Increasing signs the risk rally is stalling
Following last week's preliminary signals that risk assets may be stalling, this past week saw stock markets lose ground, key commodities reverse gains, and the USD bounce after testing key support levels. To be sure volatility remained high during the week, with new risk highs being made, but weekly closing indications increasingly suggest a peak in key risk markets has been seen. There were a number of data disappointments (see below) that worked to soften risk appetites, but attempts to extend the rally ultimately failed out of exhaustion. This was most evident following the FOMC's largely as expected statement, which noted that economic activity 'picked up' and that the Fed would maintain extremely low rate levels for an extended period. Those comments should have and did lead to a rally in risky assets, but, importantly, those gains could not be sustained and most finished down on the day.
The signs of a reversal in risk assets are not as powerful as we would like, so we cannot exclude that further upside attempts will be made, but we increasingly prefer to use strength in risky assets as selling opportunities. Next week sees month-end and quarter-end, which may spur further reduction in risk holdings as portfolio managers lock in gains and potentially position for a bumpier 4Q.
In individual markets, we would note the following technical observations:
S&P 500--Closed below the daily Tenkan line at 1060.66 and dropped back inside the weekly Ichimoku cloud (cloud top at 1053.51), suggesting a potential failure after the prior week's close above the cloud. 1035/35 is potentially significant support, with the daily Kijun line at 1036, and the 21-day sma and a daily trendline from the July lows at 1038.
Gold (XAU/USD)--After posting a long-legged spinning top in the prior week, gold closed below the daily Tenkan line at 1004.78, the 21-day sma at 993.76, and below the prior week's low at 992.30. The 975/980 area looks to be important support with the daily Kijun line at 981.16 and the weekly Tenkan line at 975.09.
Silver (XAG/USD)--Closed below the daily Tenkan line at 16.80 and the 21-day sma at 16.34, but above the Kijun line at 15.70. A bearish engulfing line following a spinning top on the weekly candles suggests an important top may have been
Oil--Brent crude oil futures closed below the daily Ichimoku cloud (base at 68.86) and below the daily and weekly Tenkan and Kijun lines, but remains within the weekly cloud (base at 57.66 next week). BCO/USD also closed below the 21, 55, and 100 day sma, all located between about 69.20 and 70.65. The $64/65 level looks to be near-term support.
USD index--Posted an 'abandoned baby bottom,' a rare but significant reversal signal after a decline, on the daily candlesticks. It also closed above the daily Tenkan line at 76.46, but below the Kijun line at 77.39. The 21-day sma is nearby resistance at 77.18. Weekly candles show a potential hammer, also suggestive of a bottom, following last week's spinning top.
EUR/USD--Closed below the daily Tenkan line at 1.4703 after failing below key Sept 22, 2008 highs at 1.4866. Weekly candles reveal a spinning top, which suggests indecision on the advance and a potential reversal signal. Key supports remains at 1.4600 followed by the 1.4450/4500 area, below which would confirm a medium-term top has been seen.
GBP/USD--Closed below the weekly Tenkan line at 1.6480 and below the 21-day sma at 1.6250. On daily Ichimoku charts, Cable continues to trade lower following its drop below the cloud last week, with daily moving average resistance clustered in the 1.63/1.6450 area. Immediate resistance is in the 1.6130/80 area, while 1.5803 June 8, 2009 lows are key support; below may see lower still to 1.53/54 area.
USD/JPY--Closed back below the daily Tenkan line at 91.02 and posted a bearish engulfing line on weekly candles, suggesting further downside potential. 87.10/20 lows from January are the major objective, but 89.00/50 is also expected to provide near-term support. (More on USD/JPY below)
Japanese Fin. Min. Fujii has been all over the place with comments on the JPY, initially saying he favored a strong JPY when he first took office, but then quickly indicating that he would not pursue a strong JPY policy. His latest comments from the G20 meeting suggested that the MOF would not intervene to stem JPY gains, which opened the door to a flood of selling and sent USD/JPY below the key psychological level of 90.00 USD/JPY. We don't doubt that Fujii may have some philosophical conflicts with intervening in currency markets, but we think the impact to the Japanese export sector will be devastating, as evidenced by the Nikkei's 2.64% decline as the JPY broke higher. Some Japanese exporters are only profitable with USD/JPY above 93.00, while many others' threshold is higher still at around 97.00/50. With global demand still weak, the last thing Japanese exporters need is a sharply stronger JPY. PM Hatoyama on Friday expressed his concern over the Japanese economy, saying it could still worsen significantly. We would also note Japan's near 180% debt/GDP ratio and a balance of payments deficit of about 7.5% of GDP, both of which are major JPY negative fundamentals.
We think Fin. Min. Fujii will eventually have to change his tune to adapt to reality and so we are leery of current JPY strength. However, until that happens, USD/JPY can see lower. If risk markets continue to trade heavy, this will also pressure JPY-crosses lower, adding to the weight on USD/JPY. We would note widespread talk of corporate buying interest in the 89.00/50 area, but below there opens potential to the 87.10/20 lows from January. USD/JPY strength back over the 91.00/50 area may signal that a low has been seen.
The top-tier data this week in the United States continued to suggest that the economy is not out of the woods just yet. Housing data diverged from the recent up-trend, durable goods orders were horrendous and employment continued to show little improvement. Existing and new home sales data both disappointed and are likely to come under renewed pressure in coming months. Durable goods showed a sharp relapse in a month when cash for clunkers was supposed to ramp up economic data. Last but not least, the jobless claims report continues to suggest new jobs remain hard to come by.
