FX Update: Tomorrow not just another day?

Yesterday's pull off the lows in risk appetite saw a bit of follow through overnight, but that move is  retreating a bit as market is afraid to commit directionally ahead of the Bernanke speech tomorrow.

Technical tea leaves

The market continues to trade nervously ahead of tomorrow's main event (the Bernanke speech), as yesterday's "breaks" saw now follow through and proved to be head-fakes so far. AUDUSD dipped to a new low but pulled back to just above the 0.8850/60 area in this morning's trade. Likewise, NZDUSD's deep cut below 0.7000 was erased overnight. Then this morning, the reversal itself was reversed as EURUSD tickled a marginal new high above 1.2720 before diving back into the range and JPY crosses were back lower as yesterday's bond rout saw a significant consolidation heading into this morning. This kind of action suggests a lack of willingness to commit and we should be cautious in reading the technical tea leaves until tomorrow's Bernanke event is behind us.

AUD

The Aussie got a bit of support from the recovery in risk from yesterday's lows and the rejection of the technical break lower in AUDUSD, but interest rate spreads have hardly budged and don't suggest that the Aussie should switch to rally mode here. We had a very disappointing Q2 capital spending data point out overnight that suggests Australia companies are heavily reducing their capital investments. On that front, it is clear that the only sector that can keep the Australia economy humming is the mining sector, which has been its champion industry for years now, but could also prove its Achilles heel. It is clear that following copper and other key Australian commodities will be critical for understanding the currency's trajectory going forward. On that account, the mining sector was a huge positive contributor to the capital expenditure data, so the overall number ex-mining would have shown an even steeper decline. And spending expectations from the mining industry are still very robust for the year forward.

Chart: AUDUSD and copper

These two instruments are joined at the hip. Copper is often considered a barometer on economic growth, as it the Aussie. The trajectory for both of these will be determined by China, which is the main destination of Australian copper and other exports and which has supported the Australian economy with its imports of thermal coal for steel-making and other key ores that end up in China's endless construction and infrastructure buildout. The question is when too much overcapacity in an economy is too much? When that point is discovered and the implications are pondered, AUDUSD is more likely to be trading close to 0.70 rather than 0.90. Until then, let's all enjoy the ride.

US claims data
The Weekly Claims data saw a sharp drop this week from yesterday's big move to 500k (now revised to 504k). As we have said many times recently, we have to take claims data at this time of year with a considerable grain of salt due to the seasonal adjustments, which are particularly large at this time of the year when firings are at their lowest rate of the year. We'll have a better idea of the claims trend as we head into October than we do now. Still, the number is the lowest reading in four weeks, so the market might draw a bit of hope from it ahead of next Friday's employment report. The bond market has decided to react strongly to the data in the immediate after math and this saw some pop in the JPY crosses, but any reaction is likely to be short-lived considering the volatility of any weekly data series and the far more important event risks on the horizon like tomorrow's Fed speech and next week's raft of important numbers.

Looking ahead
The market will likely continue to trade nervously ahead of tomorrow's speech. Again, the key here is to what degree the market is investing its hope in QE2 and to what degree Mr. Bernanke will deliver. If hopes are high for QE, we suspect that Mr. Bernanke will disappoint, which would have the usual results in FX - negative for pro-risk commodity currencies and positive for the USD. The question, as we suggested in yesterday's closing note, is whether a QE2 disappointment would see a bond consolidation, which could finally mean the USD getting out from under the Yen's thumb if we get both risk aversion and a treasury sell-off - perhaps the most interesting scenario.

Economic Data Highlights

• Australia Q2 Private Capital Expenditure fell -4.0% QoQ vs. +2.3% expected
• Germany Sep. GfK Consumer Confidence out at 4.1 vs. 4.0 expected and 4.0 in Aug.
• Switzerland Q2 Employment Level rose +0.6% vs. +0.8% expected
• Sweden Jul. Trade Balance out at 10.3B vs. 6.5B expected and 9.7B in Jun.
• Sweden Jul. PPI out a +0.1% MoM and +1.0% YoY vs. +0.3%/+1.2% expected, respectively
• Sweden Jul. Unemployment Rate out at 8.0% vs. 7.9% expected and 9.5% in Jun.
• Sweden Jul. Household Lending rose 8.8% YoY vs. 8.9% in Jun.
• UK Aug. CBI Reported Sales out at 35 vs. 18 expected and 33 in Jul.
• US Weekly Initial Jobless Claims out at 473k vs. 490k expected and 504k last week
• US Weekly Continuing Claims out at 4456k vs. 4495k expected and 4518k last week

Upcoming Economic Calendar Highlights

• US Mortgage Delinquencies (1400)
• US MBA Mortgage Foreclosures (1400)
• Japan Jul. Jobless Rate (2330)
• Japan Jul. Overall Household Spending (2330)
• Japan Jul. National CPI (2330)

Weekly Fundamentals - Energy Prices Tumbled amid Intensified Concerns on Slowdown

Trading was relative light in the commodity sector as investors continued to gauge the implications of macroeconomic indicators and government officials' comment on global economic outlook. Despite broad-based decline in risk assets, the dataflow was not entirely poor last week. US' industrial production rose +1% m/m in July after contracting -0.1% a month ago while UK's retail sales and net borrowing showed signs of improvement. Unfortunately, the market only focused on the weak side of the economy and reacted vigorously when US initial jobless claims surprisingly rose to 500K in the week ended August 14 from an upwardly revised 488K in the prior week and ECB member Axel Weber signaled stimulus should stay for the rest of the year. 

Read full article here

FX Closing Note: Bond sell-off supports JPY crosses

John J. Hardy, FX Consultant, Saxo Bank

We saw a sharp bond sell-off into the close today in the US as well as a bit of a comeback in risk appetite, which sets up an interesting picture for next week. JPY crosses to head higher in near term?

Risk appetite made an interesting comeback after trading at new lows for the week today. The usual risk instruments like the S&P500, AUDUSD , etc., reverse well off their lows for the day. Most interestingly, however, bonds finally gave up the rally impulse that seems to materialize day after day and sold off rather sharply after yields briefly touched yet another new low for the cycle. The latter move is the more interesting one, since equities haven't moved much over the last week anyway, while bonds have been the big focus. The bond sell-off pulled JPY crosses off their lows on the day.

EURUSD
EURUSD found support exactly on its 55-day moving average today (around 1.2665) after trading to the lowest levels in a month. The reversal into the close isn't emphatic enough to call bullish, so it will be interesting to see whether the support created by today's action holds into next week. EUR was generally weaker today as sovereign European debt suffered once again and the ECB’s Weber suggested that the ECB should look for normalization again, but that normalization will be dependent on the individual states and their financial systems. This is a bit more dovish than one would expect for Weber (many suggest he is aiming for the ECB presidency since Trichet’s term expires next year).

AUDJPY
JPY crosses woke up a bit after generally trading lower on the week as the US bond market finally consolidated a bit after the US 10-year note yield dipped to within 3 bps of the 2.50% yield mark. If risk appetite continues to comeback early next week and the negative AUD sentiment has gotten ahead of itself, we could see further consolidation in the JPY crosses and in AUD as well, though we are still looking for the next big AUD sell-off in the bigger picture.

