In a bid to pressure lawmakers to pass legislation for a new budget that has been delayed for more than a month, Governor Arnold Schwarzenegger has declared a fiscal state of emergency. California’s economy, which is the eighth largest in the world, faces a budget deficit of $19bn (£12bn).
Source: BBC News
If you gave the EUR its head where would it go? Prior to this morning we had been witnessing an intraday carbon-copy trading range, one that gyrated around the psychological 1.3000 handle. It seemed to be a level no one wanted to get involved in. However, renewed fears of a double-dip recession in the US has pushed the dollar lower and finally helped the EUR to establish itself above the 1.3000 mark this morning. Expect upward momentum from here to be limited ahead of tomorrows 2nd Q US GDP figures. Yesterdays US data has knocked consumer confidence again, pushing treasury yields lower and losing investor support for the ‘buck’. Lack of further data this morning should limit the EUR gains unless investors all of a sudden become technically bullish at the top!
The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.
Yesterday’s durable goods data in the US only provided more pain for the dollar bulls. Factories posted accelerating declines last month, the second consecutive month of declines, following 6-months of gains. The headline new orders fell -1%, m/m, and the biggest dip in 12-months, while the core-new orders fared no better, ex-transport it fell -0.6%. Digging deeper, the transportation sub-categories was the culprit, retreating -2.4% over the past 3-months, led by commercial aircrafts. Analysts note, that a stronger motor vehicle print (+2.5%) was able to offset some of the negativity. Market consensus was looking for a positive print in the core-durable category (+0.4%). However, declines in computers (-1.9%), machinery (-0.7%) and primary metals (-2.0%) pushed the headline print into the red. Analysts note that looking at the 3-month moving average has core-orders very much trading sideways. Than been said, various reports like leading indicators and business surveys suggest that orders are expected to recover and strengthen in the medium term.
An interesting note and a proxy for business sentiment is the booking print for non-defense, ex-transport capital goods increasing +0.6%, m/m. Finally, with the inventory to sales ratio languishing in the mid 1.55 range is calming fears that inventories are running ahead of shipments.
There were no marked surprises in yesterday’s beige book. The Fed collectively reaffirmed that the recovery, while still moving forward, ‘is progressing at a slower pace than earlier in the year’. The report recorded improvements in the service industries, an increase in tourism, an expansion of manufacturing and progress in labor markets. Capital markets were probably taken back by the ‘lack’ of emphasis on stress, supported by the recent discouraging economic data. There were no suggestions of further deterioration. Last week, Bernanke said policy makers ‘expect continued moderate growth, a gradual decline in the unemployment rate and subdued inflation over the next several years’. What can we take away from the report? The US economy is in a ‘very slow recovery mode and in some districts it got even slower’.
The USD$ is lower against the EUR +0.32%, GBP +0.22%, CHF +0.20% and JPY +0.14%. The commodity currencies are stronger this morning, CAD +0.45% and AUD +0.88%. The CAD by day’s end yesterday weakened vs. its southern neighbor as equities and crude happened to reverse its earlier advances which have temporarily reduced the appeal of higher-yielding currencies. This morning’s market has given up on that trading concept. The loonie certainly has support in its corner. For most of this week the CAD has performed better on the back of stronger commodity and equity prices. Last week the BOC tightened rates 25bp. The interest rate differential scenario seems to be getting the biggest support for now, despite it being a ‘dovish hike’. Governor Carney stated that there was no pre-ordained path for interest rates in Canada. According to his dovish communiqué ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. The 25bp hike last week will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Medium term momentum points to a stronger loonie, but, that all depends on whether the big dollar is coveted for risk aversion trading strategies again. Currently, some M&A GBP/CAD activity is temporarily underpinning the currency.
