Stocks: Prior day: Asia, Europe, US up. Today: Asia, Europe up on a continued reaction bounce as Asian and European markets rose despite significant lingering questions about the feasibility and enforcement of the latest EU/IMF bailout package, further China tightening, damage from the BP oil spill, and another major US bank investigation-this time of Morgan Stanley (MS)
- US Bonds: Up Wednesday, yields down from 3.54% Monday to 3.5350% Tuesday. NB: risk asset markets are up as of this writing, suggesting US bonds prices should be lower today and yields higher.
- FX: bias against safety currencies [JPY, USD, CHF in order of
safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GB in order of risk
appetite appeal], as market uncertainty and currency specific issues dominate rather than position of a given currency on the risk spectrum, but the top performers are the CAD, AUD, NZD, and the JPY is among the weakest – a clear statement that risk appetite is on, except for currencies with specific problems like the EU debt crisis(EUR, CHF) or dovish BoE comments(GBP).
- Main events: MON: USD Fed Announcement, AUD ANZ Job Ads, CNY Trade Balance, GBP: MPC Rate Statement, EUR Trichet Speaks and other follow up on latest EU/IMF plan TUES: CNY CPI, GBP Mfg Production, WED: AUD Home Loans, EUR German Prelim GDP, GBP Claimant Count Change, EUR Flash GDP, Industrial Prod, GVP Gov. King Speaks, Inflation Report, CAD Trade Bal. THUR: AUD Employment Change, GBP Trade Bal: USD Unemployment Change NZD Retail FRI: USD Retail, Core Retail, UoM Consumer Sentiment
Big Theme: Risk Appetite ON again?: Dangerous Divergence: Commodities reflect fear while stocks and forex show risk appetite. Oil is down, gold is rising as a safe haven from EU money printing and not on growth driven inflation concerns. Modest risk asset gains show market resilience despite ongoing concerns about the feasibility and enforcement of the latest EU/IMF rescue plan, China tightening, BP oil spill still flowing, and now an investigation into possible fraud by US investment bank Morgan Stanley. Oh yes, UK gets a warning from Fitch to reduce its deficit or risk losing its AAA rating. Oil’s decline and gold’s rise both point to weak risk appetite in commodities, suggesting a bearish diversion with stocks.
STOCKS:
US: Up- Traders ignored the still present concerns of prior days about the EU, China, oil spills and the Morgan Stanley fraud investigation, and followed Asian and European stock markets higher to their best levels of the week, but the S&P 500 now faces significant technical resistance at 1176, the 23.6% Fibonacci retracement level.
Initial gains came on the strength of Europe’s major indexes, including a 2.4% spike in Germany’s DAX after the country reported stronger-than-expected first quarter GDP growth of 0.2%.
Though the stock market was able to hold that level and close above it, the 50-day moving average represents a more formidable challenge at 1176.
Tech stocks, which collectively represent the heaviest sector by market weight, provided leadership this session with a strong 2.2% gain. Tech stocks are now up 2.1% year-to-date.
Retailers overcame early weakness to finish with a gain of 1.4%.
Natural resource plays gained strength after they had traded as laggards during the prior session. It climbed 3.5% to $4.28 per MMBtu
Despite a 0.9% drop in oil prices to $75.65 per barrel following a larger-than-expected build in weekly inventories, energy stocks followed the overall market higher for a 1.3% gain, with refiners faring best with a 4.6% gain.
The materials sector was up 1.9% as diversified metals and mining stocks rose 4.0%. Despite Gold’s 1.9% surge to finish at an all time high of $1234 ($1249 in afterhours electronic trade). Gold stocks settled with a less impressive 0.9% gain, even though individual gold prices hit new record highs.
US Bonds: Given the strong demand for stocks, the safe-haven benchmark 10-year Note predictably finished 12 ticks lower with yield up from 3.54% Tuesday to 3.5670% Wednesday, with a bid-to-cover ratio of 2.96. The Treasury also unveiled its April budget, which showed a $82.7 billion deficit. That was much more than expected and was also the largest deficit ever recorded for April.
