- Euro is expected to remain broadly pressured this week.
- EUR/USD's corrective rise from 1.4217 might be completed at 1.4578 already and further fall should be seen to retest this support.
- EUR/JPY's rise from 127.50 should have be completed at 134.36 on a small head and shoulder top pattern and deeper fall should be seen to 126.88/127.50 support zone.
- EUR/GBP has also broken out of recent range to resume the decline from 0.9410.
- Crude oil has already made a short term to at 83.95 last week and is set to have some more pull back this week.
- The focus will be on whether Gold's recovery from 1075 has completed at 1163 last week. A break of near term support of 1120 will likely trigger some selling in gold to retest 1075 and thus give dollar a boost to has a broad based rally.
- Sterling: Some important data will be released this week, including CPI, employment and retail sales, together with BoE minutes. Main focus will be on whether these events would push the sterling further higher, or will they trigger a near term reversal in the pound.
- Tuesday: UK CPI; German ZEW; BoC rate decision; US TIC capital flow; NZ CPI
- Wednesday: UK job report, BoE minutes; Canada CPI, US new residential construction, PPI; NZ retail sales
- Thursday: Eurozone PMIs; Swiss ZEW; US Philly Fed index, Leading indicators
- Friday: UK retail sales; Canada retail sales
Sunday, January 17, 2010
FX Week Ahead (Jan 18-22): GBP's Busy Week
Weekly ActionForex (Jan 11-15): Euro Broadly Lower on Greece Concern, More Downside Ahead
Key Developments last week: (a) Euro was broadly pressured last week on growing concern of Greece's large deficits and doubts over its sovereign creditworthiness, in particular after ECB Trichet made it clear that there will not be any special treatment to a signal member of the Eurozone, (b) Yen rose against most major currencies on risk aversion on as China stepped up its measures to cool lending, (c) Sterling, on the other hand, was supported by speculations that BoE will let the asset purchase program expire in February.
Dollar was initially pressured by risk appetite, but later rebounded strongly, with the help of weakness in Euro and crude oil.
As expected, the ECB meeting offered no surprise to the market on both economic outlook and monetary policy. The central bank kept the main refinancing rate at 1% and stated current interest rates are ‘appropriate. Moreover, the Eurozone’s economy will expand at a ‘moderate’ pace while inflation outlook remains subdued.
Regarding the fiscal health of Greece, Trichet said it has "a lot of hard work to do," and warned that "no government, no state can expect from us any special treatment." Nevertheless, when talking about Greece's exit of Eurozone, Trichet said he wouldn't comment on an "absurd hypothesis". Instead, Trichet said that ECB would carefully examine Greece's steps to slash the deficit over three years to below 3%.
Greece presented a three-year budget plan to EC that includes more than EUR 10 billion euro in deficit-reduction measures for this year budget shortfall. But markets are skeptical about the workability of the ambitious plan. German Chancellor Angela Merkel also said at a private forum that Greece’s fiscal crisis poses a "very difficult phase" for the euro.
Dollar was initially pressured by risk appetite, but later rebounded strongly, with the help of weakness in Euro and crude oil.
As expected, the ECB meeting offered no surprise to the market on both economic outlook and monetary policy. The central bank kept the main refinancing rate at 1% and stated current interest rates are ‘appropriate. Moreover, the Eurozone’s economy will expand at a ‘moderate’ pace while inflation outlook remains subdued.
Regarding the fiscal health of Greece, Trichet said it has "a lot of hard work to do," and warned that "no government, no state can expect from us any special treatment." Nevertheless, when talking about Greece's exit of Eurozone, Trichet said he wouldn't comment on an "absurd hypothesis". Instead, Trichet said that ECB would carefully examine Greece's steps to slash the deficit over three years to below 3%.
Greece presented a three-year budget plan to EC that includes more than EUR 10 billion euro in deficit-reduction measures for this year budget shortfall. But markets are skeptical about the workability of the ambitious plan. German Chancellor Angela Merkel also said at a private forum that Greece’s fiscal crisis poses a "very difficult phase" for the euro.
The Japanese yen was broadly higher last week on risk aversion, in particular against European majors. Also, the yen was supported by China's act to step up the measures to cool lending.
- China raised bill yields second time in a week to tightening liquidity further. PBoC sold benchmark 1-year bill at 1.8434% today. Last week, PBoC raised yield on three-month bills to 1.3684%.
- In addition, PBoC said it was raising reserve requirements ratio by 0.5 percent points which now clearly indicates that China is begging to tighten monetary policy.
Sterling, on the other hand, was supported by comments from BoE Sentance and was relatively firm during the week.
BoE MPC committee member Andrew Sentance said in an interview with Guardian
- that "at some point you have to say we have increased the amount of stimulus enough. It doesn't mean you are going to withdraw it but you don't have to keep adding to it."
- Also, he said that impact of oil and commodities prices, and sterling, on inflation need to be considered and the bank is approaching a point that need to "hold back and wait and see" how stimulus is "flowing into the recovery".
- He also express his confidence that there is little risk of a "double-dip recession" in UK.
- The comments triggered speculation that BoE will let the asset purchase program expire in February.
US Market Round-Up (Jan 11-15): First Wave of Q4 Good Earnings Greeted With Sell
Sellers crowded the market to hand stocks their worst loss in four weeks.
The broad-based push came despite better-than-expected earnings from bellwethers Intel and JPMorgan.
Semiconductor giant Intel (INTC 20.80, -0.68) announced after the previous session's close better-than-expected earnings of $0.40 per share. It even went on and issued solid revenue guidance for the current quarter. However, participants opted to sell the news of the beat after they had watched the stock climb appreciably in the sessions ahead of its report. The stock is still up roughly 2% since the start of the year.
Meanwhile, banking giant JPMorgan (JPM 43.68, -1.01) was dropped for a loss as participants showed dissatisfaction in the company's need to remain cautious toward consumer credit and persistent loss provisions. The reaction reflects the requirement of participants for higher quality earnings and explicit signs that the economic recovery is for real after watching stocks surge since March.
The latest batch of economic data did little for participants. December's Consumer Price Index (CPI) increased 0.1% month-over-month, which is a slightly softer increase than the 0.2% monthly increase that many economists had forecast, but still generally in-line with expectations. Excluding food and energy, the December CPI increased 0.1% month-over-month, as expected.
Industrial production in December increased 0.6%, as expected. Capacity utilization for December came in at 72.0%, which is on par with the 71.8% utilization rate that many had come to expect.
The preliminary January Consumer Sentiment Survey from University of Michigan came in at 72.8, which was slightly below the expected reading of 74.0, and slightly changed from the 72.5 that was posted in the previous month.
Without any data to inspire buyers to keep the stock market's recent uptrend intact, sellers were able to wrest control. Their efforts were broad based, but weakness was particularly noticeable among banks, which shared in JPMorgan's weakness and dropped 2.2%, according to the KBW Bank Index. That loss made financials the worst performing sector of the session -- it shed 2.0% in its worst percentage loss in one month.
Every other major sector also logged a loss; half of the sectors fell by at least 1%.
A stronger dollar, which was helped by continued concern about the financial health of Greece, exacerbated this session's weakness and helped the selling effort spread to commodities.
Weakness in the commodities complex dragged the CRB Commodity Index to a 1.1% loss. The slide made for a weak finish to an already-feeble week that saw commodities fall more than 3% since Monday.
Weakness among stocks and commodities helped win support for Treasuries, such that gains in the benchmark 10-year Note trimmed its yield to a three-week low. The 10-year finished with a gain of roughly 15 ticks and a yield of 3.67%.
The expiration of January options drove trading volume on the NYSE above 1.4 billion shares to a near one-month high. However, the expiration of those options distorts conviction in this session's move.
U.S. markets will be closed this coming Monday (MLK Jr. Day). However, participants will return from the long weekend to a bevy of earnings releases as more than 100 companies are scheduled to report their latest quarterly results next week.
The broad-based push came despite better-than-expected earnings from bellwethers Intel and JPMorgan.
Semiconductor giant Intel (INTC 20.80, -0.68) announced after the previous session's close better-than-expected earnings of $0.40 per share. It even went on and issued solid revenue guidance for the current quarter. However, participants opted to sell the news of the beat after they had watched the stock climb appreciably in the sessions ahead of its report. The stock is still up roughly 2% since the start of the year.
Meanwhile, banking giant JPMorgan (JPM 43.68, -1.01) was dropped for a loss as participants showed dissatisfaction in the company's need to remain cautious toward consumer credit and persistent loss provisions. The reaction reflects the requirement of participants for higher quality earnings and explicit signs that the economic recovery is for real after watching stocks surge since March.