Looking ahead
The biggest event on the horizon for FX at the moment is the Australia election, of course, which we discussed this morning. But the major treasury markets bear watching next week as this could shake up the JPY crosses next week. It's definitely worth noting that the US treasury is set to auction over $100 billion in treasuries – of three, five and seven year duration (auctions on Tuesday through Thursday).  Bond investors may be wondering whether it is time for some consolidation in the bond market with this supply on the way and considering the furious rally in bonds of the last few weeks. Bond sentiment is said to be rather extremely bullish as well – though this is only reflected in the US futures market by the evaporation of the huge short position in futures so far, rather than an outright long position.
Stay tuned.

Asia Forex Update: Preview of Japan's Central Bank Meet

China is now the second largest world economy, but it's small beer.

Australian election is expected to result in a hung parliament. Will the new government suspend the mining tax?

FX Update: USDJPY falls again on weak Q2 GDP in Japan

USDJPY fell after a surprisingly weak Japanese GDP report, and the greenback is generally under pressure despite further signs of risk aversion. Is the USD rally over with?

Japan's growth in Q2 decelerated to a paltry +0.4% rate Annualized (compare with Germany's 2.2% QoQ). But on a nominal basis, Japan’s growth was actually negative du to a -1.8% YoY GDP deflator reading. You know things are bad when you are counting on deflation to bump growth into the positive category. Even more worrying for the country, the Japanese Yen has strengthened since then, further threatening the export-dependent economy. Officials were out again over the weekend jawboning again on the Japanese Yen, though the rhetoric at this point has been fairly underwhelming. The bond sell-off we mentioned on Friday promptly evaporated today on the Japanese growth news and a bit of ugly follow through on Friday's very ugly close for risk appetite, and this pushed the JPY back to stronger levels vs. the USD and elsewhere. Still, history shows us that when specs begin to get long JPY in large amounts, that any JPY rally is not likely to last much longer. The question now is whether we get a spike before a reversal in USDJPY or whether current levels are already offering value for JPY skeptics (count us among them, even if we don't trust valuation judgments in the shortest term).

US Data
The first of the major regional US manufacturing surveys - the Empire survey - was released today and was slightly lower than expected at 7.1, though its was also slightly stronger than last month's 5.08 reading. The positive news was the solid increase in the number of employees and a bounce back in the average workweek index. On the more negative side, New Orders dipped alarmingly into outright negative territory and prices received dropped further into negative territory. The other news of interest out so far today was the TIC flows data, which is usually more forensic than predictive (in this case, it helps to explain why the USD rally faded and partially reversed in Jun. as total flows were actually negative for the month).

Chart: USDJPY hourly chart
USDJPY failed to hold the new highs on Friday as bonds rallied strongly again to open this week. The 0.618 Fibo retracement around 85.40 is struggling just ahead of the US open and below that, the only real support is the recent low at 84.75, which was the lowest level the pair has traded since 1995, when it briefly touched 80.00. For that latter level to be reached once again, we will need a persistent further move in US interest rates lower and we will also need for Japanese officialdom to remain complacent to the market's moves.

Looking ahead
On Friday, we discussed the ominous closes on the lows of the week - so far the market is trying to brush off this development and change directions, but what catalyst would offer a strong hope for the bulls? As well, the positioning reports from the CFTC released on Friday showed that spec positions are getting stretched once again in the short USD category, meaning that there may be little fuel to drive the greenback lower (though it appears that the USD direction continues to be slave to/part of the entire risk appetite equation). A caveat to the worry about the speculative positioning are the reports in the financial media (see this Bloomberg article for an example -  - that China remains interested in diversifying away from US assets after the shift in direction by Bernanke over the last two Fed meetings (more like a halt in the momentum of a move toward exit strategies as the Fed's balance sheet will remain stable). The question is whether China and other are ignoring the potential for the relative risks in Europe and Japan to prove equal or greater to those in the US in the months ahead. The only benefactor/alternative to the G-3, in the meantime, is gold, which has marched higher yet again in today's trade. The anti-USD trade looks rather stretched, in our view.

It is tough to find any particularly compelling catalyst this week in the US economic calendar, though tomorrow's housing data (July building permits and housing starts) and Thursday's weekly initial jobless claims have perhaps the most potential for the week. The NAHB survey out shortly is possibly an even better indicator on the current momentum in housing, however, even if it may not receive the attention it deserves.

On the technical front, the risk barometer of the S&P500 looks like it wants to use the 55-day moving average as resistance (there was also a lot of noise over the weekend about an almost ridiculously exotic indicator called the Hindenburg Omen that sounds very impressive but is probably a case of data mining to find some weird combination that has often spelled doom in the past). In FX, a similar risk barometer might be the 200-day moving average in AUDUSD around 0.8960, which is under assault just as we are about to go to press here.

Be careful out there - judging from Friday's close and the market's intraday volatility, it would seem that the further volatility potential remains very high.

Economic Data Highlights

• UK Aug. Rightmove House Prices fell -1.7% MoM and rose +4.3% YoY vs. 3.7% YoY in Jul.
• Japan Q2 GDP out at +0.4% Annualized vs. +2.3% expected and 4.4% in Q1
• Australia Jul. New Motor Vehicle Sales out at -2.6% MoM and +11.6% YoY vs. +7.8% YoY in Jun.
• Norway Jul. Trade Balance out at 28.4B vs. 25.5B in Jun.
• EuroZone Jul. CPI out at -0.3% MoM vs. -0.4% expected
• EuroZone Jul. Core CPI out at 1.% YoY as expected and vs. +0.9% in Jun.
• US Aug. Empire Manufacturing out at 7.1 vs. 8 expected and 5.08 in Jul.
• US Jun. Net Long-term TIC Flows out at +$44.4B vs. +$45.7B expected and +$35.3B in May
• US Jun. Total Net TIC Flows out at -$6.7B vs. +$40B expected and +$17.1B in May

Upcoming Economic Calendar Highlights

• US Aug. NAHB Housing Market Index (1400)
• Australia RBA Meeting Minutes (0130)

FX Closing Note: A clean shaven finish to the week for FX

Weekly candlesticks in major FX pairs show some interesting setups for the coming week that suggest high risk of dangerous volatility.

This Friday the 13th didn't particularly live up to its superstitious reputation as there were no particularly alarming developments in risk appetite, though equities are finishing the day on a sour note. But looking at our weekly candles, we can call this a very interesting week - one with a number of "marubozo" closes (Japanese for "clean shaven", which in candlestick terminology describes a candlestick with no, or virtually no, shadow on at least one side of the candlestick. This is most interesting when the side lacking the shadow is on the closing level. This week produced a plethora of marubozu candles as we can see below.

Chart: EURUSD
EURUSD had a particularly ugly finish to the week as most EUR crosses fell. PIGS spreads are marching higher again. The Greek 2-year yield is close to the highest levels since the ECB managed to quash the April-May blowout back in early May - now trading at 10.2%.

Chart: EURCHF
EURCHF is again an excellent measure of the Euro sentiment - the combination of the weak EUR without strong CEE worries this week is high octane fuel for the downside. Could this week set up a test of the lows for the cycle?