Asia Stock Outlook: Up at the close early Thursday GMT after Spain outlined measures to cut its deficit, easing fears the Greek debt crisis could spread in Europe and boosting exporters.
Shares of companies with upbeat earnings and outlooks found favour as well, with information services company CSK Holdings up more than 14 percent after it forecast a jump in profit this financial year.
Concerns that Greece’s debt crisis could spread to other euro zone nations with high deficit/GDP levels eased on Wednesday as Spain announced it would slash civil service pay by 5 percent this year, freeze it in 2011 and cut 13,000 public sector jobs.
The move may in fact be illegal in Spain but markets chose to ignore that technicality for now, as oversold markets grasped at any reason to go higher.
European Stock Outlook: Up –At the open early Thursday GMT, European shares rose for a second straight session to a one-week high on Thursday, as positive earnings news in recent days and the latest Spanish spending cuts plan raised hopes that Europe’s debt crisis can be resolved.
| ASIA-UP | N225 -0.16% | HS +0.33% | SSEC +0.31% | FTSTI +0.52% | AORD +0.58% | ||
| EUROPE UP | FTSE +0.92% | DAX +2.41% | CAC +1.10% | ||||
| US- UP | S&P +1.37% | DJIA +1.38% | NASDAQ +02.09% | ||||
| THIS MORNING UP | N225 +2.18% | HS +0.89% | SSEC +2.06% | FTSTI -0.04% | AORD +1.73% | ||
| UP | FTSE +0.170% | DAX +0.70% | CAC +0.57% | ||||
Commodities Outlook: Up in early Wednesday trade GMT: Indicating far less risk appetite that shown in stock markets, suggesting a bearish divergence in sentiment that may threaten the nascent stock market recovery. Oil is down, and gold is rising on its safe-haven appeal rather than as an inflation hedge due to increased growth expectations. Commodities and forex markets often reverse before stocks, making them a bearish leading indicator for stocks at this time.
Crude Oil Daily Outlook: Down– Futures rose early Wednesday, but couldn’t hold their gains, and continue falling in early Thursday trade to just below $75/bbl, continuing a third day of losses
Gold Daily Outlook: Up- Futures surging 1.9% to new all time high of $1243 at the New York close, and again to nearly $1250 in after hours electronic trade (vs. the November high of $1225).
Gold’s safe haven appeal sparkles amid doubts about the Euro, China tightening, damage from the BP oil spill, and a new US banking investigation aimed at possible fraud by Morgan Stanley. Precious metals continued to shine as gold set a new record high near $1250 per ounce. Meanwhile, silver settled 1.9% higher at $19.66 per ounce.
Gold and silver’s gain came in the face of a stronger dollar, which advanced 0.5% against a basket of foreign currencies, reflecting a drive for safe haven assets that contradicts the apparent rise in risk appetite shown in stocks, as both the USD and precious metals are seen as safe-haven assets in times of fear.
FOREX Daily Outlook: In Wednesday and early Thursday trade GMT: Bias to risk currencies except for those linked to the EU debt crisis (EUR, CHF) or with specifically dovish news (GBP)
US Dollar Daily Outlook: Up vs. the EUR JPY, CHF, GBP down vs. the AUD, NZD, CAD, indicating overall bias to risk appetite with risk currencies up, safety currencies or those with specific problems down vs. the USD.
Euro Daily Outlook: Down vs. the JPY, USD, CHF, AUD, CAD, NZD steady/lower vs. the GBP. Latest EU/IMF ‘shock and awe’ saves stocks, banks for now, but is a ‘shock and awwww’ (hat tip to Michael Ashton) disappointment for the Euro, which has continued to plunge.
