Risk assets tumbled sharply in panic selling last week. The three
major US stocks indices, DOW, S&P 500 and NASDAQ had the worst week
since the 2008 financial crisis. DOW lost -5.75% during the week,
erasing all gains made since the beginning of 2011. The S&P 500
Index plummeted -7.19% to settle at 1199.38, the lowest level since
November 2010. NASDAQ was down -8.12%. More importantly, all three
indices broke through key support levels to complete significant medium
term head and should top patterns which had very bearish implications.
The CRB commodity index dived through key support level at 326 to extend
the medium term decline while crude oil was down -9.22%. Safe haven
flow boosted US treasures, where 2 year yield made record low, and gold,
which made new record high.
In the currency markets, commodity currencies, the Aussie, Kiwi, and
Loonie, were the biggest losers, reversing most, if not all of July's
gain. The picture of who's the biggest winner was complicated by
intervention acts from SNB and BoJ.Dollar managed to gain against most of other major currencies, thanks
to the moves from SNB and BoJ to curb gains in Swiss Franc and the
Japanese Yen. Meanwhile, dollar was also boosted by strong depend for US
treasury yields. Nevertheless, we'd like to emphasized that firstly,
Swiss Franc remained the strongest currency in the risk averse markets
and managed to make new record highs against Dollar and Euro even after
SNB announcement. Secondly, Yen also, pared much of it's loss on Friday
and there was no confirmation of reversal in yen's up trend so far.
Thirdly, dollar is indeed still bounded in range against Euro and
Sterling.
ECB's lack of address to the Spain and Italy problem was taken as the
scapegoat for Thursday's selloff. Markets has indeed stabilized on
Friday on news that Italy will speed up it's austerity and ECB would buy
Spain and Italy bonds. But in any case, investors were getting
increasingly inpatient and concerned on the never-ending European debt
crisis, which simply won't go away in investors' minds. Austerity
measure will also certainly drag down growth in the region and risk
bringing the region back into recession. On the other hand, in spite of a
better than expected Non-farm payroll figure released on Friday, other
economic data from US were mostly, if not all, pointing to deeply
slowing growth. Speculation on QE3 from Fed intensified but this time,
markets were very doubtful on the effectiveness of further easing.
Volatility will certainly continue for this week considering that
firstly, S&P downgraded US' rating to AA+ (from AAA) after the US
market closed on Friday. Secondly, European central bankers will hold
an emergency conference call on Sunday to discuss latest development in
the debt crisis. Thirdly, it's believed that G7 leaders will also hold a
conference call on both issues.
Looking further ahead, note firstly that last week's development in
risk assets could have marked a major medium term turning point. Some
recovery in risks might be seen in near term after last week's panic
selling. But there are now tremendous risks on the downside in medium
term as global economic outlook deteriorates further. Hence, one should
avoid catching rebounds in commodity currencies unless risk outlook does
change. Secondly, we're maintaining our view that Dollar, Euro and
Sterling are going nowhere against each other, even though Sterling
appears to be having a small upper hand against the other two. Thirdly,
Yen would have some difficulty in extending its up trend on threat of
intervention but we don't believe that unilateral intervention would
have much effect. So, we'd indeed try to avoid going long or short on
yen crosses. And by the way, Yen is highly correlated to risk and
yields, but it's not a safe haven currency. Fourthly, Swiss Franc indeed
still the preferred safe haven currency, in particular in consideration
of the debt problems in Eurozone. AUD/CHF, NZD/CHF and CAD/CHF offer
much downside potential should sentiment worsens.
Technical Highlights
Head and shoulder top patterns were seen in DOW, S&P 500 and
Nasdaq last week. S&P 500's pattern was the prettiest among the
three (ls: 1344.07, h: 1370.58, rs: 1339.62). From a short term point of
view, some support might be seen around 61.8% retracement of 1010.91 to
1370.58 at 11408.30. But rebound attempts should face strong resistance
from the neck line, which is around (1260 level). We'll stay bearish as
long as 1260 holds.
In the bigger picture, the long term trend line from 2009 low of
666.79 has clearly been broken by last week's sharp decline. It's at bit
early on determining how far the current fall would go but 38.2%
retracement of 666.79 to 1370.58 at 1101.73 will likely be breached. The
key level should indeed be near term 1010.91 support, which is close to
50% retracement at 1018.68. We'll revisit the possibility of taking out
this key level after seeing the structure of the anticipated near term
rebound.
Outlook in the CRB commodity index is also bearish as the break of
326.74 support last week confirmed resumption of the whole fall from
370.70. Further decline should be seen ahead. At this point, there is no
clear indication of trend reversal yet. Main focus will be on 300
psychological level, which is close to 38.2% retracement of 200.15 to
370.70 at 305.55 and 100% projection of 370.70 to 326.74 from 350.50 at
306.50. Decisive break of this cluster level will pave the way to 250
and below.
Dollar index's rebound last week invalidated the immediate bearish
case and turned outlook neutral. The dollar index might stay in range of
74/77 for a while but the current development is still favoring more
downside. Break of 74.18 will likely send the index through 72.69
towards 70.70 record low.
The Week Ahead
Markets will certainly be rough considering the uncertainties we're
facing. Initial focus will be on market's reaction to US downgrade and
any announcements from Eurozone leaders or G7. Focus will then turn to
FOMC where markets are expecting a change in the statement's language to
reflect the deteriorated outlook and for starting to set the stage for
more easing. We're anticipating recovery in risk assets but such
recovery shouldn't last long. 12000 in DOW, 1260 in S&P 500 will be
the key levels to watch for and as long as these levels hold, selloff in
stocks should resume sooner or later. In such case, swiss franc will
remain the main beneficiary while commodity currencies will be hardest
hit.
- Monday: Swiss unemployment rate; Eurozone Sentix investor confidence
- Tuesday: UK BRC retail sales, RICS house price balance, industrial and manufacturing production, trade balance; China CPI; Canada housing starts; FOMC rate decision
- Wednesday: China trade balance; BoE inflation report;
- Thursday: Australia employment; Canada trade balance; US trade balance, jobless claims
- Friday: US retail sales; U of Michigan sentiment
EUR/CHF Weekly Outlook
EUR/CHF extended recent down trend last week and made another record
low at 1.0707. It's possibly losing some downside momentum for the
moment, but further decline is still expected as long as 1.1148 minor
resistance holds. Current down trend should continue to 161.8%
projection of 1.2344 to 1.1404 from 1.1891 at 1.0372 next. On the
upside, though, note that break of 1.1148 resistance will suggest short
term bottoming and will bring lengthier consolidations before resuming
the down trend.
In the bigger picture, whole down trend from 1.6827 (2007 high) is
still in progress and in any case, medium term outlook will remain
bearish as long as 1.2399 support turned resistance holds. Next target
is 200% projection of 1.3833 to 1.2399 from 1.3243 at 1.0375.
Nevertheless, break of 1.2399 will be the first sign of bottoming and
should bring stronger rebound to 1.3243 resistance for confirmation.
In the long term picture, fall from 1.6827 should be resuming whole
down trend from 1993 high of 1.8234. The is some sign of re-acceleration
as seen in weekly MACD and break of 161.8% projection of 1.8234 to
1.4391 from 1.6827 at 1.0609 and break will target 200% projection at
0.9141.
