Consolidating Previous Large Gains in a Mild and Contained Manner

Correcting and consolidating previous large gains in a mild and contained manner. 

Over the past 3 weeks, many world markets appear to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market.

Materials stock sector absolute price successfully tested its rising 50-day SMA again and remains bullish.

Consumer Staples stock sector absolute price fell below its 50-day SMA thereby turning neutral.

Health Care stock sector absolute price fell below 8-week lows.

Utilities stock sector absolute price of XLU fell below 13-week lows.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) broke down below 5-month lows.

Crude Oil price moved above 8-day highs, again confirming a bullish trend for the short term.

VIX Fear Index rose from 17.76 on 11/19/10 to 23.84 intraday on 11/29/10. A relatively high and rising VIX indicates increasing anxiety, worry, and fear for market prospects on the part of options players.

S&P 500 Composite (SPX, 1,187.76) fell 1.64 points or 0.14% on Monday. Stocks suffered a deeper loss in the morning, again on fears of war in the Korean Peninsula and fears of European debt. Stocks recovered the bulk of that early loss after 2:00 p.m. ET, thereby demonstrating bullish resilience. The S&P 500 ETF (SPY) formed a Bullish Engulfing Candlestick. Over the past 3 weeks, SPX appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Although these same old fears may linger in the short term, nevertheless, it appears that the US stock market is handling obvious uncertainties with relative calm and resilience, which suggests that there may be accumulation under the surface of unsophisticated reactive selling. I have no special insight into what might happen next abroad, but I do know from long experience that the worst-case scenario does not happen very often. SPX has been holding above 1173.00, the low of 11/16/10, and above key Simple Moving Averages: the 50-day SMA, now at 1177.31 and rising, and the 200-day SMA, now at 1133.30 and rising. This ability to hold support suggests that the bull may be still alive and merely taking a brief nap. Longer term, SPX rose above 2-year highs on 11/5/10, again reconfirming a bullish major trend.
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Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.

Bullish Stocks: Rising Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
4.67% , FDX , FEDEX
4.32% , HBAN , HUNTINGTON
3.48% , HMA , HEALTH MGMT STK A
3.33% , WAG , WALGREEN
4.08% , SNV , SYNOVUS
1.98% , FRX , FOREST LABS STK A
2.94% , KEY , KEYCORP
3.58% , HAL , HALLIBURTON
3.64% , EK , EASTMAN KODAK
0.24% , PZJ , SmallCap PS Zacks, PZJ
2.25% , USO , Oil, Crude, U.S. Oil Fund, USO
0.42% , RZV , Value SmallCap S&P 600, RZV
2.51% , AXP , AMERICAN EXPRESS
3.25% , RIG , TRANSOCEAN
2.29% , RF , REGIONS FINAN
3.45% , FCX , FREEPRT MCMORAN STK B
1.65% , MTG , MGIC INVESTMENT
2.04% , CVG , CONVERGYS
1.98% , UNH , UNITEDHEALTH GRP
2.06% , WFC , WELLS FARGO
2.02% , NBR , NABORS
1.97% , COF , CAPITAL ONE FNCL
1.96% , CI , CIGNA
1.95% , BHI , BAKER HUGHES
0.61% , IYE , Energy DJ, IYE
2.09% , OIH , Oil Services H, OIH
1.39% , AMP , Ameriprise Financial Inc.
0.29% , MYY , Short 100% MidCap 400, MYY
1.00% , BMS , BEMIS
0.93% , RKH , Bank Regional H, RKH
1.28% , ERTS , ELECTRONIC ARTS
1.93% , ININ , Interactive Intelligence ININ
1.43% , FITB , FIFTH THIRD BANC
0.63% , ITF , Japan LargeCap Blend TOPIX 150, ITF
1.61% , EWH , Hong Kong Index, EWH
1.71% , BAC , BANK OF AMERICA
1.34% , SLB , SCHLUMBERGER
1.83% , CAR , Avis Budget Group, Inc. (CAR)
0.91% , AA , ALCOA
1.60% , ATI , ALLEGHENY TECH

Bearish Stocks: Falling Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
4.67% , FDX , FEDEX
4.32% , HBAN , HUNTINGTON
3.48% , HMA , HEALTH MGMT STK A
3.33% , WAG , WALGREEN
4.08% , SNV , SYNOVUS
1.98% , FRX , FOREST LABS STK A
2.94% , KEY , KEYCORP
3.58% , HAL , HALLIBURTON
3.64% , EK , EASTMAN KODAK
0.24% , PZJ , SmallCap PS Zacks, PZJ
2.25% , USO , Oil, Crude, U.S. Oil Fund, USO
0.42% , RZV , Value SmallCap S&P 600, RZV
2.51% , AXP , AMERICAN EXPRESS
3.25% , RIG , TRANSOCEAN
2.29% , RF , REGIONS FINAN
3.45% , FCX , FREEPRT MCMORAN STK B
1.65% , MTG , MGIC INVESTMENT
2.04% , CVG , CONVERGYS
1.98% , UNH , UNITEDHEALTH GRP
2.06% , WFC , WELLS FARGO
2.02% , NBR , NABORS
1.97% , COF , CAPITAL ONE FNCL
1.96% , CI , CIGNA
1.95% , BHI , BAKER HUGHES
0.61% , IYE , Energy DJ, IYE
2.09% , OIH , Oil Services H, OIH
1.39% , AMP , Ameriprise Financial Inc.
0.29% , MYY , Short 100% MidCap 400, MYY
1.00% , BMS , BEMIS
0.93% , RKH , Bank Regional H, RKH
1.28% , ERTS , ELECTRONIC ARTS
1.93% , ININ , Interactive Intelligence ININ
1.43% , FITB , FIFTH THIRD BANC
0.63% , ITF , Japan LargeCap Blend TOPIX 150, ITF
1.61% , EWH , Hong Kong Index, EWH
1.71% , BAC , BANK OF AMERICA
1.34% , SLB , SCHLUMBERGER
1.83% , CAR , Avis Budget Group, Inc. (CAR)
0.91% , AA , ALCOA
1.60% , ATI , ALLEGHENY TECH

9 major U.S. stock sectors ranked in order of long-term relative strength:

Consumer Discretionary (XLY) Bullish, Over Weight. The Relative Strength Ratio (XLY/SPY) rose above 12-year highs on 11/26/10 and remains bullish. XLY has been at the top of my sector rankings for more than a year and has outperformed substantially. Absolute price rose above 3-year highs on 11/5/10 and remains bullish. Support 35.32, 35.02, 34.78, 33.94, 33.11, 32.66, 31.70, 29.80, 28.64, 28.21, and 26.62. Resistance 38.25 and 39.09.

Energy (XLE) Bullish, Over Weight. The Relative Strength Ratio (XLE/SPY) rose above 10-month highs on 11/19/10 and remains bullish. Absolute price rose above 2-year highs on 11/11/10 and remains bullish. Support 60.96, 60.21, 57.70, 55.68, 53.22, 50.33, 48.56, 46.16, and 43.66. Resistance 63.89, 69.95 and 78.10.

Industrial (XLI) Bullish, Over Weight. The Relative Strength Ratio (XLI/SPY) rose above 6-week highs on 11/26/10, thereby turning bullish following a normal correction. Absolute price rose above 2-year highs on 11/5/10 and remains bullish. Support 31.82, 31.58, 30.79, 30.51, 30.32, 29.77, and 27.67. Resistance 33.53, 35.00, and 36.16.

Materials (XLB) Bullish, Over Weight. The Relative Strength Ratio (XLB/SPY) appears to be holding above both 50- and 200-day SMAs, which are rising. Absolute price successfully tested its rising 50-day SMA again on 11/29/10 and remains bullish. Support 34.20, 33.70, 32.36, 29.88, 29.43, and 27.67. Resistance 36.71, 37.56, and 39.00.

Technology (XLK) Bullish, Over Weight. The Relative Strength Ratio (XLK/SPY) rose above its 50-day SMA on 11/22/10 and turned bullish again. Absolute price of XLK rose above 2-year highs on 11/4/10 and remains bullish. Support 23.74, 23.64, 23.56, 22.68, 22.53, 21.60, 20.01, and 19.51. Resistance 25.28 and 25.69.

Consumer Staples (XLP) Bearish, Under Weight. The Relative Strength Ratio (XLP/SPY) fell below 5-month lows on 11/10/10 and remains bearish. Absolute price fell below its 50-day SMA on 11/29/10 thereby turning neutral. Support 28.04, 27.76, 27.63, 27.46, 26.34, 25.30, and 24.95. Resistance 28.85, 29.27, 29.29 and 30.29.

Health Care (XLV) Bearish, Under Weight. The Relative Strength Ratio (XLV/SPY) fell below 6-month lows on 11/10/10 and remains bearish, as it has been most of the time since peaking on 2/23/09. Absolute price of XLV fell below 8-week lows on 11/29/10. Support 30.11, 29.87, 28.00, 27.49. Resistance 31.04, 31.73, 32.05, 32.18, 32.42, 32.69, 33.16, 33.37 and 33.74.

