July 26th – 30th Quick Review/Preview For Stocks, Commodities, Forex

 

Likely Market Movers To Watch This Week

For details on these see: Major Market Movers To Watch July 26th – 30th: Stocks, Commodities, Forex

 

Likely Market Movers For The Coming Week

 

Bearish

1. Suspiciously Lenient EU Bank Stress Tests Raise Uncertainty: We knew the results would be positive because the EU could hardly allow otherwise without risking a self inflicted run on its banks. The real question was whether they would be convincingly positive, with enough banks failing and criteria stringencies. They weren’t, suggesting that the unrealistic leniencies were necessary to hide the truly bleak picture of EU banking stability. Similar to the EU’s initial attempts to ease concerns about Greece early this year, by failing to decisively reduce uncertainty it has increased it. See Anticipating Market Response To EU Bank Stress Tests for the full story. Unclear whether markets will react immediately to price in the continued or greater uncertainty about EU banks, but it will do so eventually as it now has a massive excuse to pull back.
2. Major stock indices like the S&P 500 are now at major resistance levels and will likely need further good news to fuel a sustained push higher.
3. Fundamentals Remain Weak: In most of the developed world, none of the fundamental weaknesses behind the downtrend in risk assets in 2010 have materially improved. The pillars of a genuine recovery remain shaky – jobs, spending, real estate, construction and banking, longer term resolution of the sovereign and private debt levels all remain weaker than we would expect in the early stages of a real recovery.
4. ECRI data worsens: the latest weekly reading at -10.5%. As we noted last week, -10% annualized decline has historically meant a double dip recession coming.
5. Hungary Debt Picture: Hungary rejects IMF austerity measures in a bid to win popular support in coming elections. Two top ratings agencies said on Friday they might downgrade Hungary’s sovereign debt without the IMF lending credibility to the future of Hungarian deficit reduction.

 

Bullish

1. Positive momentum plus a quiet news week could be enough to keep markets moving higher if they somehow choose to ignore the EU stress tests or manage to view them positively.
2. US Earnings Week III: There are fewer big names, though the list includes of BP (BP), Boeing (BA), Chevron (CVX.N), DuPont (DD.N), Exxon Mobil (XOM), Sony (SNE) and Visa (V).
3. Further stimulus and tax reductions may be coming
4. China and other emerging market nations continue to show growth
5. China’s property bubble is easing without killing growth, a huge plus for global commodity demand
6. As emerging markets continue to resist stagnation, hopes increase that they can fill in the gap in longer term growth left by the developed world, which is looking at stagnation as most economies suffer from cutbacks in government spending
7. While little in the EU has fundamentally improved since the panic of this past spring, the panic of imminent collapse has subsided, buying the EU time to heal. As long as they can sell bonds at acceptable rates, the next stage of the EU debt crisis remains deferred.
8. Many challenge the reliability of the negative ECRI outlook
9. In our April article, CHARLES NENNER’S HIGH CONVICTION TRENDS, TRADES: 2010-11 Investors’ Roadmap, Nenner predicted a final rally in August before risk assets begin a long decline stretching well into 2011. This may be the start of that near term push higher.

 

STOCKS

 

Index	Started Week	Ended Week	% Change
DJIA	10097.90	10424.62	+3.2
Nasdaq	2179.05	2269.47	+4.1
S&P 500	1064.88	1102.66	+3.5

 

Next Major Resistance Zones: S&P 500 1140-60, Nikkei 10,000-10,100, DAX 6300

COMMODITIES

 

Table Courtesy of Oilngold.com

• Oil up on rising risk appetite, falling US Dollar, threat of supply disruption from Gulf of Mexico storms, rising China oil imports, testing resistance at annual highs around $80.
• Gold holds steady near $1188 above multi-month resistance of $1180 despite falling nervousness about the EUR, which has been the main driver pushing gold higher from 1060 at the start of the year. Gold has been falling since the start of June as the EUR stabilized and negative sentiment caused by the news about the annual report of the Bank of International Settlement (BIS) that revealed that an amount of 346 tons of gold have been swapped for liquidity from the BIS.

 

CURRENCIES

 

US Dollar Weekly Outlook: To Benefit From New Uncertainties on EU Banks, China Bad Loans

 

US Dollar Bias: Bullish

• EU bank stress tests create greater uncertainty due to their suspicious leniency, which implies EU banking weakness required such unrealistically easy criteria and assumptions. Markets didn’t have time to digest this information and may decide that this risk is not priced into risk assets. That would benefit safe haven currencies like the USD, JPY, and to a lesser extent, the CHF because as its close tie to the EU means it suffers when the EU looks weak. Upward momentum and lack of negative news might allow risk assets some near term upside, but the added uncertainty about EU banks from the test results will need to be priced in at some point soon, especially if risk assets approach stronger resistance.
• Positive US earnings season already priced in, thus its influence will either fade if good, or boost the USD if the tone turns more disappointing and hurts risk appetite.
• Chinese banks that made loans to government building authorities for new projects may lose 23% of funds loaned per a Bloomberg report.
• Friday’s advanced US Q2 GDP is the major scheduled event for the USD, and could either confirm the picture of slowing growth or provide relief from the prevailing pessimism about the US
• Risk assets are at or near strong multi-month resistance. If that strong resistance holds, the USD is likely to benefit as a safe haven currency.
• Struggling US economy could limit USD gains despite declining risk appetite. USD needs improving fundamentals relative to others, especially the EUR, to sustain a rally.
• Slowing EUR short covering means EUR gains must come on continued rising risk appetite and/or fundamental improvements.