Chart: EURGBP
EURGBP saw an ugly close on the week as falling rates around the world generally tends to favor the low yielding pound as rate spreads compress. The weak Euro helped matters out for the pound as well, though the latter still corrected sharply lower vs. the mighty greenback.

Chart: USDJPY
We've seen three strong weekly closes in the last several weeks, but this one interestingly cam after the pair posted a new low close to critical levels. The ability of the greenback to also make a comeback against the JPY this week (thus making the USD far and away the strongest currency on the week) is particularly interesting. And remember that the world is far more short the USD this time around than the JPY, which specs are actually long, if panic strikes in coming weeks. The huge focus if we do see a strong rally extension could likely be the 89.00 area - a previous strong area of contention as well as the current location of the bottom of the daily Ichimoku cloud.

Chart: USDCAD
USDCAD not doing as much as other USD crosses this week, most likely because CAD has suffered collateral damage from US economic weakness, as we have discussed over the last couple of days. The USDCAD pair has been rangebound forever and may stay capped for now before a bigger break higher further out, even if it has room to maneuver up toward 1.0800+ again.

Chart: AUDUSD
AUDUSD closed the week below the 200-day moving average and now the focus shifts to the minor rising trendline and the previous salient high around 0.8860 from late June.

Chart: NZDUSD
The antipodean currencies had a very ugly week and the ugly close at critical levels could set up plenty of further downside in the weeks to come if risk remains wobbly. This 200-day (here shown as the 40-week) moving average has been an interesting one to watch for the pair and now the rising trendline has been broken.

Looking ahead:
So the question for next week is whether this move in risk aversion keeps up a head of steam. The greenback will need for it to do so if we are to believe that this is more than a short term squeeze. The negative momentum in risk in FX-land is pretty ugly here and the equity technicals look hideous, though we've still only seen one single day of ugly downside this week (yesterday). Still, we would be reluctant to stand in the way of USD strength or the risk aversion until the bulls prove that they want to make a stand. Remember that the market "gets back to business" after September 1 (and also realize that seasonally, September is the worst month for equities in market history), but that August has occasionally been a graveyard for risk as well, as we pointed out in a post some time ago. The sell-off in risk in 2008 got started by late July, for example, and continued throughout August. AUDUSD fell as much as 1000 pips intra-month in August of 2008, for example - and that was before the Lehman news hit in mid-September

So keep carefulness at the top of any agenda and have a great weekend.

FX Update: US Retail Sales not helping the bulls

Europe ignores Asian rally as risk trades dropped sharply despite a strong German GDP number. US Retail Sales offered little reason to expect a Friday the 13th rally in risk

German GDP growth in Q2 was out at a robust 2.2% QoQ, a testament to the strength of German exports and the benefits of the weak Euro. But with the Euro now more than 10% off its lows and the fact that GDP data is always a woefully "rear view mirror" number, the German DAX dropped rather sharply on the day today after having almost miraculously reached new highs for the year earlier this month. The sell-off in risk in Europe derailed the rally attempt from Asia, where Chinese equities made a strong comeback.

New Zealand Data
New Zealand posted very strong retail sales data for June, which, combined with a chunky risk rally in Asia squeezed fresh NZD shorts mercilessly, but by this writing, NZDUSD, among others, was right back to where it was trading yesterday as the risk aversion in the European session deflated the rally. Observers should also focus on the weak House Price Index number from New Zealand. By late 2007, New Zealand was involved in an housing bubble, which the RBNZ was fighting by consistently raising the rate to as high as 8.25%. House prices then corrected about 10% during the global financial crisis an took back most of that correction as the RBNZ cut rates to 2.50%. Now, it appears the market is rolling over again, despite the RBNZ having only taken small baby steps in raising rates. The currency is not well positioned if the house price drop extends from here as it will take pressure of the RBNZ to hike any further. Back in May of this year, the market was looking for over 200 bps of policy tightening. Now, after 50 bps of actual hiking, expectations have dropped to about +60 bps for the year ahead. And NZDUSD trades at 0.7000+? Someone please tell us what we are missing here...

AUDUSD
Worth noting that AUDUSD is trading at key levels here as it plays cat and mouse with the 200-day moving average. Rate spreads have not shifted much in favor of the trade heading lower, though there was significant overshoot in the pair's price relative to the widening in rate spreads, so we're reaching the neutral point here, perhaps. Risk remains to the downside for the pair as long as risk aversion remains the theme and Australia rates will offer far higher beta if we are to use rate spreads as a coincident indicator. The next round of important Aussie economic data doesn't arrive until the end of the month, so the Aussie will likely mostly trade off risk sentiment and hard commodity prices until then.

US Data
US Inflation data was almost perfectly in line, so no surprises there, but the Retail Sales data was very weak if we look at the ex Auto and Gas number, which was actually a negative -0.1% MoM despite the positive headline and less Autos data, suggesting that all of the rise was due to the increase in gasoline prices in July. This fits well with generally low confidence numbers and certainly doesn't provide any spark for a rally in risk, as bulls woul need to shield their eyes from the latest very ugly data points out of the US (and the divergent reaction in Europe to good growth news, which suggests fragile sentiment there)

Looking ahead
The preliminary University of Michigan confidence level for August is out shortly. There is little to suggest anything shocking there. Later, the lone hawk of the voting FOMC members is out speaking about "too big to fail" banks. Next week will be potentially interesting for sterling with the CPI data release for July set for Tuesday. We will also get the latest round of US housing starts/building permits data after the last couple of month suggest the risk of a second dip in housing construction activity. The first regional manufacturing surveys are also set for release in the US after the July numbers offered mixed evidence about the degree to which the inventory restocking boom is fading (strong evidence of a decline earlier in the month until the very strong Chicago PMI shocker and relatively benign overall ISM were released later on). Other highlights include the Bank of England minutes and Canadian CPI data.

Enjoy your Friday that 13th in the meantime, be careful out there as always, and have a great weekend.

Economic Data Highlights

• New Zealand Jul. REINZ Housing Price Index fell -1.2% MoM vs. +0.6% in Jun.
• New Zealand Jun. Retail Sales out at +0.9% MoM and ex-Auto at +1.5% vs. +0.5%/+0.5% expected, respectively
• New Zealand Jul. Non-resident Bond Holdings out at 62.8% vs. 64.1% in Jun.
• Germany Q2 GDP out at +2.2% QoQ and +3.7% YoY vs. +1.3%/+2.4% expected, respectively
• Switzerland Jul. Producer and Import Prices out at -0.5% MoM and +0.5% YoY vs. -0.2%/+0.8% expected, respectively
• Sweden Jun. Industrial Production rose +1.1% MoM vs. +0.8% expected
• EuroZone Jun. Trade Balance out at -1.6B vs. -0.7B expected and -2.7B in May
• Canada Jun. New Motor Vehicle Sales rose 2.5% MoM s. 2.0% expected
• US Jul. CPI out at +0.3% MoM and +1.2% YoY vs. +0.2%/+1.2% expected, respectively
• US Jul. CPI ex Food and Energy out at +0.1% MoM and +0.9% MoM, both as expected
• US Jul. Advance Retail Sales out at +0.4% MoM and +0.2% less Autos, vs. +0.5%/+0.3% expected, respectively

Upcoming Economic Calendar Highlights

• US Aug. Preliminary University of Michigan Confidence (1355)
• US Jun. Business Inventories (1400)
• US Fed's Hoenig to Speak (1530)
• UK Aug. Rightmove House Prices (Sun 2301)
• Japan Q2 GDP (2350)
• Australia Jul New Motor Vehicle Sales (0130)

FX Closing Note: AUDUSD to accelerate lower?

AUDUSD had an ugly day on a meltdown in risk appetite. Could tonight's Australia employment data bring further misery to the pair? From a contrarian point of view, AUDUSD downside has become rather compelling again if we have a look at the IMM positioning (from US CME futures market).

Chart: AUDUSD vs. US futures positioning
It's easy to see that AUDUSD longs have been the only popular trade for a long time now, with US futures speculators only going into an outright short position only once AUDUSD had tumbled to about 0.80 back in 2008 and never really getting short during the panicky deleveraging days. This time around, the participation in the rally has been less enthusiastic (as seen in a lower net long position relative to the AUDUSD level and despite the tremendous rally - an interesting divergence.). Note that this is weekly data and that the latest data point was for positioning as of last Tuesday (releases are made every Friday.). 

Today's developments
Equities in the US closed the day on a very ugly note, with no signs of the last minute rally so often evident from the algo/HFT crowd, which has likely been at least partially sidelined after a day like today. Then after the close, we get a terrible Cisco earnings report from the networking bellwether.

It was the worst day for risk since late June and saw the average closing significantly back below the 200-day moving average that had provided support twice since last Thursday. The developments in FX were largely along the lines one would expect on a day of misery for risk, though it is especially interesting that EUR led the charge lower on the day rather than the normally more risk-prone commodity currencies. Interest rate developments partially supported the Euro weakness, but as we pointed out this morning, so too did the ugly developments in European sovereign debt, with PIGS spreads moving the wrong way once again after the long regime of spread tightening that started back in July finally reversing in the last couple of days.

Another interesting development today was the reasonably strong reversal back from new lows by USDJPY despite the very ugly day for risk appetite and generally higher yields. Will USDJPY continue to churn lower or is this finally a sign that the weak USD story has been overplayed and that traders fear testing the BoJ's/MoF's resolve here. If we look at the speculative positioning in the US future for the Japanese Yen, it also looks very stretched. Is 90 more likely than 80 for USDJPY?

Looking ahead
Next on tap we have the Australian employment report, which is either going to give a better level to push AUDUSD lower or see an additional large acceleration lower in the next couple of days as long as this move in risk aversion is white hot. Stay tuned and stay careful out there. Tomorrow will be a key test for the US bond market with the 30-year US T-bond auction out after the Fed announced that it will be buying treasuries again (but also after an enormous rally in bonds, albeit one that has seen almost no downside in recent weeks in 30-year yields relative to the steep declines in the 10-year yields in recent days.

FX Closing Note: Market reacting "the right way" to FOMC statement?

John J. Hardy, FX Consultant, Saxo Bank

The FOMC statement surprised with a plan that will see further debt monetization, a scenario that was not on everyone's radar screen, and the market bashed the USD anew. How bearish is the statement for the greenback?

The FOMC statement downgraded its view of the economy in today's statement relative to what it said in the June statement. Most importantly, the Fed has restarted a "back door" quantitative easing as it elected to (the following lifted directly from today's FOMC statement) "keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature."

So today's FOMC statement is real, liquidity-enhancing quantitative easing because it will see the Fed monetizing more debt, even if it doesn't require that the Fed expand its balance sheet (and thus one could argue that it is simply an effort to maintain the status quo). And on the surface, this has all of the usual nominally positive implications for risk appetite, lower US rates, and therefore a lower US dollar - hence today's reaction. Importantly for the risk-mongers, the US S&P500 held its 200-day moving average, etc..

But while today's move by the Fed does represent a new move to monetize debt that the Fed likely hopes will keep long rates very low and continue to support the housing market and other asset markets and thus banks' balance sheets, this is not a "real QE2". And a new dribble of US treasury purchasing to offset MBS and agency debt offloading will do nothing dramatic towards solving the fundamental problem in the economy: lack of end demand. Also, the "risk" for those looking for further moves from the Fed is that this is a pre-emptive move, and that the Fed will now have to sit back and see if its new efforts are bearing any fruit before acting again. It is likely that the Fed does little else until after the early November elections in a little over 80 days due to the political headwinds it now faces.

The grand question that looms is whether today's move is a "first step" en route to a true QE2: quantitative easing that goes beyond the traditional policies of manipulating long and short interest rates via the interest rate mechanism, liquidity facilities and debt monetization and instead circumvents the banking system entirely by somehow forcing end users to receive and spend money. This is the true helicopter drop. But will the Fed ever have the political wherewithal to do such a thing or are the Fed's days of true independence fast running out? What the US government giveth away (the creation of the Federal Reserve System in 1913), it can just as easily taketh away if it decides so to do.

That latter paragraph is for the much longer term. For now, any USD negative impact from the Fed's move here may not last for long, especially if the rest of the world enters the soft economic patch that the US now finds itself in - or worse - thus collapsing the interest rate spreads at the short end of the curve that have moved so dramatically against the greenback's favor in recent weeks. That's because this is not a particularly dramatic move by the Fed even though it was not expected - it's just a recycling of QE past. USD calls, anyone?

Stay careful out there.

Can We Turn Solar Energy into Chemical Fuel?

by Dr. Kent Moors

Dear Investor,

When I was a student, I attended a lecture by famous two-time Nobel laureate Linus Pauling.

I remember Pauling proclaiming to an enthralled audience that, if we want to generate unlimited energy, we need only harness the power of plants. He was speaking of photosynthesis, the process of combining sunlight, carbon dioxide, and water to create energy.

Years later, we may be well on our way to doing just that.

Whenever discussion turns to renewable (naturally replenished) sources of energy, solar always pops up. And then, after just a few minutes, it moves right off the topic list again.

It's not that looking to sunlight to generate energy is uninteresting or that it is not being used - far from it, on either count.

Its problems come from the high cost of solar technology, an inability to store the energy received, very uneven potential (depending on the region of the world), and the more limited use of what energy is released.

The storage shortcoming calls for better battery technology - something now hot on the research agenda. But the usage limitation has resulted in one of the more fascinating ideas to come down the pipeline in some time...

Fuel from Sunlight

Currently, solar cells can only produce electricity. But what if solar power could do for us what it does for plants? What if it could actually produce fuel?

Washington is all over this one.

The U.S. Department of Energy (DOE) has just announced a five-year award of up to $122 million. The grant is going to a Cal Tech-led group of "push the envelope" scientists from a number of disciplines. And what they are charged with doing will boggle the mind.

Their task is to produce fuel directly from sunlight.

To say this is a "game changer" is like saying the harnessing of fire "sort of changed things."

The "Fuels from Sunlight Energy Innovation Hub" is pursuing one overarching question: If plants can use photosynthesis to generate fuel, why can't we?

The Joint Center for Artificial Photosynthesis (JCAP) - to be led by Cal Tech and the DOE's Lawrence Berkeley National Laboratory - will be the focus of activity as the hub draws specialists from a number of California universities, think tanks, and research labs.

The goal is nothing less than the development of an integrated solar-energy-to-chemical-fuel conversion system, with the further application from the laboratory to the market. The hub will be funded at up to $22 million this fiscal year, with subsequent annual grants of $25 million in each of the next four years (subject to Congressional appropriations).

This is not the only "energy hub" idea moving forward with DOE support. The department believes the bringing together of a multidisciplinary team to stimulate new breakthroughs is going to be very successful.

In addition to the solar initiative, two other recent decisions are on the schedule.

One, yet to be announced, focuses upon the design, construction, and retrofitting of buildings with significantly greater energy efficiency results than current structures. A second, already underway at the Oak Ridge National Laboratory in Tennessee, seeks major advances in the modeling, design, and engineering of nuclear reactors. These are all second-generation strategies, based upon the DOE's successful Bioenergy Research Centers.

As the DOE puts it, "The hubs are large, multidisciplinary, highly-collaborative teams of scientists and engineers working over a longer time frame to achieve a specific high-priority goal. They will be managed by top teams of scientists and engineers with enough resources and authority to move quickly in response to new developments."

However, the solar approach is a long stretch - longer than anything the U.S. government has ever attempted.

A New "Solar Fuels" Industry

According to the DOE, JCAP research will be directed toward the discovery of the functional components necessary to assemble a complete artificial photosynthetic system: light absorbers, catalysts, molecular linkers, and separation membranes. The hub will then integrate those components into an operational solar fuel system and develop scale-up strategies to move from the laboratory toward commercial viability.

The ultimate objective is to drive the field of solar fuels from fundamental research - where it has resided for decades - into applied research and technology development, thereby setting the stage for the creation of a direct solar fuels industry.

As with the other energy hubs and the biofuels initiatives, the idea is to assist in the development of significant new directions in energy research and engineering through early stages of R&D, to the point where the technology can be handed off to the private sector. 

This approach, cutting across disciplines and areas of expertise, may just be the way to do it.

That eventually means non-fossil fuel energy solutions, new employment, and new companies. The last, of course, allows you to invest in them as soon as they go public. Could even be the way to turn green energy into profitable stock picks.

This may not be coming around the corner tomorrow. But both availability and adverse environmental impact have accelerated concerns for the still hydrocarbon-intensive energy sector. The increasing calls for the government to do something may have finally been answered.

And this could alter both our view of energy... and how we invest in it.

Sincerely, 

Kent Moors.

Weekly Commodity Update: Risk of another food crisis

While WTI crude oil quietly slipped out its recent range and gold found its footing all the focus was on the continued surge in the price of wheat and the possible implications for the price on anything from biscuits, bread, poultry to beer.

The “perfect storm” currently ravaging the wheat market has so far driven prices in Chicago up by 80% to a 23 month high this past month and it gained further momentum on Thursday as news broke about the Russian export ban. This has left the market exposed to further price increases as wheat importing nations from North Africa to the Middle East will have to look elsewhere for their supplies.

The Russian export ban was implemented amid the worst drought for half a century which has hurt the wheat growing region around the Black Sea. The ban caught the market by surprise as many would have thought that Russia would have used government inventories to complete export sales. It will run until December at which point they will have a good idea about the output from the all important winter wheat. 

The current crop being hurt is the spring wheat which counts for less than 20 percent of total wheat production in the most affected areas. The all important winter planting period begins mid August and runs into September. If the dry weather conditions persist planting could be delayed or worst case not going ahead at all. This uncertainty will be keep prices supported until a change in weather occurs around the region.

On a positive note it is worth mentioning that the U.S. wheat crop looks good and a near record production is expected adding to already existing inventories. U.S farmers should therefore be able to handle the shortfall from reduced production elsewhere. However given existing trade barriers with some of the countries left short from the Russian export ban it is not as easy as it might seem to plug the hole.

The impact from the price rises this past month has already been felt on other stable sources of food such as rice, corn and soybeans and also barley which is used both as animal feed and beer production. The export ban has given commodity trading firms, who acts as brokers between sellers and buyers of wheat, the opportunity to renege on signed contracts to supply at much lower prices. This is now putting pressure on food and beverage companies who find themselves on the losing end of those reneged contracts.

European food and beverage companies, as measured through the STOXX 600 Food index, have lost 7.25 percent in value since this latest crisis emerged and the sell off accelerated after the Russian ban. During this same period the overall Euro STOXX index over leading European companies have rallied 7.25 percent.

The risk now, should wheat prices stay elevated for a while, is for Corn prices to come under some upside pressure. High wheat prices will tempt U.S. farmers to switch from Soybeans and corn to winter wheat production leaving the inventory situation somewhat uncertain given the already increased demand for corn in ethanol production combined with new demand as a feed substitute to wheat. The corn to wheat ratio has moved from 0.75 down to 0.50, a wheat outperformance of 33 percent. Once the situation stabilizes this trade should favor corn as wheat prices should suffer. Until we find a plateau in the market fear will be the main driver with high volatility expected. 

The energy sector had a quiet but positive week with crude oil rising above 81 dollars, a three months high, due to among others:

-          Weaker dollar helping dollar based commodities. The dollar index has been toying with the 200 day moving average all week with a move below signaling further weakness.

-          Surge in North Sea Brent crude from lower production due to maintenance. At one stage it had outperformed the WTI by 1.75 dollars in just a couple of weeks before arbitrage trades kicked in buying WTI and selling Brent.

-          The speculative long position still relatively small leaving additional room to the upside.

Meanwhile the process of bringing crude onshore from floating storage continues with inventories at Cushing, Oklahoma, the delivery hub into NYMEX WTI having swelled to 37.8 million barrels which is only 100,000 short of the previous record from May. The forward price of crude is now so close to the spot that the buy and hold on floating storage is no longer financial attractive.

The impact of this on the tanker market is clear to see from the number of VLCC, Very large crude carriers, looking for tenders. The vessel availability is at a six year high and daily rates being paid for hiring a VLCC from the Arabian Gulf to Japan has collapsed to 6,500 dollars. As shipping companies barely break even at these prices certain VLCC owners have responded by taking vessels out of service and anchoring them until the situation stabilizes. 

Technically a new uptrend has been established with resistance now at 83 ahead of 85.25. Support is at 80.80 followed by 79.70 and 75.90.

The month long correction in Gold seems to be over as buyers re emerged on the back of dollar weakness and a pickup in physical demand with Ramadan and the Indian wedding season approaching. The important 200 day moving average support at 1,150 held and will be the focus point for any future corrections.  In addition China this week announced that they would relax trading rules for gold which could help increase investor demand from the region.

A slowing U.S. economy could prompt the Federal Reserve to expand monetary easing measures once again with a weaker dollar and higher gold price a potential consequence. The monthly unemployment report highlighted this risk as there are no signs that the labour market is being boosted and as a consequence there are risks of falling consumer confidence and spending in the next few months.

Investors in Gold ETFs continue to show loyalty and resilience with holdings only down by 1.8% during this recent 100 dollar sell off. At the same time we have seen silver outperforming gold which has also helped the market to stabilize. 

Technically the move back above 1,200 signals a retest of the July high at 1,218 followed by 1,225. Support levels can be found at 1,188 followed by 1,166.

