NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL ANALYSIS AND CHART ILLUSTRATIONS OF ALL MAJOR FOREX AND OTHER ASSSET CLASSES SEE: http://fxmarketanalysis.wordpress.com/ AND SELECT "WEEKLY OUTLOOK" FOR THE RELEVEANT ASSET
Here’s our picture of overall risk sentiment.
S&P 500 DAILY AVAFX CHART 13:23 GMT, 8:23 AM EST NB: Risk assets were again attempting to rally as of this screenshot. The Final close was 1073, another negative finish, as shown below: 01 JAN 29
S&P500 Illustrates the full reversal and loss on Friday as of the New York Close 19 JAN 30
A week of clear risk aversion, with safe haven currencies up, and virtually everything else down: high yielding and commodity currencies, global stocks and commodities.Key Events Last Week That Fed the Continued Risk Aversion
- US Earnings Season, Valuation Concerns Spark Global Stock Market Selloff: As we’ve warned readers, stocks had been overbought both from a on a valuations and technical perspective. In particular, we warned that once the S&P 500 started to pull away from its upper Bollinger Band, it tended to test to around its 50 SMA. In managed that within just 3 sessions at the end of the prior week, chopped around for most of the past week, then dove further Thursday and Friday, making this the biggest pullback for stocks, and other risk assets, since the current rally began in March 2009.
In sum, the S&P 500 and Dow Jones Industrial Average gave up about 5 % on the week, while the tech-heavy Nasdaq Composite was off 6%.
Evidence for the strong conviction behind the selling includes:
- Much higher overall volume on the down days than on the up days, especially on the last two Thursdays and Fridays.
- Selling despite positive news including: the confirmation of Federal Reserve Chairman Ben Bernanke to a second term, better-than-expected gross domestic product (OTC:GDP) numbers, and big names earnings reports like Amazon (AMZN 125.41, -0.62), and Microsoft (MSFT 28.18, -0.98), that were at least as good as those of recent quarters (when they spurred buying), as markets did not find enough to justify still higher prices for stocks.
- EU Debt Threat Continues to Pressure Euro: Although the Greek government outlined a 3-year plan to cut its deficit, currently at over 12% of the country's GDP, to below 3% of GDP as required by EU, the market doubted its effectiveness. Greece's 5-year and 10-year government bond yields rose +12.4% and+14.95, respectively. At the same time, the 5-year and 10-year credit-default swap surged to 3.73% and 3.4% respectively last week. These suggested investors are increasingly concerned about the ability of the country (as well as that of Portugal, Italy, Ireland, Spain, and others)to manage their debt loads without either massive social unrest from spending cuts, or help of EU and others.
- While we believe the EU and IMF will eventually offer some kinds of financial supports to save Greece from going bankrupt, the problem will continue to feed risk aversion, and thus boost the dollar and other safe haven currencies, while pressuring the euro and other risk currencies, stocks and commodities. Gold and oil, which are used as dollar hedges could be especially hit by a risk aversion driven rise in the US Dollar.
- Ongoing Fears of China Growth Slowing: At the World Economic Forum in Davos, the People's Bank of China reiterated its goal as to curb inflation and to maintain stable RMB. Although the government said it will 'continue with current accommodative fiscal and monetary policy', the market still expect it will step up the tightening policy. If China is to limit lending and unwind the stimulus measures, it's definitely harmful for global economic recovery. China's economy expanded +10.7% q/q, in Q4 of 2009. The IMF forecasts the country will continue to lead world growth this year.
- US GDP Beats Forecasts, Boosts Dollar, Sinks Stocks: That's because markets correctly saw the GDP figure as far less optimistic than it looks. In sum, that's because most of the improvement was due to
- Inventory replenishment: If that new stock can’t be sold profitably, it will be a drag on profits and GDP in the future
- Transfer payments from the government (and the government borrowed the money), not genuine earned income. As Carl Denninger points out in his Fourth Quarter GDP: There's Your Inventory Bounce
The amusing part of the (OTC:GDP) report is found in the personal income and outlays section:
Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter, compared with an increase of $35.1 billion (1.2 percent) in the third.
Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of $3.5 billion in the third.
Got it? People aren't earning the money, the government is handing it out. You don't pay taxes on government handouts, for the most part. There was a potential "improvement" signal in the third quarter related to tax liabilities increasing, but that has now reversed - hard - which throws a big fat rock at the concept of employment turning in any meaningful way. Instead, the "current dollar income" is being borrowed and given away by the government through unemployment extensions and other forms of handouts
- Oil and Gold, two commodities used to hedge the dollar, continued to drop.
Events And Forces Driving Markets the Coming Week
US Non-farms Payrolls And Data That Serves As Its Leading Indicators
- ADP Non Farm Payroll Report. Attempts to measure the same thing as the US Government report. Generally accurate in predicting the US NFP direction if not the exact magnitude of the change. The ADP figures have been weaker than the initially reported government number by 117K per month on average over the past 4 months. Source: Any decent economic calendar from any major financial website or broker website. My personal favorite is at www.forexfactory.com (Wednesday)
- The employment component of the service sector ISM. Over the past 10 years, the index has had a nearly 90% correlation with Nonfarm payrolls. (Wednesday)
- The employment component of the Manufacturing sector ISM. Over the past 10 years, the index has had a very strong 87% correlation with Nonfarm payrolls. (Monday)
- The 4 week moving average of new weekly unemployment claims.
- The direction of continuing claims as shown by the prior 2 reports. That is, did the most recent show greater or fewer continuing claims, and was the rate of increase/decrease greater or less when comparing the prior 3 reports. See the US Bureau of Labor and Statistics. January 28th was below expectations -470k vs. -450K, as was January 21, which showed -482K vs. -441K forecasted
- Consumer Confidence as per the Conference Board – polls 5000 families about their expectations over the next 6 months. (Tuesday Jan. 26th
- U. Michigan Consumer Confidence Survey – polls 500 people about their expectations for the next 5 years. Because of this smaller sample and longer time horizon, this report is considered less accurate than the Conference Board's report. See Friday Jan 29th economic calendar – beat expectations)
- The level of strike activity. A rising # suggests worse NFP, a falling # suggests a lower NFP. Given current conditions, has not surprisingly been near zero for some time now.
- Monster.com Employment Index (based on the # of online job ads) rising or falling. (Thursday – Monster.com)
- Challenger, Grey, & Christmas y/y Layoff Report on the number of job cuts announced by employers. Limited short term correlation with overall labor conditions. (Wednesday)
Other Potentially Market Moving Events In Currencies and Other Assets That Could Move On More Than Just Risk Sentiment:
- Sunday: ALL- WEF Meetings, CNY-China Manufacturing PMI, as markets watch for signs of growth or slowdown from China, the world’s primary growth engine.
- Monday: GBP-UK Manufacturing PMI could give hints on whether UK recovery is really occurring at all. AUD-Cash Rate, RBA Rate Statement should clarify when the next rate hike is due, could provide some support for the AUD, especially if the US Dollar is weaker at the time.
- Tuesday: USD- Pending Home Sales m/m, has considerable impact on spending and jobs, AUD Trade Balance
- Wednesday: GBP- Services PMI, another key guide to UK recovery
- Thursday: GBP- Asset Purchase Facility, MPC Rate St. Official Bank rate, could provide clarity on BoE plans for QE, rate increases and support or further feed the British Pound downtrend, EUR- Min Bid Rate, ECB press Conference: if surprises to the upside could give the Euro some support and help stabilize it after weeks of steady decline.
- Saturday: ALL-G7 Meetings
US Dollar Weekly Outlook: Jobs Data This Week The Likely Key Driver of the USD, and FX Markets
The US Dollar is involved in about 90% of all forex and commodity trade, and indirectly central to stocks as well. Here are the key points to know for the coming week.Summary
US Dollar Outlook: Bullish
- Events: SUN-WEF Annual Meetings, MON- Core PCE Price index m/m, Personal Spending m/m, ISM Manufacturing PMI, TUES- Pending Home Sales m/m, WED- Challenger Job Cuts y/y, ADP Non-Farm Employment Change, ISM Non-Manufacturing PMI, FOMC Member Warsh Speaks, Unemployment Claims, Prelim Nonfarm Productivity , Unit Labor Costs q/q, Factory Orders m/m, FRI- Non-Farm Employment Change Unemployment Rate
- Risk aversion grows on continued concerns about China tightening, EU debt worries, risk asset valuations
Fear appears deeper this time- unlike past earnings seasons, markets fail to rise even on good news of solid US corporate earnings, which instead of buying bring profit taking, IMF upgraded global growth forecast also fails to encourage markets, markets shrug off seemingly strong US GDP results as mostly inventory rebuild on recovery gamble, PCE (personal consumption expenditure) growth mostly from unsustainable government handouts
- Safe-Haven Japanese Yen, US Dollar soar on financial risk aversion
- However Swiss Franc falls as SNB attempts to keep Franc from rising vs. Euro
- EUR/USD down 8% since December dollar rally began with Dubai World Default risk.