 

Euro Weekly Outlook: Vulnerable To Pullback On New Bank Uncertainty, Lack Of News To Fuel Risk Rally

 

Euro Bias: Negative

The above comments about the USD apply with the reverse, bearish affect on the Euro.

Japanese Yen Weekly Outlook: Fading Risk Aversion Vs. BoJ Intervention Threat

Japanese Yen Bias: Positive-to-Neutral

• Pressure on risk appetite to benefit the #1 safe haven Yen due to
• Suspiciously lenient EU bank stress tests to boost risk aversion and safety currencies like the JPY, as the tests raise the likelihood of more negative surprises from EU banks
• Warnings from Bernanke on risks of slowing US growth
• Waning affects of US earnings season as good results now priced in
• Other potentially bearish market movers for the coming week as noted above
• Rising Yen over the past year threatens Japanese exports and thus economic recovery. BoJ verbal intervention becoming more likely as rising JPY hurts exports
• Improving spending and growth data balanced by deflation threat

 

British Pound Weekly Outlook: Surprising GDP Strength Vs. Not-So-Great Rate Expectations

 

British Pound Bias: Down

• Pulled between good data (positive GDP, construction, inflation data and retail sales surprises) and dovish rate expectations.
• Consumer consumption may be stronger than expected due
• Continued inflation adds inflationary pressure for a rate increase coming soon.
• While tied to Europe trade the GBP less likely to suffer from EU travails than the EUR or CHF
• Policy makers believe slack in economy will keep inflation in check despite better growth, and inflation remaining over the maximum target 3% for the past 5 months.
• GBPUSD nearing strong resistance at 1.5600 zone, which has resistance points of its 61.8% Fibonacci level at 1.5611, its 50 day SMA immediately above.

 

Swiss Franc Weekly Outlook: Benefitting From EU Travails As A Safe Haven,

 

CHF Bias: bullish

• Given their own ties to the EU, the Swiss released their own bank stress test results for their own largest banks. Test criteria were claimed to be more stringent, the results better and more believable. We haven’t seen details, though they could hardly be worse.
• Given the paucity of CHF specific events, the Swissie’s continues to move with higher with risk aversion, thus the dubious EU banks stress tests should ultimately benefit the CHF as markets flee sooner or later to safe haven currencies, though the CHF would likely lose ground to the safer, less EU-sensitive JPY and USD.
• Support for the USDCHF holding above 1.0479, for the EURCHF above 1.3255

Canadian Dollar Weekly Outlook: Improving Fundamentals Reduce Vulnerability To Risk Appetite Swings

 

Canadian Dollar Bias: Bullish

• Top growth and rate increase expectations set CAD up for best performance in the coming 12 months of all major fx
• BoC raises interest rates 25 basis points, putting short term rates at 0.75%
• BoC expects economic activity to reach full capacity by the end of 2011
• Inflation remains below the 2.0% target, with June figures showing annualized 1% growth
• Slowing global growth expected to hamper Canadian economy, though strong ties to commodity consuming BRICs should ease any pain
• Canadian banks avoided subprime mess, need for bailouts, keep Canadian spending needs trimmed
• Nonetheless, USDCAD remains under strong influence of risk appetite drivers

 

 Australian Dollar Weekly Outlook: Moving With Risk Appetite More Than Solid Fundamentals

 

Australian Dollar Bias: Short term Neutral, longer term Bearish

• RBA minutes optimistic
• AUD gains about 3% or more vs. JPY, EUR, and USD
• Continued China growth boosts AUD prospects
• Further rate hikes depend on whether inflation threat rising

 

New Zealand Dollar Weekly Outlook: NZDUSD Approaching Resistance As Rate Hike Is Priced In

 

NZD Bias: Bearish

• Consumer confidence drops to near annual low, raising doubts about imminent rate increase
• As usual, following the AUD and risk appetite more than local economic events
• Wednesday’s RBNZ rate decision the main local economic event, but key global ones remain more important
• Thus market reaction to the EU bank stress tests is likely the key event this week

Conclusion: Suspicious EU Stress Tests, Risk Assets At Resistance To Limit The Latest Nascent Rally Because There’s No Fundamental Change.

 

Given the weight of multi month resistance and pent up market reaction to the disappointing EU bank stress tests confronting the current rally, our bias is bearish-to-neutral for the coming week. Markets need to price in the increased uncertainty about EU banks, but the implied weakness was not much of a surprise, and thus markets could well continue in a summer trading range. However, with positive US earnings now priced in, markets will need new justification for a sustained push above imminent multi-month resistance levels for risk assets.

No fireworks expected from the coming weeks data barring an adjustment down to price in EU banking uncertainties. Thus the next likely source of market moving news might not come until next week’s US monthly jobs reports and the data leading up to them.

Disclosure: No Positions