Commodities in general have had a mixed week with the Reuters Jefferies CRB index, at the time of writing, being flat on the week bringing gains this past month close to nine percent. Of the 26 most active commodities all but five trades above their 200 day moving average. The dollar weakness these past few weeks has played a good part in this performance and therefore has to be watched closely in the coming days.

One of the exceptions to the positive performance has been the price development of Cocoa with prices falling both in London and New York. The price of London Cocoa trades at a two month low some 17 percent lower from the July high reached around the frenzied expiry of the old July contract where a London based hedge fund took delivery of 241,000 tons.

Production from the Ivory Coast and Ghana, the two biggest growers, usually begins in October with growing conditions currently being described as good. 

The Future Price of Gasoline, According to Sam

Sometimes, an average guy who has no access to the decision-makers or the power barons can be just the person to tell you what is really going on.

Meet Sam.

He runs a gasoline station 12 miles from my house, in a little, suburban, out-of-the-way town. We have developed a friendship of sorts over the years. He's one of the few people I meet on a regular basis who does not ask me where gasoline prices are going, because he tends to know himself, 48 hours before even his competitors do.

That is of great benefit to me, as you will see in a moment…

Usually, however, it is of minor help to his business.

My Barometer for the Local Gas Market

Sam serves a declining customer base. The local business community has been hit hard by the economic slowdown. Unemployment among residents is well above 15%, while the rest of his trade passing through (like me) has a base of operation in the city (Pittsburgh). His margins are narrowing, and what passes for a convenience store at his station is small.

That means he depends on selling gas from his six pumps to make ends meet – far more than some of the larger operations do. Having little to fall back upon, controlling his costs is a constant battle.

To cover the frequent budget shortfalls, Sam cannot just charge what he would like to, because the competition down the road, in larger communities, would eat him alive.

But he also cannot cut his prices to generate additional business, hoping to increase sales volume.

First, he has insufficient alternative revenue flow to make it for very long. Second, he is tied into a supply agreement with a major vertical oil company, the kind that controls the process from fields through refineries and distributors to setting the effective price at retail outlets, even those the company does not control.

That is becoming more commonplace these days.

The big five gasoline sellers in the U.S. – BP (NYSE:BP), Chevron (NYSE:CVX), Exxon Mobil Corp. (NYSE:XOM), Shell (NYSE:RDS), and Citgo (privately controlled by Venezuelan state oil company PDVSA) – actually own fewer stations outright than they used to.

Exxon is phasing out retail station ownership completely.

These big boys are nonetheless increasing aggregate control in gasoline sales… by tying retailers into long-term contracts.

Those, like Sam, who sell gas to the public, have few options. They need to obtain volume from somewhere; they certainly do not own their own refineries. And there are few independent refiners left. Even the likes of Valero (NYSE:VLO) – which used to be the leading independent – is now in the process of becoming a vertical.

Now here is where Sam is "stuck" (though I actually have another, more descriptive word in mind…).

If he does try to cut prices to generate business, the big boy providing the product will penalize him for undercutting the larger distribution market (one that may still contain stations owned by or leased from the vertical).

And in any event, the vertical makes far more money from controlling access to product area-wide than from what they are paid by the likes of Sam. So the major's control over pricing is increasingly important to its bottom line.

This is how five oil companies effectively control well over 60% of daily gasoline sales in the U.S. market. They further coordinate control by using OPIS (the Oil Price Information Service), a very expensive provider of hundreds of thousands of gasoline pricing points from most of the stations nationwide several times a day. The companies need not talk to each other. They merely turn on their computers.

This is not the occasion to debate the merits of such consolidation or whether a more effective pricing structure would result from some added competition. But what it does mean it is impossible for small-time operators like Sam to buck the system.

What Sam can do is give a heads-up on where gasoline prices are moving.

He needs to operate on very thin supply margins. Too much or too little gas both mean sacrificed income – unused product in the first case, sacrificed sales in the second.

So Sam has worked out an arrangement with his local "big boy" truck supplier (ok, it's the husband of his only sister) to receive his weekly shipment on Thursday. The bigger outlets get theirs on Saturday. He can better gauge station needs with a delivery during the week, he tells me, rather than on the weekend. And he passes on the wholesale cost to his customers with a standard markup (averaging about 6% in the local market over a standard year).

He is my perfect barometer for the local market.

The price posted at his place on Thursday is essentially the price going up everywhere else… two days later. Aside from the now quite infrequent gas wars, or restrictions some places still have on self-service pumps, Sam gives me the market for the next week.

And 48 hours to do something with the information.

We Will Benefit from This Early Indicator

Sometimes I negotiate client payments for my services in something other than money – stock options, discounted product volume, market access, etc. Several years ago, I contracted to get something unusual in return for consulting – 20-year access to a client's OPIS account.

Sam provides me with something else.

By plotting the advance notice he gives me, I have been following a broader multistate area of retail sales for several years now, as well as beginning to compare regions.

Two days doesn't sound like much. Yet having even a slight advantage allows me to factor change into a frequently revised model that projects pricing before it hits the market. In this way, I can equate it to refinery runs, crude oil differential supplies, and spreads between futures contracts in gasoline and several exchange-traded funds (ETFs) following that trade.

All of this started as an intellectual exercise. That changed two years ago. Now it's a model for imminent profits.

By retro calculation from retail sales to sourcing and then comparing the patterns resulting, I received early warning of the retail price hikes in 2008, but was not positioned at the time to take full advantage of what was happening in the energy markets.

This time, it will be different.

I'll be able to fill you in on who is likely to benefit first and where the pops are going to hit. Because demand is coming back, the retail sales and pricing patterns are again developing, and the current rise in crude prices is only the early indicator.

I still visit Sam each Thursday. The model is mine, as is the methodology and the way I use those otherwise mind-numbing columns of OPIS figures. But without Sam's situation requiring an early gasoline delivery each week, I never would have had the idea.

Now if he can just stay in business a little while longer…

Kent.

How to Profit from Investing in China Despite the Risks

Gary's Note: China and emerging markets are where the investment opportunities lie, but investing in China has its risks. What seems like a promising company at a great bargain may actually be a fraud. Yet great profits await investors who pick carefully. Chris Mayer explains the nature of the risks and shows how to invest successfully in spite of those risks.
By Chris Mayer
August 3, 2010
Gaithersburg, Maryland, U.S.A.

How to Profit from Investing in China Despite the Risks
Investing always involves a kind of leap of faith. Investors have to believe that the numbers they are looking at are real. They have to believe that the financial statements reasonably reflect reality. Without that trust, there is no point in going further. The investor is like a cook unsure of the safety of his ingredients.

This is why things like auditors and listing requirements and boards of directors are so important. This is why due diligence is important: asking questions, talking to people on the ground. They give some assurance to investors that what they see is real and not a fraud.

Sometimes the lines can be very fuzzy. And sometimes the taint of fraud dogs a market, making all the stocks of that market cheap, whether they are fraudulent or not. Such a market is also very susceptible to rumor.

I think the market for the U.S.-listed China-based companies has that taint. That explains the very cheap multiples that many such companies trade for. I’m talking about price-to-earnings ratios of 5–8 times for companies growing 20–30% a year.

But investors will have to be careful, as there seem to be a lot of questionable apples in the bin. And they will have to do quality due diligence to stand up to rumor and extreme price volatility.

