NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL DETAILS GO TO http://fxmarketanalysis.wordpress.com/ AND SELECT " Analysis, Key Events, Trends, Trade Ideas " FOR TODAY
Stocks: Prior day: Asia, Europe up, US down. Today: Asia up, Europe up. Risk rally that began Friday has failed thus far this week with the apparent stoppage of central bank support for the Euro, though stocks and risk assets are bouncing significantly higher today. No fundamental change however, to suggest this is anything more than a short bounce on bargain hunting.
- US Bonds: An overall drop in risk appetite this week has driven yields on benchmark 10 year treasury bonds down from a multi-month low near 3.10% last Friday to 2.180%.
- FX: Overall bias against safety currencies [JPY, USD, CHF in order of
safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GB in order of risk
appetite appeal], mostly according to a currency’s place on the risk spectrum, with the JPY, USD, CHF among the weakest and the commodity dollars the strongest. The big exception: the EUR was weakest of all over the past day.
- Main events: MON: USD Existing Home Sales, Consumer Confidence TUES: NZD Inflation expectations q/q, GBP Revised GDP, WED: USD Fed Chairman Bernanke Speaks, Core Durable Goods+, New Home Sales+ GBP Nationwide HPI, THUR: AUD Private Cap. Expenditure q/q, GBP CBI Realized Sales, USD Prelim GDP, Unemployment FRI: CHF KOF Economic Barometer
Big Theme: Risk Appetite Off again? Virtually all risk assets attempting a bounce today, most traders believe the risk rally is just another short term technical bounce, Expect the EUR and other risk assets to retest support levels UNLESS we get some serious news on the stabilization of the EU crisis, possibly in the wake of US Treasury Secretary Geithner’s trip to the UK and Germany.
US: Down- Stocks moved up over 1% higher early Wednesday on momentum from the prior session, but a lack of leadership and any significant fundamental improvement in markets caused stocks to roll over and settle with a loss.
The lack of a guiding force left stocks susceptible to a slide in the euro, which was cut to a 1.4% loss. The euro settled at session lows under the 1.22 level, or fractionally above its four-year low. Meanwhile, stocks closed with broad losses near their own session lows.
The euro's weakness comes amid continued concern about the fiscal health of several European countries. These have been stoked by the nationalization of more Spanish banks, and reports that Greece is trying to change the terms of its austerity program. As such, risk related to sovereign debt markets may act as a caveat to OECD GDP forecasts for 2010 and 2011, which were recently increased.
Volume was strong once again. More specifically, trading volume on the NYSE was close to 2 billion shares. Typical trading volume on the NYSE has been closer to 1.2 billion shares per session over the past 200 sessions.
US Bonds: Treasuries were unable to fully recover from their early session downturn. As such, the benchmark 10-year Note settled with a near 10-tick loss, with a yield of 2.180%, still well below Monday’s 3.222% yield. The 5-year Note fell roughly seven ticks after an auction of 5-years attracted a bid-to-cover ratio of 2.7 and an indirect bidder participation rate of 40.6%. The prior auction attracted a bid-to-cover closer to 2.8 and an indirect bid rate of 48.9%.
Asia Stock Outlook: Up at the close Thursday. Nikkei average came off a six-month low to jump 1.2 percent on Thursday in its best one-day performance in two weeks, with a weakening of the yen against the euro helping counter persistent concern about Europe's debt crisis. Given that there has been no change in the fundamentals driving markets lower, we see this as a short term reaction bounce at most.
European Stock Outlook: Up – European shares rose in early trade on Thursday, tracking gains in Japan, and after China denied a report it was looking to cut its holdings of euro zone sovereign debt. The move appears to be on bargain hunting as many consider equities oversold in the short term. Given that there has been no change in the fundamentals driving markets lower, we see this as a short term reaction bounce at most.
Commodities Outlook Wednesday and early Thursday trade GMT: Up- Energy and precious metals both moving higher over the past 24 hours
Crude Oil Daily Outlook: Up- at the close Wednesday 0.46% to nearly $71, surging Thursday to nearly $73 per barrel in mid day European trade GMT. Oil's advance is coming despite a much larger-than-expected weekly inventory build of almost 2.5 million barrels.