Utilities (XLU) Bearish, Under Weight. The Relative Strength Ratio (XLU/SPY) fell below 5-month lows on 11/24/10 and remains bearish. Absolute price of XLU fell below 13-week lows on 11/29/10. Support 29.66, 27.91, 27.44, and 25.76. Resistance 32.11 and 32.40.

Financial (XLF) Bearish, Under Weight. The Relative Strength Ratio (XLF/SPY) fell below 18-month lows on 11/26/10 and remains bearish. Absolute price of XLF fell below 9-week lows on 11/23/10, and the 50-day SMA remains below the 200-day SMA. Support 14.25, 14.20, 13.29, and 13.08. Resistance 14.96, 15.68, 16.13, 16.90, 17.12, 17.16, and 17.87.
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Emerging Markets Stocks ETF (EEM) Relative Strength Ratio (EEM/SPY) broke down below 3-month lows on 11/26/10 and remains neutral.

Foreign Stocks ETF (EFA) Relative Strength Ratio (EFA/SPY) broke down below 5-month lows on 11/29/10 and remains neutral.

NASDAQ Composite/S&P 500 Relative Strength Ratio rose above 9-year highs on 11/26/10 and remains bullish for the long term. This RS Ratio has been in an uptrend for nearly 2 years, since 12/2/08. Absolute price rose above 2-year highs on 11/8/10 and remains bullish.

iShares Russell 1000 Growth/S&P 500 Relative Strength Ratio (IWF/SPY) rose above 19-month highs again on 11/26/10 and remains bullish.

The Largest Cap S&P 100/S&P 500 Relative Strength Ratio (OEX/SPX) fell below 28-year lows on 11/26/10. This RS Ratio has been trending lower since 8/3/10. Longer term, big caps have been relatively out of favor for more than 10 years, since 3/29/2000.

The Small Cap Russell 2000 Index/Large Cap Relative Strength Ratio (IWM/SPY) rose above 20-year highs on 11/26/10 and remains bullish.

The S&P MidCap 400/Large Cap Relative Strength Ratio (MDY/SPY) rose above 15-year highs on 11/26/10 and remains bullish. Absolute price rose above 2-year highs on 11/24/10 and remains bullish.

Crude Oil nearest futures contract price moved above 8-day highs on 11/29/10, again confirming a bullish trend for the short term. Longer term, Oil rose above 2-year highs on 11/11/10, again reconfirming a bullish major trend. Support 80.28, 79.84, 79.25, 78.86, 72.63, 70.76, 70.35, 69.51, 68.59, 67.15, 65.05, and 64.24. Resistance 88.63, 89.10, 90.51, 98.65, and 102.84.

Gold nearest futures contract price over the past 3 weeks appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Longer term, Gold rose above previous all-time highs on 11/9/10, again confirming the bullish major trend. Support 1329.0, 1315.6, 1297.0, 1274.8, 1270.5, 1232.4, 1210.9, 1191.5, and 1155.6. Resistance: 1382.9 and 1424.3.

Gold Mining Stocks ETF (GDX) Relative Strength Ratio (relative to the Gold bullion ETF, GDX/GLD) rose above 11-month highs on 11/22/10 and remains bullish.

Silver nearest futures contract price over the past 3 weeks appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Longer term, Silver rose above previous 30-year highs on 11/9/10, confirming a bullish major trend.

Silver/Gold Ratio rose further above 2-year highs on 11/22/10, again confirming a bullish trend. Silver has outperformed Gold substantially since 8/20/10.

Copper nearest futures contract price over the past 2 weeks appears to be consolidating previous large gains. Longer term, Copper rose above previous 2-year highs on 11/11/10, again confirming the bullish major trend. Strength in Copper suggests confidence about prospects for the world economy, while weakness in Copper suggests doubts. Support 3.6065, 3.3930, 3.1775, 2.9285, 2.8555, 2.8445, and 2.72. Resistance 3.90, 4.0825, and 4.27.

U.S. Treasury Bond nearest futures contract price over the past 2 weeks appears to be consolidating previous losses. The bond fell below the lows of the previous 4 months on 11/15/10, confirming the preexisting bearish trend for the intermediate-term trend. Support 125.15, 125.07, 124.19, 123.03, 121.28, 119.26, 118.24, 118.12, 115.15, 114.06. 113.04, and 112.15. Resistance 129.03, 129.27, 132.26, 133.00, 135.12, 135.19, 136.31, 137.31, and 142.31.

Junk/Investment-Grade Corporate Bonds Relative Strength Ratio (JNK/LQD) fell below 5-week lows on 11/23/10 and remains neutral. Absolute price fell below 8-week lows on 11/23/10 and is now neutral.

U.S. Treasury Inflation Protected / U.S. Treasury 7-10 Year Relative Strength Ratio (TIP/IEF) has firmed up moderately since making a low on 8/24/10, which implies that fixed-income investors have been choosing somewhat greater inflation protection over the past 3 months.

The U.S. dollar nearest futures contract price moved further above the previous 9-weeks’ highs on 11/29/10. The short-term trend has been up since the low on 11/3/10. USD could be heading toward a test of its 200-day SMA, which stands just below chart resistance at 82.02. Longer term, USD fell below 11-month lows on 11/3/10, thereby confirming a bearish long-term price trend. Support 78.01, 75.23, 74.27, and 70.80. Resistance 82.02, 83.64, 84.73, 85.36, 86.71, 88.80, 89.22, 89.71, and 92.53.

Advisory Service Sentiment: There were 56.2% Bulls versus 20.2% Bears as of 11/17/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio stands at 2.78, which is between one and two standard deviations above the long-term mean. This is not overly excessive bullish sentiment in the second year of a bull market. The 20-year range is 0.41 to 3.74, the median is 1.54, and the mean is 1.61.

VIX Fear Index rose from 17.76 on 11/19/10 to 23.84 intraday on 11/29/10. A relatively high and rising VIX indicates increasing anxiety, worry, and fear for market prospects on the part of options players. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

The Dow Theory reconfirmed a Primary Tide Bull Market as of 11/3/10, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 25 months. The Dow Theory originally signaled the current Primary Tide Bull Market on 7/23/09, when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed above their closing price highs of the previous 6 months. Many other analysts were fooled into calling “Bear Market” by the big downside Secondary Reaction in May and June 2010, but my interpretation has been steadily Bullish on the Primary Trend.

S&P 500 Composite (SPX, 1,187.76) fell 1.64 points or 0.14% on Monday. Stocks suffered a deeper loss in the morning, again on fears of war in the Korean Peninsula and fears of European debt. Stocks recovered the bulk of that early loss after 2:00 p.m. ET, thereby demonstrating bullish resilience. The S&P 500 ETF (SPY) formed a Bullish Engulfing Candlestick. Over the past 3 weeks, SPX appears to be merely correcting and consolidating previous large gains in a mild and contained manner, which is entirely normal and natural in a bull market. Although these same old fears may linger in the short term, nevertheless, it appears that the US stock market is handling obvious uncertainties with relative calm and resilience, which suggests that there may be accumulation under the surface of unsophisticated reactive selling. I have no special insight into what might happen next abroad, but I do know from long experience that the worst-case scenario does not happen very often. SPX has been holding above 1173.00, the low of 11/16/10, and above key Simple Moving Averages: the 50-day SMA, now at 1177.31 and rising, and the 200-day SMA, now at 1133.30 and rising. This ability to hold support suggests that the bull may be still alive and merely taking a brief nap. Longer term, SPX rose above 2-year highs on 11/5/10, again reconfirming a bullish major trend.

S&P 500 Cash Index Potential Resistance
1576.09, high of 10/11/2007
1552.76, high of 10/31/2007
1523.57, high of 12/11/2007
1498.85, high of 12/26/2007
1440.24, high of 5/19/2008
1406.32, high of 5/29/2008
1381.50, Fibonacci 78.6% of 2007-2009 range
1366.59, high of 6/17/2008
1335.63, high of 6/25/2008
1313.15, high of 8/11/2008
1274.42, high of 9/8/2008
1255.09, high of 9/12/2008
1238.81, Fibonacci 78.6% of 1,576.09 high
1228.74, Fibonacci 61.8% of 2007-2009 range
1227.08, high of 11/5/10
1200.29, high of 11/18/10

S&P 500 Cash Index Potential Support
1173.00, low of 11/16/10
1171.70, low of 10/27/10
1166.74, low of 10/20/10
1159.71, low of 10/19/10
1,151.41, low of 10/7/10
1,131.87, low of 10/4/10
1122.79, low of 9/23/2010
1114.63, low of 9/15/2010
1110.88, low of 9/10/2010
1091.15, low of 9/7/2010
1039.70, low of 8/27/10
1039.31, Fibonacci 23.6% of June-Aug. 2010 range
1010.91, low of 7/1/2010
1008.55, Fibonacci 38.2% of 2009-2010 range
991.97, low of 9/2/2009
978.51, low of 8/17/2009
956.23, high of 6/11/2009
943.29, Gann 50.0% of 2009-2010 range
878.04, Fibonacci 61.8% of 2009-2010 range
874.17, Gann 62.5% of 2009-2010 range
869.32, low of 7/8/2009
805.17, Gann 75.0% of 2009-2010 range
785.13, Fibonacci 78.6% of 2009-2010 range
666.79, intraday low of 3/6/2009

