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China Govt's Secret New Gold investment could pay 500% over next 2 Years

Commodities looked for support and found it - Weekly Commodity Update

Commodities began the week on the defensive but recovered as the U.S. GDP confirmed that the recession had ended.

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The rebound in GDP however positive unfortunately came about primarily due to a rise in consumer spending helped along by various government subsidies such as “cash for clunkers” and tax credits for homebuyers. Both these subsidies have now been removed and the big question going forward is weather higher consumption can be sustained without government support.

Despite the rise in economic activity household disposable incomes fell during the quarter as unemployment kept rising. This lack of consumer confidence will play an important role during the next few months and whether the risk appetite will stay very much depends on economic data, crucially U.S. employment data next Friday.

The two main market drivers once again decided the direction during the week as early dollar strength combined with a 5.5 pct sell off in the S&P 500 sent commodities looking for support. Interesting support levels were tested in the process but the U.S. number were good enough reason to halt the return of risk aversion.

Crude Oil rally ran out of steam this week as weaker stock markets and an unexpected build in Gasoline inventories gave bears the excuse to test support that they had been looking for. The sell off only lasted a few days as support from previous highs around USD 77 halted the move.

Near term we expect continued consolidation with the range trading being the favoured strategy by most traders. Look for support at USD 77 followed by USD 75 and resistance at USD 82 (100 week moving average) followed by USD 85.

U.S. natural gas prices slipped after inventories rose 25bn cubic to another record of 3,759 bn cubic feet. One piece of good news is that is now highly unlikely that the national working capacity limit of 3,900 bn cubic feet will be breached as winter demand will increase over the next few weeks .

The market is however still left with a huge overhang of supply which has put the new front month of December under pressure as soon it became the spot month. Unless we see a change in weather forecast further upside seems limited. The December contract on Nymex will be stuck in a wide USD 5.45 to 4.35 range until further news becomes available.

The brief return of risk aversion which saw the dollar at one point strengthen by 2.5% also made an impact on gold thereby confirming the continued strong relationship between the two.  Spot gold dropped 4% but found support at the previous high at USD 1024.30 before rallying strongly ahead of the weekend. 

 

Technically the new trading range continues to take shape with support at USD 1024 now confirmed and resistance at USD 1070 having proved solid over the last month. Additional strong support can be found at USD 995 which is trend line support from the 2008 low.

A worrying development recently has been the renewed rally in the price of rice. According to the U.S. Rice Producers prices may return to record levels as bad weather curbs output in major growers including India. In addition the increased cost of oil has pushed up the cost of fertilizers boosting prices further.

Everyone remembers the food price protests that swept the globe last year after fears of supply shortages prompted prices to surge to a record of USD 25 per 100 pounds in April 2008. The Philippines has brought forward rice imports for 2010 after cyclones have reduced the domestic output while the situation in India is being watched closely. So far they have not any plans to import rice as its reserves are adequate.

 

During the week CBOT Rice for January delivery reached levels not seen since January this year. Look for resistance at USD 14.80 on the front month continuation while a break could set up a move back towards USD 16.35.

In summary commodities had the biggest rise since May primarily driven by agricultural and energy markets with the CRB index rising 10%. Going into November continue to look for clues in the dollar, stock markets, weather forecast and economic data, especially U.S. employment data next Friday November 6.

China Govt's Secret New Gold investment could pay 500% over next 2 Years

Continued appetite for risk on good headline GDP - Wakeup Call

The headline GDP figure yesterday was quite good (and better than expected), but the consumer is still only spending when given cash by the government. And no wonder, disposable income fell in Q3.

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Calendar

CA	12:30	GDP MoM (AUG)	0.1%	0.0%
US	12:30	Personal Income/Spending MoM (SEP)	0.0% / -0.5%	0.2% / 1.3%
US	14:00	U. of Michigan Confidence (OCT)	70.0	69.4

What's going on?

·         The GDP report should provide further appetite for risk. We are positive on risky assets.
·         The headline GDP was better than expected at 3.5% vs. 3.2% expected (Saxo: 3.6%), but underneath the polished headline figure things were not as rosy. Unsurprisingly the auto tax rebate Cash for Clunkers provided some relief to personal consumption as consumers cut back on savings. The problem is still income, however. Third quarter GDP is driven by consumption not supported by income; indeed consumption grew 3.4% while (disposable) income fell 3.4%.
·         Initial Jobless Claims fell again (a “whopping” 1K) but are still at a very high level so far into the crisis.
·         Also watch out for Eurozone CPI and Unemployment Rate at 10:00 GMT.

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FX

EURUSD	0/+	Grind higher, look for resistance around 1.4865. Medium term ‘weakening USD trend’ still intact.
EURJPY	0/-	Range 1.3600 – 135.50. Risk is on further JPY downside, so sell on rallies.
USDJPY	0/+	Relentlessly bid throughout asia and fixing today, looks like a test of 91.00 on the cards.
AUDUSD	0/+	Buy on dips, v-bounce looking to put 0.9250 or even 0.9300 area in focus.
GBPUSD	0/+	Perhaps only suprising is that cable holding so well, 1.6525 support, buy here for upside to 1.6600.

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Equities

DAX	0/+	Buy on dips towards 5512 and target 5565. Stop below 5495.
FTSE100	0/+	Buy on dips towards 5075 and target 5119. Stop below 5060.
S&P500	0/+	Buy on dips towards 1063 and target 1073. Stop below 1059.
Nasdaq100	0/+
DJIA	0/+

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FX-Options

EURUSD	Frontend vols sold off after US GDP with 1m down 0.7 vol. RR remained unchanged at 0.8
	EUR puts for the curve. Looking to see EURUSD trading towards 1.50 in the short run.
EURGBP	RR were very bid yesterday throughout the curve.
	Vols turned bid as well and we expect EURGBP to be back in the 0.90’s again soon.

