the massive wave of mortgage rate resets in the US. The last wave of this size sparked the current crisis and bottoming in March 2009.

As the chart below shows, resets have hit a lull, but will be picking up considerably in the coming months to the crisis provoking levels of the past. With governments on all levels already far more in debt and well over another 10 million jobs lost since the summer of 2007, how many more bullets do they have if credit markets again freeze up?

 

(image: 01 Jan 24 h)

Events

 

In addition to the events to watch for noted above

Perhaps the most threatening event risk for the US dollar is the advanced reading of 4Q GDP due Friday. There are two peculiarities to this report. The first consideration is that considering this is a release for the end of the week, it could actually stabilize the dollar (barring any big surprises this week) as forex traders avoid dramatic changes to their portfolio before such a meaningful report.

Note that this indicator can have a still-rare direct fundamental influence on the dollar (establishing its relative strength against it counterparts)and boosting expectations for the rate and extent of stimulus exit or rate increases, boosting the US dollars’ appeal as a budding risk asset.

While there are many other indicators noted above that will weigh in as well (consumer confidence, durable goods orders, existing home sales, international events); but the only other scheduled possible market mover for the US dollar that can rival or play into the undercurrent of sentiment are the FOMC rate decision and perhaps the expected comments from the Fed’s Kohn about interest rate risk.

Regarding interest rates, we should not forget that the US dollar and Japanese yen are both vying for the unwanted title of primary funding currency. When the US 3-month Libor rate is once against at a premium to its counterpart, the US dollar will not be considered the ideal funding currency for a resurgent carry and it will still be considered a safe haven, making it less likely to drop as hard in times of optimism as it did in 2009.

As for other currencies, expect the Japanese Yen and Swiss Franc, as fellow safe-haven currencies, to move in the same direction as the dollar against most other majors. The others will move in the opposite direction, the extent of their move will depend on how well they do in times of risk appetite. The commodity dollars and the euro will suffer most on more risk aversion, and benefit the most on risk appetite. Should the coming events this week not prove market- moving, these riskier currencies could be due for a bounce.

SEE http://fxmarketanalysis.wordpress.com/ FOR DETAILS ON INDIVIDUAL CURRENCIES.

DISCLOSURE: NO POSITIONS