One-Day Ranking of Major ETFs, Ranked from Strongest to Weakest of the Day:
% Price Change, ETF Name, Symbol

2.25% Oil, Crude, U.S. Oil Fund, USO
1.74% Thailand MSCI iS, THD
1.65% India PS, PIN
1.61% Hong Kong Index, EWH
1.61% Silver Trust iS, SLV
1.48% China 25 iS, FXI
1.14% Australia Index, EWA
1.06% India Earnings WTree, EPI
0.86% Materials SPDR, XLB
0.86% Taiwan Index, EWT
0.86% Bond, 20+ Years Treasury, TLT
0.83% Financial SPDR, XLF
0.83% Pacific ex-Japan, EPP
0.79% Metals & Mining SPDR, XME
0.78% Emerging Markets, EEM
0.76% Agriculture DB PS, DBA
0.76% Financial Services DJ, IYG
0.68% Brazil Index, EWZ
0.67% Energy SPDR, XLE
0.67% Russia MV, RSX
0.61% Energy DJ, IYE
0.57% Emerging VIPERs, VWO
0.55% Natural Resource iS GS, IGE
0.53% Bond, High-Yield Junk, JNK
0.51% Pacific VIPERs, VPL
0.50% Financials VIPERs, VFH
0.49% Energy VIPERs, VDE
0.49% Japan Index, EWJ
0.43% Basic Materials DJ US, IYM
0.42% Value SmallCap S&P 600, RZV
0.41% Financial DJ US, IYF
0.37% Mexico Index, EWW
0.37% China LargeCap Growth G D H USX PS, PGJ
0.36% Transportation Av DJ, IYT
0.36% Value S&P 500 B, IVE
0.36% South Korea Index, EWY
0.30% S&P 500 SPDRs LargeCap Blend, SPY
0.30% Gold Shares S.T., GLD
0.29% Malaysia Index, EWM
0.26% Bond, High-Yield Corporate, HYG
0.25% Latin Am 40, ILF
0.23% LargeCap 1000 R, IWB
0.23% S&P 500 iS LargeCap Blend, IVV
0.22% Bond, 10 Year Treasury, IEF
0.20% Canada Index, EWC
0.20% Commodity Tracking, DBC
0.15% Emerging 50 BLDRS, ADRE
0.15% SmallCap Russell 2000, IWM
0.12% South Africa Index, EZA
0.11% Bond, TIPS, TIP
0.10% Bond, Corp, LQD
0.09% Value SmallCap Russell 2000, IWN
0.09% Value SmallCap S&P 600 B, IJS
0.09% Microcap Russell, IWC
0.08% REIT Wilshire, RWR
0.08% Value VIPERs, VTV
0.08% Singapore Index, EWS
0.07% Bond, Aggregate, AGG
0.03% LargeCap Blend Russell 3000, IWV
0.02% Value 1000 Russell, IWD
0.01% DIAMONDS (DJIA), DIA
0.00% Realty Cohen & Steers, ICF
0.00% LargeCap Blend S&P 100, OEF
0.00% Dividend High Yield Equity PS, PEY
-0.01% Bond, 1-3 Year Treasury, SHY
-0.02% Bond Treasury Short-Term iS, SHV
-0.03% Small Cap VIPERs, VB
-0.03% Industrial SPDR, XLI
-0.03% SmallCap S&P 600, IJR
-0.05% Growth MidCap 400 B, IJK
-0.06% Real Estate US DJ, IYR
-0.06% REIT VIPERs, VNQ
-0.06% MidCap S&P 400 SPDRs, MDY
-0.06% Dividend SPDR, SDY
-0.06% Homebuilders SPDR, XHB
-0.07% LargeCap VIPERs, VV
-0.08% Growth LargeCap NASDAQ 100, QQQQ
-0.10% Health Care SPDR, XLV
-0.10% Biotech SPDR, XBI
-0.11% Sweden Index, EWD
-0.15% Blend Total Market VIPERs, VTI
-0.15% Semiconductor iS IGW, SOXX
-0.16% Value SmallCap VIPERS, VBR
-0.16% Growth S&P 500/BARRA, IVW
-0.17% Value MidCap Russell, IWS
-0.17% Energy Global, IXC
-0.17% Value LargeCap Dynamic PS, PWV
-0.18% Consumer Staples SPDR, XLP
-0.18% Dividend Appreciation Vipers, VIG
-0.19% Growth VIPERs, VUG
-0.19% MidCap Russell, IWR
-0.19% Growth BARRA Small Cap 600, IJT
-0.19% Utilities SPDR, XLU
-0.21% MidCap S&P 400 iS, IJH
-0.22% Consumer Discretionary SPDR, XLY
-0.24% Value MidCap S&P 400 B, IJJ
-0.24% Growth SmallCap R 2000, IWO
-0.25% LargeCap Blend S&P=Weight R, RSP
-0.25% Technology SPDR, XLK
-0.28% Bond EmrgMkt JPM iS, EMB
-0.31% Preferred Stock iS, PFF
-0.31% Growth 1000 Russell, IWF
-0.31% Dividend DJ Select, DVY
-0.33% Growth SmallCap VIPERs, VBK
-0.34% Capital Markets KWB ST, KCE
-0.36% Utilities VIPERs, VPU
-0.42% Semiconductor SPDR, XSD
-0.44% Chile MSCI iS, ECH
-0.44% Growth MidCap Russell, IWP
-0.45% Bond Muni ATM-Free S&P iS, MUB
-0.52% Switzerland Index, EWL
-0.64% Technology DJ US, IYW
-0.65% Info Tech VIPERs, VGT
-0.69% Small Cap EAFE MSCI iS, SCZ
-0.70% Networking, IGN
-0.77% Telecom DJ US, IYZ
-0.79% Global ex US ACWI iS, ACWX
-0.81% WilderHill Clean Energy PS, PBW
-0.83% Growth EAFE MSCI, EFG
-0.87% Dividend International, PID
-0.88% Global 100, IOO
-0.89% EAFE Index, EFA
-0.89% Financial Preferred, PGF
-0.94% Water Resources, PHO
-0.96% Value EAFE MSCI, EFV
-1.20% Indonesia MV, IDX
-1.32% European VIPERs, VGK
-1.63% United Kingdom Index, EWU
-1.68% Europe 350 S&P Index, IEV
-1.70% Austria Index, EWO
-1.80% Bond Ex-US Treas, BWX
-2.17% EMU Europe Index, EZU
-2.17% Germany Index, EWG
-2.32% Netherlands Index, EWN
-2.50% France Index, EWQ
-2.61% Turkey MSCI iS, TUR
-2.63% Belgium Index, EWK
-2.76% Spain Index, EWP
-2.82% Italy Index, EWI

 

Wake-up Call

FedEx earnings report the joker in today's markets

FedEx and Oracle will report earnings today and especially the former could be a joker for risk. Given the company’s global presence any comments about the outlook could move equities.

Calendar

GMT	Event	Saxo Bank	Consensus	Previous
07:30	SW Unemployment Rate (AUG)		7.8%	8.0%
08:30	UK Retail Sales ex Auto Fuel MoM (AUG)		0.2%	0.9%
09:00	EC Trade Balance (JUL)		-0.5B	-1.6B
12:00	SZ SNB 3-month Libor Target Rate		0.25%	0.25%
12:30	US PPI (AUG)		0.3%	0.2%
12:30	US Core PPI (AUG)		0.1%	0.3%
12:30	Initial Jobless Claims		459K	451K
12:30	Continuing Jobless Claims		4464K	4478K
14:00	Philadelphia Fed. (SEP)		0.5	-7.7

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What's going on?

European markets will most likely open around flat-to-negative this morning on the back of the intervention from Bank Of Japan yesterday that most likely is going to retrace a bit. We are very close to the 1130-level and for equities to travel much higher from here will take a string of positive news from the macroeconomic space. We do not see this coming but will and cannot rule out a few surprises to the upside, but this will only lead to a failed breakout of 1130.

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Market musings

UK retail sales, US initial jobless, US Philadelphia Fed. Index are the reports to keep an eye out for today together with the announcement from the Swiss central bank regarding its target rate. Initial jobless claims are expected to rise slightly following the good (relatively speaking) 451,000 print last week. However, as we said at the time that report may have been skewed since nine states estimated their claims due to Labor Day. The market is looking for the Philadelphia Fed index to head back into expansionary territory (0.5) from the miserable -7.7 print last month. However, consensus has been very optimistic in recent months overshooting the realised number by roughly 10 points no average in the last three months.

New Zealand’s central bank kept the rate unchanged at 3.00% as expected by the market. The most interesting to come out of the meeting was a slight change in language as the RBNZ adopted a more dovish stance. There were more headwinds to come for the NZD, however, as Governor Bollard said the strength of the currency was not due to fundamentals (a couple of hours earlier a NZ PMI report had shown that manufacturing fell into contrationary territory in August).

US industrial production and the Empire Manufacturing survey, which is a regional manufacturing survey for the state of New York, both delivered subpar reports yesterday though the internals of both were better than the overall numbers would suggest. New orders in New York rose in September after dipping into a negative print in August. The employees component was also solid at 14.93.

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Equities

The rally in equities is fading and it seems that the fuel sparked by the Bank Of Japan intervention is already fading out. It is a bit soon giving the very strong signal that Bank of Japan sent and with the expectation that FED will engage in a similar action before year end this warns us that risk is not going to be spurred that much by central bank intervention (unlike our initial assumption). However you should not engage in a battle with central banks because you for sure are going to lose. What you need to realize is that what central banks are securing is a flat yield curve with the long end of the curve trending down. In order to secure a decent return investors will need to add risk and this means keeping their exposure to equities and therefore this level of interest rates and expected development will keep a floor under equities. We still see equities range trade towards year end.

FX Update: Intervention risk near?

Risk appetite remains on very nervous legs after the US S&P500 failed to regain the 200-day moving average and closed on a low note, opening today at yet another low for the cycle. These are the kind of conditions that keep on keeping on until they stop and as long as we remain below this moving average - especially with increasing volatility, we should keep a bunker mentality. We'll peek out again and have a look around if risk manages to close strongly at the end of the day and/or if the authorities move to improve liquidity. In FX, it is clear that the positioning coming into this situation - short the Euro against everything - is still feeling the squeeze and could continue to do so as long as risk is on its knees.

US Senate passes new financial regulation bill
It is perhaps no coincidence that the market is in such a sour mood as the US senate today passed major new legislation regulating the financial services industry. This is a major step towards both of the houses of Congress agreeing on a final version of the law. There are still some questions about the fate of banks' derivatives business, but the main thrust of the legislation is a strong new "consumer protection" effort that is going to keep credit very crimped relative to the last two decades or more and attempt to establish a "financial stability oversight council" that will try to identify any systemic risks/too big to fail companies or hedge funds in the system to prevent systemic failure risks. It will also require that most hedge funds and private equity group register with the SEC. As always, one wonders how effective any new government bureaucracy can possibly be when the entire financial system was led into the 2008-09 disaster right under the unwitting nose of both the SEC and the Fed. It is tough to be optimistic about this program's success, and for now, this is a risk negative due to the costs to the industry to become compliant.

Spanish austerity - an oxymoron?
Spain was out today trying to shore up its fiscal credibility with a 5% wage cut for government workers, the first time that public sector wages have been cut since the 1970's. The government now predicts that growth will only reach 1.3% next year, a downward adjustment from the 1.7% previously forecast. They also project a 6% of GDP budget shortfall for 2011 compares to 10%+ this year. We all know what government projections are worth at this point, however, and the more important question for Spain is whether the market begins to extend more trust in its public debt after the recent touch and go debt auction. Spanish CDS prices have been marching higher again in recent days, though they haven't yet reached the highs from the early May peak. Of course, now a general strike threatens in Spain and the ongoing fear will be that the populace is unwilling to take the austerity needed to get Spain's fiscal house back in order.

Canadian Retail Sales
CAD has been especially weak over the last 24 hours. Today's very strong Mar. retail sales did little to support the currency with the current risk meltdown definitely at the top of the agenda. The Canadian June 2011 STIR is trading higher 10 points higher as of this writing from yesterday's close and shows that the market has now priced back out all of the tightening that it had tried to price in since late February - about 80+ bps in all. CAD should remain weak as long as market is in risk off mode. The 1.0780/1.0800 area in USDCAD has been a pivotal one since all the way back in the summer of 2007, so we should keep our eyes out for a possible acceleration through that level if it gives way - the next major technical resistance are is 1.1120.

Looking ahead
Given the current volatility and evaporating liquidity, it is highly likely that the major governments move soon to boost market liquidity and put a lid on the situation - perhaps over the weekend. While the EUR/USD rate seems to have stabilized quite impressively due to the squeeze on short EUR positions, the G3 crosses vs. other currencies (especially less liquid currencies like NOK, not to mention EM) have experienced the worst volatility since the post-Lehman environment. The environment is very fluid right now and the seemingly never ending spike in long US and German treasuries shows just how fearful this market has become. Bunds are pressing down toward a 2.50% yield, far below the slightly sub-3.0% levels of the post-Lehman crisis. At the US open, risk is trying to make a stand - if we are able to close at relatively  unchanged levels or better, we'll have made a first step at taking the momentum out of the risk bear for the short term.

Stay very careful out there as intraday ranges are likely to remain extremely high for now.

Economic Data Highlights

• New Zealand Apr. Credit Card Spending fell -1.2% MoM and rose +1.9% YoY
• New Zealand May ANZ Consumer Confidence out at 126 vs. 121.9 in Apr.
• Japan Bank of Japan Target Rate unchanged at 0.10% as expected
• Germany Preliminary May PMI Services fell to 53.7 vs. 55.4 expected and 55.2 in Apr.
• Germany Preliminary May PMI Manufacturing out at 58.3 vs. 61.1 expected and 61.5 in Apr.
• Germany May IFO fell to 101.5 vs. 101.9 expected and 101.6 in Apr.
• EuroZone Mar. Current Account out at +1.7B vs. -4.5B in Feb.
• EuroZone Preliminary May PMI Services out at 56.0 vs. 55.6 expected and 55.6 in Apr.
• EuroZone Preliminary May PMI Manufacturing out at 55.9 vs. 57.4 expected and 57.4 in Apr.
• UK Q1 Total Business Investment rose 6.0% QoQ vs. -0.6% expected
• UK Apr. Public Sector Net Borrowing at 10.0B vs. 10.9B expected
• UK Apr. Major Banks Mortgage Approvals out at 47k vs. 54k expected and 52k in Mar.
• Canada Apr. CPI out at +0.3% MoM and +1.8% YoY vs. +0.2%/+1.7% expected, respectively
• Canada Apr. Core CPI out at +0.3% and +1.9% YoY vs. +0.2%/+1.8% expected, respectively
• Canada Mar. Retail Sales out at +2.1% MoM and +1.7% less Autos, vs. +0.1%/+0.4% expected, respectively.

Upcoming Economic Calendar Highlights

• US Fed's Dudley to Speak (2300)
• Australia Apr. New Motor Vehicle Sales (Mon 0130)
• Japan BoJ Monthly Report (Mon 0500)

FX Update : Commodity currencies at center of risk meltdown

FX Update: Commodity currencies at center of risk meltdown

Some of the pressure on the Euro has eased up since yesterday, as the heavy market positioning coming into the volatility of the last few days was heavily long the commodity currencies, not only against the USD but also against the EUR and JPY, as the "weak G-3" theme we identified previously and in our monthly reports, has come under brutal fire. So EURAUD, a pair that we have been focusing on for a couple of weeks now, absolutely exploded yesterday on the combination of a stabilizing Euro while the overstretched positioning in Aussie continues to unwind in this environment of merciless risk aversion. it seems that all of the banks are now swinging around to the view that the AUD should fall, now that it has fallen 1000 pips. Fresh shorts may feel like they are late to the game, but once moves like this get going, their magnitude can be tremendous, even if the time horizon will likely be very compressed (as has been the case in risk meltdowns of markets past).

The basic risk barometer, the US S&P500, is testing below its 200-day moving average ahead of the opening of trade in New York. That level is around 1102 on the cash and 1096 on the June future. If the average is unable to reattain this level into the close (its importance doubly underlined by the recent support found there after the May 6 blow-up), then the meltdown in risk may have yet to find a bottom. 1090.75 in that June future was the "real low" after the blowup. For perspective, AUDUSD bottomed at 0.8800 when the S&P was testing that 1090.75 the last time, and is trading below 0.8300 as of this writing, just showing how late FX has been to this "anti-party" of risk.

RBA and AUD
The RBA was out overnight with some relatively stern warnings on the risk of the housing bubble and its potential ill effects on borrowers, saying that a speculative boom is not desirable and that borrowers can't rely on capital gains to service debt. It also noted that the population is growing faster than available housing. So clearly, the housing bubble is in focus for the RBA and has been a key reason for their front-loading the removal of accommodation, since so much of the mortgage debt in Australia is financed with floating rates. The RBA also noted that the effect of the mining boom in Australia is "building."  At the same time, the RBA noted that consumer spending has been "quite subdued", and that monetary policy is "well placed" for the present. This suggests little pressure for the RBA to move at the next meeting or two and, given the present risk averse environment and this rhetoric, it is not surprising that the market has ratcheted its year-forward expectations all the way down to a mere +17 bps at present from as much as +70 bps in the immediate wake of the May 4 rate hike. AUD has been the most heavily punished of the G-10 currencies over the last 28 hours.

Chart: EURAUD
EURAUD has spiked higher over the last few days as the squeeze has hit the market's heavily short EURAUD positioning. The pair has now wiped out more than a month's losses in a few short days and the upside pressure could continue as long as this meltdown in general market confidence remains in effect. The German IFO tomorrow is the next key event risk for the pair.

Euro - nothing to like, but...
The Euro has stabilized remarkably over the last 24 hours, despite the "final straw" of the German ban on shorting of all kinds of instruments (which should be considered extremely Euro negative) as market positioning may finally be bumping up against the red zone and bad news is seeing diminishing returns. There is nothing at all to like about the single currency, but the contrarians out there may just see a squeeze here in the short term - even in EURUSD, though as long as the risk meltdown is under way, the EUR/commodity currency & EM trades will likely see the most volatility. NOK was absolutely hammered on the desperate fall in oil prices and a negative (!) GDP reading out of Norway.

Market celebrates NZ tax cuts
While the market was punishing the Aussie for the RBA's relatively dovish words and on market positioning, the NZD got a boost overnight as the government announced a sales tax increase and income tax decrease to encourage a more balanced current account and more savings. The market greeted this enthusiastically, with AUDNZD selling off particularly sharply, even if NZD couldn't stay stronger vs. the suddenly mighty G-3 due to all of the risk aversion. New Zealand is still dealing with an “unpopped” housing bubble, but the government is making the right kinds of decisions. The short AUDNZD trade may continue to show promise for another year or more.

US data
The FOMC minutes from the FOMC meeting of three weeks ago released yesterday looked especially out of date considering the recent turmoil, and showed lots of back and forth and mixed views on when and whether the Fed should start selling mortgage assets vs. hiking rates. All very academic at the moment. As if sentiment wasn't bad enough, the more or less positive US economic data environment of the last week was spoiled by today's very high jobless claims, though the seasonality adjustments at this time of the year are fairly radical (the May period generally sees the fewest layoffs seasonally and the absolute number of claims has hardly gone anywhere the last three weeks).

Looking ahead
The market at present is driven purely by sentiment with old risk longs getting squeezed and new risk shorts taking advantage of their vulnerability, so it is difficult to talk up any single known calendar event in the near future that we can look for to provide a turning point in the action. As we have said previously, normally these moves play out very quickly once parabolic price action has come into play as it has. Since the fundamentals are nowhere near as alarming (as far as we can tell) as they were in the scary days of the post-Lehman bankruptcy, we assume that a short-term climax in the action (a trading low) is in the cards within the week.

If we look over at the calendar, we note the Philly Fed out later today, as well as the US Leading Indicators for April, which are expected to show a strong contraction from very strong readings in previous months. Watch out for the Bank of Japan meeting tonight as Japanese officialdom can't be happy with the proceedings and powerful JPY rally (particularly EURJPY), though the bank has been divided on whether it should revert to new quantitative easing measures. The JPY is very strong, but it may sell-off particularly quickly if the bond market buying ever sees any relief as the response mechanism in JPY vs. interest rates seems weaker than in cycles past.

Otherwise, tomorrow sees the German IFO (perhaps strong due to the weak EUR rather than weak due to  the Greece fears - we have no idea...except that it might serve as an excuse to squeeze EUR shorts even more if the reading is stronger than expected.) We also get the Canadian CPI numbers for April and Retail Sales for Mar. The US calendar is essentially empty.

Stay very careful out there and let's watch where the S&P500 closes on the day.

Economic Data Highlights

• Japan Q1 GDP out at +1.2% QoQ vs. 1.4% expected
• Japan Q1 GDP Deflator out at -3.0% YoY as expected
• Germany Apr. Producer Prices rose +0.8% MoM and +0.6% YoY vs. +0.6/+0.4% expected, respectively
• Norway Q1 GDP fell -0.1% QoQ vs. +0.2% expected
• UK Apr. Retail Sales ex Auto Fuel out at +0.1% MoM and +3.0% YoY vs. -0.1%/3.2% expected, respectively
• Switzerland May Credit Suisse ZEW Survey out at 40.5 vs. 53.4 in Apr.
• Canada Apr. Leading Indicators out at +0.9% MoM vs. +0.7% expected
• US Weekly Initial Jobless Claims out at 471k vs. 440k expected and 446k last week
• US Weekly Continuing Claims out at 4625k vs. 4605k expected and 4665k last week

Upcoming Economic Calendar Highlights

• US Apr. Leading Indicators (1400)
• US May Philadelphia Fed (1400)
• Switzerland SNB's Jordan to Speak (1400)
• EuroZone May Consumer Confidence (1400)
• US Fed's Tarullo to Testify (1800)
• New Zealand Apr. Credit Card Spending (0300)
• New Zealand May ANZ Consumer Confidence (0300)
• Japan BoJ Target Rate (time not given)

FX Update: Risk falls out of bed to start the week.

FX Update: Risk falls out of bed to start the week.

Not surprisingly, Asia decided it did not like the very weak close in the US on Friday, and risk trades were taken to the cleaners from the get-go overnight, with EURUSD rushing to a new low below 1.2250 before rebounding and commodity currencies selling off viciously. The drop below the old 2008 low at 1.2330 obviously triggered stops.

 AUDUSD almost touched its low during the May 6 US equity panic and NZDUSD traded below 0.7000 this morning for the first time since early April. That pair has not closed below that level since March 5. The JPY remains jumpy and unpredictable - at first outpacing the greenback's strength in Asia before USDJPY snapped back higher after a brief tease below last Friday's low. Again the question begs whether the cycle is changing for the Yen, and whether its relative weakness vs. the USD compared to historic behaviors (vis-à-vis US interest rates) has something to do with the fears of sovereign debt pressures down the road.

EuroZone woes
Trichet was out trying to talk up the need for a "quantum leap" in how Europe is governed, as he perhaps tries to shore up the tremendous loss of face he suffered after the recent capitulation on the bond-buying issue. Apparently, the BuBa's Weber, ECB's Stark, and Dutch CB head Wellink all voted against the decision for the ECB to buy debt. Debt spreads at the EuroZone periphery were marginally wider in today's trading.

Chart: EURUSD
EURUSD trying to make a stand in early US hours as the ECB is out describing how many bonds it has purchased and how it plans to sterilize purchases. This rally comes after crossing to new lows since 2006 overnight. Momentum is not yet divergent, so we need to see a more emphatic squeeze higher to get more confirmation. Let's see where the pair is trading on the next move through 20 in the stochastics.1.2520 is the important local resistance.

China continues to stumble
The Chinese Shanghai Composite Index closed close to a 12-month low and is now almost 18% lower from its early April highs and over 25% off its peak from mid-2009. Stories abound of the shocking effects of Chinese authorities aimed at stamping out real estate speculation. Sales activity has plummeted 50% in Beijing since local authorities restricted the number of apartments an individual could own at the end of April.Reports indicated that prices in the capital have risen as much as 100% in just a year. That kind of speculative frenzy could end in tears, and this is perhaps what the Chinese equity market is currently pricing in. A construction bust would crimp commodity demand for construction inputs, including copper, steel, and other base metals, and the most exposed currency to any drop in this kind of demand is, of course, the Aussie, which has been taking it on the chin of late and could continue to do so on this story as well as on general risk aversion.

Labour's parting gift to the new government
The pound was weaker today on the an article from the Times (see article here) suggesting that Labour had hidden billions of pounds of spending commitments and that the public balance sheet may be in even worse condition than already known. Accusations from the new government suggest that Labour was spreading around as much money as possible to boost its chances in the election. This is fairly damning stuff and the new government has a tough task ahead of it.

Fading US Manufacturing bounce?
Today's US Empire Manufacturing data is the first manufacturing-related data point to suggest a deceleration in the inventory building rebound we have seen in US manufacturing since late last year. Let's wait for the other regional manufacturing surveys to roll in before we jump to any conclusions, but most of these are at unsustainably high levels, so we may see more disappointments in this data category for a few months, even if levels are expansionary.

Looking ahead
Watch out for the SNB's Hildebrand, who is out speaking shortly. The market is clearly focusing on this 1.4000 area in EURCHF as the pair has traded virtually unchanged around that level for three days now and his rhetoric could be a trigger for more action in that pair. The US NAHB Housing Market survey is the most leading survey on housing in the US and this will be the first survey report since the expiration of the key tax incentives that were available for all home buyers until the end of April.

Speculative short Euro positions continue to march to new highs. This is a field of dreams for contrarians - on a tactical basis looking for a squeeze, at least  - but does anyone dare to step in here and offer the single currency some support? Standing aside may be the healthiest approach to the Euro - though the skew in risk reversals suggest some might be tempted to short downside volatility here and go long upside volatility. The bounce today back above the old 1.2330 low is rather interesting, and a strong close at these levels or higher might strike a bit of fear into the hearts of Euro bears, as it would create a bullish hammer formation.

Tonight's RBA Meeting Minutes
RBA Meeting Minutes - RBA rhetoric has downshifted of late - what signals will the RBA send - especially about its view of rates and the potential effect on the bubbly Australian housing market? Fed started hiking in mid-2004 and US housing market didn't top out until mid 2006. Can things possibly go that slowly in Australia as well, or is it on a more compressed time scale? The latter is certainly a risk as Australia fortunately doesn't have the "financial innovation" angle that got the US into so much trouble, as loans were extended to anyone with a pulse to feed the crazy sub-prime derivative machine.

As always, stay very careful out there.

Economic Data Highlights

• New Zealand Apr. Performance of Services Index out at 54.1 vs. 56.7 in Mar.
• UK May Rightmove House Prices rose 0.7% MoM and 4.3% YoY vs. 6.0% YoY in Apr.
• Japan Mar. Machine Orders rose 5.4% MoM vs. 6.3% expected
• Japan Apr. Domestic CGPI out at +0.4% MoM and -0.2% YoY vs. +0.3%/-0.3% expected, respectively
• UK May CBI Industrial Trends Total Orders rose to -18 vs. -36 in April
• US May Empire Manufacturing out at 19.11 vs. 30 expected and 31.86 in Apr.
• US Mar. Net Long-term TIC Flows out at $140.5B vs. $50.B expected and $47.1B in Feb.
• US Mar. Total Net TIC Flows out at $10.5B vs. $9.7B in Feb.

Upcoming Economic Calendar Highlights

• Switzerland SNB's Hildebrand to Speak (1600)
• US May NAHB Housing Market Index (1700)
• New Zealand Q1 Producer Prices (2245)
• Australia RBA May Meeting Minutes (0130)
• Japan Apr. Consumer Confidence (0500)
• Japan Apr. Nationwide Department Store Sales (0530)

Crisis at EuroZone periphery reaches a head

The market mercilessly pressed its case on the non-sustainability of officialdom’s approach to the Greece/EuroZone periphery situation through late April and into early May until the EU/IMF and ECB finally pulled together and felt forced into getting ahead of the curve. After an extremely weak ECB press conference on May 6 with Trichet declaring that bond purchases by the ECB had not even been discussed, the bottom completely fell out of risk markets.

Then, on the weekend of May 8-9, a massive EUR 750 billion package was announced that would provide enough funds to not only cover the shorter term funding exigencies in Greece (already addressed by the earlier rescue package), but also massive funds aimed at countering contagion risks to Portugal, Spain and other countries.

Most importantly for driving market prices lower on the sovereign debt at the periphery, the ECB was granted authority to purchase public and private debt on the free market, though any debt purchases were to be sterilized and not done by outright debt monetization (not yet, anyway, the cynics among us might add).

While the announced package saw the immediate effect hoped for by its creators and risk markets around the world that had been dragged down by the Euro-crisis - namely a one off explosive rally in asset prices on the Monday after the package was announced - very pressing questions remain for the EuroZone and the Euro, if not the rest of the world as well. These include the following:

Austerity still needed. Even with a bailout here, Greece will need to continue along a path of unprecedented austerity, without being able to lean back on a devaluation as it has in cycles past. Will Greece follow through and will Spain and Portugal follow through when it’s their turn? To access the funds, the countries will have to agree to fiscal restraint and possibly review by the IMF. Economists have estimated (based on a Reuters article) that Portugal, Spain and Ireland alone need EUR 444 billion just to get through the end of 2012 assuming they had no access to the bond market.

What about debt restructuring? This is really a critical part of the austerity question – the debts need restructuring if these countries – particularly Greece and Portugal are to be able to dig themselves out of their mess – this package offers no mention of restructuring and the losses that must be taken at some point on this debt. This would hamper the recovery and credit markets due to the large losses this would entail for banks all across Europe.

Disgruntled creditor nations. The bailout package is particularly unpopular in Germany, which will pay the largest chunk of the bailout funds . While one can argue that bailing out the periphery is also a bailout of German banks and the debt they own in the PIGS countries, the population doesn’t see it that way. Already, Merkel’s CDU lost control of the upper house of parliament in a regional election that took place just as the package was being announced. As well, part of the package includes up to EUR 250 billion from the IMF, a US- sponsored institution. Could this fact enter into the US political scene as well? Hasn’t the US issued enough debt bailing out itself?

 

Our look at a trade-weighted Euro basket vs. the development in PIGS 10-year spreads. This chart was taken on the Monday after the announced bailout package. The package did reverse the blowoff in spread-widening, but there’s a lot more tightening that needs to take place to get the spreads back to their historic norm. Open questions remain on whether the EuroZone project will survive if the nations at the periphery don’t carry through the necessary steps to reach a sustainable fiscal trajectory.

Besides these considerations, which could yet see the market losing faith in the EuroZone project again in the weeks and months to come, the Euro will be under pressure from a monetary policy angle (idea of a rate hike off the table basically forever from market’s point of view as austerity means deflation and very low rates) and from an investor confidence angle – especially from reserve managers of major central banks. These longer term investors will think twice about any further diversification of their reserves into Euro.

The situation has led us to front-load our forecast for the EURUSD further drop. A fall to 1.2500 again (with significant slippage potential) is in the cards for the nearest 1-3 month term, and we lower our 12-month forecast to 1.1500 for EURUSD. As we have said in the past, there is no good way out of this situation for the EuroZone – either take the pain and the fall now or take an expensive rain-check on the confrontation with the debt demons. The rain-check must eventually be cashed, however, and that knowledge will continue to pressure the Euro for some time, even if a chaotic demise of the Euro has now been kicked much further down the road with the huge bailout package.

FX Update: EURUSD tests below 1.2500 - how low can we go?

FX Update: EURUSD tests below 1.2500 - how low can we go?

EURUSD dipped to yet another low for the cycle and below the psychologically significant 1.2500 level in the early US session. The latest noise on the EuroZone revolves around the prospects and risks of a breakup, with former Fed chairman Volcker weighing in on the issue and a Spanish newspaper reporting that Sarkozy threatened to leave the Euro during negotiations with Merkel ahead of the announcement of the bailout package. Spreads widened on Greek debt today by the most since the announcement of the bailout package.

Though all of the news flow remains very Euro bearish, we are beginning to wonder at this point whether the market has pushed about as far as it can push in the near term on the bearish Euro story as bearish sentiment on the Euro is off the charts. Where will the market find new sellers of the currency now that a stabilization package has taken the EuroZone meltdown story off the front burner and put it off for another day? Certainly the multi-year lows at 1.2330 are the next key test. If this area isn't able to hold the pair, then the parabolic price action might take us all the way down to 1.2000 or even lower - as a lack of bids in the market could see a climactic sell-off before we find a significant bounce. Once price action goes into a parabolic decline, the market finds a bottom quickly, though sometimes at levels very far from where they started. 

Elsewhere, commodity currencies were lower on poor risk appetite after yesterday's weak close in the US. USDCAD touched above 1.0300 as oil traded below 74 dollars a barrel and AUDUSD was having a look at sub - 0.8900 support in today's trade as well.

UK: Ugly coalition to be a brief affair?
The awkward UK Tory/LibDem coalition that it is attempting to move forward has former BoE member David Blanchflower (whose loud and dovish voice was proven so right as the financial crisis hit the UK with full force in 2008) predicting that the coalition will only last a matter of months due to an unbridgeable ideological gap. See the commentary here, which includes Mr. Blanchflower's Keynesian exhortations for the BoE to print more money. The point is an excellent one and the Tories might do well to call for a snap election if they have the ability to gain the least bit of momentum in the coming months, as they only need the 20 additional seats to form a traditional majority government that can move to put its program through without having to kowtow to a partner at the opposite end of the ideological spectrum. This is not necessarily a tradable scenario at present, but something to keep in the back of our minds in the months to come.

Chart: USDJPY again
USDJPY is having a go at the critical Ichimoku cloud support and the 55-day moving average (red line). Today's close price looks critical for an indicator on where the yen is headed. If we are to go by past behavior, then bond markets suggest that JPY should head stronger from here, though that correlation has been called into question of late.

Looking ahead
The market hardly noticed the in-line US advance retail sales numbers todayLater today we have the preliminary US University of Michigan Confidence number, a number that has flattened and even headed slightly lower while the US recovery has supposed move forward. These confidence surveys are extremely correlated to the employment situation. Market sentiment still seems very fragile after the shocking volatility event from late last week and on the issue of the confrontation between US lawmakers/ Obama administration and the big banks.

Next week offeres a glimpse at how the US housing market is faring in May, as the NAHB survey is set for release already on Monday. We also have Australia's May meeting minutes to kick off the Asian session on Tuesday and in Europe, we have the latest inflation numbers from the UK and the German ZEW survey. We'll discuss the rest of next week's economic calendar on Monday.

Economic Data Highlights

• New Zealand Apr. REINZ House Sales fell -16.2% YoY vs. -8.0% ni Mar.
• New Zealand Apr. Housing Price Index fell -0.4% MoM
• New Zealand Mar. Retail Sales rose +0.5% MoM and ex Auto 1.1% vs. +1.1%/1.5% expected, respectively
• New Zealand Apr. Non-resident Bond Holdings fell to 63.2% vs. 63.6% in Mar.
• Canada Mar. New Motor Vehicle Sales fell -4.2% MoM vs. -4.0% expected
• Canada Mar. Manufacturing Sales rose 1.2% MoM vs. 1.0% expected
• US Apr. Advance Retail Sales out at +0.4% and +0.4% ex Autos and Gas, vs. +0.4%/+0.3% expected, respectively
• US Apr. Industrial Production out at +0.8% MoM vs. +0.7% expected
• US Apr. Capacity Utilization rose to 73.7% vs. 73.8% expected and 73.1% in Mar.