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Futures

Gold	0/+	USD weakness also seeing rebound in gold, buy dips down to 1,040 area for upside.
Silver
Crude Oil	0/+	$80.00 providing some resistance during asia hours, buy dips as uptrend to $85.00 likely to persist.

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Equities to be Supported by earnings releases this week.

S&P500 in giant wedge: Trendline resistance @ 1113. Trendline support @ 1058. Worries: DJ Transportation index is down 6% in the past three trading days.

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Calendar

Economic Data Releases
Country	Time (GMT)	Name	Expectation	Prior	Comment
US	12:30	Chigago FED Nat. Activity Index (SEP)	-	-0.9
US	14:00	Dallas FED Manf. Activity (OCT)	-0.5%	-6.4%

 

Earnings Releases
Country	Time (GMT) (G(GMT)(GMT)	Name	EPS exp.	EPS prior	Comment
GE	-	Merck	1.242	0.500
US	16:30	Verizon Communication	0.590	0.630

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What's going on?

Theme Comment

·         USD making new lows and 10-year rates are higher. That indicates that optimism is continuing this week (so far). Our stance today is “buy-on-dips” as we are still close to our mid-term target of 1121 in S&P500.

·         S&P500 in giant wedge: Trendline resistance @ 1113. Trendline support @ 1058. Worries: DJ Transportation index is down 6% in the past three trading days.

·         This week offers lots of interesting data points: US Consumer Confidence, Durable Goods Orders and Q3 GDP among others.

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FX

FX	Daily stance	Comment
EURUSD	0	N/term res still at 1.5075-00 area. Abv targets 1.5160, else stuck in 1.4980 – 1.5080 range
USDJPY	0/+	Break abv res at 92.20 will target 92.70, then 93.25 else we stay in a 91.70 – 92.20 range
EURJPY	0	Break abv 138.30 res targets 138.70 else we stick to a 137.30 – 138.30 range 85-00 seen holding for a retracement
GBPUSD	0/-	Sell rallies abv 1.63 for break below 1.6250 to target 1.62. stop abv 1.6375
AUDUSD	0	Look for consolidation below 0.9275. Below 0.92 targets 0.9160 else 0.92 – 0.9275 range

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Equities

Equities	Daily stance	Comment
DAX	0/+	Buy on dips towards 5728 and target 5780. Stop below 5705.
FTSE100	0/+	Buy on dips towards 5232 and target 5280. Stop below 5208.
S&P500	0/+	Buy on dips towards 1079 and target 1090. Stop below 1075.
Nasdaq100	0/+
DJIA	0/+

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Futures

Commodities	Daily Stance	Comment
Gold	0/+	Buy on dips towards 1048 and target 1058. Stop below 1042.
Silver	0/+	Buy at the break of 17.80 and target 18. Stop below 17.65.
Crude Oil	0/-	Sell on rallies towards 81.50 and target 79.00. Stop above 82.30.

The dollar’s respite proves only temporary; A USD negative start to the week so far….

China’s reserve diversification hits the headlines again and dictates FX sentiment

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MAJOR HEADLINES – PREVIOUS SESSION

• US Sep. Existing Home Sales out at 5.57m vs. 5.35m expected and revised 5.09m prior
• US Sep. Existing Home Sales out at +9.4% m/m vs. +4.9% expected and revised -2.9% prior
• AU Q3 PPI out at +0.1% q/q, +0.2% y/y vs. +0.3%/+0.5% expected and -0.8%/+2.1% prior resp.
• SI Sep. Industrial Production out at -7.7% y/y vs. +1.0% expected and revised +11.8% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE GfK Consumer Confidence (0700)
• Sweden Trade Balance (0830)
• UK BOE Report on Asset Purchase Facility (0930)
• US Chicago Fed Nat'l. Activity Index (1230)
• CA BOC’s Carney to speak (1255)
• USD Dallas Fed Manufacturing Activity (1430)

Market Comments:

GBP was whacked mightily on Friday after all the hopes that the UK might finally show the first positive growth since Q1 2008 in Q 3 were dashed. GDP came in at -0.4% q/q versus an expected +0.2% and forced a sharp liquidation of GBP longs that had been riding the wave of GBP’s appreciation. The fact that the economy could not even manage positive growth despite unprecedented stimulus from UK authorities, and a weak pound that should have helped manufacturers price goods more competitively, was an extremely disappointing factor and will likely keep GBP capped near-term as talk of additional QE measures is reignited. PM Brown commented that it would be “suicidal” to abandon the measures in place to stimulate the economy in the wake of the data, which confirmed the UK was in the throes of the worst recession on record since data was collected in 1955.

Elsewhere, US data was better than forecast, with existing home sales surging 9.4% m/m in September though it was noted that this is likely heavily influenced by first-time buyers rushing to take advantage of the tax credit scheme that is due to expire on December 1. Despite the data, and more Q3 earnings that beat forecasts, Wall St finished the week on a soft note and we expected Asia to carry on this tone at the start of a new week. Weekend headlines also reminded us of the spectre of the commercial real estate sector with Capmark Financial filing for bankruptcy protection, while a possible resurgence in the H1N1 virus as the West enters into winter also grabbed the attention.

Indeed, this weaker risk appetite theme seemed to dominate the start of the week, with early activity benefitting the USD to the detriment of GBP, EUR and AUD. However, some mid-morning comments/reports from China changed the mood. First off, we had headlines detailing a report that recommended China raise the proportion of Euro and Yen in its reserves while reducing the proportion held in USD. This was immediately followed by comments from Chinese Vice Premier Li Keqiang who said the China economic recovery is now solid and the market associated both sets of headlines with the Vice premier. However, it transpired the reserves report came from PBOC researcher Zhou Hai, who subsequently clarified that the views were “purely personal” and not a reflection of policy. Nevertheless, the damage had been done and the USD was immediately on the back foot and USDJPY pummeled, though the EURUSD rally stalled shortly after printing a new 14-month high.

