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September 6th – 10th Quick Review/Preview: Stocks, Commodities, Forex



 

As noted last week, expectations were so low that stocks and other risk assets were ripe for a bounce if the packed economic calendar provided even minor justification. It gave us that much. Markets appear overbought given the technical and fundamental hurdles ahead.

In sum we suspect that the possibility of a deeper slowdown in the US, EU, China, Japan and the UK in the coming 6-12 months has not been fully discounted.

See September 6th – 10th: 3 Key Market Drivers Stocks, Commodities, Forex for details.

Likely Market Movers To Watch This Week

For details on these see: September 6th – 10th: 3 Key Market Drivers Stocks, Commodities, Forex

  1. 1.       Stiff Technical Resistance for risk appetite as shown on the S&P 500

    2.       Wildcards- One or More Likely But Timing Unpredictable

    a.       EU Sovereign Debt/Bank Crisis

    b.        China Bubble Burst

    c.        US Double Dip

    3.       Calendar Events: Light Week But Central Banks Could Stir Markets

 

STOCKS – Unless Rally Rises Another 6%, Probably Just Another Reaction Bounce/Shorting Setup

 

Given the layers of technical resistance that lie ahead for equities, detailed in September 6th – 10th: 3 Key Market Drivers Stocks, Commodities, Forex, it will be difficult for stocks to climb more than about 3%  (brings stocks to resistance levels that have held since May) without significant fundamental improvement.  Next week’s light economic calendar is unlikely to provide the needed fuel.

Still, with summer officially over and full liquidity returning, the big players have an interest in trying to get a run higher in order to build shorts positions by selling longs to the dumb money before the market rolls over again, so maybe even 6% higher. For reference, that’s about 1170 on the S&P 500. In that area, there is double layered resistance comprised of both the down trend line dating back to June 2008 and the upper Bollinger Band. Most major indices show a similar array of resistance.

 

Briefing.com 13sept05

US Bonds

 

Given the rally in risk assets this week, the benchmark 10 year note fell, with its yield rising from around 2.440% at the beginning of the week to about 2.72% at the close Friday.

COMMODITIES

 

Oil

Oil typically tracks or even exaggerates the moves in stocks. Pressured this week by rising refined products inventories, however,  oil did not beat or even match the above percentage gains in equities this past week, and was little changed on the week. If stock markets continue to rally or even hold their ground, , oil could well stage a ‘catch up’ rally on pure speculation.

Gold & Silver

Continued higher, probably on lingering fears about the EUR, aided by a weakening USD

Silver jumped as it made its anticipated catch up rally to gold, aided by improved data, which favors silver because it has more industrial uses. Silver tends to outperform gold when manufacturing strengthens.

 

Oilngold.com  14sept05

CURRENCIES

 

The advantage this past week was with the riskier currencies overall, though the majors did not stick strictly to their place in the risk hierarchy. BoJ attempt to intervene backfires, further boosts Yen as markets convinced BoJ can’t do much to stop the JPY. CHF remains the strongest near term safe haven

US Dollar Weekly Outlook: Good US Data Not Good Enough To Lift the USD

 

US Dollar Bias: Neutral/Bearish for the coming week

-Good US data boosts risk appetite, hurts USD. Really good jobs data could lift USD along with risk appetite, but clearly the report was at best another ‘less bad’ month, beating already dour expectations

-With no major improvement in underlying fundamentals or rate increase expectations on the horizon, risk aversion, especially from the EU that hurts the EUR, is the USD’s best hope for further rallies

-Thus the big question for the USD: Will EU austerity fail before US stimulus erodes debt market confidence in the USD. If not, USD in deep trouble. If so, USD has major upside ahead

-Large specs remain overwhelmingly long the USD by almost 8:1, small specs by about 2.5:1

-EURUSD likely to test 1.3000 as long as risk rally remains on

-USD could get boost if BoJ tries unilateral intervention as USD is most popular JPY cross, USDJPY about 13% of all fx

Euro Weekly Outlook: Bouncing Higher With Risk Appetite, Supportive China Comments

 

Euro Bias: Bullish while stocks can avoid a drop

-China again reminds markets it wants to diversify out of USD into the EUR, a big long term plus as long as EU can avoid another eruption of EU debt/banking crisis and China real estate bubble can be deflated slowly without destabilizing its own banks and sucking away Chinese capital from EU investment