Upcoming Economic Calendar Highlights

• US May preliminary University of Michigan Confidence (1355)
• US Fed's Evans to Speak (1740)
• US Fed's Kocherlakota to Speak (Sun 0400)
• New Zealand Apr. Performance of Services Index (Sun 2230)
• UK May Rightmove House Prices (Sun 2301)
• Japan Mar. Machine Orders (Sun 2350)
• Japan Apr. Domestic CGPI (Sun 2350)

FX Update: Every day brings a new direction

Yesterday's ugly sell-off at the end of the US session yields to an almost equally strong rally this morning as the market can't seem to figure out what it wants to do here. Bonds sold off again in a mirror image of the action in equities ahead of the large auction of US 10-year notes.

UK Inflation report rains on GBP parade
GBP bulls were in the driver's seat into today on the news of the new Conservative/LibDem coalition and Cameron's promises to get tough on the UK budget. But the BoE Quarterly Inflation report cooled the rally in sterling as the bank sees inflation falling to below target in 2011 despite above-target readings this year. But the real zinger for the pound was King's refusal to rule out additional asset purchases. This and the BoE's complacent view on inflation suggests that the BoE will be happy to not budge on rates for as long as possible.

The March 2011 short sterling STIR jumped about 10 points on this news and the report obviously dragged on the pound, with GBPUSD once again rejected at 1.5000, while EURGBP bounced rather strongly from attempts at recent lows. It's hard to build a bullish case from a rate perspective just yet. Any pound rally in the near term will need to see a lower perceived default risk on UK sovereign debt - which is showing some promise, though the government has a lot to prove in the coming months. Another question here is how the bank will react when/if it's inflation forecasts are far too low. Central banks are consistently horrible at projecting economic trends - as are most dismalists. This BoE report is not good for GBP, which may lose steam here in the near term.

Australian rates and data
The Australian home loans data showed another drop in home lending activity and we note in our models that loan activity has been consistently falling off for many  months now while prices have been rising to new bubbly highs in the real estate market. The number of "owner occupied" loans has fallen to the lowest level  since early 2001 as speculation runs rampant. Could a correction lie just around the corner? We think the market has priced the Australia dollar very wrong here, though it may take some time for a negative AUD story to develop. AUDUSD put options anyone?

Chart: EURAUD and ECB/RBA rate expectations
The spread of the ECB/RBA rate expectations bottomed recently while EURAUD kept chugging lower - is there ever going to be room for a reversal in this pair? The answer to that likely depends on the market moving RBA expectations lower, which would probably require a further consolidation lower in the risk trades here.

North American Data
Today's data from Canada showed a new decline in the Canadian merchandise trade level to barely above 0 after Canada posted a deficit for this number for the first time in a generation in late 2008. The strong loonie is not helping out here as the country risks becoming a petro/metallo-state if the current trends persist. Meanwhile, a housing  bubble is raging in Canada as well as in Australia. We'll be talking more about the housing hotspots in the world in our forthcoming FX Monthly. Stay tuned.

Meanwhile, the US Trade Balance was no great surprise, and showed a slightly larger overall deficit with a small contraction in the ex Petroleum number, suggesting that consumption-led imports were not particularly strong for the month. Since the ex-petroleum trade deficit bottomed (peaked?) at less then -10B in mid-2009, it has only re-widened to about -15B, or about 1% of GDP.

Pricing the yen.
The JPY is looking weaker than it should from a rate perspective, and as we discussed recently, this may be due to the focus on sovereign default risks. CDS prices on Japanese sovereign debt rose much more sharply than those for the US during the recent cycle of fear on this issue. Over the last few days, sovereign debt concerns have faded somewhat, and will need to fade especially sharply for Japan if we are to see a more stable JPY rally. (In other words, for JPY to rally, we would need to see risk aversion that is not intertwined with sovereign debt worries, but perhaps one based on more pessimistic estimates for world growth.)

Looking ahead
RIsk is looking bubbly ahead of the US open - can we follow through yesterday's highs, which are key technical resistance? That and the results of the $24 billion US 10-year treasury auction are likely to dominate the market's attention today. On a worrying note for the risk bulls out there, the more activist US market watchdogs seem to be moving into crackdown mode, as we note the new story out about an investigation into Morgan Stanley mortgage derivative deals. Watch financial stocks (the XLF is a good benchmark as an indicator) in today's trading for general risk sentiment.

On the Chinese real estate bubble-watch, we note a story out from Bloomberg showing that a Hong Kong auction of undeveloped land fetched a third less demand than expected as speculators and developers there perhaps fear the increasingly heavy hand of the Chinese regime and its efforts to cool the overheating Chinese economy.

On the economic calendar, Aussie traders should look out for the important Australian employment report out tonight, together with an appearance by the RBA's Lowe. Tomorrow's calendar looks relatively light, with the UK Trade Balance on tap and the latest weekly jobless claims number out of the US.

Stay careful out there.

Economic Data Highlights

• US Weekly ABC Consumer Confidence out at -47 vs. -46 expected and -47 last week
• Australia Mar. Home Loan Approvals fell -3.4% MoM vs. -3.0% expected
• Germany Q1 GDP (first estimate) rose +0.2% QoQ and 1.7% YoY vs. 0.0%/1.2% expected, respectively
• Switzerland Apr. Producer and Import Prices rose +0.6% MoM and +0.8% YoY vs. +0.4%/+0.6% expected, respectively
• UK Apr. Jobless Claims Change out at -27.1k vs. -20k expected and -32.7k in Mar.
• UK Mar. Average Weekly Earnings ex Bonus rose 1.9% 3M/YoY vs. +2.0% expected and 1.7% in Feb.
• EuroZone Mar. Industrial Production rose 1.3% MoM and 6.9% YoY vs. 1.0%/6.5% expected, respectively
• EuroZone Q1 GDP (first estimate) rose 0.2% QoQ and 0.5% YoY vs. +0.1%/+0.5% expected, respectively
• Canada Mar. New Housing Price Index rose +0.3% MoM as expected
• Canada Mar. International Merchandise Trade out at +0.3B vs. +1.6B expected and 1.2B in Feb.
• US Mar. Trade Balance out at -$40.4B vs. -$40.5B expected and -$39.4B in Feb.

Upcoming Economic Calendar Highlights

• US Weekly DOE Crude Oil and Product Inventories (1430)
• US Fed's Lockhart to Speak (1630)
• US Fed's Bullard to Speak (1715)
• US Apr. Monthly Budget Statement (1800)
• New Zealand Apr. Business NZ PMI (2230)
• UK Apr. Nationwide Consumer Confidence (2301)
• Japan Mar. Current Account (2350)
• Australia RBA's Lowe to Speak (0100)
• Australia Apr. Employment Change/Unemployment Rate (0130)

FX Closing Note: Risk rallies but commodity currencies don't - say what?

An odd day for FX as the ebullience on Wall Street today was able to hold throughout the session, while the response in FX was not according to the standard script: the Aussie and Kiwi were relatively weak all day long, and weakened even further late in the US session. Is this due to the upcoming Australia employment data tonight or are we looking at large investors pulling out of FX positions that are positively correlated with China due to the fear of an unwind in the Chinese property bubble? Are traders just now waking up to Aussie bearish indicators like the falling Shanghai composite, falling copper prices and falling BHP stock price?

Certainly, divergences like the one we are seeing here between the AUD and risk appetite elsewhere are worth red-flagging. Let's see if this divergence survives tonight's employment report out of Australia. The interest rate support for the Aussie has been eroded somewhat of late, particularly versus the Loonie, as AUDCAD has plummeted in recent days as the market is pricing back in more tightening from the BoC while continuing to price out some of the earlier expectation for the RBA.

Bonds and JPY tiptoe in a range
Elsewhere, bonds were caught in a tight range today as demand was fairly healthy at the US 10-year note auction, if a bit less healthy than previously. Still, with a bid-to-cover just under 3 and a average yield still under the 200-day moving average in the 10-year benchmark, this auction ought to be considered a relative success . USDJPY flopped about, first reversing from high levels before rallying again toward the range high of the last few days. Tomorrow, the Ichimoku cloud level comes in around the low for today at 93.45, so this will be a critical level if the pair ever decides to sell off again. To the upside, 93.55 is the high after last Thursday's meltdown.

Chart: NZDUSD
NZDUSD finally looking ugly again - surprising that it was able to trade north of 0.7200 again after the firestorm that ripped through markets last week. Note that the pair is closing right on the 200-day moving average it has been trading around for months now. A close down through that average and through the weakly rising trendline could lead to a further significant correction lower.

Looking ahead
The Aussie looks a bit nervous here and we would expect large moves on the employment data tonight, regardless of the direction. The weakness confirms our fundamental view of the Aussie here, though we are a bit uncomfortable with that view with US equities closing the day on a generally high note. Still, today's performance from the Aussie looks very weak barring a scenario in which nervous AUD longs are simply getting squeezed in a relatively thin market ahead of important data.

