Overview: A risk-on day sparked by great China data AND a less demanding rise in capital requirements than feared from the Basel III meeting, both from this past weekend. As we noted in our weekly previews, both had the potential to fuel further rallies when markets opened Monday. With markets already in short term rally mode and just starting to hit the low end of resistance established in May, this data provides the excuse to venture a bit higher. We noted that markets could still move another 3%-6% higher. For details see September 13th – 17th Quick Review/Preview: Stocks, Commodities, Forex
None of this news was any great surprise. Until more significant resistance is breached, we continue to view the current rally as more of a reaction bounce in a longer downtrend, which will most likely come about from new negative surprises from the EU or US economies. China too has its issues but these not a factor thus far. A playable rally for very short term traders, those preferring longer term positions should wait for the reversal back down.
Both events were significant. China is the prime growth driver and thus good numbers are critical to keeping hope alive in a market that believes it has a good chance of heading lower in the coming months. The Basel III meeting could have potentially imposed higher capital requirements on EU banks which would have further limited their willingness to lend. The US wanted higher cap requirements and a shorter period in which to comply, but EU banks are less well capitalized than their US counterparts. With EU banking already suffering a crisis in confidence, the more lenient German approach was adopted.
Thus markets have reason to continue to probe deeper into recent resistance zones. Last week, despite further worrying developments in the EU, including spiking sovereign and bank bond and CDS rates, markets managed to recover and log modest gains with the support of better than expected data from the US, China, Australia, and Canada that managed to provide an excuse for a second week of low volume drifting higher. Assorted holidays worldwide also helped keep volume and volatility down.
The weaker EU nations are selling about $80 bln of bonds this month, which so far have been relatively successful except for the little detail of rising rates reflecting rising risk perception. Keep alert for news of these auction results, because if we see especially good or bad auctions that could well be the next surprise that either calms or panics markets.
STOCKS: US: Up – The major indices finished both Friday and the holiday-shortened week modestly higher on a light economic calendar and lighter trading volume. The economic reports that were released, however, helped quiet fears of a double dip recession.
The S&P 500 clawed back over the last three sessions offset a loss of 1.2% Tuesday after markets dropped on new concern about the EU after a Wall Street Journal report that EU bank stress tests didn’t adequately account for PIIGS bonds exposure. Reports of downward revisions to Greek GDP and investigations of other Greek financial misdoings didn’t help either.
Seven of the ten sectors advanced, with healthcare (+2.0%) and industrials (+1.6%) strongest. Overall trading volume was once again very light, in part due to the Rosh Hashanah holiday.
The Basel III capital guidelines were expected to be announced Sunday, feeding speculation regarding how much capital requirements would rise. According to reports, Deutsche Bank (NYSE:DB) is already planning on raising $9 bln Euros and is expected to be the first as many European banks that will need to shore up capital to meet the new Basel requirements. The financial sector slipped 0.5% for the week.
The economic calendar was light, though the weekly new unemployment claims reading brought some buying interest. Initial jobless claims for the week ended September 4 totaled 451,000, down 27,000 week-over-week and less than the 470,000 claims that had been expected. July consumer credit data showed that credit fell another $3.6 billion. Consumer credit has tightened for six straight months and in 17 of the last 18 months.
US Bonds: Down- (as of Friday) Benchmark 10 Year Note down with rising stocks. It was a volatile week with yields starting the week at 2.70%, reaching an intraweek low of 2.59% on Tuesday and then rebounding to settle at 2.79% as bonds sold off in favor of stocks.
Asia Stock Outlook: Up- Virtually all major indexes up over 1% after upbeat US and China data, as well as less stringent Basel III bank cap requirements all gave Asian stocks a boost.
European Stock Outlook: Up – Virtually all major indexes up over 1% after upbeat US and China data, as well as less stringent Basel III bank cap requirements all gave European stocks a boost.
Commodities Outlook Friday-Midday Monday GMT: Oil up sharply, softs mixed, gold down
Crude Oil Daily Outlook: Up- Futures up, holding recent gains at around $77 after testing below $73 early last week. Despite excess supply rising on both a closed US pipeline from Canada cutting near term supplies of about 7% of US crude imports, and positive data noted above that drove equities higher.
Gold Daily Outlook: Slightly Lower: Little changed from Friday, futures slightly down to $1244, and little changed since the start of last week though in between they tested up to about $1260, fractionally below their all time highs. Pressured by both a normal technical retracement after testing all time highs and lack of concern over the EU and thus the EUR. With gold near all time highs, the IMF has been taking advantage of the high prices to sell some of its remaining gold to some Asian central banks, demonstrating central bank support at these levels.
Softs: Mixed overall, with wheat, sugar higher, soybeans and coffee slightly lower.
FOREX Daily Outlook Friday-Midday Monday GMT: Clear bias to risk fx, continuing from last week as fx markets react to the risk rally. Last week the commodity dollars were strongest, the EUR, GBP, and USD weakest, in that order. Since Friday the AUD and other commod dollars strongest but the EUR is strongest thus far today and has pulled even vs. all of the commodity dollars on a combination of risk appetite and the new Basel III banking capitalization requirements being more lenient than expected. The EUR and other EZ risk assets are the prime beneficiary of that news.
US Dollar Daily Outlook: Up vs. JPY, down vs. all others. Pressured on risk rally and lack of the CHF’s better fundamentals.
Euro Daily Outlook: Up vs. the USD, JPY, CHF, GBP, flat vs. the commodity dollars, benefitting from both risk appetite and less demanding than feared Basel III bank capitalization requirements, which could have reduced EU bank lending activity and thus EU growth.
Yen Daily Outlook: down vs. all in classic ‘risk-on day’ fashion. Simple as that.
British Pound Daily Outlook: Up vs. the USD, JPY, flat vs. the CHF, down vs. the EUR and commodity dollars. Behaving as per its place on the risk hierarchy, recent poor data doesn’t help but clearly not so relevant either in the face of clear risk appetite.
Australian Dollar Daily Outlook: Up vs. the USD, GBP, JPY, CHF, CAD flat vs. the EUR, NZD.
New Zealand Dollar Daily Outlook: Up vs. the USD, GBP, JPY, CHF, flat vs. the EUR, AUD, CAD. NZ retail sales the only really significant report out today, could be a market mover for the NZD given the rate statement later this week from the RBNZ.
Canadian Dollar Daily Outlook: Up vs. the USD, GBP, JPY, CHF, NZD flat vs. the EUR, down vs. the AUD. We’d expect a bit more strength given oil’s shooting higher, but still doing well.
Swiss Franc Daily Outlook: Up vs. all except for the JPY as it continues to perform as the #2 safety fx on this EU inspired risk aversion day. Note the CHF’s ties to the EU are a negative relative to the JPY despite the CHF’s better fundamentals making it arguably more deserving of the #1 safe haven status.
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