 EUR bulls had also been given further ammunition to test for new highs after ECB’s Noyer, speaking at a forum in Singapore, made no comment of the level of the EURUSD. Coming on the back of EU Alumunia’s comment Friday that EUR strength is not a big risk, and EUR’s time below 1.50 was already limited.

With the RBNZ meeting later in the week now in immediate focus, weekend comments from NZ PM John Key may take on more significance. He was upbeat on the economy, saying growing demand for NZ’s commodities should help it avoid a double-dip recession and expects GDP to improve over Q3 and be “much stronger” in Q4. However, he added that NZ was unlikely to face any upwards pressure on interest rates until mid-2010 at the earliest. With the market already pricing in rate hikes by Q1 2010 and expecting the RBNZ to shift to a more neutral bias at Thursday’s meeting, we may see some activity in NZ markets early tomorrow when they return after a long weekend.

The reaction to the news in Asia may have been exaggerated due to liquidity issues as Hong Kong centre was also absent, and may explain why the move stalled after a while. There is little on the data front today to excite, with German consumer confidence and Swedish trade data to consider. The BOE’s report of its Asset Purchase Facility may grab more attention, especially following Friday’s GDP data and its implications for QE. The US session sees Chicago Fed activity for September closely followed by the Dallas Fed release for October.

Wall of money playing into the hands of Market Bulls.

Commodity markets continue their month long drive higher aided by ample liquidity, a dollar reaching a new low point for 2009 and ongoing strength in stock markets.

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The CRB index which tracks the 19 most actively traded commodities have now risen more than 12% during this past month as all sectors have showed positive returns and six commodities have showed returns above 20 percent. The Crude break out have obviously made an impact as three energy futures can be found among the top six with the remaining three being Orange Juice, Wheat and Corn.

Investors looking to hedge the risk of a falling dollar continue to pile money into commodity funds with commodity hedge funds seeing asset under management rise by 7.3 percent in the third quarter to USD 60 billion according to Bloomberg.

Crude Oil made new highs during the week and is poised for a fourth week of gains. The improved economic environment combined with continued draw of the gasoline and distillate products from storage helped the sector. Gasoline has despite its recent strength still not broken out of its trading range going back to June this year and the catalyst for further gains could be tied to an ongoing reduction of available inventories and a definite confirmation of a pick-up in demand.

OPEC’s Secretary General suggested surprisingly on Thursday that OPEC could announce an increase in production at their next meeting in December. Although it came with certain conditions such as the elimination of floating storage and stockpiles returning to the five year average it was nevertheless surprising and shows how the pace of price recovery has caught most by surprise. 

This obviously raises the question if the recovery has been too fast? One of the issues that OPEC will be looking at is the continued weakness of dollar which if it continues undoubtedly will continue to drive commodity prices higher. This will lead to the question of how high energy prices can run before consumption begins to be impacted. It is not in anyone’s interest to see Crude back to USD 100 at this stage of the fragile recovery and OPEC obviously share this view hence their comments this week.

Where does this leave Crude prices near term? The break above USD 75 recently triggered a wave of short covering from traders who successfully had been trading the range over the summer months. In addition a lot of technical buying from momentum funds took prices above USD 80 this week.

We do not see energy markets as once again having become a one-way bet upwards. Instead WTI Crude for December delivery is in the process of creating a new trading range with the top coming in between USD 85 and 90. Initial resistance is the 100 week moving average at USD 82.10 which so far has held amid overbought signals on both 9 and 14 days RSI. The downside is now well protected at USD 75 and a break below USD 70 is needed for this recent rally to be rejected.

The seasonal support for Natural Gas have driven the November contract back up to USD 5 despite U.S. inventories rising to a record for a fourth consecutive week. According to the Energy Department natural gas in underground storage rose to 3.734 trillion cubic feet and is getting close to the estimated capacity of about 3.9 trillion cubic feet.

Stockpiles historically rise until the middle of November before they begin to decline as demand for heating fuel increases during the winter.  Weather forecast over the next few weeks will be watched closely for indications of colder weather which will be supportive of prices. Other than that a general pick up in industrial demand is required for the price recovery to continue.

Copper followed in the footsteps of Crude this week breaking out of its 3 months range. However the break was not followed by any fireworks and subsequent rally. On this basis the break needs to show more conviction for the move to continue higher.  A weekly close above USD 300 on the High Copper contract for December delivery should help the positive sentiment with USD 310 being the first target followed by USD 325.

 

The move followed a combination of news that China expanded 8.9 percent in the third quarter driven by its stimulus and record lending together with worries about supply disruptions from Chile and Peru due to industrial action.

Corn which has rallied 30 percent over the last month continued to find support this week as rain and snow in the Midwest of the U.S. delayed the ongoing harvest further. The recent rally in crude has also brought back another source of support namely ethanol which again is becoming competitive with current oil prices.

Having finally left the September lows behind us corn for December delivery has now set its sight on the June high at USD 450 ahead of USD 485. One near-term concern is the RSI which indicates the market is overbought at present levels. A pull back towards USD 390 could be possible but overall support looks firm for now.

 

Gold had a quiet week consolidating further in its new trading range between USD 1,043 and 1,070 on spot. The recent dollar weakness has not triggered another move higher which indicates the need for consolidation before another attempt can be made.

Look for support at USD 1,043 ahead USD 1,032 and resistance at USD 1,070 followed by USD 1,083.

Risk is Back - Wakeup Call

Yesterdays reversal in the equity US equity market points towards that risk appetite is back.

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Calendar

Economic Data Releases
Country	Time (GMT)	Name	Expectation	Prior	Comment
UK	08:30	UK GDP QoQ (OCT)	0.2	-0.6
EC	09:00	Industrial New Orders YoY (AUG)	-22.5	-24.3
US	14:00	Existing Home Sales MoM (SEP)	4.9%	-2.7%

Earnings Releases
Country	Time (GMT) (G(GMT)(GMT)	Name	EPS exp.	EPS prior	Comment
US	Bf-Mkt	Honeywell	0.716	0.740
US	Bf-Mkt	Microsoft	0.324	0.370	Important for sentiment
US	14:00	Schlumberger	0.625	0.680

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What's going on?