There have been other grim casualties. But the pace of digging up scams seems to have quickened. I’ve been trading e-mails with my Beijing contacts for weeks. One veteran hedge fund manager, who would like to remain anonymous, told me how he was “very worried.” There are too many scams, which is not good for the market. He said, “Another big development is these detailed negative research reports. There are three–four quality reports coming out each month from different outfits. This is compared to maybe only two–three reports all of last year!”

A company called China Marine Food has recently been fending off challenges to its accounting. A website called Chinese Company Analyst performs detailed financial analysis of Chinese companies. In a highly detailed report, it contends that China Marine Food is a fraud. I can’t do justice to the report here, but here is a damning snippet:

“I question how [the company] could generate $7.6 million of revenue, $1.7 million of net income and $1.2 million of operating cash flow in its first five months of operations with (i) $44,000 of startup capital it received from its original founder, [and] (ii) $414 of capex…”

China Marine Food dropped more than 20% on the day these allegations came to light. The stock has continued to fall. The company has defended its accounting. It may or may not be a fraud, but the evidence seems to suggest that all is not quite as it seems.

Most recently, another case has come up with Orient Paper. This is a company I put on my watch list after one of my Beijing contacts told me about it. It seemed to have great fundamentals and traded very cheaply.

I never looked at it in detail, but I remember thinking it seemed fishy that the stock of an operating company could go from $1.50 to $15 within a year. That just doesn’t happen. Resource companies can make that kind of leap — you have a new discovery or the underlying commodity takes a big jump. But it is rare that a basic operating company involved in something like paper becomes a ten-bagger in a year’s time.

On June 28, a company called Muddy Waters released its “inaugural report” on Orient Paper contending that it was a fraud. The stock closed at $8.33 before the report. It dropped 13% that day, but the snowball was only just getting started. Two days later, the stock hit $4.11.

But this is one where the line is:

The Muddy Waters report is detailed. The authors of the report talked to suppliers. Some of the suppliers offer a very different view of Orient Paper’s capacity than what Orient Paper claims. Muddy Waters tried to track down customers. Some of these they found did not exist or were small mom and pop shops. Yet Orient Paper reports millions of dollars in sales from such customers. Muddy Waters tried to match SEC filings with tax filings in China. They claimed to find major discrepancies. There are pictures of site visits showing old machines. There are other observations about the number of employees and trucks and more.

It all adds up to a pretty damning dossier.

Yet there is another side. Rick Pearson, one of my Beijing contacts, also visited Orient Paper. In fact, he was on the same site visit as the Muddy Waters’ crew. More incredibly, Pearson knows the authors of the Muddy Waters report, both old classmates of his.

Pearson wrote up his views for TheStreet.com. He has a totally different view of the company. He bought the stock after the report! As he writes:

I was quickly on the phone to the company, to its IR firm and to other major investors who own the stock. Everyone was equally shocked by the report, and the company vowed to respond immediately. I know a number of investors who have toured ONP, met management and invested in public and private offerings by the company. The investors have all expressed interest in buying at these levels.

Pearson was also critical of the due diligence of his former classmates, who apparently asked few questions of management on the visit and didn’t speak Mandarin. He felt like they were there to “check a box” to say they’d visited the company.

Pearson’s piece must’ve helped settle the market, because it rose 44% the day his piece came out, to back over $7 per share. (The fact that the stock moved so much during this whole period shows how little investors really knew about the company. This is why I say you have to have strong due diligence. Otherwise, you’ll wind up locking in losses on the merest rumor, to which Chinese companies seem susceptible at the moment.)

So what does all this mean? I don’t know if Orient Paper is a fraud. I have a lot of respect for Pearson’s research and expertise. He was a former investment banker. He lives in Beijing. He speaks Mandarin. And this — U.S.-listed, China-based stocks — is his métier.

I suspect that Orient Paper’s accounting is not entirely up to snuff. I suspect it’s probably not a high-quality company (that doesn’t mean that you can’t make money in it). I don’t really know. As I say, I have not done my own due diligence on Orient Paper.

But the point of this piece is really to show you how tricky the market for U.S.-listed China-based stocks is right now. It also helps explain the low valuations we see. Don’t just assume that a China-based stock is a bargain because it trades for 6 times earnings and is growing 30% a year. It may not be quite what it seems.

Regards,

Chris Mayer    

Oil N' Gold Focus Reports

Gold's Rally may not have Ended as Suggested by US Yields

Gold changes little in European session. While price has recovered in tandem with broad-based strength in the commodity market, liquidation from previous long positions and re-allocation of capitals to stock markets capped gold's upside. While investment demand for gold recedes as risk appetite improves, physical demand has picked up as price declines from its peak. Despite a small number compared with that in 2008 (full year imports in 2008: 165.9 metric tons), Turkey, the world's third-largest gold consumer, is reported to have imported 19.93 metric tons of gold bullion in July, up +39% from 14.32 metric tons the same period in 2009. Apart from the lucrative double-digit growth, July's imports marked a significant improvement of gold demand from the first half of the year. Monthly imports from January to June averaged less than 1 metric ton a month!

Read the rest here ......

Crude Jumped to a 3-month High as Eco Data Beat Expectations, Equities Surged

Crude oil's rally accelerated after breaking above the resistance level at 80. The front-month WTI contract rallied +3.02% to a 3-month high of 81.34. Better-than-expected PMIs in the US and Europe, weakness in USD and news of a tropical depression forming in the Atlantic were forces driving price higher. Risk appetite improved as earning results from banks were generally strong. Wall Street and European bourses jumped as led by banking and commodity sectors.

Read the rest here ......

FX Update: US Q2 GDP falls short of forecasts but risk appetite seems to survive into August

US Q2 GDP falls short of forecasts but risk appetite seems to survive into August

China PMI data marginally lower; a precursor for the rest of the world?

Market Comments:
 

The well-telegraphed month-end fixing demand saw AUD and EUR pushing higher again during the European session, and all eyes were on EUR to see if it could break the 1.31 mark. European data releases were mixed, with German retail sales heavily below forecast but containing hefty upward revisions to the previous month’s number while Euro-zone inflation and unemployment numbers were both as expected. In the end, EUR stalled just short of 1.31 as position trimming ahead of the US Q2 GDP numbers took hold.

As for the US data, Q2 GDP was below forecast, coming in at +2.4% q/q versus 2.6% expected and sent equity markets initially lower and pushing EUR below the 1.30 mark briefly. The release also contained revisions to previous years’ data with growth rates between 2007 and 2009 all revised lower between 0.2% and 0.4%. The July Chicago PMI was a very strong 62.3 versus 56.0 expected and 59.1 last and seems at odds with other data and the Fed’s Beige Book, while the final Michigan sentiment number was higher at 67.8 from 67.0. These two numbers helped Wall St recover into the close with the S&P +0.01% (notably finishing the month above the 1,100 mark) completing its best monthly gains in a year. The USD failed to regain the 82.0 level on the index as the softer data sent the 2-year US yields to record lows, ensuring USDJPY remained capped on the day.