In the O/N session, the RBNZ hiked rates by +25bps, albeit with a more dovish statement than expected. The hike was fully priced into the market. The RBNZ noted that while it will continue to remove accommodative policy conditions, the ‘pace and extent of further increases is likely to be more moderate than was projected in the June Statement’. Overall, there is still a sign of concerns that the world economy is in a fragile recovery phase. The Kiwi has been under pressure since and falling against all its major trading partners. Unlike the AUD which has grinded higher as investor’s technical risk attitude increases. Earlier this week and after a surprisingly weaker than expected CPI headline print (+0.6% vs. +1%), the currency happened to fall as the future traders priced out an RBA tightening next week. This does not rule out the possibility that Governor Stevens will not hike further in the calendar year. Since then the currency has rallied after regional bourses advanced. Recently, policy makers stated that they are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.9026).
Crude is higher in the O/N session ($77.17 up +18c). Crude prices fell for a third day on signs that a slowing economic recovery in the US will limit fuel consumption in the world’s second-largest energy user. China is now the newly crowned number one consumer. Yesterday’s weekly EIA report happened to add to the commodity’s bearish sentiment. The inventory data stumped all market expectations with its surprising increase. The headline print had stocks increasing +7.3m barrels vs. a market expectation of +1.7m. Couple this with last weeks +3.1m gain and we have a market flushed with the ‘black-stuff’. Despite global demand slowly improving it’s currently have little effect on supplies. Somewhat of a surprise was the lower than expected fuel inventory gains. Gas stockpiles rose by +100k barrels, below expectations for a build of +500k, while distillate fuels advanced by +900k barrels. Analysts had been expecting an increase of +2.1m barrels. The refinery utilization rate also happened to fall to 90.6%, below the expected 91%. The build in inventories even with some weather related production shut downs continue to paint a bearish fundamental picture for the energy sector. Of late, the commodity has been trading in a tight $5 range and failing to break out on the top side last week coupled with this week’s stock report will have traders reluctant to buy the dip short term. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices.
It took its time. The technical support levels for gold gave in (the 100-day moving average $1,181) earlier this week. Once through, the market aggressively dumped some of their weaker long positions. Yesterday, the commodity fell to its lowest price point in 3-months, as the rally in global equities this week has eroded demand for the precious metal as an alternative investment. Some investors have been caught wanting higher risk and seeking higher returns, and owning gold is currently not the answer. With the EUR continuing to stabilize against most of its trading partners has accelerated the selling of this asset class. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally as this is the ‘slowest’ season for physical demand. Technical analysts are trying with might to convince the market that these levels provided a good buying opportunity. The current problem is that the market has built in a large insurance premium over the past few months and with some market stability nervous investors will want to lighten their positions even more. Year-to-date, the commodity has gained +5.8% and is in danger of further losses ($1,169 +$7).
The Nikkei closed at 9,696 down -57. The DAX index in Europe was at 6,214 up +36; the FTSE (UK) currently is 5,353 up +34. The early call for the open of key US indices is higher. The US 10-year eased 5bp yesterday (3.00%) and is little changed in the O/N session. As to be expected, dealers will use any excuse to cheapen up the curve ahead of an auction to absorb product. This week the market is taking down $104b’s worth of product. With the benign 2-years already completed, yesterday’s $37b 5’s was better received, perhaps on the belief that the beige book was to report, as expected, that the US economy is weakening, reinforcing expectations for the Fed to keep interest rates at a record low. The bid-to-cover ratio was 3.06 vs. the four auction average of 2.65. Notes were sold at 1.796% and below the 1.806% WI’s. Indirect bids took down 47% vs. the 41% four auction average. Direct bidders took 11%. The market will now have to brace itself for the last of this week’s auction, $29b of 7’s. Demand is there if equities underperform.
Here is a simple trading tip that is provided by our guest contributor and professional trader Abe Cofnas
Among technical indicators, Bollinger Bands is one of the most famous as well as useful. Basically, a Bollinger Band is a statistical bell curve. Each band represents a standard deviation distance from a moving average. The standard setting is 20 for the simple moving average, and 2 for the standard deviation. If you don’t remember basic statistics, one standard deviation would mean that the price is 67% of the time between the two bands, and 2 standard deviations means that the price is about 96% of the time between the two bands. We should add that 14 represents the default periods.