The latest batch of economic data did little for participants. December's Consumer Price Index (CPI) increased 0.1% month-over-month, which is a slightly softer increase than the 0.2% monthly increase that many economists had forecast, but still generally in-line with expectations. Excluding food and energy, the December CPI increased 0.1% month-over-month, as expected.
Industrial production in December increased 0.6%, as expected. Capacity utilization for December came in at 72.0%, which is on par with the 71.8% utilization rate that many had come to expect.
The preliminary January Consumer Sentiment Survey from University of Michigan came in at 72.8, which was slightly below the expected reading of 74.0, and slightly changed from the 72.5 that was posted in the previous month.
Without any data to inspire buyers to keep the stock market's recent uptrend intact, sellers were able to wrest control. Their efforts were broad based, but weakness was particularly noticeable among banks, which shared in JPMorgan's weakness and dropped 2.2%, according to the KBW Bank Index. That loss made financials the worst performing sector of the session -- it shed 2.0% in its worst percentage loss in one month.
Every other major sector also logged a loss; half of the sectors fell by at least 1%.
A stronger dollar, which was helped by continued concern about the financial health of Greece, exacerbated this session's weakness and helped the selling effort spread to commodities.
Weakness in the commodities complex dragged the CRB Commodity Index to a 1.1% loss. The slide made for a weak finish to an already-feeble week that saw commodities fall more than 3% since Monday.
Weakness among stocks and commodities helped win support for Treasuries, such that gains in the benchmark 10-year Note trimmed its yield to a three-week low. The 10-year finished with a gain of roughly 15 ticks and a yield of 3.67%.
The expiration of January options drove trading volume on the NYSE above 1.4 billion shares to a near one-month high. However, the expiration of those options distorts conviction in this session's move.
U.S. markets will be closed this coming Monday (MLK Jr. Day). However, participants will return from the long weekend to a bevy of earnings releases as more than 100 companies are scheduled to report their latest quarterly results next week.
Sunday, January 10, 2010
ActionForex 2010 FX Outlook: USD, EUR, GBP, NZD
After strong rallies in 2008 and early 2009, USD peaked in March. In order to combat the worst recession since the World War II, the Fed reduced the policy rate to an unprecedentedly low level and implemented a series of quantitative easing policies.
The 'twin deficits' problem (current account and fiscal deficits) has put USD's status as the reserve currency at risks and triggered investors to dump the currency. Worries about the dollar's future as well as increase in risk appetite as global economic outlook recovered later in 2009 brought the greenback to extremely low levels.
Undervaluation: According Fed's measure, the trade-weighted USD index plummeted -13% against major currencies after making 2.5-year high in March. On annual basis, the gauge dropped -8%, the biggest loss since 2003. Despite modest recovery in December 2009, the dollar index continued hovering at historic lows.
ICE's US dollar index also showed a similar pattern. The valuation is about 1.5 standard deviations below its long-term average. From the viewpoint of mean-reversion, the dollar is poised for a strong rebound.
On a PPP basis, the dollar also looked undervalued when compared with major currencies. The table below shows the PPP values of 8 currencies which were used by Fed in composing the USD Major Currencies Index. Using closing price as of December 2009, USD is undervalued when compared with all 'major currencies'.
Economic growth in the US: Massive monetary and fiscal policies have helped reboot the growth engine as US data have turned more positive.
US growth is expected to outpace its counterparts in the advanced economy: Labor productivity grew +4% in 3Q09, compared with decline in Germany and the UK, suggested faster recovery in the employment market in the US. In fact, appreciation in the euro and the yen in 2009 was a barrier for economic growth in the Eurozone and Japan.
Economic expansion in Japan remained slow and deflationary risk continued to linger despite the government's expansionary measures. As urged by the Prime Minister, the central bank called for an urgent meeting in mid-December but the BOJ Governor Masaaki Shirakawa and his colleagues refrained from announcing more policy actions but sticking to a rate of 0.1% and a 10 trillion yen ($111 billion) lending program adopted in the previous meeting. It's widely anticipated that the BOJ will implement more expansionary policies to boost growth.
In the UK, further QE cannot be ruled out if growth remained subdued. Current account deficit widened +10% mom to -$108B in 3Q09. As a share of GDP, the deficit increased to 3% from 2.8%. Despite this, we see the trend of shrinking deficit as a % of GDP since the peak in 4Q2005.
Fiscal deficit in the US remains high. The chart below shows that the 'twin deficits' as a % of GDP reached 12.3% in 3Q09. Although it recovered modestly from a record of 15.6% in 1Q09, the double-digit reading is still worrisome.
A critical issue to offsetting the deficits is capital flow which is yet to improve. It's too early to say it will rise in the near-term but as the balance sheet in the US starts to improve, investors will flee to US asset, particularly when USD is trading at historic lows.
Gradual Exit from QE (End of the Asset Purchase Program): The Fed funds futures factored in 50-60% chance that the Fed will increase the policy rate by at least +25 bps by June.
However, analysts in the street are more conservative and the consensus is that the first rate hike will not take place earlier than 4Q10. Although the Fed may not raise interest rates in the near futures, the end of the asset purchase program can effectively withdraw liquidity from the market and indirectly tighten monetary policies.
According to the accompanying statement of December's FOMC meeting, most of the Fed's special liquidity facilities (including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility) will expire on February 1, 2010, consistent with the Fed's announcement of June 25, 2009.
The amounts provided under the TAF will continue to be scaled back in early 2010. The anticipated expiration dates for the TALF remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral.
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Fed announced purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt. While the program remains in progress, the Fed is gradually slowing the pace and these transactions will be executed by the end of the first quarter of 2010.
As the asset buying program ends by the first quarter, abundant Treasury supply will no longer be absorbed by the Fed and this will add upward pressures to long-term interest rates. Credit Suisse forecasts Treasury 10-year note yields will rise to about 4.25% this quarter. Many investors view the end of the program as an end of the Fed's pledge to keep long-term interest rate low. In this case, market will react as if the Fed is tightening.
To conclude,
2010 Currency Outlook: EUR
In the near-term, we see further upside for the euro against the dollar:
2010 Currency Outlook: NZD
New Zealand dollar surged in tandem with Australian dollar and commodity prices in 2009. Trade-weighted NZD gained +16% last year after falling sharply, by +20%, in 2008. Compared with AUD, strength in NZD was less prominent. In fact, AUD has outperformed NZD over the past 4 years, reflecting weakness in New Zealand's underlying fundamentals.
In 2010, we expect slow economic growth should weigh on NZD, Moreover, gains in NZD amid speculations on early tightening be pared and the market pushes back the timing and magnitude of the first rate hike.
Economic Development: Recovery in New Zealand is not as strong as many had expected. According to RBNZ Alan Bollard, economy remains fragile domestically. Although the economy surprisingly exited recession in 2Q09 with modest growth of +0.23% qoq, expansion slowed down in 3Q09. Job market remains dismal. The country's unemployment rate has been in an uptrend since 2008 and the latest reading of 7.3% (4Q09) represented the highest level since 2Q99.
Consumer spending stalled as dismal employment situation affected sentiment. Led by sales in department stores and appliance outlets, retail sales were flat from a month ago in December. Inflation contracted -0.18% qoq in 4Q09 although reading on annual basis stayed within the central bank's range of 1-3%.
Housing market in New Zealand is recovering but the pace has been moderate so far. In fact, recent data have revealed slowdown in housing market improvement. Building permits declined -2.4% mom in December, following a modest growth of +0.1% in the previous month. According to Real Estate Institute, median house prices dropped -2.8% mom in January from December. Given the high correlation between house prices and Kiwi, we worry NZD will weaken further against USD.
Pressure from Twin Deficits: Released in late-January, New Zealand's cash budget deficit totaled NZD 5.28B during five months to November 30, larger than the market expectation of NZD5.12B, as tax receipts were NZD485M less than forecast during the period. At the same time, the operating deficit was at NZD1.4B, compared with consensus of NZD2.48B. New Zealand's budget recorded a cash deficit for the first time in 9 years in the 12 months through June and the government has projected 5 years of deficits as debt increases. Last year, the government rolled out tax subsidies and welfare programs so as to combat recession, thus reducing the government's income.
Although the annual currency account balance improved to 3.1% of GDP in 3Q09 from the peak of 8.7% of GDP last year, rolling of tax windfall should worsen the situation again later in the year.
The market will be watching closing how the government boosts economic growth while reducing budget deficits this year.
Impacts from China's Cooling Measures: Similar to Australia, albeit to a lesser extent, New Zealand benefits from rapid expansion of Chinese economy. As stated in the January RBNZ meeting statement, 'global activity continues to recover, helping push New Zealand's export commodity prices higher. Economic growth is most apparent in China, Australia, and emerging Asia. However, sustained growth throughout our trading partners is not assured, with many still facing impaired financial sectors and overall activity still reliant on policy support'. Therefore, recent stimulus-unwinding measures in Chinese are negative for New Zealand.
People's Bank of China (PBOC) required banks to increase reserve ratio by +50 bps effective February 25, as stated in its Website last week. This was the second time this year the central bank raised banks' reserve ratios as a means to curb lending. On January 12, PBOC increased banks' reserve ratio for the first time since June 2008 as new loans reached a record of RMB 9.59 trillion in 2009. Concerns that growth in china will be slowed down as the government pushes out more tightening measures should exert additional pressures on NZD.
Despite its lower exposure to Chinese economy than Australia, performance of New Zealand dollar was actually worse than Australian dollar after China announced its cooling measures. The chart below shows than AUD strengthened against NZD on both January 12 and February 12, the day when China raised the required reserve ratio. This indicates underlying weakness in the Kiwi.
Monetary Policy: The RBNZ reduced its OCR by -575 bps to 2.5% during the period of June 2008 and April 2009. At the same time, the central bank also facilitated liquidity through measures including Term Auction Facility, which enabled banks to borrow funds using bills, bonds and mortgage-backed securities as collateral.
Since April 2009, the RBNZ has mentioned in the post-meeting statement that there's no urgency to begin withdrawing monetary policy stimulus, and 'we expect to keep the OCR at the current level until the second half of 2010'. However, the tone has turned less dovish since December and the RBNZ stated that 'if the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010'.
However, economic data released since January's meeting might have damped the central bank's outlook. In fact, after release of higher-than-expected unemployment rate in early February, the market pushed back the timing of the first rate hike to June from April. NZ-US 3-year swap dropped below 300 bps in February, the first time since September 2009. Narrowing in yield differential is negative for NZD.
The 'twin deficits' problem (current account and fiscal deficits) has put USD's status as the reserve currency at risks and triggered investors to dump the currency. Worries about the dollar's future as well as increase in risk appetite as global economic outlook recovered later in 2009 brought the greenback to extremely low levels.
Undervaluation: According Fed's measure, the trade-weighted USD index plummeted -13% against major currencies after making 2.5-year high in March. On annual basis, the gauge dropped -8%, the biggest loss since 2003. Despite modest recovery in December 2009, the dollar index continued hovering at historic lows.
ICE's US dollar index also showed a similar pattern. The valuation is about 1.5 standard deviations below its long-term average. From the viewpoint of mean-reversion, the dollar is poised for a strong rebound.
On a PPP basis, the dollar also looked undervalued when compared with major currencies. The table below shows the PPP values of 8 currencies which were used by Fed in composing the USD Major Currencies Index. Using closing price as of December 2009, USD is undervalued when compared with all 'major currencies'.
However, being cheap is not sufficient to make USD higher. The US needs to show promising economic growth to attract buying.
Economic growth in the US: Massive monetary and fiscal policies have helped reboot the growth engine as US data have turned more positive.
US growth is expected to outpace its counterparts in the advanced economy: Labor productivity grew +4% in 3Q09, compared with decline in Germany and the UK, suggested faster recovery in the employment market in the US. In fact, appreciation in the euro and the yen in 2009 was a barrier for economic growth in the Eurozone and Japan.
Economic expansion in Japan remained slow and deflationary risk continued to linger despite the government's expansionary measures. As urged by the Prime Minister, the central bank called for an urgent meeting in mid-December but the BOJ Governor Masaaki Shirakawa and his colleagues refrained from announcing more policy actions but sticking to a rate of 0.1% and a 10 trillion yen ($111 billion) lending program adopted in the previous meeting. It's widely anticipated that the BOJ will implement more expansionary policies to boost growth.
In the UK, further QE cannot be ruled out if growth remained subdued. Current account deficit widened +10% mom to -$108B in 3Q09. As a share of GDP, the deficit increased to 3% from 2.8%. Despite this, we see the trend of shrinking deficit as a % of GDP since the peak in 4Q2005.
Fiscal deficit in the US remains high. The chart below shows that the 'twin deficits' as a % of GDP reached 12.3% in 3Q09. Although it recovered modestly from a record of 15.6% in 1Q09, the double-digit reading is still worrisome.
Nonetheless, we believe fiscal deficit in the US is near the trough whileIn recent elections, Japanese and German governments promised to increase government spending and reduce taxes while the US will likely focus on narrowing deficits next year.
fiscal situations in Europe and Japan may worsen.
A critical issue to offsetting the deficits is capital flow which is yet to improve. It's too early to say it will rise in the near-term but as the balance sheet in the US starts to improve, investors will flee to US asset, particularly when USD is trading at historic lows.
Gradual Exit from QE (End of the Asset Purchase Program): The Fed funds futures factored in 50-60% chance that the Fed will increase the policy rate by at least +25 bps by June.
However, analysts in the street are more conservative and the consensus is that the first rate hike will not take place earlier than 4Q10. Although the Fed may not raise interest rates in the near futures, the end of the asset purchase program can effectively withdraw liquidity from the market and indirectly tighten monetary policies.
According to the accompanying statement of December's FOMC meeting, most of the Fed's special liquidity facilities (including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility) will expire on February 1, 2010, consistent with the Fed's announcement of June 25, 2009.
The amounts provided under the TAF will continue to be scaled back in early 2010. The anticipated expiration dates for the TALF remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral.
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Fed announced purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt. While the program remains in progress, the Fed is gradually slowing the pace and these transactions will be executed by the end of the first quarter of 2010.
As the asset buying program ends by the first quarter, abundant Treasury supply will no longer be absorbed by the Fed and this will add upward pressures to long-term interest rates. Credit Suisse forecasts Treasury 10-year note yields will rise to about 4.25% this quarter. Many investors view the end of the program as an end of the Fed's pledge to keep long-term interest rate low. In this case, market will react as if the Fed is tightening.
To conclude,
we expect the dollar to strengthen in 2010 as it was dumped to extremely low level in 2009.Moreover, recovery in economic condition and removal of excessive liquidity in the market should attract foreign investments. While it's not likely for a broad-based rally against all currencies, we believe long positions in USDYEN will yield good returns as the Fed's gradual exit from QE and the BOJ's re-entrance of QE should push the US-Japan yield in favor of the dollar.
2010 Currency Outlook: EUR
In the near-term, we see further upside for the euro against the dollar:
- as strong global economic recovery and a broad-based low interest rate environment continues to favor 'higher-yield' assets,
- disappointing US non-farm payrolls in December evaporated much speculation about an early Fed tightening,
- renewed weakness in USD, after a strong recovery in late-2009, should persist for a few months before favorable data emerge again.
ECB monetary policy. Although the ECB has been trying to separate withdrawal of liquidity from monetary policy so as not give the market a sense that the ECB is tightening (which would bring the euro higher), what it has been doing is effectively tightening.
In December's meeting, the ECB announced that the rate in the last 12-month longer-term refinancing operation (allotted on 16 December 2009) would be fixed at the average minimum bid rate of the MROs over the life of this operation. This decision increased the uncertainty of the cost of funds in the December repo as it would be determined by the strip of ECB repo rates over the next year. As a result, many banks may seek funding in the market instead of the ECB. Moreover, the 6-month longer-term refinancing operation on 31 March 2010 will be the last one.
The unprecedented supply of liquidity had tremendous impact of money market rates. Therefore, a withdrawal of which should also be influential. The upside effect on money market rates should be more significantly felt in the second half of the year.
In order not to spur excessive appreciation in the euro, the ECB sent some 'dovish' message.
For instance, it said that the main refinancing operations as fixed rate tender procedures with full allotment for as long as is needed - and at least until the third maintenance period of 2010 ends on 13 April. Moreover, President Trichet stressed that the move isn't a signal the ECB has decided to raise its main rate which is 'appropriate'.
We believe the ECB's liquidity withdrawal process should accelerate in 2Q09 when it put an end to full allotment and this should be positive for the euro. However, economic recovery and sovereign debt risk may more than offset the supports offered by the withdrawal plans.