Theme Comment

·         Stocks in a strong reversal higher yesterday. The risk-trade is on again. USD and JPY lower and commodities, AUD and EUR higher.
·         US 10-year Treasuries threaten to break support at 117-20. That could be an intraday trigger for new highs in stocks.
·         The S&P500 trendline resistance today is at 1114.
·         Earnings show improvement, but there is an ongoing discussion about the quality of earnings in especially financial shares.

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FX

FX	Daily stance	Comment
EURUSD	0/-	May struggle past 1.5075-00 area. Prefer to sell, stop above 1.5140, target 1.4950 again
USDJPY	0/-	Seen capped at 91.70-80 for a retracement back to 91.0, possibly 90.50
EURJPY	0/-	Res at 137.85-00 seen holding for a retracement back to 137.0, then 136.60 85-00 seen holding for a retracement
GBPUSD	0/-	Prefer to sell rallies to 1.6700-10, stop abv 1.6760. GDP data to determine n/term direction
AUDUSD	0	Expect o consolidate below 0.9300. Suggested range 0.9240 – 0.9300

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FX Options

FX-Options	Comment
EURUSD	German name seen buying more middle of the curve 10 delta EUR puts for customers.
	Buying interests likely to continue so expect vols to be well supported.
USDJPY	Vols have been soft in Asia and as spot moves nearer to 9200, risk reversals have also
	eased off. Expect spot to range between 9100-9250 in the near term.
AUDUSD	Curve got given as spot fails to break higher. Even if it does grind to 9300 again, front end
	should continue to be offered except for 2 week date which gets the RBA and nonfarm .

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Equities

Equities	Daily stance	Comment
DAX	0/+	Buy on dips towards 5819 and target 5880. Stop below 5792.
FTSE100	0/+	Buy on dips towards 5255 and target 5298. Stop below 5229.
S&P500	0/+	Buy on dips towards 1093 and target 1103. Stop below 1089.
Nasdaq100	0/+
DJIA	0/+

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Futures

Commodities	Daily Stance	Comment
Gold	0/+	Buy at the break of 1065 and target 1076. Stop below 1060.
Silver	0/+	Buy on dips towards 17.50 and target 17.70. Stop below 17.40.
Crude Oil	0/-	Sell on rallies towards 82.50 and target 80.00. Stop above 83.30.

Risk swings turn theDollar this way and that...

Asia closing the week with a slightly better bid dollar

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Aug. Retail Sales out at +0.8% m/m vs. +0.4% expected and revised -0.5% prior
• US Weekly Initial Jobless Claims out at 531k vs. 515k expected and revised 520k prior
• US Weekly Continuing Claims out at 5923k vs. 5970k expected and revised 6021k prior
• US Sep. Leading Indicators out at +1.0% vs. +0.8% expected and revised +0.4% prior
• US Aug. House Price Index out at -0.3% m/m vs. +0.3% expected and +0.3% prior
• AU Q3 Import Price Index out at -3.0% q/q vs. -2.8% expected and -6.4% prior
• AU Q3 Export Price Index out at -9.6% q/q vs. -4.7% expected and -20.6% prior
• SI Sep. CPI out at -0.4% y/y vs. -0.2% expected and -0.3% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE PMI Manufacturing/Services (0730)
• GE IFO Surveys (0800)
• EU PMI Manufacturing/Services/Composite (0800)
• UK Q3 GDP (0830)
• UK Index of Services (0830)
• UK BBA Loans for House Purchase (0830)
• EU Industrial new Orders (0900)
• EU ECB’s Nowotny to speak (1030)
• US Fed’s Bernanke to speak (1230)
• US Existing Home Sales (1400)
• US Fed’s Kohn to speak (1530)

Market Comments:

It was a familiar story overnight with what looked to be a “risk off” and dollar-positive day in Asia soon running out of steam in the European/US session. Risk bears were caught offside and the ensuing snapback rally brought us back to Asian opening levels. Again Q3 earnings generally beat market expectations as Asia took over the baton with risk appetite firmly back in place.

GBP had a slight scare after the retails sales data came in well below forecast (flat for the second straight month versus +0.5% expected), even though the data series is regarded as erratic and irrelevant. BOE Deputy Governor Paul Tucker reminded us that an increase in quantitative easing beyond the £200 bln proposed under the current scheme “would be possible and it would happen” if it was deemed necessary. However, thought the economy now appeared to be on a path to recovery, though it would be hard to tell whether we face anaemic or above-trend growth. The early pressure that GBP felt was soon reversed as the dollar retreated though.

Of the Fed speakers overnight, Rosengren grabbed the headlines with a comments that the US risks dipping back into recession after expanding in H2 2009. When asked about the dollar he replied that “the movement we have seen is a pretty natural movement that reflects people’s comfort level with a recovery in US and other economies. We care about the dollar to the extent that it impacts inflation and unemployment.” No obvious impact on the dollar at the time.

Activity in Asia was limited to relatively tight ranges. The “risk-on” feel, with equity markets starting off strongly, pulled EURUSD through the supposed barrier at 1.5050 but managed only another 9 ticks before reversing quickly. Profit-taking and an FT article suggesting the Fed may be considering a slight adjustment to the language of its statement that rates would be held low for an “extended period”. The piece muses that the Fed will want to avoid a situation where it is forced to move quickly from forecasting an “extended period” of low rates to raising them, a move that would disrupt markets and certainly undermine its credibility. The dollar was comforted by the possible development and the USD index was marginally in positive territory by lunch.

Q3 GDP data is the major event for the UK today with the market looking for growth of +0.2% q/q, the first positive growth since Q1 2008. However, yesterday’s weak retail sales data and news that industrial production surprisingly fell in September may suggest that a weaker result may not be too much of a surprise. If we stay in negative growth for another quarter, then watch out below GBP!

Elsewhere we get to see German PMIs and IFO surveys, Euro-zone PMIs and industrial new orders for August. The US sees existing home sales (note other housing data has been a tad softer of late) while Fed speakers Bernanke and Kohn wrap up the week.

Have a great weekend.

US jobless claims disappoint as EURUSD criss-crosses 1.5000. Higher bond yields continue to weigh on JPY.

China's growth numbers largely in line - but is quality more interesting than quantity? AUD is the G-10 China proxy.

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MAJOR HEADLINES – PREVIOUS SESSION

• Japan Sep. Adjusted Merchandise Trade Balance out at ¥58.6B vs. ¥375B expected
• Japan Sep. Merchandise Trade Exports fell -30.7% YoY vs. -29.7% expected and -36.0% in Aug.
• China Q3 GDP out at 8.0% YoY vs. 9.0% expected and 7.9% in Q2
• China Sep. Producer Price Index out at -10.1% YoY vs. -10.7% expected and -11.4% in Aug.
• China Sep. CPI out at  -0.8% YoY as expected and vs. -1.2% in Aug.
• China Sep. Retail Sales rose 15.5% YoY as expected and vs. 15.4% in Aug.
• China Sep. Industrial Production rose 13.9% YoY vs. 13.2% expected and 12.3% in Aug.
• Japan Sep. Supermarket Sales fell -2.4% YoY vs. -3.4% in Aug.
• Switzerland Sep. Trade Balance was 1.92B vs. 1.72B in Aug.
• Sweden Sep. Unemployment rate out at 8.3% as expected and vs. 8.0% in Aug.
• Sweden Riksbank left rates unchanged at 0.25% as expected
• EuroZone Aug. Current Account out at-1.3B vs. 3.7B in Jul.
• UK Sep. Retail Sales out at 0.0% MoM vs. +0.5% expected
• Canada Aug. Retail Sales out at 0.8% MoM and 0.5% less Autos, vs. +0.4%/+0.6% expected, respectively
• US Weekly Initial Jobless Claims out at 531k vs. 515k expected and 520k last week
• US Weekly Continuing Claims out at 5923k vs. 5970k expected and 6021k last week

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Sep. Leading Indicators (1400)
• US Aug. House Price Index (1400)
• Canada Bank of Canada Monetary Policy Report (1430)
• US Fed's Rosengren to Speak (1430)
• UK Bank of England's Tucker to Speak (1530)
• US Fed's Dudley to Speak (1730)
• US Fed's Evans to Speak (2000)

Market Comments:

An ugly late afternoon sell-off in US equities tilted the risk appetite gauge back into neutral territory after the earlier rally, and the latest move weaker in the USD consolidated, with EURUSD criss-crossing 1.5000 and AUDUSD backing well off the new highs for the cycle posted above 0.9300 yesterday. The weak USD move is so stretched at this point that any further progress lower in the USD, if it occurs, looks likely to be a tough grind. Speculative positioning has long been extremely crowded.

Overnight, Chinese data was largely in-line, but questions abound about the quality of that growth and whether too much is a result of the government stimulus program as China tries to transition from its old export-led ways. An excellent Op-ed piece in the FT out late yesterday "China's Baozi economy" discusses that very issue and frets the trajectory of the Chinese economy. There is also excellent discussion of this article on ftalphaville. Looking at Japan's export figures out overnight, with year-on-year merchandise exports still off some -30%, one can imagine that it is tough to find a productive place to put capital to work in China's former production/export-led economy.

Riksbank dashes market expectations
The Riksbank surprised the market as the bank promised to keep rates at the current very low level until this time next year, certainly a surprise for the market that, judging from interest rate expectations, has priced in a good deal of tightening between now and then. Such dovish talk is likely to put a damper on the krona for some time, and volatility in EURSEK has already shown signs of declining. Going forward, the krona is likely to act as a weak proxy for the global recovery due to the huge importance of exports for its economy - with a special sensitivity to developments in Eastern Europe. The latter theme, and especially the still dire situation in Latvia, halted SEK strength over the last few weeks, but bad news there is largely already priced in, it would seem. Despite the dovish talk from the Riksbank, EURSEK looks relatively expensive given market conditions and historic valuations for the krona.

US Jobless Claims spoil the trend
The trend to lower weekly jobless claim was spoiled today with a weekly reading 2% higher than last week's and an upward revision of the previous week's number as well. The US economy is still seeing more workers file for claims than the same time last year, which was already well into the recession. The weekly claims numbers need to drop back well below 400k before we are likely to see the employment situation improving and wages rising again - a key element in any real recovery of confidence and spending.

Looking ahead
We have a very sparse calendar until tomorrow's German IFO and UK GDP data, as well as the preliminary readings on EuroZone October Manufacturing and Services PMI's. The economic calendar finishes off the week with US Existing Home Sales and Bernanke is also out speaking tomorrow on regulatory issues. Today, the focus is squarely on equities, which finally appear to be rolling over into correction mode (though this rally has been the cat with nine lives) much like AUDUSD (see below) and perhaps even more so on long bonds, were US 10-year yields are zeroing in on the round 3.50% resistance. Their behavior will be key for whether the JPY sell-off will continue here. The USDJPY rally was rejected at new highs today, but there may not be a floor here for the JPY is bonds continue to sell-off. We may see announcement of next week's US treasury auction sizes today.

Chart: AUDUSD
AUDUSD has largely been a one-way ticket since the beginning of September. We recently highlighted the turning stochastics level suggesting that the pair's rally is moving momentum. The lack of consolidation and abundant signs of speculative fervor suggest that a consolidation, even if not a trend-destroyer, risks being rather volatility and sizeable the longer this kind of action continues. Note that the last few days have seen each successive new high retracing rather deeply the next day, a possible sign of an imminent correction - perhaps to the 0.8900 area if a reasonable correction in equities sets in here. The AUD rally could pause a bit here as well if the market decides to take a good hard look at the quality of Chinese growth.