Now that we got a basic definition out of the way, I want to point out some better understanding of the use for the bands for currency pairs. First, many traders misinterpret the fact that a price is probing one of the bands. They see this situation as a reversal indicator. It is not! Just because a price goes to a Bollinger Band doesn’t mean it is going to reverse. Remember, it got there for a reason. Sentiment has pushed the price to the outer levels of the band. All it means is that there is an alert to watch out. It may reverse. A second point is important, the shape of the band itself. If the Bollinger Bands are sloped up or down, its more likely than not that if a price goes to the band, it will stick along there. A sloped band reduces a bounce potential. Very often we see a price stay for a long time hugging an upward slope, or sliding down a Bollinger band- but not reversing. We can see this in the example below. The candles went beyond the lower band, and stayed below for a while before it reversed up. The slope of the Bollinger Band was not level. But when the price went to the upper band and actually penetrated it, notice the band was very flat. A reversal then occurred.
A good idea when using Bollinger Bands is to add another band with a different setting. I call this an Extended or Extreme Bollinger Band. The second Bollinger Band provides a greater level of granularity to the price action. The question that the trader faces, is how extreme is the price when it hits the band. We saw with one Bollinger Band at a standard setting, a price probing the band is not a very reliable indicator on its own of a reversal. But when we add another band with a setting of (13, 2.618) things get interesting.
This setting shortens the moving average to 13 instead of 20, and extends the standard deviation to nearly 99% instead of 96%. In other words, if a price is at an Extended Bollinger Band, it is really extreme and more likely to be a reversal indicator!
Let’s look at the chart below with two Bollinger Bands. The outer band has the setting of (13, 2.618) and the inner band has the regular setting of (20,2). A nearly perfect “bounce” set up is seen in the middle. The Bollinger bands are flat. The candle went above the first band and touched the outer extended band and then came off it. A sell signal occurs when the price goes back below the standard band. The same scenario applies to a buy signal. We can see the candle went beyond the lower standard band, didn’t quite make the outer band, and returned back. It then moved back up for a nice bounce. The main point is that once we have a second extended Bollinger Band on, we can judge reversal conditions much easier!
Tags: Bollinger Bands, Breakout, currency trading, Forex, Moving Average
Robert Schiller, professor of economics at Yale University, believes the economy is still vulnerable to another recession.
“For me a double-dip is another recession before we’ve healed from this recession … The probability of that kind of double-dip is more than 50 percent,” Shiller said. “I actually expect it.”
Source: Reuters
The euro has enjoyed a strong rally so far this summer. It has quietly gained on its early summer low of $11.8, and recently surpassed $1.30. Despite the recent strength of the euro, several investment firms have gone public with predictions that the euro rally is unlikely to last.
BNP Paribas for instance, suggests the euro could end 2010 at $1.08. One school of thought, is the possibility of an upswing in carry trades using the euro to finance the purchase of higher-yielding currencies.
Source: Reuters
The US Commerce Department said today that orders for US durable goods fell 1.0 percent in June after declining a revised 0.8 percent the previous month. The result was a bit of a surprise as analysts had expected a 1.0 percent increase.
“The number was weaker than expected and it could add to the idea that the economy is slipping into a double dip recession,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co. in Nashville.
Source: Reuters
Without the US consumer on board, economic recovery looks vulnerable. Yesterday’s falling consumer confidence print and the growing likelihood of a double-dip in house prices is shaping up for US GDP growth to slow in the second half of this year. How will this affect the dollar? Over the last few weeks weaker US data has crippled the currency, gone is the historical ‘safer heaven vehicle’ so it seems. The market is trying desperately to push the EUR higher despite the order books being stacked with sellers. Dealers are trading with little conviction and little risk so it seems. Intraday movements have been laborious. Discipline is required, no chasing the summer market doldrums, otherwise you will be second guessing and that becomes expensive.
The US$ is mixed in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in another ‘whippy’ trading range.
Finally, we got some US data that moved the market, albeit not that convincingly. May’s reading for the 20-city S&P/Case-Shiller HPI advanced +4.6% vs. market expectations of +3.9%. The report revealed that average home prices are similar to the average level of house values in 2003. It’s worth noting that mortgage levels then were around +6%. Analysts note, that despite the reading coming in strong, it means relatively little ‘until homes that qualify for the government incentives finally close and prices reflect the post-credit reality’. One should expect prices to decline before recovery as we move further away from the contract signing (April 30th) and the closing deadline (June 30th). Fundamentally, the lowest mortgage rates on record are making houses more affordable, which should ease the burden of the rising foreclosures that are pressurizing property values.