- Worsening technical, fundamental indicators, January effect in the S&P 500, suggest further US Dollar gains in 2010 as it places well among the “least ugly” among major currenciesAnalysis
As we’ve reminded readers for months, the US Dollar is driven by four basic event types- we saw news in three of them:
- General Fear Events: We got those from concerns about China growth, risk asset valuations relative to growth prospects as global equities failed to respond to solid US earnings, GDP results, and IMF global growth forecast upgrades, as these led to profit taking rather than buying.
- Fear Events That Undermine the Euro: There were ongoing EU sovereign debt concerns, as neither Greece nor any of the other PIIGS showed signs of making real headway in resolving their creditworthiness. Japan’s downgrade by Standard and Poor’s to negative watch did not help sooth markets.
- Improving US Fundamentals: It looked like the big US GDP figure, beating estimates so well, did that, at least at first glance, though markets correctly saw that most of this was from buildup of depleted inventories and government subsidized personal consumption expenditures (PCE). Unless there is real demand for the new inventory and PCE can sustain itself, these could come back to haunt the US as excess inventory sapping profits and relapsing consumer spending while the US government is left with no long lasting growth except in its own debt levels.
Losses of 5% in the US S&P 500 and broad deterioration in financial market risk sentiment boosted the safe havens like the US dollar. A positive surprise in highly-anticipated US Q4 GDP results likewise improved expectations for QE withdrawal and rate rises for the US Dollar, giving it a rare rise on fundamentals improvement in addition to its safe-haven appeal. The US Dollar now boasts three consecutive weeks of significant appreciation vs. the Euro. Given previous bearish extremes in US Dollar sentiment and positioning, we have argued for months that the dollar could stage a major comeback through the new year, especially given the dubious fundamentals justifying the March rally in risk assets. Already we see that both the EUR/USD and S&P 500 have posted significant declines on the month, and the January Effect in stocks and currencies points to further Greenback appreciation into February and beyond.
Technical indicators also point to more gains vs. the Euro. The EUR/USD alone comprise about 33% of all Forex trade, thus these currencies push each other in opposite directions like children on a seesaw.
The pair crashed through virtually every major support level established since June, be it price or Fibonacci level, major moving averages or trend lines. In addition, the 50 day Simple Moving Average is about to cross below its declining 200 day SMA, creating an ominous “death cross” that suggests the downtrend is not to be short lived. A move to 1.3800, which would complete a full retracement of the EUR/USD’s rise since June, appears to be coming.
However, further gains for the dollar will likely demand more fear or more improvement in the US economy, as unwinding dollar shorts become less of a factor. Based upon the latest CFTC data on forex positioning in the futures markets, traders have increased their short EUR/USD positions to the highest level since September 2008. The prior week, short Yen positions were at the highest level since 2008 but the recent decline in USD/JPY has flushed out many of the short Yen and long dollar traders.
Key Events To Watch
As noted above, this first week of February is packed with economic event risk, climaxing in the critical US NFP and Unemployment report. Jobs and spending are the prime metrics by which the Fed will decide to tighten economic policy and boost the dollar, and these reports are as important in that regard as they come. Forex options markets have priced in considerable price moves in the days ahead. The critical question is how the dollar and risk appetite will respond to the results.
See the above section on key events for the coming week for a full listing of leading indicator data for gauging the likely results of Friday’s NFP and Unemployment report.
These are notoriously difficult to predict, very volatile, and prone to major revisions. Yet traders respond to the data at hand, and any significant surprises in earlier ADP Employment and ISM Services Employment Index figures could easily move markets by themselves, in addition to surprises in the market-moving Nonfarm Payrolls numbers.
Shorter-term traders should keep a close eye on the S&P 500 chart as the best overall picture of risk appetite, and on the EUR/USD and dollar index charts as the best single gauges of US Dollar sentiment. Also watch other risk barometers surrounding major news events out of the US and other large economies. We remain bullish the US Dollar on the Euro’s break below 1.40, but as we continue to note, once the EUR/USD stops climbing down its lower Bollinger band and pulls away from it, the pair tend to stage a reaction bound to test resistance levels. That’s been tried repeatedly this week in early trading, only to see the move fade towards the close in New York.
In sum, we still believe that risk assets could get come kind of reaction bounce in the near term. However, the signs remain for growth to be unsteady at best, and economic relapse into the feared “W” shaped recovery is a real threat, particularly with so many sovereign credit down grade threats in Europe, Japan, the UK, and really, the US too. Until there are more signs of self sustaining growth (vs. growth from unsustainable government spending or inventory rebuild) the US dollar rally could continue on risk aversion alone.
DISCLOSURE: NO POSITIONS