-Per latest COT report large speculators slightly short the Euro, small ones evenly divided

-EUR remains vulnerable to new eruptions of EU sovereign debt/banking crisis, spiking PIIGS bond and CDS rates reveal EUR credibility still shaky, and likely to limit upside until EU can address fundamental problems- credible way to heal PIIGS, enforce fiscal discipline

-China support could prove critical as long as China can avoid its own banking crisis

-BoJ intervention likely to benefit the USD more than the EUR given that the USDJPY is much more widely traded than the EURJPY

Japanese Yen Weekly Outlook: Intervention Threat Grows As USDJPY Nears 80 And Crowded Long Positioning  Vulnerable

Japanese Yen Bias: Neutral

-See Coming Yen Intervention -Why, When, and What Could Reverse Its Uptrend for full details

-Per latest COT report large speculators remain long by 5:1, whereas small ones are net short about 1.5:1, a bullish indicator for the JPY

-Despite BoJ apparent impotence to stem JPY rise on risk aversion, record JPY longs make easier for BoJ to spark at least a short term JPY drop, USD likely biggest beneficiary as it is a funding currency for JPY longs and the USDJPY comprises about 13% of all forex trade, meaning a drop in JPY pushes up the USD more than any other JPY cross

-If risk rally can continue, it will likely lower the JPY, avoid intervention for now, squeeze out overcrowded Yen longs

British Pound Weekly Outlook: Poor Mfg, Service Data, Rising Risk Appetite Hurt GBP,

 

British Pound Bias: Neutral

-BoE rate statement, asset purchase expected to produce no surprises, but changes in asset purchase facility could move the GBP, as austerity may force BoE to further stimulus

Swiss Franc Weekly Outlook: Risk Rally Hurts CHF, Which Remains Strongest FX Since May Even Vs. the Yen

 

CHF Bias: Neutral short term, bullish once risk rally fades

-Past week’s risk rally halts CHF rise, but is becoming the favored safe haven as it’s got the better underlying fundamentals than the JPY or USD

-Thus likely to be one of if not the strongest fx as long as global recovery struggles over the coming years, especially in times of crisis, though tie to EU could hurt when EU crises erupt

-This past week both GDP and retail sales beat expectations-retail by double the forecast +4.8% vs. +2.3% forecasted

-Per latest COT report both large and small speculators remain long by about 2:1 margin

Canadian Dollar Weekly Outlook:  Risk Appetite, BoC Rate Decision Key

 

Canadian Dollar Bias: Bearish

-GDP disappoints

-Rate increase of 0.25% expected, if BoC disappoints CAD likely to drop

-Though strong moves in risk appetite/aversion likely to be more influential than the BoC decision

-Per latest COT report, the biggest increase in fx futures was large speculators (smart money) selling CAD long contracts and switching to the short side, a bearish indicator, confirmed by small speculators (dumb money) holding the largest percentage of long contracts

-Canadian jobs reports may also be influential

-USDCAD technically a mixed bag: remains in upward channel, though has broken below 38.2% fib retracement

 Australian Dollar Weekly Outlook: Prime Beneficiary of Risk Rally

 

Australian Dollar Bias: Neutral

-GDP, trade balance data beats expectations, raises rate hike expectations

-Per latest COT report large specs still long 5:1

-Open interest not growing for AUD futures despite its rally – does this reflect lack of confidence in risk rally, or just sated long demand?

New Zealand Dollar Weekly Outlook: As Usual, Going With Risk Flow

 

NZD Bias: Neutral

-Per latest COT report large speculators still long NZD futures by about 2:1

-As always, rises/falls with risk as AUD proxy

-Data not good this week, falling business confidence first trade balance deficit in 7 months.

Conclusion

 

Light calendar and strong resistance likely to limit stocks and other risk assets to 3%-6% further rally at most. A tradable move yet. Light economic calendar lacks the fuel for much rallying, though smart money returning from vacation has motive to try and push risk rally as it builds short risk positions. New stimulus may also give rally a bit more time. Expect most fx to follow stocks. though

DISCLOSURE & DISCLAIMER: NO POSITIONS, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER