FOREX TRADING

Overview

Stocks tried to rally for a second consecutive week, subsequently giving up those small gains, to end unchanged (though the Nikkei and Shanghai Composite lost 1.85%). Rather than the usual ‘risk on/risk off’ knee-jerk reaction investors seem to have become a little more savvy; they continue buying top-quality bonds, so that US benchmark two-year TNote set a record low yield at 0.58%, UK five-year Gilts matched 2009′s record low 1.985%, while ten-year BBB+ rated Mexican ones set a new record low at 6.64% as did Brazil’s BBB- at 4.34%. Peripheral Eurozone Treasuries remain under pressure trading at or close to record spreads with the ECB’s reluctant quantative easing in place. While buying yen, taking it to 86.50 per USD, they sold dollars against most currencies taking the Euro to $1.3008 and Cable $1.5473, an increase of 2.5% in five days leaving consensus opinion (for a stronger greenback) head-scratching calling this a ‘technical short-covering rally’; previous ‘darlings’ are lagging well behind. CBOT Wheat rallied strongly again for a third consecutive week, caused by the heat wave in Europe and parts of North America, reaching 598.5 cents per bushel and its most expensive in a year, dragging Corn up to 397 cents.

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Total CPI was bang-on expectations at -0.1% m/m, resulting in a y/y growth rate of 1.1%. The closely watched core measure came in above expectations with a 0.2% m/m gain, holding the annual rate steady at 0.9%.

The annual growth rate in total CPI dropped significantly from 2.0% in May, but this was due to baseyear effects from large energy price increases this time last year.

In recent months, a largest single downward influence on the core measure was owner’s equivalent rent (OER), which edged up 0.1% m/m in June. After six months of continuous declines, this subcomponent has finally held its ground in the past two months. Nevertheless, OER still shaved half a percentage point from the annual growth rate of the core measure. (more…)

Industrial production managed a 0.1 percent gain in June following its increase of 1.3 percent in May. And slower growth over the next few months after a very strong first half is the theme in the factory sector.

Industrial Production

The hot summer month of June helped to boost utilities output by 2.7 percent. But the more telling manufacturing component fell 0.4 percent, with gains in high technology industries more than offset by a decline in the motor vehicle sector. With anecdotal evidence that auto manufacturers will not shut down this summer, we could see that drop reverse over the next few months. Neither gains nor losses predominated as business equipment, energy and materials saw gains while consumer durable and nondurable goods production fell off. Metals and machinery performed well but food, beverages and tobacco as well as chemicals declined. (more…)

• Retail sales disappointed in June but the headline masks better underlying sales
• Downward revisions to core sales in April and May paint a more downbeat picture of Q2 personal spending
• With the recent run of data, Q2 GDP growth is now tracking 2.5-3.0% q/q AR which is below our previous expectations

Details

Headline retail sales disappointed in June but this masks a better underlying sales pace. As expected, the major drags came from motor vehicles down 2.3% m/m and gasoline sales down 2.0% m/m reflecting lower gasoline prices as these are nominal data. (more…)

U.S. Dollar Trading (USD) positive sentiment and continuation of gains in the US session saw risk currencies and the Euro trade at fresh month highs. May’s Trade balance was weak at -42bn vs. -39bn forecast but this was overlooked as company earnings from Intel beat estimates. In US stocks, DJIA +146 points closing at 10363, S&P +16 points closing at 1095 and NASDAQ +43 points closing at 2242. Looking ahead, June Retail Sales are forecast at -0.2% vs. -1.2% previously. Also Released, Weekly Crude Oil Inventories are forecast at -1.1mn vs. -5mn previously.

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U.S. 10-year treasury notes are cheapening up ahead of a $21 billion auction later today as yields rise to the highest since the end of June. With corporate profits starting to emerge for the second quarter looking set to rise by more than one-third compared to a year ago, stocks are gaining. The stage seems set for further weakness in bonds as investors once again reassess their bearish growth outlooks.