Bulls and Bears Hold the Dollar near threshold levels

Very little on the data front to tip the scales today

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Aug. Wholesale Sales out at -1.4% m/m vs. -0.4% expected and revised +2.6% prior
• CA Sep. Leading Indicators out at +1.1% m/m vs. +0.8% expected and revised +1.2% prior
• US Sep. PPI out at -0.6% m/m vs. flat expected and +1.7% prior
• US Sep. Housing Starts out at 590k vs. 610k expected and revised 587k prior
• US Sep. Building Permits out at 573k vs. 595k expected and revised 580k prior
• CA Bank of Canada leaves rates unchanged
• US Weekly ABC Consumer Confidence out at -50 vs. -48 prior
• NZ Sep. Visitor Arrivals out at 3.8% vs. revised -0.5% prior
•  AU Westpac Aug. Leading index out at 1.1% vs. revised 1.4% prior
• AU Sep. New Vehicle Sales out at +2.9% m/m, -2.0% y/y vs. revised +0.1%/-6.1% prior resp.
• NZ Sep. Credit Card Spending out at -2.3% y/y vs. +0.1% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• UK BOE Minutes 0830)
• UK CBI Qtrly Industrial Trends Survey (1000)
• US Weekly MBA Mortgage Applications (1100)
• US Fed’s Lacker to speak (1300)
• US Fed’s Cumming to speak (1300)
• US Fed’s Tarullo to speak (1700)

Market Comments:

While Q3 earnings releases continued to beat forecasts overnight, markets instead decided to focus on the less than stellar US data, resulting in a dollar rebound and a slight retracement on Wall St. US housing starts increased only marginally (590k from revised 587k last, 610k expected) while building permits declined to 573k from 580k (consensus 595k).

The dollar’s recovery ensured that EURUSD left the 1.50 level untouched, a level that French President Sarkozy’s speech writer Guaino described as “disastrous for European industry and the economy”. Fin Min Lagarde also mentioned that she is worried about EUR levels (though not specifically versus the USD).

CAD was the major underperformer after the BOC’s rate announcement. The BOC left rates unchanged but highlighted the negative impact of the CAD’s current strength, saying that, over time, it would “more than fully offset the favourable developments since July”. In addition, the bank reminded that it had extraordinary policy measures as an option (ie QE). The firmer dollar and softer CAD ensured that the parity level that had been in the sights for USDCAD remained a pipe dream, at least in the near-term.

In his speech yesterday, BOE Governor Mervyn King sounded especially dovish on the UK economy, saying that while it is likely to return to positive growth in H2 2009, the recovery will neither be smooth nor painless. As such, the conduct of monetary policy would be particularly difficult and challenging. He noted that UK banks were still overly dependent on the government and the impact of the global financial crisis would likely be felt for a generation. He was a tad more hawkish on the CPI outlook, saying it was likely to remain volatile and could edge higher in coming months due to higher petrol prices, sterling’s weakness and the reversal of a cut in the VAT on Jan 1^st. His comments could be a precursor to the tone of the BOE minutes due to be released later and is likely to keep GBP on the back foot.

There was no such problem for the NZD after RBNZ’s Bollard surprised the market with a comment in a radio interview suggesting that the high level of the NZD was not necessarily an obstacle to raising the cash rate. He later qualified this comment by adding that this was in the context of stronger domestic demand and house prices. Nevertheless, wWith eyes on next Thursday’s policy meeting, and the expectation that the RBNZ would drop its easing/dovish bias, today’s comments seem to affirm that prospect. NZDUSD had a quick 40-50 point run-up post-comments but ran out of steam shortly thereafter in a broadly USD-positive environment. Nevertheless, expect the NZD to maintain support on other crosses near-term.

BOJ Deputy Governor Nishimura was also on the wires, reaffirming the BOJ’s dovish stance by saying it is important to persist with an accommodative policy to help sustain the economy's recovery. Though he expects Japan's economy to pick up further, he notes downside risks are still high adding that developed countries in general could face downwards pressure due to balance sheet adjustments. Otherwise he notes it will take a while for inflation to go to the desired level, with annual CPI falls likely to continue for a considerable time. Financial conditions are said to be widely improving though, with the BOJ to decide on whether to extend its corporate support measures at the next Oct 30th policy meeting or later. Whilst on Japan, car-maker Honda commented on the fall of the dollar, saying that if it falls further then the company would need to secure key export markets other than the US to sustain production at its Japanese factories. Nissan also joined in with comments that it would use US-made cars for exports to “dollar countries” such as in the Middle East. Bear in mind that Japanese corporate had mostly budgeted a USDJPY rate closer to 95.0 than current levels for Q4 and current sentiment suggests such a level is well out of reach.

It's a very quiet session on the data front today, so more Q3 earnings will dominate headlines. Apart from the BOE minutes, the UK will see the quarterly CBI report  with the only other data the weekly US mortgage applications. Fed speakers are out in force with Lacker, Cumming and Tarullo all scheduled.

The White House's secret plan for the Dollar

From Richard Russell in Dow Theory Letters:

Now I'll let you in on an awful secret. The US, despite all its BS talk, really wants a lower dollar. The fact is that the US is doing absolutely nothing to defend the dollar.

Of course, if the Fed wanted to defend the dollar they could halt their mass printing of dollars, and they could raise interest rates. And Bernanke could win the 800 meter race at the next Olympics at Rio.

But let's be rational - how in God's name is the US going to pay off trillions in debt? By raising taxes? Impossible. They could renege on the debt like Argentina - unthinkable. But there is a way - they'll try to minimize the importance of the debt with a cheaper devalued dollar.