In weekend news, China’s PMI data for July showed further deterioration, sliding to 51.2 from 52.1 previously and below forecasts of 51.4, though note still above the 50 threshold of expansion/contraction. The HSBC equivalent, released early this morning, was not quite as rosy, falling below the 50 threshold for the first time this year to hit 49.4 having peaked at 57.4 in January. Latest polls for the Australian election (August 21) are showing the two main parties tied at 50:50 with Labour’s lead sliding from 52:48 previously.

It was a slow start to the week in Asia with a bank holiday in Sydney hitting liquidity and activity. The imposition of new margin requirements for retail traders in Japan had little impact in trading though some expressed hopes/concerns that margin calls might force liquidation of some JPY crosses.
Heading into Europe and it is the PMI data-fest at the start of the month that fills the calendar with releases from Sweden, Norway, Switzerland Germany, Euro-zone and UK. Swiss retail sales is the only other indicator of note scheduled. The US session is also dominated by the manufacturing ISM and construction spending releases while Fed chief Bernanke speaks later in the session on the US economy.

Welcome to August.

Economic Data Highlights

• US Q2 GDP out at +2.4% q/q vs. 2.6% expected and revised 3.7% prior
• US Q2 Personal Consumption out at 1.6% vs. 2.4% expected and revised 1.9% prior
• US Jul. Chicago PMI out at 62.3 vs. 56.0 expected as 59.1 prior
• US Jul. Final Michigan Confidence out at 67.8 vs. 67.0 expected and 66.5 prior
• US Jul. NAPM-Milwaukee out at 66.0 vs. 57.0 expected and 59.0 prior
• China Jul. PMI Manufacturing out at 51.2 vs. 51.4 expected and 52.1 prior
• AU Jul. Performance of Manufacturing Index out at 54.4 vs. 52.9 prior
• AU Jul. TD Securities Inflation out at 0.1% m/m, 2.8% y/y vs. 0.3%/3.6% prior resp.
• AU Jun. HIA New Home Sales out at -5.1% m/m vs. -6.4% prior
• China Jul. HSBC Manufacturing PMI out at 49.4 vs. 50.4 prior
• NZ Jul. ANZ Commodity Prices out at -0.8% m/m vs. revised -1.6% prior

Upcoming Economic Calendar Highlights
(All Times GMT)

• Sweden Swedbank PMI Survey (0630)
• Norway PMI (0700)
• Swiss Retail Sales (0715)
• Swiss SVME – PMI (0730)
• GE PMI Manufacturing (0755)
• EU PMI Manufacturing (0800)
• UK PMI Manufacturing (0830)
• HK Retail Sales (0830)
• US ISM Manufacturing (1400)
• US ISM Prices Paid (1400)
• US Construction Spending (1400)
• US Fed’s Bernanke to speak on US Economy (1415)

Financials, Oil & Gold on the Move

Most traders I have been talking with are feeling the same thing. Something big is brewing for the equities market but most do not want to get heavily involved until there is a clear direction. The broad market has been consolidating for almost 3 months and it’s important to remember that the larger the consolidation the bigger the move.

Also the biggest and best moves come from failed patterns. So is the big head & shoulders pattern on the SP500 which everyone is yelling about (the sky is falling) really going to happen or is this the BIG fake out? Only time will tell, either way no matter which way it goes I will be sure to catch some of it.

Below area few charts pointing out patterns and trends which could provide some opportunity in the coming days or weeks.

XLF – Financial Sector ETF
Financials play a large roll in moving the major indexes so if this reverse head and shoulders patter breaks out to the upside then the indexes should rally and XLF etf could reach its measured move of $16.50.

USO – Crude Oil Fund
Crude oil almost looked like it was going to breakout and mover higher this week but sellers jumped in sending it lower once again. The daily chart shows a large bearish pennant which is known as a continuation pattern. So it looks as though we should see lower prices for oil.

GLD – Gold Bullion ETF
Gold has been sliding lower for several weeks now and it looks to be showing selling exhaustion. The 5th wave down with the volume spike indicates panic selling as investors cannot hold onto those positions any longer and exit. This is a bullish sign for gold. Also we are seeing gold fall deep into a support level along with the 200 day moving average.

Mid-Week Financial, Oil and Gold Trading Conclusion:
In short, the equities market is in limbo until a clear trend is established. If the financial sector breaks out to the upside then we should see a sizable rally. As for oil it looks to be trading in near the middle of its range but is still in a down trend overall. Gold is almost looking ready for a bounce but I am waiting for more confirmation before jumping on the wagon.

Chris Vermeulen

Turn $10,000 into $2 Million with My Simple Gold Strategy

By Dr. Steve Sjuggerud

 

I came up with a Simple Strategy to tell you when to own gold... and when not to.

 

It's so simple, you could teach a monkey to follow it.

 

Best of all, $10,000 invested in this Simple Strategy would have turned into nearly $2 million. Just buying and holding gold over the same time period would have turned $10,000 into just $300,000.

 

The chart here tells the story... The blue line is the Simple Strategy. The gold line is the price of gold:

 

Not only did this Simple Strategy dramatically outperform the price of gold, it did so with substantially less volatility...

 

My Simple Strategy managed to steadily rise from the lower left of the chart to upper right. It almost entirely avoided gold's big fall in 1975-1977. And it generally avoided gold's two-decade fall from 1980 to 2000.

 

The Simple Strategy is so simple, it's almost embarrassing. But it is based on an important point. Let me explain it...

 

How do you know when it's a bull market in gold? Sometimes people will say, "Oh, it's not a bull market in gold... It's simply a bear market in the dollar."

 

You see, if the U.S. dollar is crashing against other currencies, it's probably also going down in terms of gold. That can make it look like gold is in a bull market. But what if gold is falling in terms of the euro or the yen? That's not a gold bull market.

 

So what is a bull market in gold?

 

One simple definition is: when gold is going up in terms of the world's most important currencies. I took a look at the four most widely traded currencies... the U.S. dollar, the euro, the British pound, and the Japanese yen. And I came up with my Simple Strategy. Here's how it works:

 

If gold is up versus all four currencies over the previous month... buy gold. Repeat the next month.

 

That's it.

 

When I tested it over the last 40 years of data, the results were astonishing... When gold was up versus all four currencies in the most recently ended month – when my Simple Strategy flashed a buy signal – gold rose at a compound annual rate of 35%. My Simple Strategy was in buy mode about a third of the time. (All the rest of the time, astoundingly, gold lost money.)

 

If you simply bought gold when you got a signal and then switched to cash (Treasury bills) when the signal was off, you'd have turned a $10,000 investment in 1971 into nearly $2 million today.

 

Since 1971, the price of gold has risen at a compound annual rate of 9.2% a year. By using this much less volatile Simple System, where you're invested in gold about one-third of the time, your wealth would have compounded at 14.5% a year.

 

This system is simple, but it's sound... History shows that a great predictor of when gold will go up is when it's already going up versus the major currencies.

 

It would be easy to refine my Simple Strategy to produce more dramatic results (and chances are we will for a future product we're working on). Or you could leverage it up with a double-long gold fund, for even bigger profits.

 

But at the very least, now you know how to find out if conditions are bullish for gold.

 

In case you're curious... we're in a bull market in gold... and we have been since March. Each month, gold has been up against all four currencies. Trade accordingly.

 

Good investing,

 

Steve.