European bond markets – German yields have risen off yesterday’s floor despite a Moody’s downgrade for Portuguese debt. The ratings agent cited the fiscal mix and limited prospects for growth for the foreseeable future as it slashed two notches off its grade. Part of the improved tone undermining bond performance today is due to the successful sale by the Greek government of more than €1 billion of six-week treasury bills at 4.65%. Despite the fact the yield is a full 4.5% higher than comparable U.S. six-week bills it marks the first sub-5% sale since the EC came to its rescue in May. (more…)

Bond prices made limited headway allowing yields to diminish as investors awaited the outcome of European bank stress-testing due out on July 23. After a poor close at the end of last week yields are creeping lower once again as investors attempt to unravel the limited amount of information available ahead of publication of the report. As they try to see through the reports investors are trying to get a sense of what the public sector would do in the event of a private sector failure. German Finance Minster Wolfgang Schaeuble heading to the meetings said the reports would be an important test towards easing investor concern about the strength of banks. (more…)

HIGHLIGHTS OF THE WEEK

• Financial markets showed some appetite for risk this week. Stock indexes posted significant gains across the globe, the US dollar lost ground versus its main trading crosses, and 10-yr Treasury yields edged above 3%.
• In the U.S., initial unemployment claims were down 21K in the week of July 3; however, the declining trend in both initial and continued claims has decelerated sharply since April.
• U.S. consumer credit declined by $9.1 billion in May. With household deleveraging unlikely to be a fleeting phenomenon, consumption growth will continue to be increasingly reliant on job and income expansions.
• The Canadian labour market posted an astounding gain of 93,000 net jobs in June, pulling the unemployment rate decisively downward by two-tenths of a percent to 7.9%.
• Total employment is now a mere 14,000 jobs away from its pre-recession level.
• But, overall economic growth is expected to moderate due to a pullback in consumer spending and this will, in turn, moderate employment growth going forward.
• Housing starts declined for the second consecutive month in June by 3.1%, after falling by 5.2% in May.

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Yields on government bonds diverged to end a week marked by growing speculation that the global economic recovery has come to an impasse. Equity markets had fallen over the past couple of weeks with investors running scared that valuations failed to price in risks of a slowing economy. Barring a late selloff today, the Dow industrials average looks set to close back above 10,000 having reached 9,614 a week ago. Observations of a strengthening European economy from its central bank chief and firm evidence of strengthening labor markets in growth-sensitive nations have left investors to find their own path on Friday. Yields are not exactly moving in tandem and it seems to be a case of ‘each to his own’ for fixed income investors.

British gilt – An unexpectedly muted producer price index for June saw goods’ prices leaving the factory gate fall for the first time since January 2009. Core output PPI for June slipped 0.3% over May leaving the annual pace of gain running at 4.8%. Gilt prices responded favorably with the September contract trading up almost a half point at 121.37. Short sterling futures also breathed a sigh of relief adding three basis points as yields eased. 10-year yields slipped four basis points to stand at 3.33%. (more…)

The Greek sovereign debt crisis has grabbed global headlines over recent weeks, and has prompted the market to scrutinize other European sovereign debt situations more closely, especially those of Portugal, Spain, Ireland and Italy. Hungarian debt, too, has been a focus of attention. In such an environment, the U.S. debt markets have benefited, as has the U.S. dollar, as investors fled the perceived higher risk European sovereign nations for the perceived safety of the U.S. But does this dynamic reflect the underlying safety of the U.S.? Commentators have noted that the U.S. has a fiscal situation that could become critical in a few years. The Greek situation may not be so much different from what lies ahead for the U.S. if nothing is done to rectify the fiscal train wreck we appear to be heading on.

Greece got into fiscal trouble because the government made commitments in the past without adequate regard to how it would meet them in the future. Greece has too many public employees enjoying compensation and retirement benefits that are outrunning the government’s revenue resources. The future is now here for Greece; investors fear Greece will default on its obligations and have refused to buy more Greek government bonds. The European Union has constructed a rescue operation, providing funds for the next several years. However, Greece will have to institute major fiscal reforms to avoid defaulting on its debt in the future. (more…)

Wakeup Call: 1040 Troubles S&P 500 While ISM Non-Manufacturing Disappoints

The S&P 500 failed to follow the pace set by Europe as it could not find a way past the resistance around 1040. Meanwhile, ISM for the service sector disappointed (though still points to expansion).

What’s going on?