That's the time-honored US way, but loyal Americans don't believe it. If they did, gold would be selling at $4000 an ounce.

Gold did it and Crude Followed - Weekly Commodity Update

It has been a very interesting few weeks in the commodity arena with upside breakouts all over the place driven by a wall of liquidity, strong equity markets and a weak dollar.

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The five month range in Crude Oil finally got broken on Thursday following in the steps of a similar move in gold the previous week. Momentum had been building all week as strong equity markets driven by stronger than expected Q3 company earnings continued to drive the dollar lower thereby supporting the upside move in energy. The move out of the trading range occurred as the weekly DOE storage data showed bullishness across the board. This fundamental support gave traders the confirmation they had been looking for and a wave of stop loss buying from those who had successfully been playing the range for so long saw November WTI Crude reach USD 78.17 on Friday, a new high of 2009.

A big drop in gasoline stocks, down 5.2m barrels versus an expected rise of 0.8 m were the main trigger. Interestingly enough some of the reason behind this drop were due to a big fall in refinery activity caused by poor demand and weak margins. In other words data over the following weeks will be watched very closely.

Another slight worry is that distillates inventories are currently 40% above last year’s level which means that the U.S. can sustain a very cold US winter lasting all the way to June. 

The next few weeks will undoubtedly set the trend for the remainder of the year. Many will rightfully argue that the range has been broken and the uptrend from March could be about to resume. The next big technical level is 50% retracement of the big sell off last year which stands at USD 90.

What we probably need initially is confirmation of the break so look for a buying opportunity down towards USD 76.30 with a stop below the previous high at USD 75 on WTI Crude for November delivery. Next week the December contract will become the new spot month but the above levels will still be valid as they are based on the continued spot month contract.

Gold have near term run out of steam after making a new record high at USD 1072 during the week. Just like Crude attention have now turned to the sustainability of the break out, something that can really only be confirmed by testing the underlying strength on any setback.

It is a popular belief that gold should be a hedge against inflation. We believe that to be inaccurate. Gold is a hedge against instability. It tends to rise in periods of unanticipated inflation as well as unanticipated deflation/disinflation. That is why gold rallied in 1982 and in 1985-1987. That is also why gold is performing extremely well in the current environment where the US is experiencing the first deflation since 1955.

On this basis we see the break above USD 1,000 as having opened up the possibility of a sustained move higher, initially towards USD 1,100 and longer term towards USD 1,300. The road ahead will be bumpy with major setbacks along the way. Near term the market bulls are fighting a huge speculative long position and a period of consolidation is required in order to sustain the rally. 

Technically we are looking for a setback towards the 2008 high of USD 1,032.70 and would be a buyer towards that level. Near term one of the big drivers, namely the weak dollar have found some support ahead of the 1.5000 level versus the euro and some consolidation seems needed before another attempt to weaken the dollar further is instigated. Other support levels to look out for are USD 1,024 and very importantly USD 985.

The long awaited move higher for US grains and soybeans has begun over the last few weeks with several factors helping the prices along the way. First of all the weaker dollar has increased US farmers competitiveness on the international market but secondly and quite significantly the weather has begun to play up with frost and rain keeping the combine harvesters of the fields.

Freezing temperatures covered areas of the Midwest this past week and temperatures dropped below levels at which some yield loss can be expected. How much damage has been done to what has been expected to be a record harvest is still too early to say?

We see the downtrend as having been broken and will be looking for buy opportunities in December Corn at USD 350, December Wheat at USD 480 and December Soybeans at USD 945.

Sugar which has more than doubled over the past year rallied this week and a break above USD 24.90 on the ICE NYBOT March contract would signal a resumption of the uptrend with some talking of USD 40 being a possible target.

Global consumption is expected to outpace supply by nearly 7 million metric tons next year after bad weather has hurt crops in India and Brazil.

China Govt's Secret New Gold investment could pay  500% over next 2 Years

Forex Market Update

The meltdown of the three FX stooges: USD, JPY and GBP, continues, as equities notch new highs.

Banking Holiday in Canada and United States today - though US equity markets will be open.

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MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Sep. QV House Prices fell -1.1% YoY vs. -2.8% in Aug.
• Germany Sep. Wholesale Price Index fell -0.2% MoM vs. +0.3% expected
• Sweden Sep. AMV Unemployment Rate out at 5.3% vs. 5.4% expected and 5.5% in Aug.

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US National Economic Council's Summers to Speak (1615)
• US Treasury's Krueger to Speak (1715)
• New Zealand Retail Sales (2145)
• UK Sep. BRC Retail Sales Monitor (2301)
• UK Sep. RICS House Price Balance (2301)
• Australia Sep. NAB Business Conditions (0030)

Market Comments:

The USD meltdown continued this week after a brief respite on Friday after Bernanke threw out a snippet of rhetoric suggesting that rate. With equities jumping higher again in the Asian and European sessions today, the greenback and its low yielding fellow travelers, the pound sterling and Japanese Yen, didn't stand a chance, and all three weakened again versus the high flying Loonie especially, which continues to find support from the shockingly strong  Canadian employment report from Friday.  Crude oil tacking on to recent gains fueled further gains for the currency, and likely also helped NOK notch new highs vs. the Euro in Asia before backing off in the European session today.

Today is one of those odd "half holidays" in the US in which banks - and therefore the treasury market - are closed for the day, while equity markets will be open for business.

Reserve accumulating central banks are the primus motor of the moves in currencies here, as US and UK policies are seeing major banks shun the fiscally hopeless and low yielding currencies and diversifying especially into Euros, and the Yen to a lesser extent. A Bloomberg article this morning cites Barclay's Capital tally of the latest quarter's accumulation of FX reserves at over $400 billion. Barclay's also estimates that 63% of new reserves are being funneled into Euros and Yen. This was for the quarter ending in June, and there is certainly no sign of a change of behavior since then, in fact, the trend only seems to have strengthened. If the Chinese economy is doing so well, we ask again, then why have they not signaled that it is time to allow the renminbi to begin appreciating again? And while Europe has begun to complain about the unfair strengthening of its currency, why have the complaints not been more belligerent?

