Updated Jun 25, 2010 5:00:00 PM
Dark clouds gathering on the horizon
US housing data in the past week revealed the extent of the artificial and temporary support provided to the US housing market by the home buyer tax credits. The data had been expected to show decent gains on a final flurry of home closings before the end of June deadline to close, but the sharp declines showed that many home buyers were unable to secure financing. Housing data is only expected to deteriorate from here out as an extension of the tax incentive program seems highly unlikely in the current deficit reduction environment. Given the still high levels of foreclosures and underwater mortgages, as well as a large 'shadow inventory' (homes that would be on the market if conditions were better), it appears US housing is about to see a 'double dip' decline. The implications for household spending are quite ominous, as the wealth effect of deflated home values and still depressed stock market portfolios generate a negative feedback loop to consumption. Add in still high unemployment levels (and the failure to extend unemployment benefits due to deficit concerns), and we have another negative feedback loop undermining US consumption. Together, these threaten to see the US recovery falter sooner than we expected, which has also altered our view on the broader global recovery.
Up until about a month ago, two of the three global economic regions (North America and Asia) were experiencing solid improvement (Europe is the laggard third), enabling the global recovery to continue. Now that the US appears set to slow more severely into the end of the year, two of the three pillars of the global recovery are now set to underperform, suggesting a more serious headwind to the global rebound. Looking ahead, G20 economies are moving
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Updated Jun 18, 2010 5:00:00 PM
USD sputters, EUR recovers, but risk lags
This past week saw broad based USD weakness against all other major currencies as tensions over the Eurozone debt crisis eased further and optimism returned that the global recovery would stay on track. The EUR was a prime beneficiary of the rebound in global sentiment (more below), but by the end of the week its progress looked to be stalling. From a broader perspective, risky assets (stocks, commodities and JPY-crosses) failed to exhibit the same degree of optimism, suggesting risk aversion remains just beneath the surface. Indeed, gold surged to new all-time highs while US Treasuries rallied and yields remained around recent lows, suggesting safe haven refuges remain in demand. As well, stock markets broke to new highs for the current rebound but seemed unable to extend those gains in any significant fashion going into the end of the week.
From the technical side, the picture is a bit more mixed. Most risk assets have shown some constructive potential on the Ichimoku charts, with the S&P 500, many of the JPY-crosses, and most of the USD-pairs making bullish crossovers of the daily Tenkan and Kijun lines, suggesting more upside potential lies ahead. But they are all still below their daily Ichimoku clouds, which serve as critical resistance zones above. Daily momentum studies are all risk-bullish, but shorter-term studies (e.g. 4 hours) have been registering bearish divergences on the late-week price gains, highlighting the view the rebound may be stalling. Perhaps it's just a case of World Cup lethargy restraining risk sentiment, but overall we remain extremely cautious on the prospects for the risk rebound to continue (see below) and we'll be alert to any signs of a reversal lower. In particular, we are focused on the key risk support
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Updated Jun 11, 2010 5:00:00 PM
Risk recovers marginally, but doubts remain
Most major markets saw some stabilization in the past week, but recent range highs have contained most of the gains. JPY-crosses and commodity currencies led the charge higher after a raft of data releases at the end of the week rejuvenated the view that the global recovery was continuing. We remain extremely cautious on the prospects for further gains in risky assets (stock, commodities, JPY-crosses, and commodity currencies) going forward, as the weight of looming fiscal austerity measures, high levels of unemployment, and struggling consumer demand (seen in the latest US retail sales decline), is more likely to undermine rather than support the global recovery. As such, we prefer to remain sellers of risk assets on strength. Another way of looking at it is that this past week's price action has simply 'closed the gap', or re-tested the prior week's break-down levels, which have held. This suggests consolidation rather than a correction higher in risk.
In terms of specific price levels to monitor, EUR/USD has critical resistance in the 1.2150/1.2200 area, and the 1.1800/50 area is critical support. The US dollar index is also worth watching as key 5 year-old trend line resistance was tested this week at 88.50, but has held for the time being. In stocks, the S&P 500 is biased lower while below the 1105/10 level and the 1035/1040 area is the support to watch. AUD/JPY as a proxy for other JPY-crosses (and 90% positively correlated to the S&P 500) faces resistance from recent range highs at 78.00/79.00 and selling in that area is the focus of our Weekly Strategy, looking for a drop back to the 72.00/74.00 area. WTI crude oil prices are also facing key resistance in the 75.50/76.50 area. Gold prices were once again
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Updated Jun 4, 2010 5:00:00 PM
Risk faltering again on EUR woes, weak US NFP
Risk trades had been faring reasonably well for most of the last two weeks, as seen in solid gains in JPY-crosses, in line with our view that risk sentiment was due for a rebound. All that came to an abrupt end around the middle of the global trading day this past Thursday as concerns surfaced over the state of Hungary's commitment to cut its deficit. Those concerns exploded onto the scene again on Friday, as the PM's spokesman indicated that the economy was in 'very grave situation' and even raised the specter of a default. Then came the extremely disappointing US May employment report, which sent risk trades into a tailspin to finish out the week. What had looked like stabilization in risk sentiment potentially turning into a rebound has seen a distinct relapse. Markets look set to embark on a new phase of 'risk off' and this should see the USD, CHF and JPY outperform, while commodities and commodity currencies (AUD, NZD especially, but CAD too) are likely to suffer. The EUR remains utterly friendless and barring intervention seems to have no place to go but down (more below).
Before we get too depressed, let's look at the two main catalysts for the reversal in risk this past week: Hungary and the US jobs data. On Hungary, much of it appears to be a badly communicated political message hitting a market with raw nerves. The Fidesz party of PM Viktor Orban swept into office taking two thirds of parliamentary seats on promises to end fiscal austerity measures, engage fiscal stimulus and cut taxes. But Hungary has been on EU/IMF credit support since it was bailed out in Oct. 2008 at the height of the financial crisis,
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Updated May 28, 2010 5:00:00 PM
(N.B.: Monday May 31 is a holiday in the UK and US. Market liquidity is likely to be lower and volatility may be higher as a consequence.)
Risk sentiment and markets stabilizing; rebound potential
Global stock markets appeared to stabilize in the past week on signs that the recent sell-off was extreme and that the global recovery was continuing. The MSCI World index managed to rebound slightly after falling to new lows for the decline, generating a sizeable 'hammer' pattern on weekly candlestick charts, a potential bullish reversal indicator. The S&P 500 also saw a sharp rebound from the significant 1040/45 level, potentially putting in a key price low. Other risk assets recovered more convincingly, such as the CRB commodity index, which held the prior week's lows and closed up about 1.5%. US Treasury yields also gained on the week in another sign that demand for safe haven assets was beginning to ebb. In currencies, the JPY-crosses (e.g. AUD/JPY, CAD/JPY) mostly held above recent lows and posted gains for the week, the exception being EUR/JPY. Gold prices also saw some bounce after a week of vicious liquidations and regained the $1200 level.
We think there is further potential for risk assets to recover in coming weeks, though there are certainly many different headwinds. Overall, the credit crisis in Europe appears to be receding, with some slight declines toward the end of the week in sovereign debt credit default swaps (CDS), a measure of the risk of default. To be sure, concerns over the health of European private sector banks remain, and this is the most likely source of further risk aversion in the near-term. But as long as credit markets continue to calm down, investors desperate for returns are most likely to return and
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