The Richmond Fed economic activity index moderated this month (16 vs. 23). The details showed that the shipments index was 22 from 31 the previous month. On a brighter note, the employment index advanced to 15 from 9. Again inflation is a non issue under the index, the manufacturing prices paid was 1.59 from 2.31, while prices received was 1.45 vs. 2.39. Finally, the service sector revenue index advanced to 8 from 5 in June, the retail sales revenue index came in at 0 after declining to -1 the previous month.
Consumers are not a happy bunch. Their concerns over the outlook for incomes and the economy over the next 6-months happened to depress yesterday’s consumer confidence index (50.4 vs. 54.3-revised up). The expectations component fell from 72.2 vs. 66.6, while the current situation print adjusted from 26.8 to 26.1. Their confidence levels for job growth over the next 6-months also took a blow, falling to 14.3% vs. 16.2%. Fairing no better was the business conditions outlook, with 15.9% believing that conditions will worsen. Sentiment may be slow to improve until companies start adding to their payrolls at a faster rate.
The USD$ is higher against the EUR -0.09%, GBP -0.13%, CHF -0.11% and JPY -0.11%. The commodity currencies are mixed this morning, CAD +0.42% and AUD -0.96%. The CAD by day’s end yesterday weakened vs. its southern neighbor as equities and crude happened to reverse its earlier advances which have temporarily reduced the appeal of higher-yielding currencies. At one point during the session the currency managed to print its highest print in over a month. The loonie certainly has support in its corner. For most of this week the CAD found support on the back of stronger commodity and equity prices. Last week the BOC tightened rates 25bp. The interest rate differential scenario seems to be getting the biggest support for now, despite it being a ‘dovish hike’. Governor Carney stated that there was no pre-ordained path for interest rates in Canada. According to his dovish communiqué ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. The 25bp hike last week will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Medium term momentum points to a stronger loonie, but, that all depends on whether the big dollar is coveted for risk aversion trading strategies again.
In the O/N session, the AUD fell over -1%, the most in a week, after the surprisingly weaker than expected CPI headline print (+0.6% vs. +1%). The currency happened to fall against all its major trading partners as the future traders priced out an RBA tightening next week. This does not rule out the possibility that Governor Stevens will not hike further in the calendar year. Technical analysts are suggesting that the currency could pare some of its recent gains back down to 0.8850 levels to price out the rate hike. All this week, the currency had rallied after regional bourses advanced and after most European banks passed the stress tests. Recently, policy makers stated that they are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8952).
Crude is higher in the O/N session ($77.69 up +19c). Crude prices fell from its 3-month high after the CB reported confidence among consumers declining further this month on the fear that the lack of jobs will limit the economy’s recovery and energy demand. Fundamentally there is a glut of supply. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices. The market expects today’s weekly inventory report to show that US stocks dropped to a 4-month low. Supplies reported last week were at the highest level in 17-years. For weeks the black-stuff has been confined to a tight trading range. The market has been using all the excuses to vindicate their position taking. Last weeks EIA report recorded a surprise increase in inventories, reporting a rise of +400k barrels of oil, whilst the market had been expecting a headline decline of -1.6m. The dovish report continued with its gas inventories rising +1.1m barrels and its stockpiles of distillates (diesel and heating oil) doubling expectations to +3.9m barrels. Once again technically, the gas markets numbers show the strength of the ‘lackluster demand’. Overall market sentiment continues to look for vindication.
It took its time, however, the technical support levels for gold gave in (the 100-day moving average $1,181). As expected, the market aggressively dumped some of their long positions once the moving average was truly penetrated yesterday. The commodity fell to its lowest price point in two months as a rally in global equities eroded demand for the precious metal as an alternative investment. Some investors have been caught wanting higher risk and seeking higher returns, and owning gold is currently not the answer. With the EUR continuing to stabilize against most of its trading partners has accelerated the selling of this asset class. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally as this is the ‘slowest’ season for physical demand. Year-to-date, the commodity has gained +5.7% and is in danger of giving up more ($1,166 +$4.50).