Existing and new home sales data this week threw some cold water on the housing market renaissance. The August reports showed existing sales dropping -2.7% while new home sales rose a much lower than expected 0.7% on the month. Both saw the July numbers revised lower as well. What is interesting is that this occurred a few months ahead of the expiration of the $8,000 first-time homebuyer tax credit. Home sales were ostensibly going to blow away expectations as buyers race to close on their homes ahead of the November 30 deadline. Instead, we got the exact opposite. Given that the average closing takes about two months (longer for so-called short sales), we expect the sales numbers to look even worse as the expiration of the government bailout nears. The IRS reported that some 1.4 million folks have taken advantage of the tax credit thus far. We wonder what home sales would have looked like without that and the Fed buying MBS hand over fist (keeping mortgage rates artificially low). The one noted bright spot in the housing reports is that inventory levels are coming down. On this file, however, we would just remind folks that there are reportedly some 7 million properties likely to be seized by lenders that have yet to hit the market. Caveat emptor!
The durable goods report also points to weaker than expected growth ahead. The headline number collapsed -2.4% in August while, excluding transportation, we saw a flat print on the month. Consensus was that we would see significant gains and thus the surprise was palpable. More importantly, however, was what lurked in the guts of the report. The so-called capex proxy - non-defense capital goods orders excluding aircraft - declined for the second month in a row and remained down well over -20% on an annual basis. This number tends to lead capital expenditure activity and suggests a softer than expected 4Q GDP print. With the cash for clunkers boost now over and done with, the data on this front have the potential to get even worse in the months ahead.
On the employment front we saw little in the claims report to suggest things have gotten materially better. While the initial claims number fell to only 530K from 551K, continuing claims suggest folks are still finding it extremely difficult to find jobs. The widely advertized 6.2 million in continuing claims only includes those on State programs. If we throw in the folks who have exhausted benefits and are now on the Federal rolls, the actual continuing claims number is closer to a whopping 9 million! This, by the way, dovetails nicely with what the unemployment rate that includes marginally attached and part-time workers is telling us - it stood at a record 16.8% last month. We hear all the time that employment is a lagging indicator, but we are not sure how you can drive the US economy in an era of credit contraction without some organic employment and wage growth. More evidence on the health of the US employment situation is due up next week with the September NFP. For now, we are looking for a below consensus -205K print.
Cable fell around 2.0% during the course of last week taking out key technical support along the way at 1.6150/6200. From a technical perspective, the move risks a fall down to the USD1.53/55 area. What would stop this move would be a significant improvement in the UK fundamental outlook. While the week ahead may produce some brighter news, the underlying tone of sterling is likely to remain vulnerable.
Both fiscal and monetary policies are having a bearish impact on sterling at present. Faced with the possibility of a rise in the budget deficit to 13% of GDP this year, fiscal policy is likely to dampen enthusiasm for the pound for some time. The use of QE by the Bank of England this year has been a negative influence for the pound and the fact that the Bank has left the door open for more at a time when the ECB and the Fed are both seen to be holding policy steady has been a negative influence on sterling over the past few weeks. While no discussion on QE is expected until November (given the coincident publication of the Quarterly Inflation Report), it is considered possible that the Bank may lower the rate on commercial banks' reserves with the Bank in Oct. Clearly, expectations for more rates cuts would diminish on better than expected economic data. Forthcoming UK house prices data and the UK distributive trades survey may provide further evidence of stabilisation but are unlikely to counter the impression that risks to economic growth remain.
That said, the warnings from BoE Chief Economist Dale that pumping too much money into the system could create an asset bubble hint that the BoE may becoming more conscious of inflation potential. The minutes of the Sep MPC also make note that the risk that CPI will fall below 1% had fallen from the publication of the Aug Inflation Report. Sterling would find support from a change in tone from the BoE. However, for now it seems likely that sterling will remain under pressure in the run up to the Oct MPC and we would remain sellers on any bounces.
The US is jam-packed with economic data next week. Monday kicks things off with the typically under the radar Chicago Fed National Activity Index. Case-Shiller home prices and consumer confidence are due on Tuesday while Wednesday is quite busy with ADP employment, GDP, Chicago PMI and crude oil inventories. Thursday has personal income/spending, ISM manufacturing, construction spending, pending home sales and motor vehicle sales. The highlight of the week is on Friday with the US employment report. Look for Fed Chairman Bernanke's testimony before the House Financial Services Committee on Thursday as well.
It is also quite busy in the eurozone. German consumer prices are up on Monday while Tuesday has the eurozone business climate indicator, eurozone consumer confidence and German import prices. Eurozone consumer prices are up on Wednesday along with German employment. Thursday has the all-important eurozone PMI manufacturing, eurozone employment and German retail sales. Eurozone producer prices rounds out the week on Friday.
The UK action starts on Sunday with the Hometrack housing survey. Tuesday is busy with GDP, current account, net consumer lending, mortgage approvals, GfK consumer confidence and the monthly CBI distributive trades report. Thursday brings PMI manufacturing while Friday ends the week with nationwide home prices.
Japan has a couple of top-tier events due. Consumer prices lead the way on Monday while small business confidence, PMI manufacturing and industrial production are on tap Tuesday. Housing starts, retail trade and the Tankan business surveys are lined up for Wednesday. Thursday closes things out with employment and household spending.
Canada is ultra-light next week. Industrial product prices and GDP are the only noteworthy reports, both out on Wednesday.
The calendar down under is relatively busy. Monday sees New Zealand building permits while Wednesday rounds out the week with New Zealand business confidence, Australian leading index, Australian retail sales, Australian private sector credit, Australian building approvals and Australian performance of manufacturing index.