With the current persistent trends very clear and powerful, we have a look at coincident indicators and any event risks on the horizon that might provide a pivot point in the action. On the former, the strength in the Aussie, to take an example, is outpacing differentials in interest rates and is beginning to feel overdone, particularly as the last leg of Aussie appreciation has shown an acceleration in an already very well established trend. Usually, such aggravated action cannot be sustained for long, so we might expect sideways consolidation at minimum soon. Speculative positioning suggests that long Aussie positions have been crowded for some time, as well. In the case of CAD, the recent data surprise triggered moves in interest rates that fully justify the latest strengthening. And the over-riding theme of high risk appetite feeding the weaker USD will continue as long as equity markets are rallying.

As for upcoming event risks, the most interesting items on the calendar this week are Wednesday's US Advance Retail Sales and US FOMC minutes. The former is very important for measuring the strength of end demand, as our outlook suggests that end demand will not bounce back enough to provide a strong recovery due to private balance sheet deleveraging and weak wage growth. The FOMC minutes could be interesting due to the continued signs of a divided Fed, so we'll look for signs of the split widening or the hawks' impatience growing. Thursday's jobless claims number will be important for showing whether the trend toward fewer jobless claims continues now that we have entered the seasonally most important part of the year for employment. (Still interesting that more claims were filed last week than for the same week last year, just to show how much further we need to go to get real improvement rather than "less badness"). Then on Thursday we have the first two of the regional US manufacturing surveys.

Chart: GBPUSD
GBPUSD managed to stave off new lows today below 1.5800 as GBP, USD and JPY fight for lowest spot on the currency totem pole. Today's low and the 1.6110 area are the two key trigger areas for GBPUSD's next larger move now.

America's Huge New Source of Oil

By Matthew Badiali

Mexico's colossal Cantarell field was once the second-largest oilfield in the world...

Cantarell funds 40% of Mexico's annual budget. Those petro-dollars paid for universities, built a $12 million sports stadium in Chihuahua, erected a giant flagpole in Nuevo Leon, remodeled churches in Yucatan, and constructed swanky government offices in Oaxaca.

But according to a recent Wall Street Journal article, oil production from Cantarell peaked in 2005 and has fallen 75% since then. The golden goose is a dead duck... and its decline cost the government $14 billion this year.

The same thing is happening in Indonesia, Iran, and Venezuela. Indonesia went from a proud member of OPEC to a net oil importer. Venezuelan production peaked in 1997 and is down 27% since then. Iran's production peaked in 2005, but has only fallen 2% so far... The worst is yet to come there.

A lot of factors contributed to the undoing of these great oilfields – bureaucratic mismanagement and socialist daydreaming are key culprits – but behind it all is a simple, unavoidable fact of geo-engineering. That fact is going to make a few energy investors rich... Here's why:

Oil recovery comes in three stages: primary, secondary, and tertiary. The early part of oil production flows under the natural pressure of the field – the iconic gusher of the oil industry. Oil escapes into the well, where it can be pumped to the surface. That's easy work. But primary production will only get about 10% of the oil in the field to the surface.

Eventually, production exhausts the field's natural pressure. Then the engineers begin to replace the natural pressure by pumping water or natural gas into the field. That allows the companies to recover 20% to 40% of the oil left in the field. But it also means 60% to 80% of that oil remains trapped underground in so-called "depleted" fields.

Tertiary recovery, or enhanced oil recovery (EOR), employs more sophisticated techniques to recover another 25% of the original oil in place. That means companies can recover 50% to 100% as much oil as the field originally produced.

When you consider the U.S. has pumped 75 billion barrels of oil since 1977... that means, conservatively, we could recover another 35 billion barrels of oil from known fields.

A lot of the big oil companies scrapped their EOR plans in the '80s, when the price of a barrel of oil wallowed in the teens. Now that oil is back up around $70, EOR is viable again... and it represents a huge "new" source of oil.

EOR companies in the U.S. spend between $20 and $25 per barrel to produce light, sweet crude oil. That's in line with the industry's average cost to find and develop each barrel of oil. And it's well below the cost of developing fields offshore or in tar-sand deposits.

Right now is a terrific time to buy these kinds of oil plays. On average, the market values oil companies at about $14 per barrel of reserves. But you can buy EOR companies for half that – about $7 per barrel of reserves.

You see, most oil companies are valued on their "proven" reserves, meaning these oil holdings have been scrutinized and can be "economically and legally produced under existing economic and operating conditions." That's the SEC's standard: that the reserves can be produced today.

But by definition, most of the oil reserves held by EOR firms can't be produced today... That's why these companies are using unconventional techniques. EOR companies have to describe them to investors as "probable" reserves. And the market doesn't pay for "probable" – certainly not nearly as much as it does for proven.

The market distinction between proven and probable reserves suggests probable reserves are more risky, that maybe there isn't as much oil as the company says. But the fact is, this isn't speculative drilling in virgin territory. Domestic EOR companies are working in 100-year-old oilfields that have been measured, assessed, assayed, developed, and produced over and over. Everyone knows the oil is there.

As soon as the rigs start pumping out petroleum, the SEC's bureaucrats can no longer ignore those reserves. The EOR companies can shift them to the "proven" category, and the market will respond by bidding up the value of those barrels.

Oilfield reclamation technology is actually the future of the entire U.S. oil industry. It's safe, inexpensive, and will get cheaper over time. According to a 2006 study for the Department of Energy, the U.S. has about 210 billion barrels of oil that it can recover using EOR techniques. That's nearly 10 times today's proven reserves.

With prices so low, now is the time to buy these companies.

It's simply taking more innovation to find it. The winners of that innovation race will make for terrific speculations.

Good investing,
Matt Badiali