Stocks rallied hard in the European session with the DAX going all the way to – but not through – the 100DMA. The S&P 500 attempted a rally of its own but crashed head first into the resistance around 1040. It was downhill from there and in the end the index could only muster a 0.54% gain for the day.

ISM Non-manufacturing was weak at 53.8 (Saxo: 54.5, consensus: 55) and it was disappointing to see the employment component go below 50 again after a very short peek above in May. The economy-weighted ISM composite is suggesting that GDP growth have only a little more to give on a YoY basis. (more…)

The dollar had another mixed session yesterday as directional bets were nonexistent. Stock markets managed to close positive on the day above 0.5%. From the financial calendar we saw the US non manufacturing ISM index drop to 53.8 for the month of June however the report still shows growth in the economy albeit a lot weaker than hoped. Earnings season starts in one week from now with Alcoa Inc. first to report. Expectations are weak as CEO’s outlook was surveyed. A bad earnings season maybe the next event risk to trigger massive sell offs in riskier assets. USDJPY price action yesterday was between 88.00 – 87.34.

In the Eurozone focus remains firmly glued to related news on the upcoming stress tests. The results are due to be released on July 23rd however the market is not convinced the results will be beneficial for all EU member states. Today the market will turn its attention to Eurozone GDP expected to come in at 0.2% qq. Near term resistance levels for the EURUSD is touted to lay ahead of the 1.2672 area while major support ahead of the 1.2152. EURUSD price action yesterday was between 1.2661 – 1.2478. (more…)

Today saw investors selling the US Dollar, with strong gains by its major rivals – the Euro, Pound, and Yen. There are mounting fears of a global double-dip recession as recent data is showing the US recovery sputtering with the labor market remaining to be very loose and housing retrenching sharply following the expiration of the government’s home-buyer tax credit.

Traders and investors are also likely pricing in a very weak Friday non-farm payroll report. Today also showed that the manufacturing sector in the US is beginning to cool as the ISM manufacturing index slowed to 56.2 from 59.7. Expectations had been for a reading near 58.9.

Adding fuel to the fire are the ongoing troubles with European banks as well as austerity measures that will be undertaken by European nations and the UK which will hurt growth in that region. But even more importantly, the developed world may have been counting on the developing world – and China – to lead the way forward. However, China, being concerned about an economy that is overheating and fueling not only inflation but a possible housing bubble has tried its best to put the brakes on its economy. The efforts seem to have paid off at least in the manufacturing sector, as data overnight showed. (more…)

You can hear the screams in the streets! Equities lower, lower, the sky is falling!

Well, not entirely, but equities are indeed lower and significantly so with the S&P breaking down and closing below what was seen by many (including myself) as significant support around the 1045/43 level. Needless to say that this gave the Asian indices a strong lead and from there we saw the Shanghai index fall another 4% for the second day running with other indices in the region down by similar amounts. None of this fairs well for the open today in Europe and local indices remain looking rather soft going into the month end.

From an objective point of view this is a less than positive development given that the whole move in risk aversion and equity declines has come in the absence of any real substantial news or events. There are many pundits including a lot of tier 1 named banks out there calling a further decline into 950 on the S&P and that this is the first step in a deeper correction. I’m cautious not to get too caught up in the herd mentality here but still can’t deny that I do believe a deeper setback is in the offing. Worth noting is that it is indeed month end today and with it will come a lot of book squaring and re balancing of currency exposures… Logically this should be USD positive overall for the following reasons; (more…)

European money markets have been nervous this week ahead of the expiry of the 1Y LTRO. Market conditions have worsened. The 3M EONIA has risen to the highest level since July 2009, and there has been elevated volatility in short dated EONIA on worries that weak European banks may have difficulties securing liquidity.

The ECB 12-month long-term refinancing operation (LTRO) conducted in June 2009 (EUR442bn) expires on Thursday, 1 July. The LTRO is planned to be financed by two new ECB operations: (1) a three-month LTRO, which is announced today; and (2) a six-day fine-tuning operation, which serves as a bridge facility between the 1Y LTRO and next week’s normal seven-day main refinancing operation (MRO). (See overview of operations in table on page two.) As the 1Y LTRO matures and with the ECB sticking to its weekly MROs and 1M and 3M LTRO, the average duration on liquidity should decline significantly. (more…)