Gold Daily Outlook: Up- Futures higher closed up 0.16% Wednesday to $1215.30, down slightly to $1211 in early Thursday trade GMT.
Volatility in the Euro is driving gold, thus a mild rally in the Euro over the past day has predictably stalled gold’s rally, and also that of the USD.
On Monday we said:”With no near term inflation threat and a rising USD, gold’s short term prospects appear largely tied to anxiety about the value of the EUR, which is widely believed to have lots more downside ahead as all the fundamental weaknesses driving it lower, particularly relative to the USD, remain in place for now. Thus more EUR weakness is likely to support gold even as the USD strengthens. Both are moving in the opposite direction of the Euro. See The Must Know Truth About Gold for more on how to understand gold’s likely moves.
This relationship has played out exactly as we noted, note how the EUR began to weaken May 20th, and gold reacted by moving back up (no other explanations for gold’s move). Expect gold to continue to move up as the EUR falls.
As of this writing at 8:45 GMT, the Euro is attempting a bounce, and not surprisingly, gold’s rally is stalling out.On the other hand, if there is renewed central bank intervention to prop up the EUR, expect gold and the USD to pull back.
Similarly, any anticipation of coordinated intervention to support the EUR may transition a decline in GOLD/EUR into GOLD/(other currencies). Should the EUR catch a bounce, we suspect support for gold will be in the $1160-$1200 will continue unless there is new EUR weakness or strength. Next support zone is at the 200 day SMA around $1,120.
FOREX Daily Outlook: In Wednesday and early Thursday trade GMT: Overall bias to risk fx as seen with the USD ,JPY and CHF being among the weakest and commodity dollars strongest. The EUR remains the weakest over the past 24 hours though is attempting a rally today.
US Dollar Daily Outlook: Up vs. the EUR, JPY, down vs. the AUD, CAD, NZD, CHF, GBP. The USD losing ground vs. all major fx except the JPY in early Thursday trade, suggesting a risk asset rally is under way.
Euro Daily Outlook: Down vs. all since Friday and continuing all this week into today, though it is attempting a reaction bounce higher early Thursday off of strong 1.2200 support. Reports that, contrary to rumor, the Chinese are not seeking to reduce EUR exposure in their forex reserves have also helped the modest rally, which is weakening as of 10 am GMT. With no improvement in the EUR’s underlying fundamental weaknesses, we expect the EUR to head back down to test recent support around 1.2200 -1.2000 near term. It has already broken 1.2400 support Monday and remains well below it, currently around 1.2261. The Euro has ceded about half of its gains from earlier today.
Yen Daily Outlook: Down vs. the USD, CHF, GBP AUD, CAD, NZD up vs. the EUR. Losing ground on what appears to be a technical, reaction bounce risk asset rally.
British Pound Daily Outlook: Up vs. the EUR, USD, JPY, CHF, NZD, down vs. the AUD, CAD.
Australian Dollar Daily Outlook: Up vs. all-the USD, EUR, JPY, GBP, CAD, NZD, CHF gaining vs. all majors over the past 24 hours, weakening against the CAD, up sharply against the safe haven CHF, JPY, USD. The move appears prompted by the risk appetite bounce, as whatever AUD news has come out over the past day has been negative, though comments from the Government that the mining tax might be overdone could help. In sum, unless we get a double dip recession across the globe, the move in the AUD appears to be overdone.
New Zealand Dollar Daily Outlook: Up vs. all except the AUD, CAD
Canadian Dollar Daily Outlook: Up vs. all except the AUD
Swiss Franc Daily Outlook: Down vs. all except the USD, JPY, EUR, as most fx behave according to their place on the risk appetite spectrum.
CONCLUSIONS & Big Picture: Risk assets rallying thus far to today (11:00 GMT), though most traders believe the rally to be a reaction bounce. Even the Euro is attempting a bounce though the EURUSD had ceded about half its earlier gains already.
DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.