Tomorrow sees the last of the week's US treasury auctions as the Treasury is set to auction off $16 billion in 30-year T-bonds. The results may be the event that sees USDJPY either breaking higher or testing lower. after the uncertainty of the last couple of days.

Tomorrow is relatively quiet with UK Trade Balance and US weekly jobless claims on tap, though Bernanke is out participating in a conference that will include a Q&A session.

Stay careful out there.

FX Closing Note: EURUSD tests 1.3000 - what's that in USDDEM?

It was a very long day for the bulls, as the growling risk bears finally took out a big enough bite to really bring risk to its knees today. The toxic combination of Euro uncertainty and a vicious Chinese real estate credit crackdown (a new higher reserve requirement, but also strict new measures in Beijing restricting the number of homes an investor may own) , with the background uncertainty of US financial reform was a lot for the market to wrap its head around, and FX responded with a tremendous sell-off in the market's former darlings - NZD, CAD, and especially AUD, all of which were as weak or weaker than the very weak Euro by the end of the session - and that despite the renewed blowout in sovereign debt spreads at the EuroZone periphery.

Elsewhere, the Euro worries allowed EURGBP to try below the key 0.8600 level and the stronger greenback had EURUSD trying below 1.3000 at its weakest levels on the day. The JPY was the only G-10 currency outpacing even the greenback in today's trading. Euro sentiment, already in the cellar, has turned even worse than we thought was possible as talk is surfacing of the potential for the ECB needing to monetize debt to stem the risk of worsening contagion.

Chart: Saxo Bank Carry Trade Model
We noted some divergence recently in the degree to which carry trades were recovering relative to other risk measures, which saw a less ebullient jump after the onset of the recent worries. According to our model, the carry trades have not yet responded as much as one would expect considering the behavior of our survey of other risk indicators. Note that the fast Carry Trade Index is at its lowest level since the early February trough in equity markets, and yet JPY crosses have barely turned around so far.  Are carry trades diverging or are they just slow to process what is going on in the world around them? Carry traders beware if this situation continues to cause stress in risk markets in the days ahead. We could see a spectacular finish to the week when Japan arrives for work again on Thursday.

Scared Scandies
A side note on today's action: the Scandies were flat against the pathetic Euro today - so USD/SEK and USD/NOK could be in for a rocket ride higher along with other risk sensitive dollar pairs if this move in risk aversion deepens. USD/NOK could be especially interesting tomorrow if Norges Bank is sufficiently concerned here that it doesn't hike tomorrow (fairly high odds of that since before the latest blowback analysts have been split on whether the bank would move higher this time around. Oil was down $3.50/barrel in today's trade. SEK is very leveraged to Euro demand considering its export economy.

Looking ahead
The focus in the coming days is the ECB and how it and Euro politicians respond to the situation here. Will the ECB cut the rate 50 bps and hint at new measures to get ahead of the curve by the weekend? This kind of response is likely on the table at the moment in discussions by the European powers that be.  The situation is so fluid that they will need to do so if they want to brake current developments. This reminds us of the Fed back in the days of the financial crisis, when it was trying to get ahead of the situation in late 2008 and early 2009.

The question will be how enthusiastically the market will respond to any vigorous new program that would allow the ECB new powers, even if Dutch, German, and French politicians are willing to grant these new powers. This is a huge test for the entire ECB/Euro system and talk is already surfacing among serious analysts (BNP Paribas for one) that the larger EuroZone countries are more likely to want to exit than the countries at the periphery (see this article for more). While all of this is transpiring, how much faith will the market puts in the recovery prospects for the rest of the world while Europe struggles through its crisis?  Seems to us there is enough reason for significant pause here globally, especially with uncertainty over China thrown into the equation. The EuroZone issue is similar to the US subprime in 2007-08, if perhaps less concentrated.

An excellent test for how much "the fundamentals" matter for the moment comes with tomorrow's ISM Non-manufacturing data point and then the US employment report on Friday. In the meantime, we have US weekly ABC Consumer Confidence out after the close, the Australia Apr. AiG Performance of Services Index and Mar. Building Approvals out in Asia. Tomorrow we also have the Norges Bank meeting (a bit more than half were expecting a hike before today according to a Bloomberg survey). We also have the ADP employment change number, which was way off the NFP release last month.

Exercise extreme caution as you stay very careful out there.

FX Closing Note: Fourth direction change for risk in Five days

Whiplash is the order of the day for risk bulls and bears as equity markets performed their fourth strong directional move in five days, increasing the uncertainty of the short-term picture here. The relative calm in Euro PIGS debt spreads today (tightening for Greece, relatively stable elsewhere), a super-strong ISM Manufacturing number, stellar sales results from US carmakers, and a strongly rebounding Goldman stock seem to have given bulls the green light for the day, as US equities posted their strongest single-day gain since February.

 This is the second strong rebound in equities since the Goldman hearings early last week saw the risk bulls first meet serious resistance. Other risk indicators were improved as well, thought they have not rebounded as emphatically as, say, US tech stocks. In FX, carry trades are higher again, especially in the JPY crosses, with NZDJPY nudging to new highs again, though AUD remains a tad cautious ahead of the RBA.

Elsewhere in FX, EM remains a bit of a conundrum as EM debt spreads have not tightened appreciably since widening a bit during last week's risk hiccup and equity markets there are also less ebullient.  EM markets peaked earlier in the month than the US markets - a very interesting divergence. Is this just nervousness over China and its suffering equity market and attempts to crack down on credit there or is it a leading indicator suggesting smart money is pulling out of emerging markets? The USD/EM currency trade has long ago stopped following the risk appetite picture that it followed so slavishly before and for a long time after the great meltdown of 08/09 - at least in places. A few currencies, and especially the Turkish Lira, have managed to keep up the pace with global risk willingness.

Looking ahead
The market is looking for a hike from the RBA, which is mostly priced in. The March 2011 Australian STIR had its lowest close since April 7, so the market is leaning on the hawkish side of things. Watch the guidance from Stevens and company. The risk for the Aussie bulls is that the RBA indicates that it is front-loading the policy trajectory ahead of a wait and see period to see how the Australian economy responds.

The new heavy mining tax (good for tax revenues and the sovereign debt side of the equation, which looks impeccable at the moment, though an asset bubble pop could see a sudden changing of that perception if the massive private sector debt in Australia were to be transferred to the public balance sheet a la the USA and Europe....) is another reason for the RBA to perhaps hike to 5.00% and then pause a bit to see how the mining-driven sectors of the economy  are faring. As well, most mortgages in Australia are done at floating rates and a rate of 5.00% would represent a 200 bp tightening from the lows last year.  The RBA/Aussie government may want to find ways to cinch off the housing bubble outside of simple manipulation of the Cash Target rate, and any hints that the RBA/government is looking for a solution outside of raising the target rate is a potential Aussie negative. The shortest term will be hard to trade on here, but owning downside volatility in AUDUSD is worth a thought.

Gold Pulls Back after a 2-day Rally, Correlation with USD Turns Positive

Crude oil price extend gains above 84 in European session as investor concern about a European fiscal crisis eased temporarily. Stocks and bonds drift higher while the euro continues to recover from a 1-year low. Currently trading at 84.3, the front-month contract of WTI crude oil price surges another +1.3% after Wednesday's rise of +0.95%.

Now that the market expects negotiations between Greece, the EU and the IMF regarding the rescue package will be speeded up as the sovereign crisis is quickly spreading to other countries in the Eurozone. According to Reuters news, austerity measures being discussed between the parties include raising VAT by 2-4% from 21%, reduction in salary bonuses and state sector wage supplements. Taxed on fuel, tobacco and alcohol may also be increased by at least 10%. While none the measures are confirmed, the market anticipates more details will be released over the weekend.

Corporate earnings and economic indicators catch more attention today. In the Eurozone, economic confidence rose to 100.6 in April from 97.9 in March. The market has anticipated a milder improvement to 99.4. Other confidence readings also beat forecasts. For instance, industrial confidence improved to -7 (consensus: -8) from -10 and services confidence rose to 5 (consensus: 3) from 1.

European stocks soar as driven by encouraging earnings results. Banco Santander, the biggest Spanish Bank, reported +5.7% y/y increase in net income in 1Q10. Unilever, the world's second largest food company reported a jump of net income, by +33% y/y, in first quarter. Moreover, Repsol YPE, the biggest oil company in Spain, said the company's upstream division will expand 3-4% per year through 2010.

Gold pulls back after soaring for 2 days as concerns over European sovereign debt moderated. Currently trading at 1169, the benchmark contract for gold slides -0.24% from Wednesday's close but remains at this year's high.

There have been speculations that gold will make new record highs as the yellow metal's appeal as a safe haven increases. the chart below shows that the correlation between gold and USD has changed since the beginning of the year. Movements between the 2 have become more positively correlated recently. The 2010-high (1175.3) made yesterday was just -4% below the all-time high of 1227.5. Whether gold can advance further and reach a new high this year depends on evolvement of the deficit problems in the Eurozone as well as other countries bearing huge debts, and investment flows into ETFs.