Currency markets clearly recognize that the EU has yet to deal with numerous questions about implementation, enforcement, and preventing another crisis. Also, the adoption of US-style QE by ECB purchases of PIIGS bonds threatens future devaluation through inflation, which would turn the once solid EUR into a second rate USD that lacks the reserve currency status of the Dollar.
Yen Daily Outlook: Up vs. the CHF, EUR down vs. the USD, NZD, CAD, GBP, AUD. Down as the prime safe-haven currency in a risk appetite environment, as shown by the strength of the leading risk currencies today – the CAD, AUD, and NZD.
British Pound Daily Outlook: Down vs. the JPY, USD,CHF, NZD, AUD, CAD steady/higher vs. the EUR, following dovish BoE comments and inflation report. Tied for the weakest over the past 24 hours along with the EUR.
A Fitch warning that the UK needs a strong credible plan to maintain its AAA credit rating also weighs on midday GBP gains.
Australian Dollar Daily Outlook: Up vs. the USD, EUR, JPY, GBP, CHF, NZD, down only vs. the CAD
New Zealand Dollar Daily Outlook: Up vs. all except the AUD, CAD
Canadian Dollar Daily Outlook: Up vs. all no idea why because on a daily basis the CAD trades as a risk currency following oil and stocks in particular, both of which are down. No special news on it either. We suspect speculative buying on rate increase hopes.
Swiss Franc Daily Outlook: Down vs. all except for the GBP, EUR as it moves with the EUR despite its better fundamentals, due to expectations that the SNB will intervene to keep it from gaining against the EUR and hurting Swiss exports to the EZ.
CONCLUSIONS & Big Picture: Markets stabilizing –risk asset gains show market resilience despite ongoing concerns about the feasibility and enforcement of the latest EU/IMF rescue plan, China tightening, BP oil spill still flowing, and now an investigation into possible fraud by US investment bank Morgan Stanley. Oh yes, UK gets a warning from Fitch to reduce its deficit or risk losing its AAA rating. However, the continued slide of the Euro and oil suggests ongoing doubts about the EU rescue that could easily undermine the nascent recovery in risk appetite, as all recognize that NONE of the root causes of the EU debt crisis have been dealt with yet.
Unlike the other plans, this one finally dealt with the immediate problem of being large enough and comprehensive enough to calm markets not just about a Greek default but also assure that ALL PIIGS were now too big to fail.
However, similar to the others, many details remain unclear, and ambiguity ultimately killed off the other plans. Biggest current questions that need answering:
· Will leaders and voters accept the burdens imposed by this rescue, especially those not in the EZ, like those of the UK and US?
· Can the economically weak PIIGS nations afford to contribute to the plan, especially the smaller ones which bear a higher per capita burden (over $1000/ household in Ireland for the prior plan that was 1/10th the size – more than Germany or any of the PIIGS nations)?
· Will the Germans accept paying their share of the bill, especially after yesterday’s regional election protests German funding and may cost Merkel her job. The current plan has largely abandoned the ‘sound-currency’ principles of the EU, something the Germans may ultimately find unacceptable. Expect rigorous, possibly violent domestic German opposition.
· Will Greece and other PIIGS nations, now freed of need for bond markets and likely to come calling for EU aid, truly enact the sustained austerity measures, now that they know they are too big to fail? Opposition in Greece, both in the Parliament and streets, is not an encouraging sign.
· THE BIGGEST QUESTION: What is the enforcement mechanism to ensure we don’t have a similar crisis later, especially now that even the smallest EZ members appear to be deemed too big to fail? Default is no longer a threat, so what is? Economic/military takeover?
Market concerns over these and other issues will determine if markets continue to rally, stall out, or resume their slide. Expect doubts and backtracking as voters and leaders realize the size of the bill they are being asked to pay with no clear guarantees of repayment.
NB: There are also bearish divergences between commodities and other risk assets. Oil is down, and gold is rising as a safe haven and not on fears of growth-inspired inflation. Commodities and forex tend to reverse before stocks, so this bears watching.
DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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