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. (more in BOJ Extends Size Of Asset Purchase Program After Currency Intervention and SNB Goes For Quantitative Easing As Franc Appreciates Sharply.) 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.

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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.

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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.

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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.

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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.

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