The Nikkei closed at 9,753 up +256. The DAX index in Europe was at 6,214 up +7; the FTSE (UK) currently is 5,376 up +11. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.05%) and is little changed in the O/N session. As to be expected, dealers will use any excuse to cheapen up the curve to absorb product. This week the market is taking down $104b’s worth of product. Yesterday’s $38b 2’s was a rather ‘benign’ auction. The lower participation rate by indirect bidders (33% vs. 41.4%) has the core of the market apprehensive about the record low yields along most of the curve. With risk allocation somewhat healthier has investors shying away from the asset class. The market will now have to brace itself for $37b of 5-years later today and $29b of 7’s tomorrow. Current market sentiment has dealers wanting to be better buyers on much deeper pull backs.
With the release of today’s consumer confidence report, there appears to be a growing “outlook gap” between institutional investors, and the average consumer. According to the Conference Board, a private research group that tracks consumer confidence, the US consumer confidence index fell to 50.4 in July, from a revised 54.3 index rating in June. This pessimistic outlook flies in the face of the actions of some of the country’s largest professional money managers who have been returning to equity stocks at a pace not seen in a year and a half.
This is apparent when you examine a breakdown of the positions held under management. Latest figures indicate that equities now account for more than 68 percent of the holdings of institutional investors, compared to just 63 percent in April.
This move to equities by money managers seems to be at complete odds with the sentiment of consumers who if anything, are feeling more pessimistic with each passing day. The reason for the discrepancy becomes clearer once you understand that consumer fears can be traced to one nagging concern – the slow pace of employment gains.
The employment level has stabilized somewhat from the beginning of the year when it officially topped 10 percent, but it is still in the range of 9.5 percent. The reality however, is that the actual unemployment rate is considerably higher. The number of workers who have exhausted their extended benefits continues to climb, and these individuals are no longer included in the unemployment count. The lack of clarity over whether the government will expand the extension of unemployment benefits also adds to the concern as more families are forced to get by solely on their savings.
For those fortunate enough to have maintained their employment through the recession and recovery, there is no guarantee that further layoffs will be avoided. Thus, even with full employment, consumers are watching their spending and trying to build reserves should they find themselves out of work in the near future.
Contrast this with recent actions on Wall Street where the bulls are said to be displacing the bears in ever-growing numbers. All this makes for interesting reading of course, and while the return of the bulls is a positive and welcome sign, it may be a bit premature to declare the crisis truly over. For instance, according to the Bank of America Corp., hedge funds – which historically are more aggressive with respect to holding short equity positions than other investor groups – have actually increased their bets on certain equities losing share price. Bank of America claims that hedge funds currently have, on average, only 27 percent more long positions, than short. Traditionally, the range is 35 to 40 percent more in favor of stock prices appreciating.
With so many conflicting signals, where should we turn for guidance? Bill Miller, Chairman and Chief Investment Officer with Legg Mason Capital Management provides his take on the situation. While not a ringing endorsement perhaps, Miller believes that stocks will be “a grinding process” that overall, “will continue to advance”.
Jobless Recovery
In addition, I would offer that the rate by which the economy advances, is tied directly to the rate at which jobs are added to the US economy. Until there is an appreciable gain in employment, consumer confidence will continue to lag, as will the overall pace of recovery. This fact is not lost on Federal Reserve Chairman Ben Bernanke who continues to warn that job growth will remain weak well into next year. The idea that the US is experiencing a “jobless recovery” is an oft-repeated theme and is likely to dominate Fed policy for some time yet.
Prices for single-family homes rose half a percent in May according to the latest Standard & Poor’s/Case Shiller home index survey. The results, based on an examination of home prices in twenty US cities, showed a greater-than-expected 0.2 percent increase.
“While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year still does not indicate that the housing market is in any form of sustained recovery,” David M. Blitzer, chairman of the Index Committee at Standard & Poor’s, said in a statement.
Source: Reuters
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