Economic outlook. The Eurozone exited recession in 3Q09 with a GDP growth of +0.4% qoq after contraction since 2Q09. While encouraging expansions were seen in Germany and France, economies remained weak in most countries: GDP contracted -0.3% qoq and -4% in yoy terms.
As supported by the government, the manufacturing sector has been recovering in an impressive pace. Manufacturing PMI returned to 'expansionary territory' (above 50) in November. In December, the reading surged to 51.6, the highest level since March 2008, as driven by output growth and robust investment. We expect further output expansion in the 2010 but overall growth should be tame with consumer spending and unemployment remaining the biggest headache.
According the OECD, the Eurozone economy is projected to growth by +0.9% in 2010, followed by +1.7% in 2011. Corresponding growths in the US will be +2.5% and +2.8%.
Although the easing monetary and fiscal policies have helped improve financial conditions and stabilize export demand, consumer spending remained weak in the 16-nation region. There is a viscous cycle between consumer spending and the job market.
Consumers curb spending as they lose jobs and/or feel pessimistic about the job market. Companies continue to lay-off as a way of cost-cutting in order to survive but this pushes the employment rate higher. It is very difficult to break this loop. Unemployment rate in the Eurozone rose to 10% in November from an upwardly revised 9.9% in the prior month. That's the highest level since August 1998.
Strength in the euro is a curse for economic recovery. ECB's data showed that the nominal effective exchange rate of euro (trade-weighted against 21 main trading partners' currencies) surged +8.6% yoy in November. Although rebound in USD erased part of the euro's gain in December, the index still rise +2.6% yoy in 2009. As an economy heavily reliant on exports, net trade is expected to have contributed -1% to the 16-nation region's GDP growth in 2009 given euro's appreciation. If the single currency strengthens further in 2010, this should continue to restrain economic recovery.
Sovereign Debt Risks. On December 8, Fitch Ratings cut Greece's rating to BBB+, the 3rd lowest investment grade, on concerns over the country's medium-term outlook for public finances given the weak credibility of its fiscal institutions and the policy framework. The lack of substantive structural policy measures reduced confidence that medium-term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilized and then reduced over the next three to five years.
Less than 2 weeks later, on December 17, S&P also downgraded Greece to BBB+ from A- after placing its long-term rating on Credit Watch for a week as 'the measures the Greek authorities have recently announced to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden'.
The Greek government has planned to use one-time taxes, a crackdown on tax evasion and cuts in civil servant bonuses to cut its deficit, hoping to reduce to 8.7% of GDP this year from 12.7% in 2009 and push it below the 3% limit (the Maastricht criteria) by 2012. However, most analysts and industry experts doubt the effectiveness of these measures.
The CDS spread on 5-year Greek government debt rose to 210.6 bps on December 8 after Fitch's downgrade and surged further to 267.9 bps on December 17 after S&P's downgrade. The spread has been trading above 250 bps since then. Increase in funding costs only makes the debt situation worse. Moreover, the euro will be at risk as investors worry about monetization of debts.
The financial situation in Greece can affect the Eurozone as a whole despite its small size. If it turns out a bailout is needed, it may suggest other economies such as Spain and Ireland, which also have huge debt burdens, may need bailouts. This will by all means affect the credibility of the euro.
Status as the Principal Reserve Currency: One of the themes triggering euro's rally against the dollar was the issue of reserve currency. The 'twin deficits' problem (current account and fiscal deficits) has put USD's status as the reserve currency at risk and triggered investors to dump the greenback. Speculations arose that the euro may be replacing the dollar to be principal reserve currency as it's the second largest currency in terms of total reserve holdings. Holdings of the euro have risen to 28.8% in 3Q09 from less than 20% in 2001.
However, we do not feel USD's status will be replaced that easily. Although the percentage of total reserves held in USD has reduced, it remained above 60%. Moreover, most investors, (official, institutional and retail included) should still find US Treasury securities which worth around $ 7 trillion the most liquid and secure. We believe speculations about replacing USD by other currencies will fade in 2010 as the US government begins draining liquidity and the US economy improves.
Although the euro may strengthen further in the first quarter of the year as 'risk appetite' trades dominate in the market, country-specific fundamentals and unwinding of monetary policies should be in play later in the year.
The measures announced by the ECB in December indicated the beginning of monetary policy tightening. This should drive the euro higher as the Fed reiterated the low policy rate should stay low for an extended period. However, economic recovery in the Eurozone is expected to be weaker than the US in 2010 and 2011. Together with sovereign debt risk, the longer-term outlook in the euro is not that promising. (so, up or down, strength or weaken?)
2010 Currency Outlook: GBP
Since January 2007, the pound has dropped -23.5% against its major trading partners with the decline against the euro slightly more than that against the dollar. Although the pound managed to gained against most of these partners in 2009, much of the return was erased in the second half of the year as BOE committed to adopt extremely loose monetary policies and economic contraction was more serious than previously anticipated.
In 2010, we expect the pound will remain weak in the first quarter as there are still uncertainties in how the nation's economy will develop and whether the central bank will expand or unwind stimulus policies. However, things may be clearer towards the second half of the year.
More rapid economic growth (compared both with 2009 and with other OECDs) and improvement in fiscal conditions may help lift the pound. That said, 2010 will be a year full of variables in the UK. Election, exit of monetary policies, return of VAT to 17.5%... are all important issues for British economy this year and their impacts on economic development and currency are yet to tell.
Economic outlook: Economy should have grown slightly in 4Q09 after contracting almost -6% in the first 3 quarters. Forward-looking indicators have been improving and net trades have been boosted by weakness in the pound (against a basket of currencies, sterling has dropped more than -20% since 2007 and -4.4% since July 2009).
In 2010, recovery is expected to continue although the path should be gradual and bumpy - a situation similar to most advanced economies. The OECD forecast UK's GDP will expand +1.2% in 2010 and +2.2% in 2011, after tumbling -4.7% in 2009.
These are compared with corresponding growths of +0.9% and +0.9% in the Eurozone and +2.5% and +2.8% in the US.
The UK inflation jumped +2.9% yoy in December, +1% higher than the increase in November, as oil price rallied while reduction in sales tax in 2008 was not repeated. This is the first time since May that inflation has exceeded BOE's target of 2% and we forecast the rise may speed up in coming months as VAT has returned to 17.5%, from 15% last year, since January 2010.
However, this is premature to predict an early tightening by the central bank. In fact, the MPC expected a spike in CPI. At November's inflation report, the BOE said that inflation will accelerate and then dip below the 2% target and the rate will not return to the target until 2012.
Labor market in the UK has been resilient. The -15.2K decline in claimant count in December was the biggest drop since early 2007. Moreover, the decline in ILO unemployment rate to 7.8% in the September-November period from 7.9% in the August-October period also evidenced that the job market has performed better than expected since the beginning of the recession.
Monetary Policy: Same as its counterparts in the advanced economy, the UK implemented a series of conventional and unconventional measures to stimulate growth. The BOE cut its policy rate to from 5% to 0.5% in the 5-month period from October 2008 to March 2009. The interest rates are expected to stay unprecedentedly low until at least late-2010.
Moreover, policymakers also started buying assets in March 2009 and the size was increased from 75B pound in the beginning to 125B pound in May, 175B in August and then 200B pound in November.
It's a difficult task to forecast the BOE's policy as it surprises the market very often! In July, the market had expected the BOE would extend the asset buying program by 25B pound because it would be ending at the end of July, before the August meeting. Therefore, in order to avoid discontinuity, it's tactical for the central bank to extend the plan to 150B pound which was the total amount authorized by the Chancellor at that time. However, the outcome was that the MPC members decided to stick to 125B pound (May's decision).
After the meeting, the market widely anticipated the BOE would slow down the pace of purchases so that the whole program would extend beyond the meeting on August 6-until policymakers could acquired more information, from the Quarterly Inflation Report in August, on the impact of the existing monetary and quantitative easing policies.
While the market had expected the BOE would put everything on hold in August, it extended the asset purchase program by 50B pounds to 175B pound as 'the recession appears to have been deeper than previously thought. GDP fell further in the second quarter of 2009. But the pace of contraction has moderated and business surveys suggest that the trough in output is close at hand. Underlying broad money growth has picked up since the end of last year but remains weak. And though there are signs that credit conditions may have started to ease, lending to business has fallen and spreads on bank loans remain elevated'.
Another move was seen in November when the BOE raised the size of the program by another 25B pound to 200B pound, probably because the unexpected economic contraction in 3Q09 suggested dismal outlook in the country.
The next move will be in February when the Quarterly Inflation Report will be released. We and the market expect policymakers will announce a pause in QE at the meeting.
A 'pause' in QE has good and bad implications. The good thing is that the BOE may think that there's evidence that economy in the UK has shown signs of improvement and previous easing programs are sufficient to drive growth. Moreover, putting an end to liquidity provision should be supportive for sterling which was being dumped in the second half of 2009 due to BOE's aggressive QE. On the other hand, if the BOE announces it a 'pause', it means there's possibility for further extension of the program should the economy deteriorate. While both the ECB and the FED have shown signs of unwinding their liquidity programs, potential expansions of QE by the BOE is really negative.
The BOE's monetary policy will even be harder to gauge this year as fiscal and political issues are playing important roles in the monetary outlook. In short, substantial fiscal tightening will prolong the accommodative monetary situation while how aggressively the government will work to cut the budget deficits greatly depends on which party wins the General Election which must occur by June 3, 2010.
Fiscal Policy and Election: The UK is running at huge deficits and the government said in the Pre-Budget Report public sector net borrowing (PSNB) will increase to 12.6% of GDP in 2009/10 while public sector net debt (PSND) will rise to 55.6% of GDP during the period. While the former should be more than halved by 2013/14, the latter will probably surge to 77.7% by 2014/15. IMF forecast in October that UK's net debt will rise to 75% of GDP in 2010 before 2010.
Credit agencies have warned that the nation's deficit problem is hurting its credit rating. While Moody's said on December 8 that the UK may test the 'Aaa boundaries', S&P lowered the outlook on the country's AAA rating 'negative' from 'stable' in May.
The 3 political parties in the UK have pledged to tighten fiscal policy as economic recovers but the Conservative party appears to be the most aggressive one regarding the issue. The opposition party said the current Labor government's plan to halve the deficit in 4 years is not enough and the cut needs to start immediately. Last week, the shadow Chancellor of Exchequer George Osborne said he will target programs that 'represent poor value for money' including spending on advertising and consultants. Tax credits for people earning more than 50 000 pounds and tax-free child trust funds for “better off families” will be cut' during the financial year. Currently, opinion polls show that the Conservatives are 10% ahead of the Labors in opinion polls.
The pound should be lifted with a hope of narrowing fiscal deficit. Therefore, it's possible for GBP to rebound after weakening in the first quarter, as election gets closer. However, the rise should not be too strong as fiscal tightening may hinder economic recovery and prolong the low-rate monetary policy.
If the election result replicates the polls, a lead of around 9-10% should produce a Conservative majority. However, if that's not the case, a hung parliament, with no party with an outright majority, could cause sterling to fall as well as increase the difficulty in coming up with an agreed approach to tighten fiscal policies.
2010 Currency Outlook: NZD
New Zealand dollar surged in tandem with Australian dollar and commodity prices in 2009. Trade-weighted NZD gained +16% last year after falling sharply, by +20%, in 2008. Compared with AUD, strength in NZD was less prominent. In fact, AUD has outperformed NZD over the past 4 years, reflecting weakness in New Zealand's underlying fundamentals.
In 2010, we expect slow economic growth should weigh on NZD, Moreover, gains in NZD amid speculations on early tightening be pared and the market pushes back the timing and magnitude of the first rate hike.
Economic Development: Recovery in New Zealand is not as strong as many had expected. According to RBNZ Alan Bollard, economy remains fragile domestically. Although the economy surprisingly exited recession in 2Q09 with modest growth of +0.23% qoq, expansion slowed down in 3Q09. Job market remains dismal. The country's unemployment rate has been in an uptrend since 2008 and the latest reading of 7.3% (4Q09) represented the highest level since 2Q99.
Consumer spending stalled as dismal employment situation affected sentiment. Led by sales in department stores and appliance outlets, retail sales were flat from a month ago in December. Inflation contracted -0.18% qoq in 4Q09 although reading on annual basis stayed within the central bank's range of 1-3%.
Housing market in New Zealand is recovering but the pace has been moderate so far. In fact, recent data have revealed slowdown in housing market improvement. Building permits declined -2.4% mom in December, following a modest growth of +0.1% in the previous month. According to Real Estate Institute, median house prices dropped -2.8% mom in January from December. Given the high correlation between house prices and Kiwi, we worry NZD will weaken further against USD.
Pressure from Twin Deficits: Released in late-January, New Zealand's cash budget deficit totaled NZD 5.28B during five months to November 30, larger than the market expectation of NZD5.12B, as tax receipts were NZD485M less than forecast during the period. At the same time, the operating deficit was at NZD1.4B, compared with consensus of NZD2.48B. New Zealand's budget recorded a cash deficit for the first time in 9 years in the 12 months through June and the government has projected 5 years of deficits as debt increases. Last year, the government rolled out tax subsidies and welfare programs so as to combat recession, thus reducing the government's income.
Although the annual currency account balance improved to 3.1% of GDP in 3Q09 from the peak of 8.7% of GDP last year, rolling of tax windfall should worsen the situation again later in the year.
The market will be watching closing how the government boosts economic growth while reducing budget deficits this year.
Impacts from China's Cooling Measures: Similar to Australia, albeit to a lesser extent, New Zealand benefits from rapid expansion of Chinese economy. As stated in the January RBNZ meeting statement, 'global activity continues to recover, helping push New Zealand's export commodity prices higher. Economic growth is most apparent in China, Australia, and emerging Asia. However, sustained growth throughout our trading partners is not assured, with many still facing impaired financial sectors and overall activity still reliant on policy support'. Therefore, recent stimulus-unwinding measures in Chinese are negative for New Zealand.
People's Bank of China (PBOC) required banks to increase reserve ratio by +50 bps effective February 25, as stated in its Website last week. This was the second time this year the central bank raised banks' reserve ratios as a means to curb lending. On January 12, PBOC increased banks' reserve ratio for the first time since June 2008 as new loans reached a record of RMB 9.59 trillion in 2009. Concerns that growth in china will be slowed down as the government pushes out more tightening measures should exert additional pressures on NZD.
Despite its lower exposure to Chinese economy than Australia, performance of New Zealand dollar was actually worse than Australian dollar after China announced its cooling measures. The chart below shows than AUD strengthened against NZD on both January 12 and February 12, the day when China raised the required reserve ratio. This indicates underlying weakness in the Kiwi.
Monetary Policy: The RBNZ reduced its OCR by -575 bps to 2.5% during the period of June 2008 and April 2009. At the same time, the central bank also facilitated liquidity through measures including Term Auction Facility, which enabled banks to borrow funds using bills, bonds and mortgage-backed securities as collateral.
Since April 2009, the RBNZ has mentioned in the post-meeting statement that there's no urgency to begin withdrawing monetary policy stimulus, and 'we expect to keep the OCR at the current level until the second half of 2010'. However, the tone has turned less dovish since December and the RBNZ stated that 'if the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010'.
However, economic data released since January's meeting might have damped the central bank's outlook. In fact, after release of higher-than-expected unemployment rate in early February, the market pushed back the timing of the first rate hike to June from April. NZ-US 3-year swap dropped below 300 bps in February, the first time since September 2009. Narrowing in yield differential is negative for NZD.
2010 Market Outlook by Briefing
Overall, we expect 2010 to be a shareholder-friendly year.
Strong earnings growth and conservative spending plans by corporate America should produce healthy levels of free cash flow that allow for increased stock buyback activity, dividend hikes, and a jump in M&A activity.
With the stock market having achieved its best year since 2003 during one of the most turbulent political and economic periods in U.S. history, it is fair to say expectations are on the optimistic side of things for 2010. (Can't believe that 2009 went that well for US equities after a near armageddon just a year before 2008)
It is very unlikely, though, that the stock market will have the kind of year like it did in 2009. Expectation is that the S&P 500 will achieve a low single-digit to low double-digit percentage return, with the first half of the year looking better than the second half of the year in terms of performance.
Easy earnings and economic comparisons will be sustaining factors in the first half of the year, as will low interest rates (the Good News). However, (a) the specter of interest rates eventually going up, (b) the extraction of stimulus measures, and (c) income and capital gains tax rates set to move higher as of Jan. 1, 2011, should be persistent headwinds that curtail the market's bullish bias as the year unfolds (the Bad News).
The economy will be on better footing in 2010, if it is not exactly on sound footing. We are projecting:
- 2.5% to 3.0% average real GDP growth for the year,
- unemployment rate, a little above 10.0% on average for 2010,
- total CPI, between 1.9%-2.2% y-o-y,
- core CPI, which excludes food and energy, between 1.8% and 2.0%.
Subdued inflation readings and the weak labor market should allow the Federal Reserve to refrain from raising rates in 2010. Inflation expectations, however, will be closely monitored and could force a tightening in 2010 even if CPI is in the Fed's comfort zone.
A weak labor market, continued credit losses, and regulation angst should be among the factors that leave banks feeling closely tied to their excess reserves.
Credit standards may not be as tight in 2010 as they were in 2009, but they are still expected to remain tight. That should help keep inflation at bay since money will be slow to turn over, yet it will be an impediment to a more robust economic recovery.
Continued excess capacity on both the labor and production fronts should keep inflation under control.
More importantly, corporate profit growth is anticipated to be robust in 2010.
With all of the cost-cutting done in late-2008 and throughout 2009, companies will have a good deal of operating leverage that can lead to double-digit profit growth with only modest increases in sales.
By way of example, S&P operating earnings for Q4 2009 are projected to spike 203% while revenue growth is expected to be up just 7%, according to Thomson Reuters.
The consensus operating earnings estimate for calendar 2010 is $77.56, which is a 30%increase from calendar 2009.
The forward four quarter consensus earnings estimate is $72.18. At current levels, we believe that leaves the market fairly valued at 15.4x forward four quarter earnings.
With the 10-year note yield at 3.84%, the current earnings yield of 6.5% still supports a value-based argument in accordance with the Fed model. However, with the risk premium in Treasuries expected to subside as the economy stays on a growth trajectory, supply issues lingering, and investment grade corporate bond yields at 5.86%, the relative value in stocks is less in our estimation than it appears based on the Fed model.
Consensus earnings estimates are generally expected to move higher, so further stock price appreciation is expected, yet we do not expect to see multiple expansion as price appreciation should be more closely aligned with the pace of estimate revisions.
Strong earnings growth and conservative spending plans by corporate America should produce healthy levels of free cash flow that allow for increased stock buyback activity, dividend hikes, and a jump in M&A activity.
With the stock market having achieved its best year since 2003 during one of the most turbulent political and economic periods in U.S. history, it is fair to say expectations are on the optimistic side of things for 2010. (Can't believe that 2009 went that well for US equities after a near armageddon just a year before 2008)
It is very unlikely, though, that the stock market will have the kind of year like it did in 2009. Expectation is that the S&P 500 will achieve a low single-digit to low double-digit percentage return, with the first half of the year looking better than the second half of the year in terms of performance.
Easy earnings and economic comparisons will be sustaining factors in the first half of the year, as will low interest rates (the Good News). However, (a) the specter of interest rates eventually going up, (b) the extraction of stimulus measures, and (c) income and capital gains tax rates set to move higher as of Jan. 1, 2011, should be persistent headwinds that curtail the market's bullish bias as the year unfolds (the Bad News).
The economy will be on better footing in 2010, if it is not exactly on sound footing. We are projecting:
- 2.5% to 3.0% average real GDP growth for the year,
- unemployment rate, a little above 10.0% on average for 2010,
- total CPI, between 1.9%-2.2% y-o-y,
- core CPI, which excludes food and energy, between 1.8% and 2.0%.
Subdued inflation readings and the weak labor market should allow the Federal Reserve to refrain from raising rates in 2010. Inflation expectations, however, will be closely monitored and could force a tightening in 2010 even if CPI is in the Fed's comfort zone.
A weak labor market, continued credit losses, and regulation angst should be among the factors that leave banks feeling closely tied to their excess reserves.
Credit standards may not be as tight in 2010 as they were in 2009, but they are still expected to remain tight. That should help keep inflation at bay since money will be slow to turn over, yet it will be an impediment to a more robust economic recovery.
Continued excess capacity on both the labor and production fronts should keep inflation under control.
More importantly, corporate profit growth is anticipated to be robust in 2010.
With all of the cost-cutting done in late-2008 and throughout 2009, companies will have a good deal of operating leverage that can lead to double-digit profit growth with only modest increases in sales.
By way of example, S&P operating earnings for Q4 2009 are projected to spike 203% while revenue growth is expected to be up just 7%, according to Thomson Reuters.
The consensus operating earnings estimate for calendar 2010 is $77.56, which is a 30%increase from calendar 2009.
The forward four quarter consensus earnings estimate is $72.18. At current levels, we believe that leaves the market fairly valued at 15.4x forward four quarter earnings.
With the 10-year note yield at 3.84%, the current earnings yield of 6.5% still supports a value-based argument in accordance with the Fed model. However, with the risk premium in Treasuries expected to subside as the economy stays on a growth trajectory, supply issues lingering, and investment grade corporate bond yields at 5.86%, the relative value in stocks is less in our estimation than it appears based on the Fed model.
Consensus earnings estimates are generally expected to move higher, so further stock price appreciation is expected, yet we do not expect to see multiple expansion as price appreciation should be more closely aligned with the pace of estimate revisions.
Weekly ActionForex (Jan 4-8): Commodity Currencies Soared in New Year; Dollar Down Continues
Australia dollar and Canadian dollar shined last week on strong rally in commodities and strength in global stocks (a replay on Carry-Trade coming in vogue again?)
Dollar was lower following dovish FOMC minutes as well as disappointing job report.
Rally in crude oil and rebound in gold also put some pressure on the greenback. But after all, the weakness against European currencies was limited so far.
Japanese yen was generally lower as new Finance Minister Kan expressed his position on a weaker yen. Japanese yen would remain soft in near term too at least until selling momentum on Yen diminishes.
Although the Fed upgraded forecasts of 4Q09 and 2010 growth outlook, the minutes revealed that policymakers remained concerned about the vulnerability of recovery by removal of stimulus.
(a) While announcing the asset purchase programs will end by 1Q10, the Fed did not rule out the possibility of increasing and extending the program should economy weaken, (b) A few members noted that 'resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken, or if mortgage market were to deteriorate', (c) More in FOMC Minutes – December: Cautious Policymakers Did Not Rule Out Further Asset Purchases.
The highly anticipated non-farm payroll report from US was a disappointment for investors looking for sustained sign of recovery. Non-Farm Payrolls showed -85k contraction in December versus expectation of 0k. Nevertheless, November's data was revised up to 4k, which was the first expansion since Jan 2008. Unemployment rate was unchanged at 10.0%.
Job market data from some countries were also released last week: (i) Eurozone unemployment rate rose to 10% in December -at 11 year high, (ii) Swiss unemployment rate also climbed to a 12-year high of 4.2%, (iii) Canadian unemployment rate was unchanged at 8.5% but the economy lost -2.6 jobs in December.
ISM reports released last week was encouraging suggesting that the economy is still growing mildly: (i) ISM manufacturing index rose more than expected to 55.9 in December, while (ii) ISM services also climbed above 50 to 50.1.
Naoko Kan was named new finance minister of Japan as Hirohisa Fujii stepped down on health reason. Kan called for a weaker currency and said he would cooperate with BoJ to guide yen exchange rate to appropriate levels. He even mentioned that such appropriate level in terms trade would be around 95 in USD/JPY. The comments are in sharp contrast to his predecessor, Hirohisa Fujii, who openly said that a strong yen is in Japan's interest. Nevertheless, Kan later moderated his comment by saying that exchange rates should be decided by the markets. Yen was broadly lower last week but selling momentum was so far weak.
BoE left interest rates unchanged at 0.5% and asset purchase program unchanged at GBP 200b as widely expected. No detail was released with the statement and focus will turn to meeting minutes to be published on Jan 20 as well as the Quarterly Inflation Report to be published on Feb 10.
Commodities and Energy were noticeably strong last week with CRB index rose to as high as 293.75. The development provided strong support to Australian dollar and Canadian and limited rebound of the greenback against European majors. Crude oil finally managed to break through 82 high and have the medium term rally from 33.2 resumed. Strength in oil should carry on in near term to upper trend line resistance at 83/84 level, or even further to 90 psychological level before topping.
On the other hand, Gold's corrective rebound from 1075.2 has also expected to as high as 1141 last week. Such rebound is likely still in progress for 61.8% retracement of 1227.5 to 1075.2 at 1169.3.
Development in commodities will continue to pressure the greenback and favor Aussie and Loonie. Nevertheless, as mentioned before, the overall outlook for dollar was not that weak. Indeed, recent price actions in EUR/USD, USD/CHF and GBP/USD are clearly corrective in nature.
Same picture is seen in dollar index. While the consolidation from 78.45 might extend further and another fall to below 77.09 cannot be ruled out. We'd continue to expect downside to be contained by 38.2% retracement of 74.19 to 78.45 at 76.82 and bring rally resumption. Medium term fall from 89.62 should have completed at 74.19 already and we'd expect rise from there to extend to 89.62 and will target 38.2% retracement of 89.62 to 74.19 at 80.08 in the least bullish scenario.
Dollar was lower following dovish FOMC minutes as well as disappointing job report.
Rally in crude oil and rebound in gold also put some pressure on the greenback. But after all, the weakness against European currencies was limited so far.
Japanese yen was generally lower as new Finance Minister Kan expressed his position on a weaker yen. Japanese yen would remain soft in near term too at least until selling momentum on Yen diminishes.
Although the Fed upgraded forecasts of 4Q09 and 2010 growth outlook, the minutes revealed that policymakers remained concerned about the vulnerability of recovery by removal of stimulus.
(a) While announcing the asset purchase programs will end by 1Q10, the Fed did not rule out the possibility of increasing and extending the program should economy weaken, (b) A few members noted that 'resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken, or if mortgage market were to deteriorate', (c) More in FOMC Minutes – December: Cautious Policymakers Did Not Rule Out Further Asset Purchases.
The highly anticipated non-farm payroll report from US was a disappointment for investors looking for sustained sign of recovery. Non-Farm Payrolls showed -85k contraction in December versus expectation of 0k. Nevertheless, November's data was revised up to 4k, which was the first expansion since Jan 2008. Unemployment rate was unchanged at 10.0%.
Job market data from some countries were also released last week: (i) Eurozone unemployment rate rose to 10% in December -at 11 year high, (ii) Swiss unemployment rate also climbed to a 12-year high of 4.2%, (iii) Canadian unemployment rate was unchanged at 8.5% but the economy lost -2.6 jobs in December.
ISM reports released last week was encouraging suggesting that the economy is still growing mildly: (i) ISM manufacturing index rose more than expected to 55.9 in December, while (ii) ISM services also climbed above 50 to 50.1.
Naoko Kan was named new finance minister of Japan as Hirohisa Fujii stepped down on health reason. Kan called for a weaker currency and said he would cooperate with BoJ to guide yen exchange rate to appropriate levels. He even mentioned that such appropriate level in terms trade would be around 95 in USD/JPY. The comments are in sharp contrast to his predecessor, Hirohisa Fujii, who openly said that a strong yen is in Japan's interest. Nevertheless, Kan later moderated his comment by saying that exchange rates should be decided by the markets. Yen was broadly lower last week but selling momentum was so far weak.
BoE left interest rates unchanged at 0.5% and asset purchase program unchanged at GBP 200b as widely expected. No detail was released with the statement and focus will turn to meeting minutes to be published on Jan 20 as well as the Quarterly Inflation Report to be published on Feb 10.
Commodities and Energy were noticeably strong last week with CRB index rose to as high as 293.75. The development provided strong support to Australian dollar and Canadian and limited rebound of the greenback against European majors. Crude oil finally managed to break through 82 high and have the medium term rally from 33.2 resumed. Strength in oil should carry on in near term to upper trend line resistance at 83/84 level, or even further to 90 psychological level before topping.
On the other hand, Gold's corrective rebound from 1075.2 has also expected to as high as 1141 last week. Such rebound is likely still in progress for 61.8% retracement of 1227.5 to 1075.2 at 1169.3.
Development in commodities will continue to pressure the greenback and favor Aussie and Loonie. Nevertheless, as mentioned before, the overall outlook for dollar was not that weak. Indeed, recent price actions in EUR/USD, USD/CHF and GBP/USD are clearly corrective in nature.
Same picture is seen in dollar index. While the consolidation from 78.45 might extend further and another fall to below 77.09 cannot be ruled out. We'd continue to expect downside to be contained by 38.2% retracement of 74.19 to 78.45 at 76.82 and bring rally resumption. Medium term fall from 89.62 should have completed at 74.19 already and we'd expect rise from there to extend to 89.62 and will target 38.2% retracement of 89.62 to 74.19 at 80.08 in the least bullish scenario.
Weekly Market Round-Up: Friday, 8 January 2010
4:30 pm : (a) The latest monthly payrolls report and (b) a raft of analyst rating revisions made up for a lack of corporate headlines this session. Though the general reaction to those reports was negative, stocks still managed to make their way higher.
The early tone to trade was negative as participants pressured stocks upon learning that December nonfarm payrolls dropped by 85,000, which took many by surprise since the consensus called for no change to payrolls. However, nonfarm payrolls for November were revised upward to show an increase of 4,000 jobs. That marked the first payroll increase in two years and helped keep the unemployment rate at 10.0%, which was expected.
(i) Financials caught the brunt of the early selling effort and trailed for most of the session, but trimmed their losses to finish 0.5% in the red. News that analysts at Citigroup cut their estimates for Goldman Sachs (GS 174.31, -3.36), Morgan Stanley (MS 32.25, -0.67), and JPMorgan Chase (JPM 44.68, -0.11) triggered some profit taking after the financial sector had climbed 6.4% during the previous four sessions. Financials still netted a weekly gain of nearly 6%.
(ii) Analysts at JP Morgan hit Coca-Cola (KO 55.15, -1.04), Colgate-Palmolive (CL 81.51, -1.49), and Alberto-Culver (ACV 29.14, -0.55) with downgrades, which weighed on the defensive-oriented consumer staples sector and sent it to a 0.5% loss.
(iii) Retailers had to contend with some downgrades, too, but they were able to cut their loss for the session to 0.1%. Still, Macy's (M 16.92, -0.57) wasn't so fortunate; news of a downgrade by analysts at Goldman Sachs sent the company's shares sharply lower, which reversed the gains that came when the company increased its earnings outlook in the previous session.
(iv) Tech stocks bounced back from a recent fit of weakness. Tech was the best performing sector in 2009, booking a 60% annual gain, but it has lagged in the new year. However, renewed support for large-cap issues helped drive the sector to a 0.8%gain this session. They also helped the Nasdaq outperform its counterparts.
(v) Industrial stocks made up this session's best performing sector. Their 1.5% advance added to the 1.3% gain that they booked in the previous outing. Despite the move, the sector lacked the influence to make it a legitimate leader for the broader market.
Bottom line, a worse-than-expected nonfarm payrolls number resulted in a significant sell-off in the dollar, with after-effect on materials and resources as follow:
(a) Strength among steel stocks combined with gains from other raw materials stocks, thanks partly to a 0.6% drop by the dollar, to drive the materials sector to a 1.0% gain.
(b) Precious metals were trading lower this morning as the dollar index was higher. Then, Non-Farm disappointed; Gold and silver futures soared. Although the dollar index attempted to pare losses, it ended the session 0.5% lower, allowing gold and silver futures to end in positive territory. February gold finished 0.5% higher at $1139.90 per ounce and March silver finished 0.7% higher at $18.47 per ounce.
(c) Natural gas futures opened the pit trade moderately lower and traded relatively flat for most of the session. February natural gas closed down 1.2% at $5.74 per contract.
(d) Crude oil futures finished marginally higher at $82.75 per barrel. After opening the pit trade lower, February crude oil spiked mid-session as the dollar weakened. After reaching the $83.48 per barrel mark, the February contract sold off and dipped into negative territory before closing slightly higher.
(e) Orange juice futures closed limit-up for the third time this week on concerns that unseasonably cold weather will hurt this year's harvest. The March orange juice futures closed 7.1% higher at $1.512 per pound.
Still, the stocks were able to catch a late bid that helped the broader market break free from an afternoon of sideways chop. The support helped stocks finish higher for the fifth straight session and gave the stock market a weekly gain of 2.7%, which marks its best weekly performance in two months.
Advancing Sectors: Industrials (+1.5%), Materials (+1.0%), Tech (+0.8%), Energy (+0.5%), Health Care (+0.3%)
Declining Sectors: Financials (-0.5%), Consumer Staples (-0.5%), Telecom (-0.5%), Utilities (-0.1%)
Unchanged: Consumer Discretionary
DJ30 +11.33 NASDAQ +17.12 NQ100 +0.9% R2K +0.4% SP400 +0.6% SP500 +3.29
Earlier in the morning, the mood and pre-opening started out this way
09:05 am : S&P futures vs fair value: -4.00. Nasdaq futures vs fair value: -5.00.
U.S. stock futures continue to trade with weakness in the wake of some disappointing monthly payroll numbers. Europe's major bourses have also retreated in the wake of the data, unhelped by news that unemployment in the euro zone hit 10% for the first time in the history of the euro currency, according to reports. The EuroStoxx is down 0.2% and the FTSE is currently down 0.5%.
Some banks and miners have gained, though.
Barclays (BCS) has been helped by an upgrade from analysts at UBS.
In Germany, the DAX is down 0.6% at the moment, though Deutsche Bank (DB) has shown strength, thanks partly to an upgrade from analysts at UBS. Its shares are at their highest level since October.
In France, the CAC is currently off by 0.2%. Banks are also limiting losses there.
In Asia, the MSCI Asia Pacific Index added 0.6%, but Japan's Nikkei climbed 1.1% to hit a 15-month high. Carmakers were boosted with help from a weaker yen. However, the yen had actually pared losses from a four-month low against the dollar after Japan's Prime Minister Hatoyama said rapid moves in the currency market were "not good." Japan Airlines continued to flounder amid bankruptcy worries. In Hong Kong, the Hang Seng eked out a 0.1% gain, but that was good enough to erase early losses. In mainland China, the Shanghai Composite also closed just 0.1% higher.
08:35 am : S&P futures vs fair value: -3.00. Nasdaq futures vs fair value: -1.80.
Both stock futures and the dollar have pulled back as a result of some disappointing monthly payroll figures. Specifically, nonfarm payrolls for December decreased by 85,000, which is worse than the flat reading that had been expected. However, nonfarm payrolls for November were revised upward to reflect an increase of 4,000 jobs -- that marked the first increase in two years. The unemployment rate still stands at 10.0%, as expected. Average weekly hours worked also went unchanged at 33.2, as expected.
08:00 am : S&P futures vs fair value: -0.80. Nasdaq futures vs fair value: +3.30. The dollar has modestly extended its gain from the previous session, but stock futures remain flat. The tepid tone among premarket traders precedes the official December payrolls report, which is due at the bottom of the hour. Economists, on average, expect nonfarm payrolls to be flat for the month and that the unemployment rate will remain unchanged at 10.0%. Wholesale inventory data for November follows at 10:00 AM ET, then November consumer credit at 2:00 PM ET, but for broader market concern those reports are secondary to the jobs report.
The early tone to trade was negative as participants pressured stocks upon learning that December nonfarm payrolls dropped by 85,000, which took many by surprise since the consensus called for no change to payrolls. However, nonfarm payrolls for November were revised upward to show an increase of 4,000 jobs. That marked the first payroll increase in two years and helped keep the unemployment rate at 10.0%, which was expected.
(i) Financials caught the brunt of the early selling effort and trailed for most of the session, but trimmed their losses to finish 0.5% in the red. News that analysts at Citigroup cut their estimates for Goldman Sachs (GS 174.31, -3.36), Morgan Stanley (MS 32.25, -0.67), and JPMorgan Chase (JPM 44.68, -0.11) triggered some profit taking after the financial sector had climbed 6.4% during the previous four sessions. Financials still netted a weekly gain of nearly 6%.
(ii) Analysts at JP Morgan hit Coca-Cola (KO 55.15, -1.04), Colgate-Palmolive (CL 81.51, -1.49), and Alberto-Culver (ACV 29.14, -0.55) with downgrades, which weighed on the defensive-oriented consumer staples sector and sent it to a 0.5% loss.
(iii) Retailers had to contend with some downgrades, too, but they were able to cut their loss for the session to 0.1%. Still, Macy's (M 16.92, -0.57) wasn't so fortunate; news of a downgrade by analysts at Goldman Sachs sent the company's shares sharply lower, which reversed the gains that came when the company increased its earnings outlook in the previous session.
(iv) Tech stocks bounced back from a recent fit of weakness. Tech was the best performing sector in 2009, booking a 60% annual gain, but it has lagged in the new year. However, renewed support for large-cap issues helped drive the sector to a 0.8%gain this session. They also helped the Nasdaq outperform its counterparts.
(v) Industrial stocks made up this session's best performing sector. Their 1.5% advance added to the 1.3% gain that they booked in the previous outing. Despite the move, the sector lacked the influence to make it a legitimate leader for the broader market.
Bottom line, a worse-than-expected nonfarm payrolls number resulted in a significant sell-off in the dollar, with after-effect on materials and resources as follow:
(a) Strength among steel stocks combined with gains from other raw materials stocks, thanks partly to a 0.6% drop by the dollar, to drive the materials sector to a 1.0% gain.
(b) Precious metals were trading lower this morning as the dollar index was higher. Then, Non-Farm disappointed; Gold and silver futures soared. Although the dollar index attempted to pare losses, it ended the session 0.5% lower, allowing gold and silver futures to end in positive territory. February gold finished 0.5% higher at $1139.90 per ounce and March silver finished 0.7% higher at $18.47 per ounce.
(c) Natural gas futures opened the pit trade moderately lower and traded relatively flat for most of the session. February natural gas closed down 1.2% at $5.74 per contract.
(d) Crude oil futures finished marginally higher at $82.75 per barrel. After opening the pit trade lower, February crude oil spiked mid-session as the dollar weakened. After reaching the $83.48 per barrel mark, the February contract sold off and dipped into negative territory before closing slightly higher.
(e) Orange juice futures closed limit-up for the third time this week on concerns that unseasonably cold weather will hurt this year's harvest. The March orange juice futures closed 7.1% higher at $1.512 per pound.
Still, the stocks were able to catch a late bid that helped the broader market break free from an afternoon of sideways chop. The support helped stocks finish higher for the fifth straight session and gave the stock market a weekly gain of 2.7%, which marks its best weekly performance in two months.
Advancing Sectors: Industrials (+1.5%), Materials (+1.0%), Tech (+0.8%), Energy (+0.5%), Health Care (+0.3%)
Declining Sectors: Financials (-0.5%), Consumer Staples (-0.5%), Telecom (-0.5%), Utilities (-0.1%)
Unchanged: Consumer Discretionary
DJ30 +11.33 NASDAQ +17.12 NQ100 +0.9% R2K +0.4% SP400 +0.6% SP500 +3.29
Earlier in the morning, the mood and pre-opening started out this way
09:05 am : S&P futures vs fair value: -4.00. Nasdaq futures vs fair value: -5.00.
U.S. stock futures continue to trade with weakness in the wake of some disappointing monthly payroll numbers. Europe's major bourses have also retreated in the wake of the data, unhelped by news that unemployment in the euro zone hit 10% for the first time in the history of the euro currency, according to reports. The EuroStoxx is down 0.2% and the FTSE is currently down 0.5%.
Some banks and miners have gained, though.
Barclays (BCS) has been helped by an upgrade from analysts at UBS.
In Germany, the DAX is down 0.6% at the moment, though Deutsche Bank (DB) has shown strength, thanks partly to an upgrade from analysts at UBS. Its shares are at their highest level since October.
In France, the CAC is currently off by 0.2%. Banks are also limiting losses there.
In Asia, the MSCI Asia Pacific Index added 0.6%, but Japan's Nikkei climbed 1.1% to hit a 15-month high. Carmakers were boosted with help from a weaker yen. However, the yen had actually pared losses from a four-month low against the dollar after Japan's Prime Minister Hatoyama said rapid moves in the currency market were "not good." Japan Airlines continued to flounder amid bankruptcy worries. In Hong Kong, the Hang Seng eked out a 0.1% gain, but that was good enough to erase early losses. In mainland China, the Shanghai Composite also closed just 0.1% higher.
08:35 am : S&P futures vs fair value: -3.00. Nasdaq futures vs fair value: -1.80.
Both stock futures and the dollar have pulled back as a result of some disappointing monthly payroll figures. Specifically, nonfarm payrolls for December decreased by 85,000, which is worse than the flat reading that had been expected. However, nonfarm payrolls for November were revised upward to reflect an increase of 4,000 jobs -- that marked the first increase in two years. The unemployment rate still stands at 10.0%, as expected. Average weekly hours worked also went unchanged at 33.2, as expected.
08:00 am : S&P futures vs fair value: -0.80. Nasdaq futures vs fair value: +3.30. The dollar has modestly extended its gain from the previous session, but stock futures remain flat. The tepid tone among premarket traders precedes the official December payrolls report, which is due at the bottom of the hour. Economists, on average, expect nonfarm payrolls to be flat for the month and that the unemployment rate will remain unchanged at 10.0%. Wholesale inventory data for November follows at 10:00 AM ET, then November consumer credit at 2:00 PM ET, but for broader market concern those reports are secondary to the jobs report.
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